ACADEMY OF ECONOMIC STUDIES OF MOLDOVA

EUROPEAN ECONOMY AND STRATEGIES

CHIȘINĂU 2012
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CONTENTS
1. Understanding the European Union.......................................................................................5
1.1 The development of the European Communities.....................................................................5
1.2 Treaty Agreements establishing the European Union..............................................................8
1.3 The Community legal system.................................................................................................11
1.4 The Community finances........................................................................................................11
2. The structure and functions of European Union.................................................................16
2.1 European Parliament...............................................................................................................17
2.2 The Council of the European Union......................................................................................18
2.3 The European Commission....................................................................................................20
2.4 Court of Justice......................................................................................................................22
2.5 Other European Union Institutions........................................................................................23
3. Customs Union in the European Community......................................................................29
3.1 Concept of regional integration, integration theory and economic analysis..........................29
3.2 Customs Union: economic and legal framework……………………...…………………...30
3.3 Intra-community trade..........................................................................................................31
● Elimination of internal frontiers..........................................................................................32
● Veterinary and plant health legislation................................................................................32
● Administrative cooperation.................................................................................................33
3.4 Trade with non-member countries...........................................................................................33
● The common customs tariff.................................................................................................34
● Economic tariff matters.......................................................................................................35
● General customs legislation.................................................................................................36
● Origins of goods...................................................................................................................37
● Customs procedures with economic impact.........................................................................37
4. The Single Market...................................................................................................................39
4.1 The internal market Programme. Single European Act..........................................................39
4.2 The removal of physical, technical and fiscal barriers...........................................................40
4.3 The impact and effects of the Single European Market........................................................43
4.4 Understanding the four freedoms: Free movement of goods, capital, labor and
services...................................................................................................................................46
5. Economic and Monetary Union in European Union...........................................................51
5.1 The European Monetary System and the birth of the Exchange Rate Mechanism.................51
5.2 Launching EMU: Maastricht Treaty........................................................................................53
5.3 Economic policy and convergence of national economic policies under EMS and beyond...58
5.4 European Monetary Union impacts.........................................................................................61
5.5 European Monetary Union and European Union tax harmonization......................................66
6. Common policies of the European Union..............................................................................68
6.1 Horizontal policies...................................................................................................................68
● Regional Development Policy...............................................................................................68
● Social Policy..........................................................................................................................73
● Taxation Policy......................................................................................................................79
● Competition Policy................................................................................................................88
● Environment Policy.............................................................................................................103
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6.2 Sectoral Policy.......................................................................................................................104
● Industrial..............................................................................................................................104
● Enterprise Policy..................................................................................................................106
● Energy Policy......................................................................................................................107
● Common Transport Policy...................................................................................................108
● Common Agricultural Policy...............................................................................................110
7. External Economic Relations of the European Union........................................................121
7.1 Comercial Policy and the multilateral trading system (GATT-WTO)..................................121
● Common rules for import....................................................................................................121
● Trade protection...................................................................................................................122
● Common export arrangements.............................................................................................124
● GATT and WTO..................................................................................................................125
● Sectorial commercial policy measures................................................................................127
7.2 External relations and the EU’s hierarchy of trading preferences.........................................128
● The European Free Trade Association and European Economic Area...............................128
● European Economic Area Agreement: Norway, Liechtenstein and Iceland.......................129
● Custom Union Agreement: Turkey, Malta and Cyprus.......................................................129
● European Association Agreement.......................................................................................130
● Euro-Mediterranean Association Agreements.....................................................................130
● ACP – European Community Partnership Agreement........................................................130
● The Generalized System of Preferences..............................................................................131
7.3 EU external trading relations: Japan and the US…………………………………………...131
7.4 The emergence of regional trade blocs and the global Triad…………………………….…133
8. The Transition Economies: Central and Eastern Europe.................................................137
8.1 The Central and East Europeans............................................................................................137
8.2 The nature of transition..........................................................................................................139
8.3 Trade re-orientation and entry into international economic community...............................145
8.4 Transition: progress and challenges.......................................................................................147
9. European Union Enlargement..............................................................................................151
9.1 Central and Eastern European countriesdevelopment and integration with European Unio.151
9.2 The European Union pre-accession strategy.........................................................................151
9.3 European Union enlargement – costs and benefits................................................................153
9.4 The financial consequences of enlargement..........................................................................154

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This variety of institutions only acquires a logical structure if we look at the specific aims of these organizations. a further objective was added. Mongolia. the gradual creation of imperceptible. namely the voluntary integration of different nations. The CMEA was begun in 1949 to promote economic cooperation among the member countries as a Soviet counterpart to the Marshall Plan. The US Secretary of State at the time. communications were broken. The continent also faced a future between the superpowers. Much of Europe lay in ruins. NATO ( North Atlantic Treaty Organization).1 The development of the European Community The history of modern European integration was launched in the late 1940s in the wake of the Second World War. The method of construction chosen. the Central and Eastern European countries and the Soviet Union (with Cuba. This was a markedly different form of economic integration from the other types of integration. Understanding the European Union 1. links between the nations taking part in the experiment. the main aim of the OEEC was to liberalize trade between countries. It was no coincidence that the first European organizations of the post-war period. the European Atomic Energy Community and European Community) coexist without any real links between them. which provided the foundation for the rapid reconstruction of Western Europe. It took the complete collapse of Europe and its political economic decline to create the conditions for and give a new impetus to the idea of a new European order. Belgium.2 Treaties establishing the European Union 1. by means of instruments voluntarily adapted by all. This came in the form of the Marshall Plan. The number of member countries in these various organizations ranges from 19 (WEU) to 40 (Council of Europe). moves towards unification in Europe since the Second World war have created a confusing mixture of numerous and complex organizations that are difficult to keep track off. was created at the initiative of the United States. France. and Vietnam had been integrated through the Council for Mutual Economic Assistance (CMEA. It involves (in its conception). Six years of conflict had left a demand for politic and economic reconstruction as a devastated Western Europe sought ways to rebuild its economy and to prevent future wars. namely to promote economic progress in the this World through development aid. The organization offers its members a platform for close cooperation on security and defense. Spain and Greece are now members of the WEU.3 The Community legal system 1. called on the countries of Europe in 1947 to join forces in rebuilding their economies and promised American help. the European Union (which started life as the European Coal and Steel Community. In 1954. but innumerable. In overall terms. WEU (Western European Union). founded in 1948. food and fuel were in short supply and industry was geared to the needs of war. such as OECD (Organization for Economic Cooperation and Development).4 The Community finances 1. when the United States and Canada became members. The OEEC then became the OECD. There are many other organizations appeared at that time. the Council of Europe. the OEEC (Organization for European Economic Cooperation). NATO was founded as a military alliance with the United States and Canada. George Marshall. and thus serves both to strengthen Europe’s political weight in the Atlantic alliance and to establish a European identity in security and defense policy. had never before been tested in human history. Portugal. these can be divided into three main aims:  The Euro-Atlantic organizations The Euro-Atlantic organizations came into being as a result of the alliance between the United States of America and Europe after the Second World War.1 The development of the European Community 1. It brought together the countries that had concluded the Brussels Treaty (United Kingdom. In 1960.  The Council of Europe and OSCE 4 .1. For example. often called COMECON). a developing “Cold War” creating a dividing line between Europe’s war-ravaged nations. At first. the Western European Union (WEU) was created to strengthen security cooperation between the countries of Europe. Luxembourg and the Netherlands) with the addition of the Federal Republic of Germany and Italy. In 1949.

in which he put forward the plan he had worked out with Jean Monnet to pool Europe’s coal and steel industries. the European Atomic Energy Community and the European Community. In the early 1950s those sectors were the basis of a country's power. these aims also include the creation of a safety net to enable disputed to be settled by peaceful means. He advocated some transfer of sovereignty to an independent High Authority which would exercise the powers previously held by the States in those sectors and the decisions of which would bind those States. in his declaration of 9 May 1950. rather than for the constitutional method. which had shown signs of serious sickness well before the damage and dislocation of World War II. Beyond the coal and steel community. did not need to give it up immediately and its entirety for the benefit of a federal European State. the same set/up is to be found in the United Nations (UN) Security Council. which would be based on the constitution of a federation. In so doing he extended a hand to yesterday’s enemies and erased the bitterness of war and the burden of the past. The choice of coal and steel was not fortuitous. In his declaration of 1950. He made history by putting to the Federal Republic of Germany. Robert Schuman proposed the creation of a common market in two important economic sectors which had until then been used for military purposes. The feature that is completely new in the EU and distinguishes it from the usual type of international association of States is that the Member States have ceded some of their sovereign rights to the EC at the center an have conferred on it powers to act independently. It was therefore a question of progressively reducing the existing contradiction between European integration and national independence. The Convention not only enabled a minimum standard for the safeguarding of human rights to be laid down for the member countries. it also established a system of legal protection which enables the bodies established in Strasbourg under the Convention under the Convention (the European Commission on Human Rights and the European Court of Human Rights) to condemn violations of human rights in the member countries. nor does it provide for the transfer or merging of sovereign rights. Alongside measures to build up trust between the countries of Europe. the influence which each of them was incapable by exercising alone. the EC is able to issue sovereign acts which have the same force as laws in individual States. still has a long way to go in this respect. That meant that the European States. which itself has grown out of the European Coal and Steel Community. and to other European countries who so wished. which had just regained their national sovereignty following the Second World War. the pooling of French and German resources in coal was to mark Franco-German reconciliation. Robert Schuman. Decisions on all important questions require unanimity. The Strategy was to reconcile German economic recovery and French national security. there was an awareness that these organizations would not go beyond customary international cooperation. thus. the plan was designed to overhaul the French economy. That was to say that the cooperation of the Member States in those sectors should be completely different from that already existing within the traditional international organizations. The most important and best known of these is the Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR) of 4 November 1950. In return they would gain the right of inspection of those affairs of their partners which were placed under common management and would to that extent enlarge their own sovereignty. he set completely new process in international relations by proposing to old nations together to recover. Schuman. opted for the functional method of European Integration. The Council of Europe is therefore designed only with international cooperation in mind. Europe. They merely needed to renounce the dogma of the indivisibility of sovereignty and therefore certain parts of sovereignty in certain clearly defined areas. In exercising these powers. founded in 1994 at the Conference on Security and Cooperation in Europe. These organizations include the Council of Europe. At the same time. The OSCE is bound by the principles and aims set out in the 1975 Helsinki Final Act and the 1990 Charter of Paris. on a scale comparable to that the United 5 . Its Statute does not make any reference to moves towards a federation or union.  The European Union The third group of European organizations comprises the European Union.The future common to the second group of European organizations is that they are structured to enable as many countries as possible to participate. The foundation stone of a European Community was laid by the French Foreign Minister. by exercising jointly their sovereignty. As events of the recent past have shown. the idea of creating a community of pacific interests. Numerous conventions have been concluded by the Council in the fields of economics. culture. In addition. In addition to the economic benefits to be gained. Robert Schuman envisaged the creation of a common market for all products. namely the coal and steel sectors. which means that every country has a power of veto. which was founded as a political institution on 5 May 1949. it would be a matter of integrating Germany economically and politically into a European Coal and Steel Community with France an other willing countries. social policy and law. This group also includes the Organization for Security and Cooperation in Europe (OSCE).

Norway. Having been impressed. allow it to impose its influence. on the other hand. to use the building image. Belgium. Accession of those countries initially met with the opposition of the President of the French Republic. The accession on the United Kingdom. What would have become of that Community if the French National Assembly had not refused on 31 August 1954. The second British application for accession. After laborious negotiations. The committee presented its report on 21 April 1956 and its conclusions were approved by the Intergovernmental Conference in Venice on 29 May 1956. As defense. Only ten to sign the Treaties establishing the two new communities. The United Kingdom. Portugal. the functioning of the common market in coal and steel showed that economic integration was possible and worthwhile and that it should extend to all products. On the other hand. the date of entry into force of the ECSC Treaty. but the latter would remain autonomous with regard to commercial policy vis-à-vis third countries. Denmark. It was aware that the United Kingdom could not maintain its political influence if it played a preponderant role onto in the Commonwealth. Even beyond economic integration he envisaged political integration. of course. through the creation in stages of a “European Federation”. by means of the European countries. But that was to be achieved gradually through concrete achievements or. That undertaking was somewhat at variance with R. to ratify the Treaty establishing it on the grounds that it regarded the abandonment of a national army as a serious infringement of French sovereignty? Probably. Paul-Henri Spaak. Iceland and Switzerland acceded. In 1959 it has been created “European Free Trade Association” (EFTA).as opposed to the European Community. only six States signed the treaty establishing the European Coal and Steel Community (ECSC) in Paris on 18 April 1951.States. chaired by the Belgian Minister for Foreign Affairs. Norway. On 24 October 1950 the French Minister of Defense Rene Pleven. was not examined for much time owing to France’s misgivings. Thus. that he wished to discontinue them. wanted a European free trade area. Customs duties would. the objectives of which were economic . as a solution to the problem of German rearmament. meeting in Messina from 1 to 3 June 1955. better division of labor and the improved use of new production techniques. in 1967. Schuman's idea of progressing little by little. Italy. Surprising proposal was immediately accepted by the Governments of the Six and led to the signing in Paris of the Treaty establishing the European Defense Community. that Community along with the European Political Community. which also had political aims. with Ireland. declared. The Ministers for Foreign Affairs then decided to initiate negotiations between the six countries with a view of creating a European Energy Community (EEC) and a European Atomic Energy Community (EAEC). the Ministers for Foreign Affairs of the Six. namely Denmark ad Norway. by the early successes of the European Community. only five – Germany. British attempts at creating a vast European free trade area between the European Economic Community and the other Member States of the OECD failed during the autumn of 1958 owing to intractable differences of opinion between France and the United Kingdom. Denmark. Therefore. be abolished between member countries. however. the Treaties of Association were finally signed on 22 January 1972. That example was followed by two other EFTA member countries. being extremely distrustful of the United Kingdom’s application for accession. the creation of a European army answerable to the political institutions of the united Europe. Austria. Schuman. Nor could EFTA. Against a backcloth of the Korean War and worsening tension between East and West. Portugal and Switzerland supported that argument. and also by Ireland. So in August 1961m the United Kingdom submitted an initial official appreciation to become a full member of the European Community. was logically amongst the last aspects of the construction of Europe. like foreign policy. he proposed. Austria. the Netherlands and Luxemburg – gave a favorable reply. They instructed a committee of experts. The Europe of six began its construction on 25 July 1952. made a declaration to the National Assembly similar to the by R. to which the United Kingdom. the draft of which was adopted on 10 March 1953 by the ad hoc Assembly set up by the ECSC Member States. following favorable referendum (Ireland and Denmark) and ratification 6 . to prepare a report on the matter. Ireland and Denmark took effect on 1 January 1973. Iceland. discussed the possibility of creating a common market embracing all products and a separate Community for nuclear energy. right in the middle of the negotiations in 1963. which did not involve and waiving of national sovereignty. to be set up. it was not long before the British Government was rethinking its refusal to play an active role in the work of European unification. The issue of the accession of those countries could not be resolved until following General de Gaulle’s resignation in April 1969. General de Gaulle who. in which the conditions would be fulfilled for rapid and regular economic expansion through economies of scale. with Finland joining at a later date. Although the appeal from the French Minister for Foreign Affairs was addressed to all European countries. Sweden. would have proved to be premature as long as the de facto solidarity which Robert Schuman and his adviser Jean Monnet considered necessary for the advent of European political union was missing. by means of brick upon brick to make up the community edifice. Denmark and Norway were yet again associated.

during a given transition period. find itself in the European Economic space.2 Treaty agreements establishing the European Union In force 1952 5. most distrustful in particular of the Community’s fisheries policy. if a Member State of the European Union decided to withdraw from it.by the national parliaments. for example. those countries submitted applications for accession to the European Community. which were separated from it until the end of the 80s by an impassable wall. Portugal and Spain. in June 1987. Since the 1st January 1995. Treaty of Nice 2000 1. see it as a strong. in 1975 in Greece’s case and in 1977 in the other two cases. the Twelve decided to complete their internal market on 31 December 1992. The small population of Greenland was. 1957) Treaty establishing a Single Council and a Single Commission of the European Communities (Merger Treaty. CFSP and JHA pillars Amended the Maastricht and EEC Treaties. The example of Greenland. the Member States of the EFTA. It could. 1992) 1993 8. Only Norway’s accession was prevented. and be capable of adopting. in February 1984. Introduced measures for the completion of the Internal Market and extended the scope of qualified majority voting Established the European Union. 4. notably those of Central and Eastern Europe. a judicial and internal affairs policy and a common foreign and security policy. Extended codecision.49% of the Norway’s population opposed accession to the European Community in a referendum. since the 1 January 1994. One year before that date. With the signature of the single European Act. the Danish Government and the EC agreed. bears witness to that. thus transforming the European Economic Community into a European Union (EU). as fishing was the island’s main economic activity. A similar solution could be found. 1. but which. which brings together. in December 1991. the people of Norway having again voted against membership of the Union by a majority of 52. However. 2. 1965) European Elections Act (1976) 6. under conditions to be negotiated between the outgoing State and the others. created the codecision procedure. to allow Greenland to leave the Community as from 1 February 1985 and to grant it the status of overseas territory associated with the EC. after 53. and Spain and Portugal on 1 January 1986. 1958 1958 Summary A sector-specific Treaty of limited application. Greece acceded to the Community on 1 January 1981. but. The European construction can and one day certainly will accommodate other European countries. even though it is not specifically provided for in the Treaty it is certainly possible. It has to be emphasized here that any State wishing to accede to the Community has to be prepared to adopt. with the accession of Austria. 1951) European Economic Community (EEC) Treaty (Treaty of Rome. 3. which become more and more acute after each new enlargement. Treaty on the European Union (Maastricht Treaty. following the demolition of the latter. added new employment title to Treaties and incorporated the Schengen accord into the EEC Treaty Not in force 7 . The European Union has already declared its intention to welcome these countries and Cyprus. The case of withdrawal of a Community Member State has never occurred and is difficult to imagine. First of the founding Treaties Concluded on the model of the ECSC Treaty but with a broader range of objectives A sector-specific Treaty of limited application 1967 Created a single institutional framework serving all three Communities 1978 The basis for the first (1979) and subsequent European Parliamentary elections Amended and expanded the EEC Treaty. 1957) European Atomic Energy Community (EAEC) Treaty (Rome. however. it must solve its institutional problems. functional refuge. Treaty European Coal and Steal (ECSC) Treaty (Treaty of Paris. the Europe of Twelve became the Europe of Fifteen. Finland and Sweden. before it can do so. Having voted by a small majority in a referendum to withdraw from the Community. all the Community law which constitutes the various policies examined in this work. minus Switzerland. although partial and special. amended and expanded the EEC Treaty. Once democracy was restored in Greece. they decided in Maastricht to develop within the single market an economic and monetary union. Single European Act (1986) 1987 7. Greenland had been integrated into the EC in 1973 by virtue of its links with Denmark. Treaty of Amsterdam (1997) 1999 9. codified the EC.8%.

without discrimination on grounds of nationality. The ECSC Treaty was concluded for 50 years. however. which was to develop technology and stimulate nuclear production in Europe. harmonization of national policies of four basic freedoms: freedom of movement of goods. An important amendment to the Treaties establishing the European Communities took lace on 1 July 1987 with the coming into force of the Single European Act. In order that all this could be achieved. between Member States. EUROATOM) was signed in Rome on 25 March 1957 and came into force on 1 January 1958. the coordination of the research programmes of the Member States and a joint research programme. The key elements in this Treaty were. on the other hand. it provided detailed plans for the creation of a common market among its signatories. the Treaty laid down certain rules on investment and financial aid on production and prices. of course. environmental. The intentions of the founders of the ECSC were. b) Implementation. At the same time it consecrated the European Council. inhabitants. import quotas and other barriers to trade between Member States. establish common nuclear legislation. freedom of establishment and freedom to provide services by independent persons and companies and. the ECSC Treaty introduced a European Assembly and a European Court of Justice. Lastly. when it will expire in the year 2002. the abolition of customs duties. That involved: a) The achievement of a customs union entailing. the decisions of which would be binding on all Member States. EUROPEAN UNION First pillar: EUROPEAN COMMUNIES EC . and introduce a system for supervising the peaceful use of nuclear energy and common standards for nuclear safety and for health and safety protection of the population and workers against ionizing radiation. implemented in a Joint Research Centre. indeed. freedom of capital movement. research and technology. finally. Ambitious despite its restricted scope. the specific rules covering these two sectors will be incorporated into the EEC Treaty. on the other hand.Single market and measures law -Trade policy -Democracy xenophobia NEW OR AMENDED -Fighting terrorism -Economic and monetary union -Trans-European networks -Disarmament -Research and environment -Europe’s security framework -External borders EUROATOM ECSC Second pillar: COMMON FOREIGN AND SECURITY POLICY Third pillar: JUSTICE AND HOME AFFAIRs CO-OPERATION -Foreign policy -Cooperation between judicial -Agricultural policy -Peacekeeping . Capital and workers in both sectors should also circulate freely. introduce a common system for suppliers of fissile materials. including a High Authority and a special Council of Ministers. the Single Act committed the Community to adapt measures with the aim of progressively establishing the internal market over a period expiring on 31 December 1992. on agreements and concentrations of businesses ad on transport and Community institutions.Police cooperation -Aid to non-member countries -Fighting drugs and the arms trade -Customs union and -Cooperation. that it should be an experiment. European cooperation on foreign policy and social and economic cohesion. Its aim was to create a common market for nuclear materials and equipment. culminating in a “European Federation”. common positions authorities in civil and criminal -Sectoral policy -Human rights -Combating racism and -Fighting organized crime Trafficking in human beings -Education and culture concerning the security of the EU -Health -Long-term: -Asylum policy PROVISIONS ON: SECURITY POLICY -Criminal acts against children. which could gradually be extended to other economic spheres. the one establishing the European Coal and Steel Community (ECSC). the introduction of a Common Customs Tariff (CTT) vis-à-vis third countries. The Treaty establishing the European Atomic Energy Community (EAEC. Supplementing in particular the EEC Treaty. was signed in Paris in 18 April 1951 and entered into force on 25 July 1952. but also freedom of movement of salaried workers.The first European Treaty. it confirmed the Community’s competence in numerous fields: social. Signed at the same time as the Euroatom Treaty the European Economic Community (ECC) Treaty signed in Rome on 25 March 1957. -EU citizenship -Drawing on the WEU: questions -Consumer protection -Financial aspects of defense -Social policy -Immigration policy 8 . Its main objective was to eliminate the various barriers to trade and to create a common market in which coal and steel products from the Member States could move freely in order to meet the needs of all Community.

Since the citizens have the rights and obligations deriving from the European Treaties. to mobilize public opinion in their favor. and forms of cooperation. The Treaty of Amsterdam. focusing on the three issues ‘left over’ from Amsterdam – size and composition of the Commission. which might in time lead to a common defense. the Union sets itself the following objectives: – To promote economic and social progress which is balanced and sustainable. emphasizing the respect of human rights and of democratic principles by the Member States. The Union’s basic Treaties are very difficult to read and understand. but a new amendment of the TEU or a new Treaty would be necessary in order to complete the reform of the institutions and make it possible for them to work in the context of more than twenty Member States. – to maintain in full the “acquis communautaire” and build on it with the aim of ensuring the effectiveness of the mechanisms and the institutions of the Community. The Treaty of the EU separates the European construction into three pillars or edifices. – 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.But it is the Treaty on European Union (TEU). On June 1997 at Amsterdam. Concluding the Intergovernmental Conference held in 2000 at Nice. through the strengthening of economic and social cohesion and through the establishment of economic and monetary union. public health and consumer protection. including the eventual framing of a common defense policy. notably through the extension of the co-decision (Parliament/ Council) procedure and of the majority voting in the Council. The Amsterdam Treaty has taken steps towards meeting this last objective. the new Treaty gives Centre-stage to the need for them to act together to find solutions to unemployment.as well as other necessary amendments to the Treaties arising as regards the European institutions in connection with the above issues and in implementing 9 . which includes consolidated versions of the two main Treaties. – To give Europe a stronger voice in world affairs by making the European Council (heads of State or government) responsible for defining common strategies to be implemented by the Union and the Member States and by designating a High Representative for the CFSP (the Secretary General Council) and a Policy Planning and Early Warning Unit under his responsibility. – to assert its identity on the international scene. signed in Maastricht on 7 January 1992 that marked a new stage in the process of creating an ever-closer union among the peoples of Europe. since it has renovated certain community policies and has instituted several others. particularly towards the eastern European countries which are knocking at the Union’s door. According to Article B of the Treaty. by consolidating and “communitarising” the cooperation of the Member States in the field of Justice and Home affairs. – To make the Union’s institutional structure more efficient with a view to enlarging the Union. such as education and youth.the European Community . weighting of votes in the Council and possible extension of qualified majority voting (QMV). culture. including ultimately a single currency. Even within the main edifice . These other two pillars have lower institutional capacity. the European Atomic Energy Community (EAEC) and the EEC). which is the European Community (namely the ECSC. The Treaty of Nice which was signed on 26 February. with a new numbering of their articles. which is the number one problem in Europe today. they can rightly claim the transparency of these texts. – to develop close cooperation on justice and home affairs. gives a beginning of the solution of their problem. distinguished mainly on the basis of the decision-making process: The main pillar. the Heads of State and Government of the fifteen countries of the EU revised the Treaty on European Union. While confirming that the Member States bear primary responsibility for employment. – The sweep away the last remaining obstacles to freedom of movement and to strengthen security. which is hardly likely. in particular through the implementation of a common foreign and security policy. It also makes clear progress on matters relating to the free movement of its citizens. while enabling the war on organized crime to be waged more effectively. The Treaty of Amsterdam establishes a more democratic Europe. namely the second pillar dealing with Common Foreign and Security Policy (CFSP) and the third pillar dealing with Co-operation in Justice and Home Affaires. The Treaty of Amsterdam has four main objectives: – To place employment and citizens’ rights at the heart of the Union.the TEU has brought about profound changes. in particular through he creation of an area without internal frontiers. 2001 should mark the end of a prolonged phase of adjustment for the EU. the Commission plays a lesser role and the common positions or joint actions adopted do not constitute Community law. The Union is founded on the European Communities and supplemented by new policies. There is normally no majority voting. The two other pillars remain largely intergovernmental. the one on the European Union (TEU) and the one establishing the European Community (TEC).

the Community institutions and.as well as common positions and joint actions of the common foreign and security policy and of justice and home affairs (Art. suggesting a political desire to act in a given area. Yet the basic goal was achieved: the possible institutional obstacles to enlargement were removed. p. In addition to these legal acts. i.the Treaty of Amsterdam. binding acts and recommendations.e. 10 ETC). in transposing them into national law. while others permit the progressive adjustment of that legislation to Community provisions. European institutions). failing which they are infringing Community legislation. that is. Directives take effect by virtue of being notified to the Member States to which they are addressed. which are also not binding. or even all the Member States or one or more natural or legal persons. Although they are generally published in the Official Journal. and some relaxation of the conditions for “enhanced cooperation”. The latter are obliged to adopt the national measures necessary for implementation of the Directive within time-limits set by it. who may be one. a decision can produce direct effects creating for the individuals rights that national jurisdictions must safeguard 1. it gives rise to rights and obligations directly applicable to the citizens of the European Union. It ensures from the Treaties and the constant decisions of the Court of _________________________________________________________________________________________ 1. in taking into account of special national circumstances. Member States. Furthermore. giving certain rights and obligations to the citizens and obliging the Member States to adapt their legislation and/ or the administrative practices.Member States and/or citizens. While Resolutions and opinions are published in the “C” series (communications) of the Official Journal of the European Communities (OJ). It is not possible to foresee exactly how the new arrangements may work. a complex system of reweighting of votes with a triple threshold for qualified majority a limited extension of qualified-majority voting. It is a sort of Community framework law and lends itself particularly well to the harmonization of laws. Regulations must be complied with fully by those to whom they addressed (individuals. The Regulation has a general scope. “ensure fulfillment of the obligations arising out of the Treaty or resulting from action taken by the institutions of the Community” (Art. There was an agreement to have one Commissioner per Member State as of 2005 and a reduction to an unspecified number less than that of the Member States once there are 27 countries in the EU. they have some discretion. This variety of potential addresses is coupled with a variety in the scope of its contents. and they may be modified before they come into force. the law adopted by the institutions in order to pursue the objectives of the European Treaties. A generally accepted aim of re-weighting was to ensure that any winning coalition under QMV will represent a reasonable majority of the population and that decisions cannot be blocked by too small a minority. the effects of which are binding on the Member States. where they do not set a date. They must however. is binding in all its elements and is directly applicable in each Member State. ECR 1970. without any legal obligations for the addressees. Judgement of 6 October 1970. Just like a national law. The Directive binds any Member State to which it is addressed with regard to the result to be achieved. the citizens of the Member States. Regulations enter into force on a date which they lay down or. As “European laws”. These legal acts may be undertaken by the competent institutions with legal effect only if they are empowered to do so by the European Treaties (principle of attribution of powers). Article 249 of the EC Treaty provides for five forms of legal act. These instruments enable the Community institutions to adopt positions in a non-binding manner. according to the Court of Justice. the cement is the will of the different nations to live peacefully together.12. It defines the objective or objectives to be attained and leaves it to the Member States to choose the forms and instruments necessary for complying with it. Grad. It takes effect on its communication to the addresses rather than on its publication in the Official Journal. several. the Council and the Commission can adopt Recommendations suggesting a certain line of conduct and opinions assessing a current situation or certain facts in the Community or the member States. In any case. 13 and 31 of TEU) are published in the “L” series legislation of the OJ. It is the binding instruments that constitute Community law. The regulation substitutes European law for national law and is therefore the most effective legal instrument provided for by the EC Treaty. Since the Member States are only bound by the objectives laid down in directives. while allowing the national authorities jurisdiction as to the form and methods used. 1. The Decision id binding on the addressees it indicates.3 The Community legal system In the image of the European construction. the Council and the European Parliament adopt Resolutions. case 9/70. which may extend from a quasi regulation or a quasi directive to a specific administrative decision. Community law is uniformly and entirely valid throughout the Community and cannot be invalidated by the individual law of one Member State. the building plans are the treaties and the bricks are the legal acts adopted by the Parliament and the Council.838 10 . each with a different effect on the Member States legal systems: some are directly applicable in place of national legislation. in many cases. on the twentieth day following their publication in the Official Journal of the European Communities.

Article 49 of the Treaty of Paris stipulates that the High Authority (now the Commission) is “empowered to procure the funds it requires to carry out its tasks by imposing levies on the production of coal and steel”. It may itself determine the mode of assessment and the amount of that tax. the Community controls its own resources. pursues certain federal objectives. It therefore does not depend on the amount of the VAT itself. the development of common policies. After the expiration of the Treaty. agreed to raise the ceiling on own resources from 1. and its expenditure in the main corresponds to a transfer of resources from the national to the supranational level. which has a uniform basis of assessment. provided for in the Treaty. The European Council. since 1970. OJ L315. That tax. as it is levied at the consumption level. 08. which decided on those tasks. of financial transfers or even of financial compensation. 4. affects all citizens of the European Union and takes fairly accurate account of the economic capacity of the Member States. 2 3. grounded on an additional base representing the sum of the member States GNPs at market prices. thus leading to its total elimination when the ECSC Treaty expires (23 July 2002)1. exceed 1 percent». The system applied in this connection by the Commission is similar to the VAT system.Justice that this law has precedence over national law. is made up of all taxable supplies of goods and provisions of services in the Union. the Member State have definitively transferred sovereign rights to the Community they created. the rates of which vary from Member State to Member State.1989 11 . to use a proportion of the value added tax (VAT) as an additional source of Community financing. In most instances their financial requirements amount to staff and operational expenditure: if they are entrusted with operational tasks. the Commission proposed the doubling of the financial allocation in 1997 compared to its 1992 level (Delos package II).1970 Council Regulation 1552/89.20 % of the Community’s GNP in 1993 to 1. As customs duties are being progressively abolished or reduced under the General Agreement on Tariffs and Trade (GATT) and the various tariff concessions granted to the least developed countries. however. In fact. 07. Only the payment of that revenue to the customs union. 28. Accordingly. The revenue from customs duties is therefore often collected in a country other than the country of destination or of consumption. makes it possible to neutralize that effect. the cohesion effort and the cost of enlargement. in such organizations. the assets of the ECSC in liquidation should revert to the Communities revenue and be administered by the Commission2. of the Member States. Indeed. The “uniform base”. the 1. must pay to the EU.4 The Community finances The conventional international organizations such as the UN or the OECD are financed by contributions from their member countries.4% of total revenue) in accordance with its wealth. The transfer of customs revenue to the Community budget by Decision of 21 April 1970 was the logical outcome of the attainment. OJ L 155. in 1970. It is virtually never a question. A new own resource was added to the others. In such a union the country of import of goods from a third country is not always the country of final destination of those goods. The levy is applied to undertakings in the steel and coal sector. The levies are “assessed annually on the various ECSC products according to their average value. In order to give tangible form to the Maastricht commitments.1994 COM (97) 506. the Commission has gradually reduced the levy. and they cannot subsequently go back on that transfer through unilateral measures which are incompatible with the concept of the Community. Each Member State contributes to this fourth resource (21. meeting in Edinburgh on 11 and 12 December 1992. until 2006. whether it predates or postdates Community legislation. of a genuine customs union3. Provision had been made in the EEC Treaty (Article 201) for replacing the Member States initial contributions (determined on a scale according to GNP shares or other criteria) by own resources after establishment of the Common Customs Tariff (CCT). A 1996 Regulation improved implementation of the own resources collection system by making it more transparent and strengthening the provisions to combat fraud 4. 8 October 1997 Council Decision 70/243. Since 1994. the creation of an environment stimulating Europe’s competitiveness and development of Community action on the external front.27% in 1999. including the common agricultural policy.04. the Santer Commission asserted that the financing system of the Community had worked satisfactorily and did not need any adjustments to the Member States contributions.27 % GNP ceiling could suffice to finance. Commission Decision 2983/94/ECSC. particularly as regards economic and social cohesion. OJ L 94. Customs duties on products within the province of the ECSC Treaty now constitute Community own resources. their financing is generally provided on an “a la carte” basis by those member countries. In its “Agenda 2000” outlook and position document of 15 July 1997. the rate thereof shall not. A Council Decision of 31 October 1994 fixed the level of own (Community) resources available for the period 1995-1999 and the structure of the Community financing system 1. The European Community. even the constitutional law.06. 1. which was adopted for calculating the proportions of the VAT yield which countries. on the other hand. The first European tax was introduced with the creation of the ECSC. __________________________________________________________________________________________ 1.12. in this instance to the Community. for that reasons it was decided. although it is not a federation.

12. As far as Community expenditures are concerned.11. we should note that they have increased between the early eighties and the early nineties from 1.The Commission had taken account of a number of factors.1994 and Council Regulation 1149/99. More than 90% of the receipts of The European Union are redistributed to the Member States and serve to finance the objectives of the various common and Community policies.11. little more than one percent of the cumulative Gross Internal Product of the Member States.1999 Expenditures 12 .6%) to administrative expenditure and the remaining amount to reserves including guarantees 2. They still represent. OJ L 293. EUR 39 billion (40. such as the balance of payments facility or the financial assistance for certain non-member countries.2 The EU Budget for 2000 Income ___________________________________________________________________________ 1. 2. OJ L 139. in particular the economies obtainable under the agricultural guideline. EUR 5.06. however.7 to 2. Table 1.4% of all public expenditure in the Member States. Thus. 12.5 billion (4.02. A Guarantee Fund for external actions is designated to reimburse the Community’s creditors in the event of default by the recipient of a loan given or guaranteed by the Community in a non-member country3. the fruits of economic growth and the benefits of budgetary discipline in the context of economic growth and the benefits of budgetary discipline in the context of economic and monetary union. Council Decision 94/728. OJ L 293. roughly the same amount to external action of the Union (6%). EUR 4. 02.1994 Decision 1999/105. 3. the effect of greater concentration of structural expenditure on the most needy regions. OJ L39.6%) were allocated to the common agricultural policy. 12.2%) to structural measures including the Structural Funds. It is interesting to note that the guarantee of the Community budget covers lenders when the Community floats an issue under one of its financial instruments.8 billion (6%) to other internal policies. out of a total of EUR 97 billion (41.1999 Council Regulation 2728/94.

including institutional administration and policy-related expenditure. the EU budget totals nearly 100 billion Euro with commitment appropriations of 96. since 1988.5%). Two-thirds of this expenditure goes to the European Commission.The General Budget of the European Union The EU is endowed with revenues.1 % of EU GDP. These reserves are used 13 . Equally. In 1999 the projected proportions from these three resources were as follows: VAT.27 % of EU GNP) are generally referred to as the General Budget of the European Union. while it is often argued that the EU is excessively bureaucratic. Agriculture. Monetary reserves. For example. Since 1995 (and until 2002). Nonetheless.93 billion Euro in 1999.2% of the EU’s budget was directed towards category 6 (monetary reserves).11% of EU GDP and about 2. While the amount spent on agriculture (including the Agricultural Guidance Fund) had been reduced to 45. Second. 1.6% of total commitment appropriations by 1999. a proportion of VAT receipts levied by member states is paid over to the EU. Repayments and administration. 6. Today. and external policies (and action) a comparable 6. Structural operations. Key areas such as education and the environment and other internal policies such as research claim only 5. whereby a guaranteed price system for farm products was established. Since 1988 expenditure has been divided into six broad categories: 1. 4. which is probably not excessive for any organization of its size. since 1988 Categories 2. this is only approached by spending on structural operations (excluding the EAGGF). it should be noted that only 4.8% of total spending in 1999. First. The annual increases of expenditure on each category have to be contained within an agreed rate of increase. The pattern of the EU’s budgetary revenues and expenditures has changed over time. the proportion of VAT receipts paid over has been reduced to 1.5%). agricultural and sugar levies (38%).0% raised on a lower total of 50% of GNP. which it is empowered to discharge for certain specified functions. These consist principally of general customs duties. customs duties (15. for price guarantee purposes. Third.4% of VAT revenues raised on 55% of GDP at market prices. It was roughly evenly distributed among administration. transformed this situation.0%. External (or other policies). This now represents 1. research and energy and aid for developing countries. Internal policies (with multi-annual allocations). agriculture. Between 1986 and 1994 this was equivalent to 1. Political priorities have been reflected in allowing the rates of increase to differ between categories. 3 and 4 have been allowed to expand more rapidly than others. 3. These revenues (capped at a limit of 1. and GNP resources (46. 2. the duties that member states collect on imports into the EU are paid centrally. The introduction of the Common Agricultural Policy in 1968. For the first decade expenditures were modestless than 0.5% of the total expenditure of the EU member states. In 1999. agricultural tariffs and levies on sugar imports. the great bulk of that expenditure was absorbed by agricultural policy. which accounted for 34.5% of the EU budget is spent on administration. the difference between what is raised from the first two revenue sources and what is required to meet EU expenditure is raised from member states in proportion to their national income. These budgetary funds (which are of the same order of magnitude as a large UK government department) emanate from three sources. European Union expenditure is still dominated by agriculture and in particular. 5.9% of the budget. Not only did total expenditure rise dramatically.

pag 12. 1997. institutions.eu. Vol. Macmillan. Luxembourg.int/eur-lex Glossary of EU terminology Full text legislative information 14 .int/scadplus/ http://europa. PUF. 1999. pag 4. Spring 2001 1. Dictionnaire de l’union Europeenne. Brussels. Sphie and Kalypso Nocolaidis. 4. 2 nd ed. 15. 1997. 7. 1996. “L’Europe des quinze: chiffres cles”. EUROPEAN POLICY CENTRE. “European Parliament”. Politiques. How does the European Union work? Office for official Publications of the European Communities. European Integration. 1998. Richard Welford. Kate Prescott. 11. Moussis Nicholas “Access to European Union”. Basindstoke. De Boeck/Universite. Harlow. A new idea for Europe: The Schuman declaration 1950-2000. Essex.86-87. The Finances of the European Union. 1999 5. 13. http://europa. PELKMANS Jacques. Guide to European Union policies. Methods and economic analysis. 2000. 1996.int/ http://europa. pag 2-9. Eipascope (2001). Ever Closer Union: an Introduction to European Integration. Making Sense of the Amsterdam treaty. Luxembourg. programmes. Paris. European documentation. 1997. EUROPEAN COMMISION. pag 69. “European Business. 2 nd ed. European Study Service. No. Macmillan Press. ”. Institute of European Affairs.eu. 12. pag 5-7. 1998. 2.2. 1999 10. Basingstoke. European Study Service. MOUSSIS Nicholas. Droit et Politiques de la Communaute et de l’Union europeenne 5e ed. 16. including emergency aid. EUROPEAN COMMISSION. 2001. 2001.for a variety of purposes. Addison Wesley Longman. ECSA Review.eu. Meunier.. PASCAL Fontaine. LAFFAN Brigid. Treaty of Amsterdam: what has changed in Europe. Brussels. 14. 12-16. DRUESNE Gerard. March 2000. 3.14. Luxembourg. “Trade Competence in the Nice Treaty”. 8. General references on the EU and suggested readings: DINAN Desmond. “The Treaty of Nice: Not Beautiful but it’ll do”.European Commission. DEGRYSE Christophe. Edward Best. 9. 6. 23-28. pag 1-3.. Bruxelles. 4 th edition. Office for official publications of the European Communities. pag 7-9.

static effects.2 The Council of the European Union 2.6 Institutional reform: future challenges Objectives:  delimitation of the main institutions of the European Union. market common economic union. the Court of Auditors) 2. attention should now be turned to the organization of the EU and to the institutional arrangements of the Community pillar.3 European Parliament 2. Keywords: economic integration. economic union complete. many of which govern their activity and behavior.4 Court of Justice 2. knowledge of the organization and operation of the main EU institutions.2. adoption of EU legislation in the EU. Those firms operational in the European business environment should at least understand how EU rules. the European Investment Bank. THE INSTITUTIONS OF THE EU European Council 28 Heads of State or Government and the President of the Commission Committee of the Regions 353 members Court of Auditors 28 members European Central Bank Council of the EU 28 ministers European Court of Justice 28 Judges European Parliament 751 members Economic and Social Committee 353 members European Commission 28 members European investment Bank Having considered a brief history of European integration and the role of integration theories in helping us to understand pathways and progress.1 The European Commission 2.  knowledge of the role and powers in the European Union's main institutions.  knowledge of institutional bodies and specialized agencies of the EU and their main skills. The structure and functions of European Institutions 2. Those firms hoping to influence the decision-making process (through lobbying) require a detailed understanding of the openings for dialogue and of the centers of executive and legislative authority. are issued and from which centers of power. Committee of the Regions.  acquisition procedure for establishing the agenda. free trade area. 15 . and other institutions and bodies of the EU's institutional structure. customs union.5 Other EU Institutions (Economic and Social Committee. interpretation and application of Union law. monetary union. regulations and directives. dynamic effects. Much recent attention has been paid to the EU as a governance system and an understanding of its basic elements is a fundamental requirement for European businesses. In order to understand the workings of the EU it is necessary to outline the role and activities of each of four governing institutions with a role in the initiation. enactment.

This process is called "ordinary legislative procedure" (formerly "co-decision"). Luxemburg. • governments promote interests of member states in the Council of the European Union. The adoption of European legislation. in an enlarged Union. and the Commission must ensure that EU law is correctly applied. it requires Parliament's opinion on a number of important decisions such as the accession of new countries to the EU. to ensure consistency. Slovenia Cipru. the Parliament and Council adopt them. Setting the agenda. Parliament is one of the main European institutions with legislative power with the Council of the European Union ("Council"). It is headed by a president and brings together the Heads of State and Government of the member countries. Slovacia Croaţia. In principle. Currently. which represents the interests of the Union as a whole. Together. effectiveness and continuity of its policies and actions ". Debate and adopt EU legislation together with the Council EU.Organizing the institutional framework of the European Union Since its creation by Article 13th of the treaty establishing the European Union. Parliament cooperates with the Council (representing national governments institution) to decide on the content of laws and for adopting them. The European Council sets the general policy of the EU but has no powers legislative. members of European Parlament represent the peoples of European Union. during some meetings taking place over several days. Irlanda. energy policy. • The European Commission. which brings together national and European leaders. Parliament has three essential roles: 1. In many areas. Regatul Unit Spania Polonia România Olanda Belgia. are promoted by the European Commission. which represents the EU's citizens and is directly elected by them.. Portugalia. Developing and adopting European legislation involves three institutions: • European Parliament. whose members are nominated by national governments. While its role in shaping the directions of the Union's development has so far been an important one. Malta Total Number Members 96 74 73 54 51 32 26 21 20 18 17 13 11 8 6 751 of 16 . to serve the objectives and interests of Member States and its citizens. such as consumer protection and the environment. immigration and EU funds. these three institutions develop policies and laws that apply throughout the Union. This gives the European Parliament more power to influence the content of legislative acts in sectors such as agriculture. Subsequently. it seems to acquire the role of a discussion forum in which successive Presidencies of the Council are trying to coordinate the objectives and priorities of each term. Also. marked by initiatives such as the monetary union. through the "ordinary legislative procedure" (formerly "codecision"). Republica Cehă Suedia Austria Bulgaria Finlanda. Ungaria. was increase the number of policy areas covered by the new ordinary legislative procedure. • European deputies directly elected represent the citizens interests in the European Parliament.1 Allocation of seats in the European Parliament Country Germania Franța Italia. represent the Member States. Presidency of the Council is held on a rotating basis by the Member States. Lituania Letonia. the EU benefits from a single institutional framework in the world in which: • general priorities are set by the European Council. Grecia. Danemarca. specifying that the EU must have an institutional framework to "promote values. • Council of European Union. Estonia. • interests of the Union as a whole. Under the Lisbon Treaty. the Commission proposes legislative acts. Table 1. together with European Commission by the President twice per semester. the Commission and the Member States implement them. Organizing the European Union's institutional framework The main institutions of the European Union EUROPEAN PARLIAMENT directly elected by EU citizens once every five years.

2A see Article 17 of the Cotonou Agreement of 22 June 2010. Members of European Parliament (MEP) are broken down by political affiliation and not nationality. Parliament exercises its influence to other EU institutions in several ways. delegations and political groups guide Parliament's activities. of a statute for political parties at European level and rules regarding their funding. following a first reading agreement between Parliament and Council in April 2014. in transnational groups. Members of Parliament examines petitions from citizens and form committees of investigation. Parliament's political bodies are: the Bureau (the President and the 14 Vice-Presidents). The President represents Parliament in the other EU institutions and internationally and is assisted by 14 vice-presidents. According to the results of European elections in 2014 mandates in Parliament are distributed as follows: European People's Party (Christian Democrats) (220 seats). together with Council President signs all legislative acts once they are adopted. committees. each committee or delegation elects its own office. When national leaders are meeting in the European Council. including the adoption of framework legislation. the number of deputies has been temporarily increased to 754. When forming a new Commission. Parliament may constitute special committees (Article 184) or committees of inquiry (Article 226 TFEU and Article 185). the Greens / European Free Alliance (50 seats). the maximum number of 751 was achieved with the elections of 2014. The term of office of the President. Vice-Presidents and Quaestors and the Committee Chairs and of Delegation is two and a half years. especially the Commission. 44 European 17 . responsible for administrative and financial matters Members Conference of Committee Chairs and Conference of Delegation Chairmen. Under Article 191. Composition of the European Parliament. Conservatives and Reformists European (70 seats). the European Parliament now has 751 members. its 28 members (one per Member State) can not enter the duties without Parliament's approval. P7_TA (2011) 0570. which was revised in 2007 (Regulation 1524/2007 (EC)) to introduce the possibility of financing political foundations to support parties that are affiliated with educational and research activities. a political group must comprise Members elected in at least one quarter of the Member States and be made up of at least 25 deputies (Article 30). Debate and adopt the EU budget with the Council. Parliament adopts the annual budget EU together with the Council of the European Union. Political bodies. two subcommittees. point 2.1. consisting of a chairman and up to four vice-presidents in March. Under the Lisbon Treaty. Article 224 TFEU provides a legal basis for adoption under the ordinary legislative procedure. Political groups MEPs are not in national blocks but according to political affinities. European political parties and foundations. the Commission proposed a new regulation repealing Regulation 2004/2003. which will come into force in 2014. It monitors the other European institutions. If do not agree with the nomination of one of the nominated Commissioners members of Parliament can reject the entire proposed team. Most political parties are created under Regulation (EC) no. Since funding for election campaigns remains weak and is still subject to national regulations. The European Parliament recommends creating an environment conducive to the ongoing development of European political parties and foundations. divided between Member States as shown in Table 1. the Conference of Presidents (President and political group chairmen). European Parliament Secretariat Secretary-General's Office consists of 12 Directorates General and the Legal Service. Parliament takes a decision on how the Commission has managed the budget of the previous financial year. 3 See European Parliament decision of 14 December 2011 on the numerical strength of the standing committees. Parliament sends a delegation and Assembly Joint formed under the Agreement between the African. The number of parliamentarians from each country is about in proportion to the number of inhabitants of that country. Therefore. parliamentary cooperation committees and multilateral parliamentary assemblies in January. no country can less than 6 or more than 96 representatives. Committees and delegations: Members are organized into 20 committees. Members of Parliament elect the President for a term of 2. Parliamentary committees play an important role in this respect. to ensure that they operate democratically. Parliament must give its opinion on the topics on the agenda. With the entry into force of the Lisbon Treaty on 1 December 2009. Under the Rules of Procedure. and 39 delegations (delegations and delegations to joint parliamentary committees. 3. Also the Parliament may request the resignation of the Commission in exercise. Caribbean and Pacific (ACP) and EU2. Confederal Group of the European United Left / Nordic Green Left (52 seats). Some political groups correspond supranational political parties operating in the EU. The procedure is called "motion of censure". the Group Europe Direct Freedom and Democracy (48 seats) and the non-attached MEPs (52 votes).2. Alliance of Liberals and Democrats for Europe Group (68 seats). the Group of the Progressive Alliance of Socialists and Democrats in the European Parliament (191 seats). Political groups arrange regular meetings in the week before the part-session and week of session and workshops to establish the basic principles of their work. The organization is guided by the European Parliament Rules of Procedure. President of the European Parliament. Parliament retains control over the Commission by examining the reports they draw it and interpellation of Commissioners. Every year. However. the five Quaestors. In the framework of Parliament there is a committee that monitors how the budget is spent. 2004/2003.5 years. It's mission is to coordinate legislative work number for each committee Members set out in paragraph 1 of the European Parliament decision of 14 December 2011 on the numerical strength of the standing committees (P7_TA (2011) 0570).

in all areas of EU activity. The European Council shall elect its President. The European Council comprises the heads of state and government from each EU country. where it holds 12 monthly part-session. If the Treaty does not contain specific provisions on this issue. by qualified majority. High Representative for Common Security and Defence Policy also take part in the meetings. Parliament has 12 periods of four-day session in Strasbourg and six-session two-day Brussels. Additional sessions held in Brussels. President of the European Council. Another objective is to encourage diversity and preserving cultural identity of all member countries. COUNCIL OF THE EUROPEAN UNION The European Union Council is the institution representing EU governments. President of the Commission and High Representative for the Common Foreign and Security not vote. has no power to adopt acts. P7_TA (2014) 0421 in connection with the European Parliament's resolution of 16 April 2014 on the financing of political parties. the Council or the Commission. Since 1 December 2009 under the Treaty of Lisbon. Parliament is based in Strasbourg. in one year. P7_TA (2014) 0422. Parliament organizes its work independently. punctual and urgent debates and statements by the Presidency. Council of Europe is an international. At the European Council. known as the EU Council represents forum bringing together ministers from member states to adopt laws and coordinate European policies. Council of the European Union. The European Council meets. Normally organized four such meetings a year. The European Council has a dual role . chaired by a permanent president.Parliament's resolution of 16 April 2014 on the proposal for a regulation of the European Parliament and of the Council on the statute and financing of European political parties and European political foundations. the Heads of State meet government in every country of the EU Commission President and President of the European Council who chairs meetings. European Council meetings are summit in which EU leaders take decisions on general policy priorities and major initiatives. The European Council meets twice every six months. Also known as the informal EU Council or the Council of Ministers. the Parliament decides by majority vote (Article 231 TFEU). and other countries in central and eastern Europe. It is important to make the distinction between the European Council. It is independent of the European Union is different and the European Council or the Council of the European Union. the rule of unanimity or qualified majority. Operation European Parliament: Under the Treaty. It acquired a formal status in the Treaty of Maastricht in 1992. the European Council takes its decisions by consensus. including the session in which it decided on the EU's annual budget. His term began on 1 December 2014 and will end on 31 May 2017. European Union and Council of Europe. In accordance with Article 229 TFEU. It decides the agenda for its session periods. the President shall convene an extraordinary meeting of the European Council. In general. 73 and to hold plenary sessions and meetings. questions to the Commission and the Council. It was established on 5 May 1949 and brings together all the democratic states of the European Union. When the situation so requires. In some cases. The mandate of the President is two and a half years. EUROPEAN COUNCIL The European Council was created in 1974 with the intention of establishing an informal forum for discussion between Heads of State or Government. renewable once European Council President Donald Tusk. which are intended mainly to the adoption of the reports prepared by its committees. It also provides technical and legal assistance and expert advice parliamentary bodies and Members to assist them in exercising their mandates. the European Council became one of the seven institutions of the Union. It shall adopt its rules of procedure by majority vote (Article 232 TFEU). depending on the provisions of the Treaty. Unless otherwise provided in the Treaties. Committee meetings and plenary sessions are public and broadcast on the Internet. representing forum bringing together ministers from member states to adopt laws and coordinate European policies. The Council of Europe is based in Strasbourg and the main objective is the promotion of democracy and protection human rights. convened by its President. The Secretariat provides interpretation and translation services for all meetings and official documents. The European Council has quickly become the body that sets the Union's objectives and the line followed to achieve them. that "the European Council impetus for its development and defines EU general political guidelines thereof". Table 1. usually in Brussels and is assisted by the General Secretariat of the Council.2 Presidency of the Council of the European Union in 2014 – 2020 Country Period Greece January-June Italy July-December Latvia January-June Luxembourg July-December Netherlands January-June Slovakia July-December Year 2014 2014 2015 2015 2016 2016 18 . democratic pluralism and rule of law in all European countries. While it may influence setting the political agenda of the EU. intergovernmental and regional council. Parliamentary committees meet in Brussels.setting priorities and overall political direction of the EU and tackling complex or sensitive that can not be solved by intergovernmental cooperation to a new level. Parliament may meet in extraordinary part-session at the request of a majority of its component members.

science. In other words. Sign agreements between the EU and other countries. Council and Parliament have the last word on legislation proposed by the Commission. EU does not have its own army. during 2014. Slovakia Cyprus. Lithuania. Hungary. Coordinates cooperation between courts and police forces in member countries. The voting system. but weighted in favor of countries with fewer inhabitants (Table 1. they can fall acordasupra common objectives and can exchange experience. Estonia. 5. In sensitive areas. Council and Parliament decide jointly on the annual budget of the EU. That meeting will be called "Environment Council". Ireland. EU citizens must have equal access to justice throughout the Union. Foreign and defense policy makers in the EU. Council members. in reality. Among the objectives of the EU Council. if the Environment Council meets in the period when Estonia holds the EU presidency. the EU Council adopted decisions applying the rule "qualified majority". individually. such as security. improve education and healthcare systems and increasing welfare. Number of votes of the member states in the EU Council Country Germany. which is involved only in humanitarian. At each meeting of the Council.in cases of divorce. the meeting will be chaired by the Estonian environment minister. In the Council. In general. rescue and peacekeeping. Member States shall send the ministers responsible for the discussion on the agenda . Denmark. 2. trade. fisheries. Council signs on behalf of EU agreements in various fields: environment. But to react as quickly as in the case of international conflicts and natural disasters. Luxembourg. This procedure is called double majority system. Bulgaria. the more votes are available to the country. Poland Romania Netherlands Belgium. The country's population is larger. Portugal Sweden. the number of votes is not strictly proportional to population. but work together to develop so called Common Security and Defence Policy. justice ministers are striving to ensure that the sentences handed down by a court in an EU country . Justice and Home Affairs ministers coordinate surveillance of external borders and the fight against terrorism and international organized crime. National governments have control of these areas.3. for their own policies in these areas.Malta January-June 2017 UK July-December 2017 Estonia January-June 2018 Bulgaria July-December 2018 Austria January-June 2019 Romania July-December 2019 Finland January-June 2010 The role of the EU Council: 1. Latvia.are recognized in all other Member States. it will need to meet two types of majority: a country (at least 16) and the EU population (the countries that are in favor of the proposal must represent at least 65% of the EU population (ca. Slovenia Malta TOTAL Number of votes 29 27 14 13 12 10 7 4 3 352 For a proposal to be adopted. if the meeting focuses on environmental issues. textiles. To approve the EU's annual budget. However. Greece. Austria Croatia. 3. All other meetings are chaired by the minister from the country holding the EU presidency at the time.for example. Czech Republic. every country has the right veto. coordinated economic and finance ministers of each country. in addition. While Member States are responsible. Council brings together the foreign ministers is permanently chaired by the same person or the High Representative for Common Security and Defence Policy. environment ministers. are: to create jobs. For example. foreign affairs and taxation Council decisions have unanimously. development. technology and transportation. Coordinates the general economic policies of the Member States. 6. The Council is composed of permanent members. otherwise proposalIt can not be adopted. Italy. 329 million EU citizens of all 506 million). EU Member States have decided to pursue a common overall economic policy.) Table 1. the UK Spain.3. any Member State may request verification that most sitting represent at least 62% of the population. The Council is the main forum for conducting this cooperation.2020 is shown in Table 1. example . 19 . 4. . France. some countries contribute troops to the rapid reaction force. Finland. Adopt EU legislation. EU Council Presidency calendar. Chairing meetings.2.

If at least 15 of the 28 commissioners agree with the project. In parallel with the President and other members of 20 . It does so only in situations where an effective measure can not be taken at national. The Commission is a team of 28 commissioners. one from each Member State. the Commission shall organize public consultations to ensure that they are taken into account the views of all stakeholders. with the proposal itself is and publish an assessment of economic. with responsibility for the implementation and coordination. It must obtain a majority vote MEPs. Before submitting proposals. • representation: The Commission represents the EU's external interests and speak on behalf of all EU countries in international bodies such as the World Trade Organization. is appointed every five years. Council must nominate another candidate within one month. submit it to Parliament and the Council for approval and oversees the spending of European funds. Committee members will be elected under a system of rotation based on the principle of equality. demographic and geographical range of all the Member States. regional or local level (subsidiarity). acting unanimously. the Commission may refer the case to the Court of Justice. with the agreement President of the Commission. The main powers of the Commission are: • initiative: the Commission has the 'right of initiative' . • each successive college should be established in such a way as to reflect optimally. At the end of the procedure. after debating it and make the changes. This replaces both the Commissioner responsible for External Relations and senior police one European Council of 11-12 December 2008 foreign and security policy. provided for the adoption of a decision from the Commission to have further comprises one national of each Member State after 2014. acting by a qualified majority. The Treaty Lisbon creates also a new function within the Commission – High Representative of the Union for Foreign Affairs and Security Policy. • control: with the Court of Justice. Court can impose sanctions. social and environmental benefits that it might have. Also. If MEPs reject the proposal. the Commission seeks to take into account the interests of the widest categories. the treaty provides for a derogation as the European Council. from 2014. the European Council of 11-12 December 2008. decides to alter the number of commissioners. two members of the same nationality can not be present in the College. the responsibility for one or more policy areas. President-elect forms his team Commissioners considered the proposals of the EU countries and establishing the portfolio of each member. In any case. To ensure that technical details are right the Commission consults experts from the various committees and working groups. the Commission had first addressed a formal letter asking him to rectify the situation. the implementing rules which will be adopted by the European Council. If it considers that a government is not respecting its obligations in this respect. • Member States should be treated equally in terms of order of rotation and duration of the presence of its representatives in the College of Commissioners. negotiating international agreements between the Union and other countries receives credentials of ambassadors of the countries outside the EU in the EU and has Delegations with the rank of ambassador . the Commission sets priorities for long-term expenses in the context of "financial framework" European. In order to facilitate the entry into force of the Lisbon Treaty. Also.may propose legislation to protect the interests of the Union and its citizens. The European Commission represents the interests of the European Union (unlike Parliament and Council) and the EU's executive arm. The Council is supported by the Permanent Representatives Committee (Coreper) and over 150 workshops and highly specialized committees. Each Commissioner is assigned by the chairman.in the candidate countries or other countries outside the Union. deciding whether to adopt it or not. Ultimately. as well as representative offices Member States etc. This rotation system is the rule of principle enshrined in the EU Treaty. As "guardian of the Treaties". the Commission shall ensure that each Member State shall apply correctly the European legislation. When proposing a legislative proposal. However. prepare a draft annual budget. Shall manage the funds devoted to European policies (eg agriculture and rural development) and programs such as Erasmus (student exchange). the Treaty of Lisbon provides that in future the Commission will be composed of a number of Commissioners lower than the number of Member States. and its decisions are binding for all countries and European institutions. and management of Structural Funds and the Union's annual budget. for example. • execution: Government plays a Community level. it is submitted to Council and Parliament. Commissioners list is sent for approval (by qualified majority) and the Council of Ministers and Parliament. EUROPEAN COMMISSION The European Commission is one of the main institutions of the European Union that represents and upholds the interests of the Union as a whole. known as "preparatory bodies of the Council". This option has already been used. the Council officially appoint the new Commission. The Commission departments in charge of drafting legislation. which will decide unanimously on the following principles: • the number of Commissioners should represent two thirds of the Member States. oversee the EU Treaty and implementation of Community legislation. High Representative of the Union for Foreign Affairs and Security Policy chairs Foreign Affairs Council but is also one of the Vice Commission. These preparatory works examine legislative proposals and conduct leading up to Council decisions. by national and regional agencies and authorities.Organizing the EU Council. This It is appointed by the European Council. In most cases. Together with Parliament and the Council. Composition. The European Council nominates a candidate for President of the Commission. which. Its role is to conduct foreign policy of the Union. The way the Commission manages the budget is verified by the Court. Propose legislation and managing the implementation of European policies and how EU funds are spent. However.

to alter their powers. economists. only if so empowered by Commission to act on its behalf in their respective fields. From 1 November 2014. for a period of 5 years. The term "Commission" means both "college" of Commissioners and staff of the subordinated function. Each DG is responsible for a particular policy area and is headed by a Director General who shall report directly to the President. • European Court of Auditors checks the financing of the Union's activities. the president and the vice president. Court of Justice of the European Union: • review the legality of acts of the institutions of the European Union. The Commission has also an office (a "representative") in each EU Member State. lawyers. the High Representative of the Union for Foreign Affairs and Security is occupied by Federica Mogherini.Organized into departments called "directorates-general" (DGs) or Commission services. companies or individuals in space EU. At the request of the commissioner. translators. appointment is subject to Parliament's vote of approval. Court of Justice of the European Union. President gives. Thus. trade. one judge per Member State. Two other European institutions play a vital role: • European Court of Justice ensures compliance with European law. College secures strategic objectives and annual work program. THE EUROPEAN COURT OF JUSTICE Since its creation in 1952. Governments need to agree on nominees. EU institutions. Composition. Since the entry into force of The Lisbon Treaty. even when decisions are taken by majority vote. which deliberates generally by consensus. usually on Wednesday. which adjudicates in disputes between the European Union and its officials). for a period of three years which may be 21 . It deals with actions brought by private individuals. Treaties of Amsterdam and Nice have expanded greatly credentials. The Commission meets in Brussels once a week. Extraordinary meetings are held in situations that require urgent intervention or discussions with the Council of Ministers. DGs draft legislative proposals. but they do not behave official character than the College of Commissioners when they adopt in the weekly meetings. When Parliament's plenary sessions held in Strasbourg. Within this mission. the College of Commissioners is also meet in Strasbourg. it can also requiring a commissioner to quit Depending without having to seek the approval of the college. on some major issues. environment. the mission of the Court of Justice of the European Union is to ensure "compliance with the law in the interpretation and application of" treaties and has jurisdiction to hear disputes involving the governments of Member States. Commissioners different tasks and responsibilities may change during his tenure. they is the basis of everything the EU does. the college may initiate a vote. its legal and political responsibility of the Commission. • ensure that Member States fulfill their obligations under the Treaties • interprets EU law at the request of national courts. Previously. Currently. In this case. it should define policy guidelines college and also to determine the internal organization of the Commission. Treaties also establish regulations and procedures that the EU institutions must follow. this function was performed Catherine Ashton. Operation. decisions are taken by simple majority. in collaboration with the courts of the Member States.directors. Agenda meetings are based on the work program of Commission. Then the whole college takes a collective decision. The Court has the support of nine "advocates-general 'whose task is to present views on cases brought before the Court. regional policy. Each item on the agenda is presented by the Commissioner responsible for the area concerned. but may consult at any time. Since their creation. • political accountability by all Commissioners. consists of three courts: Court of Justice. which operates mainly in Brussels. etc. President of the Commission. From 1 December 2014. Each judge and attorney general are appointed for a term of six years which may be renewed. In this case. The members of the Committee shall appoint Vice except High Representative Union for Foreign Affairs and Security Policy. it is the judicial authority of the European Union. Commissioners submit proposals to the College. agriculture. and to offer citizens better legal protection. The Commission manages a number of executive agencies. The Commission operates according to the principle of collegiality. approximately 28 000 judgments. interpreters. The public does not have access meetings and debates. because the decisions are taken without partisan pressures. in turn. Judges of the Court of Justice shall appoint. Therefore. They are adopted by the Heads of State and / or the Prime Ministers of the Member States and ratified by national parliaments. Commissioners have no decision-making power of its own.) and may. as each proposal must be consulted on all Commissioners. The President plays a major role: defining the political guidelines. and cases relating to competition law) and the Civil Service Tribunal (created in 2004. therefore. agenda and processes verbal. secretaries etc. to the European Parliament. at any time. ensure uniform application and interpretation of Union law. the Court is composed of 28 judges. transport. Court (created in 1988 to help the Court of Justice cope with the large number of cases brought before it. collectively. The principle of collegiality ensures: • the quality of decisions. assign a portfolio each Commissioner (internal market. Decisions are taken jointly by the College of Commissioners responsible. the European Commission president is Jean-Claude Juncker. Daily activity of the Commission is provided by the staff (about 33 000 employees) . • independence of the institution. they were delivered by the three courts. businesses and some organizations. whose headquarters is in Luxembourg. . The duties and responsibilities of these institutions are laid down in the Treaty.the Commission.

frequently carries out on land. and the chambers of three judges for a period of one year.the Court is required torespect a full multilingualism. Member States and the European countries receiving aid. environment and climate change. to manage monetary policy in the euro area. The Court of Auditors has approximately 800 employees. 5) Direct action . Parliament examines the Court's report thoroughly before to decide whether or not to approve the Commission's handling of the budget. the euro and ensure price stability in the EU. if they were collected and spent in compliance with rules and relevant legislation and whether to obtain the best cost-benefit in their use. Included in his written reports to the European Commission and Governments of the Member States. So. Court can not grant sanction the discovery of irregularities or fraud. but also translators and administrators. the dismissal of a Commissioner who has not complied with its obligations) and where it considers that a question of exceptional importance. 3) action for cancellations – when is considered that certain EU legislation violates EU treaties or fundamental rights. using a common language which. without interpreters. and in cases of particularly complex or important.OLAF). Discussions taking place during thesessions are translated simultaneously. the ECB administers the single European currency. when you must decide the dismissal of the Ombudsman or to order. In order to guarantee European taxpayers that public money is well spent effectively. public finance. traditionally is French. Germany. not only auditors. The judges deliberate. So ECA mission is to contribute to improving EU financial management. To this end. because each of the official languages of the Union Language of the case may be. Court judgment on cases notified. The other cases are heard in chambers of five or three judges. They prepare draft reports on which the court takes decisions. Operation. CEC checks how they are managed EU funds and its role is to review the legality of operations of the Community budget and matches the annual program its management. The ECB is also responsible for defining and implementing the EU's economic and monetary policy. namely language in which it will take place. the Grand Chamber (fifteen judges) or in chambers of three or five judges. 4) actions in consisted the failure to act – when EU institutions are acting to take decisions which are required to take. The five common types of case are the following: 1) actions for delivery a preliminary ruling – the national instances ask the Court to interpret a legislative european act. ex officio. the Court is empowered to audit (to audit) any person or organization that manages European funds. 2) actions to consist the fulfillment of obligations–initiated against governments that do not implement European legislation. into various official languages of the European Union. EUROPEAN COURT OF AUDITORS European Court of Auditors (CEC) was established in 1975 and is based in Luxembourg. but only inform the competent Community bodies (European Anti-Fraud Office .brought by individuals. The Court consists of 28 members (independent and experienced in auditing public finances) from the 28 member states. Its linguistic regime does not have equivalent in any other court in the world. They are divided into groups of audit. the language of proceedings is the language of National court of country which addressing to the Court of Justice. promote accountability and transparency for document management and act as the independent guardian of the financial interests of EU citizens. ECA is independent of other Community institutions (but at the same time. One of the most important tasks of the Court of Auditors is to submit to Parliament and the Council an annual report on the previous financial year ("annual discharge"). as required. the language used in the Introductory application (which may be one of the official languages of the 24 European Union) will be Language of the case. As an independent external auditor of the European Union. with a term of six years. The starting point for its audit activity is the EU budget and EU policies. Court activity aimed mainly European Commission responsible funds. European Court of Auditors was established to carry out the audit of EU finances. The Court shall sit in plenary in cases provided for in the Statute (among others. Regarding demands of the pronouncement of preliminary rulings. Operation. national authorities manages 80% of revenues and expenses. we must remain constantly in contact with them) and has full freedom in the organization and its audit planning and reporting. members of the Court shall elect a chairman with a term of three years. added value. CEC can be organized into "rooms" in order to adopt certain categories of reports and opinions. The Court may sit in full.renewed. The Court must issue an opinion on EU financial legislation and the possibilities for combating fraud. European Central Bank aim is: 22 . In turn. The Vice-President shall assist the President in the exercise of his duties and replace him in case of foreclosure. The Court shall sit in a Grand Chamber when a Member State or an institution that is part of a process. businesses or organizations against EU decisions or action. President shall direct the Court of Justice and chair meetings and deliberations in the case of larger panels of judges. The Presidents of Chambers of five judges are elected for a period of three years. The Court's audit on the implementation of the budget for both revenue and expenditure. Other institutions and bodies of the specialized inter-institutional framework of the EU European Central Bank (ECB) ECB was established in 1998 when the euro was introduced. the Court's role is to check that EU funds are correctly accounted for. but in practice. Whereas Each Member State has its own language and legal system specifically Court of Justice of the European Union is a multilingual institution. As regards direct actions. Based in Frankfurt. Composition. Auditors. The auditors Court frequently carries out in the EU institutions. mainly in areas related to economic growth and employment. improving EU financial management and to submit reports on the use of money servants. due to the need to communicate in the language of the parties and ensure the dissemination of its jurisprudence in all Member States.

regional development and social affairs . • The General Council contributes to the actions of the ECB for consultation and coordination and provide support to countries preparing to join the euro area. – preservation and management of the reserves Member States. – defining and implementing the monetary policy of the euro area. Lithuania became the 19th member state). which together constitute the single currency and the euro. All opinions are forwarded to the Union's decisionmaking bodies and then published in the Official Journal. • manages the currency reserves of the euro area buys and sells currency. the Committee shall. consumer protection. especially in countries that use the euro. ECB cooperates with the central banks of all 28 Member States. but has clarified the eligibility criteria for membership. The role of the Committee is: • to advise the Council and the Commission's decision-making process. • ensure that financial institutions are properly supervised and markets by the national authorities and the payment systems functioning properly. The ECB decision-making bodies of the following: conducting foreign operations. • authorize the central banks of the euro area countries to issue banknotes. The ECB also establishes cooperation between the central banks of the 19 Member States (from 1 January 2015. such as employment policy labor. Committee members are not paid. 170 advisory opinions and documents.unions. It consists of 6 members of the Executive Board and the Governors of the 18 central banks of the euro area. • Governing Council shall formulate the monetary policy of the eurozone and sets interest rates at which commercial banks can obtain money from the Central Bank. European Economic and Social Committee was established in 1957 as a forum for discussion on issues related to the single market. vice president and other 4 members) appointed by euro zone leaders for a term of 8 years. They are nominated by national governments and appointed by the EU Council for a term of 5 years. • to ensure greater involvement of civil society in the European initiative and promote social dialogue. • to strengthen the role of civil society organizations and associations in non-member countries of the EU.especially the Council. The existing cooperation at the level of the small group called the "Eurosystem". gender equality. The EESC gives lobbyists in Europe . – promoting an efficient payment system. representatives of economic and social interest groups across Europe. • ensure that financial institutions are properly supervised and markets by the national authorities and the payment systems functioning properly. they form Eurosystem. • manages the currency reserves of the euro area buys and sells currency. The objectives of the scheme are: – defining and implementing the monetary policy of the euro area. All EU institutions and national governments must respect this principle. when necessary to maintain the balance of exchange rates. – promoting an efficient payment system. Neither the ECB nor the national central banks of the Eurosystem and no member of the court responsible decisions can not ask for or accept instructions from any other body.• to maintain price stability (ie to keep inflation under control). public health. It comprises the President and Vice-President of the ECB and central bank governors of all 28 member states. – preservation and management of the reserves Member States. Committee of the Regions (CR) The Committee of the Regions is a consultative body that represents local and regional authorities in the European Union. education. Together. ensuring that the institutions are properly supervised markets.last on specific issues. The ECB also: • fixed interest reference rates for the euro area and the money supply under control. • monitors price trends and assessing the risk that it might pose to the stability of the euro area. annually. – conducting foreign operations. The ECB decision-making bodies of the following: • The Executive Committee manages the daily activity. environment. The Committee consists of 353 members. but receive allowances to cover their travel and accommodation expenses incurred in attending meetings. when necessary to maintain the balance of exchange rates. the Committee may issue opinions on its own initiative. On average. • monitors price trends and assessing the risk that it might pose to the stability of the euro area. employers. The ECB is an independent institution. Commission and European Parliament. The areas where the Committee is consulted are: the internal market. • authorize the central banks of the euro area countries to issue banknotes. This is a consultative assembly which issue opinions to the larger institutions . • to maintain the stability of the financial system. The ECB also: • fixed interest reference rates for the euro area and the money supply under control. and so on Also. The role of the Committee of the Regions is to raise awareness of local and regional 23 . renewable.the opportunity to formally express about the proposed EU laws. European Economic and Social Committee (EESC) representatives of employers. It consists of 6 members (president. employees and other interest groups can express their views on EU actions by European Economic and Social Committee. farmers . Nice Treaty did not SM changed the number and distribution of seats at CES.

regional or local. There are six 'commissions' to deal with the different policy areas and prepare the opinions to be debated in sessions plenare1: • Territorial cohesion. public health). Commission. national. Members and alternates are appointed by the Council. European Investment Bank (EIB) European Investment Bank belonging to the 28 Member States. This money is provided on favorable terms projects that are in line EU policy objectives. 2) the proximity principle: all levels of government should aim to bring citizens closer through a proper organization of their work. European External Action Service (EEAS) European External Action Service shall assist the High Representative of the Union for Foreign Affairs and Security Policy. • Renewable energy sustainable. • Education. education. European Investment Bank support projects and invests in future EU Member States and partner countries. Once you submit a legislative proposal. Institutional and External Affairs. Committee of the Regions. 3) the partnership principle: collaboration and involvement in decision-making authorities at European. About 90% of loans go to programs and projects developed in the EU. the EIB borrow on the capital markets for not seeking EU budget. the EIB supports EU development policy implementation and cooperation with partner countries. particularly for newly established companies and those with technological orientation. • Environment. Under the Lisbon Treaty. the EIB raised an amount of about 60 billion euros. • Natural resources. regional and local level. composed of 28 finance ministers (the equivalent number of Member States). eg banks. Recipients can be very different from large corporations to municipalities and small businesses. Turkey and three EFTA countries (Iceland. special purpose vehicles. both in the public and private sectors. CR consists currently of 353 members (and an equal number of alternates) from all 28 Member States. EIB finances investment projects the EU and supports small businesses through the Fund European Investment Fund (EIF).points of view on EU legislation. • Guarantees: a large number of bodies. the European Commission is obliged to consult with local and regional authorities and their associations as early as possible in the pre-legislative stage. It also provides guarantees to financial institutions (eg banks) to cover loans to SMEs. to define general political guidelines and to adopt opinions. mutual guarantee funds. Committee members are elected members or stakeholders within local and regional authorities in the area of origin. to achieve a strong European governance. • Environmental sustainability. The Bank does not operate in for profit but grants loans at an interest rate close to the cost of the loaned money. EIB grants loans under six priority objectives listed in the Bank's business plan: • cohesion and convergence. authorizing financing 24 . ensuring at the same time. engineers and experts to complement financing facilities. if that proposal aimed at one of the policy areas with direct impact on local and regional authorities. EIB services can be grouped into: • Loans: granted to viable programs and projects. The EIB's shareholders are SM Union Bank is administered by a Board of Governors. The task of the European Investment Bank is taking borrow from markets capital and to provide low-interest loans for projects improving infrastructure. • Economic and Social Policy. Employment labor. Youth and Culture. In this regard. EIF is not a lending institution: does not lend or grant nor invests directly in any society. consistency and coordination of actions undertaken by the EU externally. the Committee issues reports ("Opinions") on the Commission proposals. • Technical assistance: provided by a team of economists. leasing companies. guarantee institutions. Instead. This leads the Foreign Affairs Council and outlines policy direction Foreign and Security Policy. EIF provides venture capital for small and medium enterprises (SMEs). using either its own funds or those entrusted by the EIB or the European Union. Council's responsibilities are to: establish lending policies. Governance. as the mouthpiece for local and regional authorities. acting through banks and other financial intermediaries. • Venture capital: requests for venture capital should be addressed directly to an intermediary. In 2008. CR activity reflects three basic principles of EU activity: 1) the subsidiarity principle: the EU should not take on tasks which are better suited to national. electricity or improving environmental standards in both countries EU and in neighboring countries or in developing countries. Liechtenstein and Norway). • The development of trans-European transport and energy networks (TEN). Committee of the Regions meets five times a year in plenary session. the proposal home countries for a term of 5 years. • Citizenship. environment. geographical and regional / local.. • implementing the "Innovation 2010 '(i2i). is deeply involved in this procedure. approval of the balance sheet and annual report. • Support for small and medium enterprises (SMEs). Outside the EU. Council and Parliament should consult the Committee before taking decisions in areas affecting local and regional (eg. Each country is free to set their own criteria for appointing members but delegations should reflect a balanced distribution of political. the Commission must consult again with the Committee. Overall. The Fund is active in the Member States of the European Union. competitive and secure. Climate Change and Energy. a post he held for Federica Mogherini.

under European legislation. C.operations outside the Union and making decisions on capital increases. EU publications (EU Bookshop). attend all staff working in EU institutions SEA thereby contributing to the dissemination of common values. created to fulfill specific tasks. scientific or management. EU institutions and bodies are obliged to respect the privacy of the person concerned. His responsibility is to organize competitions for recruitment for employment in all EU institutions. try to find an amicable solution. bodies. However.unique phenomenon in the publishing world. If it does not accept the recommendations. Once a year. of the Management Committee and the Audit Committee. it must be submitted to the Ombudsman within two years of the date on which it was found maladministration. body. in accordance with Council Decision 2009/496 / EC. state agencies. divided into 4 groups: A. There are strict rules regarding privacy. because it has been already dealt with the matter). European Administrative School European School of Administration was established on 10 February 2005. When processing personal data about a person who can be identified. The Board of Governors appoints the members of the Board of Directors. recording and storing them. This centralization is more effective than if each institution would organize their own competitions. erasure or destruction. For example. EU institutions and bodies are not allowed to process personal data that communicate information about racial or ethnic origin. If you need more. It is possible that the Ombudsman can solve the problem simply by informing the institution. local councils). the Ombudsman strives to identify the body which can help EU citizen. The responsibilities of the Authority are to ensure that EU institutions and bodies respect the right to privacy when processing personal data. Euratom agencies. in general. 'Processing' covers activities such as collecting data. failure to comply with the principles of good governance. because it can take the necessary political steps. which apply to these activities. Executive agencies. In addition. • tribunals or bodies activities of existing national ombudsman. it can make a special report to the attention of Parliament. offices or agencies infringements. The courses. we shall present a report to the European Parliament. office or agency concerned. The European Data Protection Supervisor The position of European Data Protection Authority was created in 2001. She works closely with the training departments of all the institutions to avoid submitting a double effort. even when the complaints aimed at European issues. the Publications Office provides various services online that offer free access to information on EU law (EUR-Lex). it does not support any intervention by governments or other entities. regional or local authorities in Member States (government departments. Office of the Ombudsman carries out investigations after receiving a complaint or on its own initiative. B. The European Ombudsman investigates complaints from citizens. EPSO's annual budget of around 21 million euros is lower by 11% than the expenses that it incurs in the past the EU institutions for recruitment. European Ombudsman receives requests for appeal of decisions taken by these entities. sending them available to other people. and is appointed by Parliament for a term of five years. Complaints vis-à-vis the dissatisfaction activity carried out by an institution. blocking. EU Agencies are distinct bodies of institutions . Numerous specialized agencies and decentralized bodies carrying out a series of activities for technical. office or agency of the EU. It is also editor or co-editor of the publications in the context of institutional communication activities. religious or philosophical beliefs or trade union membership. human rights abuses. Publications Office responsible for the daily appearance of the Official Journal of the European Union in 23 languages (or even 24. the Ombudsman can not investigate: • complaints against national. If they fail. when required and published in Irish) . political opinions. Publications Office EU Publications Office is an interinstitutional bodyIt aims to provide editing the publications of the EU institutions. The authority is working with officials in charge of data protection in each EU institution or body to ensure that the rules on privacy. Its mission is to provide training in specific areas for EU staff. 25 . body. retrieving them for consultation. There are over 40 agencies. the institution or body against which the complaint and the problem is. promoting better understanding among EU staff and achieving economies of scale allowing. If you can not examine the complaint (for example.separate legal entities. leading to remedy the situation reported. Euratom. The European Personnel Selection Office The European Personnel Selection Office (EPSO) became operational in January 2003. The complaint must be specified from whom a complaint is received (also the complaint to remain confidential). The Authority shall ensure that this happens. businesses and organizations in the EU who report cases of maladministration in the institutions. decentralized agencies. public procurement EU (TED) and research and development EU (CORDIS). the Ombudsman can make recommendations to the institution concerned. European Ombudsman European Ombudsman (or Ombudsman) is equivalent to an Advocate People at Community level. • complaints against businesses or individuals. As an independent body.

education. However. Currently.D. While the EU is the main focus of its activities. The European Union is an entity with an international vocation with many of the attributes of a nation state. the EU is far enough from the attributes of a state entity. European Investment Bank The European Investment Bank (EIB). launched at the Barcelona Conference and assisting the Middle East peace process. the EIB channels a large amount of its financing towards less-favoured regions. Ensuring that loans and grants are complementary brings the Bank into close collaboration with the Commission. environmental protection and urban renewal. Underpinning regional development is the Bank's priority task and two thirds of its total lending is advanced for productive investment in regions. • manages not only partial affairs. provides long-term loans for capital investment promoting the Union's balanced economic development and integration. and involves it in the preparation and implementation of structural support programmes. The Bank carries out a rigorous appraisal of each investment project. but it is a bank. promoting urban development and safeguarding the EU's architectural heritage. EIB loans go to projects. • Do not exercised in a manner a range of skills election. not only assessing its consistency with EU policies but also vetting its economic and environmental justification as well as its financial and technical viability. justice and defense.  In fostering cross-border infrastructure and environmental projects. They are determined by policy priorities and the demands of economic operators. there are still many attributes is exercised only intergovernmental basis. the executive body with numerous responsibilities in implementing legislative measures. • In foreign policy. The EIB also focuses its lending on basic infrastructure sectors and trans-European networks (TENs) in transport. more jobs. • Extending and modernizing infrastructure in the health and education sectors as well as assisting urban renewal. longstanding beneficiaries 26 . The direct benefits of EIB lending activities to the citizens have included new companies. In pursuit of these aims. paying particular attention to the linking of neighboring regions with the European Union. In the European Union. • Improving trans-European networks in transport. under the 'Amsterdam special action programme in support of growth and employment. which pays a quality of life dividend for millions of citizens. becoming a signatory to all international treaties and agreements more. as well as developing the productive private sector in Mediterranean non-member countries. The Union is committed to a strategy for strengthening the economies of Member States. the EIB also helps to execute the financial aspects of the Union's cooperation policies with non-member States. telecommunications and energy transfer. To this end. which fulfill one or more of the following objectives: • Strengthening economic progress in the less-favored regions. The EIB is not a bank in which people deposit their money. Complementing the efforts of the Member States and the EU to further a balanced economic development. • Achieving secure energy supplies. their competitiveness and their capacities to create new jobs. telecommunications and energy transfer. The EIB is a flexible and cost-effective source of finance whose ECU 26 billion volume of annual lending makes it the largest of the international financing institutions in the world. the European Union's financing institution. which are lagging behind or facing industrial decline. Loans are not allocated according to any system of quotas. In 1997 the bank launched its three-year Amsterdam special action programme (ASAP) aimed at investment in: health. • Enhancing industry's international competitiveness and its integration at a European level and supporting small and medium-sized enterprises. for AC1: • No government in the true sense of the word. the European Council at its recent meetings called on the Bank to play a major role in the Union's economic integration in the run-up to economic and monetary union (EMU). The ElB's financing for regional development often goes hand in hand with grants from the EU's Structural Funds and Cohesion Fund. EU diplomatic relations with various third party entity.  In the 70 African. Especially in Central and Eastern Europe. and additional support for large infrastructure schemes. the Bank is operating in more than 100 of these countries:  In support of economic development projects in the countries of Central and Eastern Europe preparing for EU membership. EU member states harmonize laws. better communications and improved environmental protection.  In contributing to the set-up of the Euro-Mediterranean partnership. • Protecting the environment and quality of life. European Institute of Innovation and Technology (EIT). new venture capital facilities for high-growth innovative SMEs. Caribbean and Pacific signatories to the Lome Convention.

2001 10. The European Parliament. 5. 17-20. 1997. Richard Welford.eu.eu. Peterson John and Bomberg Elisabeth. pag 5-7.org  Improving the functioning of the co-decision procedure. thus promoting the financial market's confidence in the single currency. and in the Republic of South Africa. 1999 9. Les institutions europeennes. Projects supported by EIB loans carry the lightest possible interest rate burden. 7. Dinan Dinan. Financial Times. Macmillan. Pascal Fontaine. Office for official publications. Discussion Document by the VicePresidents responsible for conciliation.1995. Burban Jean-Luis. pag 14-15. p. 1999. Les institutions europeennes. particularly for the emerging markets in the EU candidate countries in Central and Eastern Europe. European Commission. 4. “Serving the European Union”. http://www.int/ http://esc. 2001. 2000.eu. Klaus-Dieter Borchardt.int http://europa. Simon Mercado. London. European Documentation.statewatch. 1997 2. 2 May 2001. 6. much as it did to support the ECU at the beginning of the 1980s.eu. Le Monde.int http://curia. Marcel Scotto. joint ventures and environmental protection in Asian and Latin American countries which have signed cooperation agreements with the ED. European Parliament http://statewatch. Macmillan. In financing projects of mutual interest in such areas as technology transfer. ue.pdf  Open Letter from civil society on the new code of access to documents of the EU Institutions. 10-20. Basingstoke.eu. 1999. The Bank's borrowing policies also aim to help prepare the ground for a large and liquid euro capital market. Helen and William Wallace. Decision-making in the EU.int/ http://eib. 217-220. “European in ten points”. Oxford University press. Vuiber. “Ever Closer Union?”.org/news/2001/mar/codecision.int/ http://www.org/news 27 . 8. Luxembourg. ____________________________________________________________________________________________  References on the European institutions and suggested readings: __________________________________________________________________________________________ 1. Luxembourg: Office for Official Publications of the European Communities.of EIB loans. “European Business”. “The ABC of Community law”.esc. As a major presence on the capital markets — raising over ECU 23 billion in 21 curren cies in 1997 — the EIB plays an important part in their development. Forth Edition.int/comm/ http://europarl. p. Policy-Making in the European Union. 3. 9-11. Paris.eu. Web guide http://www. The Bank obtains the bulk of its resources on the capital markets where its top (AAA) credit rating enables it to borrow on the best terms available and to pass on the benefit to project promoters. la reforme inachevee. 1999. pag 9-13. pag 56-57.

Customs Union in the European Community 3.political and security dimensions may also be relevant in the formation of regional economic groupings .4 Trade with non-member countries  The Common customs tariff  Economic tariff matters  General customs legislation.  Origins of goods. Although specific incentives may vary over time and by case .REGs are expected to be at their most attractive when 28 .2 Customs Union: economic and legal framework 3.1 Concepts of regional integration.  Customs procedures with economic impact 3.1 Concept of regional integration.3. integration theory and economic analysis The eagerness of countries to affiliate themselves to a regional economic grouping stems from the various benefits offered by economic integration including opportunities for gaining economies of scale (in an enlarged trading market) and the promotion of trade and welfare through increased specialization of production. integration theory and economic analysis 3.3 Intra-community trade  Elimination of internal frontiers  Veterinary and plant health legislation  Administrative cooperation 3.

4. With the realization of the single currency in Europe (EURO) the EUR11 grouping of EMU participants (the Eurozone) exhibits many of these traits. 3. Since 1995. since the 1960s. many argue it is likely that their political independence will be reduced and political and economic decisions will be made at the center. each state maintains its own external tariff and customs policy with regards to third countries. There is another level of integration which carries this process one step further and leads to the creation of a single or common market. One of the most basic forms of integration or co-operation is that of a preferential agreement wherein preferential tariffs are applied mutually or by one party on another. though not all. The high level of trade conducted within the continental region between European states makes trade with other parts of the world less significant than for countries in other regions. Although a free-trade area also involves the reduction. The USA is a collection of separate states. This implies a high degree of co-operation between members of the union and will include the co-ordination of monetary and fiscal policies and macroeconomic planning across all member countries. while countries may remain individual political units.the level of economic and commercial interdependency between members is at its greatest. Preferences will be limited to a particular good or range of goods. between member countries. Tariffs levied on products imported from non-participating countries are levied at whatever rate the individual country chooses. the average share of intra-EU trade has been somewhere between 63% and 69% of total foreign trade and the average share of regional trade (taking account of other European market sales) in excess of 70%. This would usually result in a single currency being used. of customs duties and charges having equivalent effect on the area’s originating products. foreign exchange controls. Thus. for example. the average EC/EU member state has relied on Community markets for over 50% of total export sales. In time. And while a degree of political and legal sovereignty is maintained by each state. Agreements on this kind can range from preferential tariff arrangements to full economic union and different models involving an ascending order of degrees of integration can be characterized on a five-point scale: 1. between the UK and members of the Commonwealth prior to the UK’s EEC entry (1973). they share a single monetary system and are subsequent to a federal government with control over most. The EC.2 Customs Union: economic and legal framework A customs union is an economic area whose members agree. charges having equivalent effect or quantitative restrictions on each other and to adopt an external common customs tariff in their relations with third countries. In the case of mutual preferences. by treaty to refrain from imposing any customs duties. 3. A form of integration extends the preferential tariff to cover all imports between the countries involved in the agreement. standards and indirect taxes other than tariffs have to be harmonized or eliminated. This sort of arrangement is often referred to as a free trade area and characterizes the arrangement for industrial products made between the countries of EFTA (the European Free Trade Association). Free trade between member countries is ensured not only by the elimination of tariffs but also by removal of all other obstacles (non-tariff barriers) to free trade in goods and services. Thus licenses. taxation and public expenditure. provided an example of an integrated group of countries with common market policies and principles. The ultimate level of economic integration is complete economic union. An internal market also operated with respect to production as well as exchange and therefore freedom of mobility for labour and capital is also required. 2.Pacific area. at the end of 1992. customs procedures. This provides conditions for net trade creation. only those goods made in the 29 . The customs union introduced by the EC countries in July 1968 is thus fundamentally different from a free-trade area such as the European Free Trade Association (EFTA). they cease to be independent economic units. Examples include the Central African Customs and Economic Union and the MERCOSUR grouping in Latin America. There is a type of arrangement known as a customs union. When this is achieved. Tariff revenues become common property and are subsequently shared out according to some agreed set of rules. Here there is completely free trade in all products between the members of the union and a common external tariff levied on imports from non-member states. In contras. The further extension of fiscal and tax harmonization would go some way to realizing a full economic union amongst these economies. Commonly all imports from one country party to the agreement will be at a zero tariff while comparable imports from countries outside the agreement will be subject to a tariff barrier. 5. NAFTA and ASEAN. Such an agreement is common among countries which have close political links. The study of economic integration is the study of arrangements between two or more sovereign states as a result of which trade and economic transactions between them are conducted on a basis more favorable to them than to states outside the agreement. The US relies on the north and South American region for just 35% of its exports and Japan sells only an equivalent percentage of its exports in the Asia . participating countries agree to levy a lower rate of taxation on imports from each other than that levied on countries outside the agreement. although a degree of development to regions is likely.

and were recognized by the General Agreement on Tariff and Trade (GATT) Treaty. article 4a of the ECSC Treaty prohibited import or export duties. This distinguishes the EC’s customs union from the trade areas that the EC has established with the European Free Trade Association (EFTA) countries (most of which have now acceded to the EU) and for a wide range of products. as provided for in Article 10 (1) of the EC Treaty. so that: 1.3 Intra – Community trade (Tariff Union and free circulation) Before the Community treaties came into free. Thus. Slovenia and the three Baltic Republics. Article XXIV 8 (a) of which contains the following definition: “ A customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories. is Article 9. duties and other restrictive regulations of commerce… are eliminated with respect to substantially all the trade between the constituent territories of the union or at least with respect to substantially all the trade in products originating in such territories. charges having equivalent effect was problem-free and by 1954. Furthermore. EAEC and the EEC. iron and coal markets have certainly faced serious problems. free trade with all these countries is subject to the fulfilment of origin criteria. are not new. As industry was well protected. The founders of the community had. as well as requiring “substantially the same duties… to be applied by each of the members of the union to the trade of territories not included in the union’. even if no individual country has been responsible for a substantial enough transformation to confer origin. was the main victim of this situation. the EC does not distinguish between goods on the basis of their origin: free circulation applies equally to goods wholly obtained in the EC and goods imported into a member state from a third country and put into free circulation by the payment of import duties and the completion of any other formalities applicable to those goods. however. The steel. and can accept a limitation to ‘trade in products originating in such territories”. is now referred to as the EC Treaty). Robert Schuman said: “the circulation of coal and steel within acceding countries will immediately be freed of all customs duties…”In fact. Romania. through the so-called Europe Agreements. is the foundation of the ECSC. The European consumer. not only ‘substantially’ all trade and duties. services and capital could be trade freely. with the Czech and Slovak Republics. and more recently. and 2.territory of the free trade area can move freely. it saw no need to make large-scale efforts to modernise or reduce production costs. the founders of the EC decided to create a ‘maximalist’ customs union applying to all trade and harmonizing all duties. for the purposes of free movement between member states. they foresaw not only a formula offering economic advantages. On the contrary. but also a common market in which goods. had yielded good results in terms of trade intensification. Rules that define the notion of an origination product are laid down both in general Community provisions (non-preferential origin rules) and also in specific origin rules for certain products that are negotiated in the framework of individual preferential trading arrangements (preferential origin rules). In economic integration. with Bulgaria. Customs union and free trade area. whereas freedom of movement is applicable in a customs union regardless of the origin of goods. as originally adopted in Rome in 1957. 3. which provides in paragraph 1 that: “The Community shall be based upon a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect. In his historic declaration of 9 May. every country protected its national production with customs tariffs preventing the import of goods at prices lower than those of the national production and quantitative restrictions preventing the import of certain products in quantities exceeding those which were necessary to satisfy local demand not covered by national production. from the start the goal not only of setting up a customs union. a country would import the quantities and qualities not normally supplied by its internal production. The first operational article of the European Economic Community (EEC) Treaty (which. but also the means to set up conditions for political union in Europe. first in the 60s and then in the 80s. the later enabled the industries of \member |States to face together the coal crises 30 . which inevitably entail an element of discrimination in favour of certain trading partners and against others. structural problems caused by customs union. and the adoption of a common customs tariff in their relations with third countries”. Customs union. …subsequently the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union. in a similar form. which enable products that have been transformed successively in two or more countries that are party to a free trade agreement to enjoy a preference. A current activity of considerable importance to the EC and its preferential trading partners is the development of rules for cumulation of origin. Hungary and Poland. faced with a limited choice and high prices for low quality goods. since the entry into force of the Treaty on European Union in 1993. These were. Although the GATT Treaty refers to ‘substantially all the trade’. aimed at correcting such a situation.

of the sixties and the steel crisis of the eighties and to allow for survival of the fittest regardless of national interests. such as consumer or environment protection standards which varied from one State to another. inter-Community trade had been freed of customs duties and quantitative restrictions on imports and exports. customs union and the common transit procedure have only had a limited effect thanks to the inventiveness of national administrative departments. the member states abolished between themselves on 1 January 1959 (one year after the entry into force of the Treaty) all customs duties on imports and exports or charges having equivalent effect. which resulted in investment growth.24 TEC). various regulations could completely block the import of product. growth was a key factor to economic development and the raising of the standard of living in all member countries of the original EEC. Fortunately. In reality. Thanks to the fact that enterprises faced increased competition in their principal markets. the economic results of the free circulation of goods achieved by it were indisputable. were far from gone. A great number of those trade barriers were hidden in regulations. the good results of the customs union and the common market. such as charges having equivalent effect to customs duties and measures having equivalent to quantitative restrictions. which varied from one State to another. Despite this shortcoming of the customs union. such as consumer. Such exceptional trade. The elimination of non-customs barriers to trade proved to be much more difficult and took three times as long as did the elimination of customs barriers. as seen in the chapter on the common market. Due to the importance which indirect taxation has now acquired in the smooth operation of the Single Market. These products were to circulate freely on the markets of new member states a year after their accession. 18 months ahead of schedule. 31 . while customs barriers raised the price of imports or quantitatively limited them. which replaced them with a plethora of documents to be completed at borders. This means that products coming from a third country can move freely within the Community if the import formalities have been complied with and any customs duties or charges having equivalent effect which are payable have been levied in the importing Member State (Art. the simulative effect of a wider market created a felling of confidence. However. This demonstrates that there were no major problems. Elimination of internal frontiers Theoretically. inter-Community trade had increased nine fold. the Community having laid down the foundations of customs union and the common customs tariff (CCT) having replaced national tariffs. Their restrictive effects were often more damaging than customs duties and quantitative restrictions. In 1973. a large part of border formalities should have been eliminated since 1968. various regulations could completely block the import of a product. and all quantitative restrictions on the import and export of goods and products which come under the provisions of the chapter on the nuclear common market. Consumers emerged as the overall winners. Fortunately. the Community is based upon a customs union which covers all trade in goods and which involves the prohibition between member States of customs duties on imports and exports and of all charges having equivalent effect and the adoption of a common customs tariff in their relations with third countries. Although the Treaty gave the Member States the option of varying the rate of reduction of customs duties according to product (should a sector have difficulties) the reduction was constant and problem –free. As requested by article 93 of the EAEC Treaty (EUROATOM). other trade obstacles. such extreme cases were rather limited. Indeed. such extreme cases were rather limited. the elimination of non-customs barriers to trade proved to be much more difficult and took three times as long as did the elimination of customs barriers. as any country objection would have prevented the change of schedule provided by the Treaty. The customs union of the EC covers all trade in goods. The accelerated accomplishment of the tariff union meant that. the Commission has replaced it with an Advisory Committee on Customs Matters and Indirect Taxation. The new member States of the Community had a five-year transitional period to eliminate customs duties in inter-community trade. while trade between the six founding Member States and the rest of the world had tripled. However. A great number of those trade barriers were hidden in regulations. Article 13 and 14 of the Treaty of Rome provided that customs duties and charges having equivalent effect to customs duties on imports were to be progressively abolished during the twelve-year transitional period from 1 January 1958 to 31 December 1969. while customs barriers raised the price of imports or quantitatively limited them. Their restrictive effects were often more damaging than customs duties and quantitative restrictions. From 1958 to 1972. However. According to article 23 of the EC Treaty. The rate of tariff dismantling was even accelerated by two Council decisions and completed on 1 July 1968. Indeed. the Commission created an Advisory Committee on Customs Matters to advise and assist it in the management of customs union. as of 1 July 1968. supply was much more diverse and products cheaper than before tariff dismantling. or environment protection standards.

1992 Council Regulation 719. Hence.1998 32 . no customs formalities are required for trade within the Community. OJ L78.03. 2. 3. 26. OJ L302. OJ L 253. 25.1992 repealed by Council Regulation 2913/92.1995 and Council Regulation 374/98. as of 1 st January 1993. In order to guarantee the free movement of persons provided for by Article 18 of the EC Treaty.02.1993 Council Regulation 1172/95. 26. the non-suppression of identity checks has provoked much criticism on the part of citizens and the European Parliament. the Veterinary and Phytosanitary Inspections Office has been entrusted with the internal and external organization and implementation of inspection measures.10. It is in the interest of all member States to strengthen their common legislation in these fields and. To this scope. 19. thus ensuring the uniform application of these. 1993. This saves a great deal of time for economic operators and thus helps cut the cost of transporting goods within the Community.03. 19./91. OJ L 302. but also for the protection of the environment and of human health. OJ L48. ___________________________________________________________________________ 1. The Community henceforth forms one single border-free area for the purposes of the movement of goods under cover of the TIR (international road transport) and ATA (temporary admission of goods) carnets 2. Although customs checks of persons have disappeared since the 1 st January 1993.10.12. 1993 controls and formalities appertaining to cabin and hold baggage of persons taking an intra-Community flight and the baggage of persons making an intra-Community sea crossing3. Veterinary and plant health legislation The veterinary and plant health legislation is important not only for intra-Community trade. has necessitated the establishment of a system for collecting statistical information on exchanges of goods between Member States directly from undertakings (INTRASTAT). The abandonment of customs formalities. OJ L 78.1991 repealed by Council Regulation 2913/92.10. a Council Regulation of December 19. checks and monitoring in the veterinary (including fishery products) and plant health fields in accordance with Community regulations. The amendments to customs legislation following the completion of the internal market have necessitated the updating of the regulations on the completion of statistics on the trading of goods with non-member countries4. OJ L 118. not to upset intra-Community trade of foodstuffs. 19. The absence of duties and formalities bolsters intra-EU trade of the Fifteen and up to 80% of the total imports or exports of some countries of the Union.1992 Council Regulation 3925/91. 11. all checks and all formalities in respect of goods moving within the Community have been eliminated 1. at the same time. 31. both suffered from the same problems and finally benefited from the same remedies.05. 1991 abolished with effect from January 1. Since January 1.1991 and Commission Regulation 2454/93. Council Regulation 717/91. 4.which were the goals of the Treaty of Rome. IJ L374.

In the veterinary field. the efforts of the Community are mainly geared towards protecting the health of animals and consequently human health.1993 2. The Code is divided into three parts:  the basic rules of customs legislation: customs territory of the European Union. are transmitted daily to the Member States by electronic data transfer (TARIC interface) and to traders via the Internet. the Community Customs Code groups together and presents all of the provisions of customs legislation governing the Community’s trade with third countries in the light of its undertakings within the World Trade Organization3. it aims to improve the clarity of Community customs regulations and move the risk of divergent interpretations or legal vagueness. These arrangements include the rules applicable to the intra-Community trade of plants and plant products imported from third countries. customs tariff. In order to establish mutual trust. The Food and Veterinary Office (FVO). updating of the Community’s integrated tariff multilingual database (Taric). In this context.The plant health arrangements which came into force on 1 June 1993 have made it possible to remove all physical obstacles to trade of plants and plant products 1.10. is responsible for consumer protection and particularly for the monitoring of all slaughterhouses approved in the Member States for intra-Community trade. Administrative cooperation Since they collect customs duties.10. OJ L 119. presupposes that the external relations of the Member States be regulated in the same way. OJ L 258. For this purpose. thus ensuring smooth operation of the market. 3. however. OJ L 302. free of frontiers. economic tariffs matter. which is managed centrally by the Commission. the Community has switched from a system characterised by a policy of systematic preventive vaccination against foot and mouth disease.1992 and Regulation 955/1999. At the same time. Modern administrative management increasingly uses computerised methods. OJ L 376. several computerized links have been developed. which must be paid in the Community budget and guard the external frontiers against illicit trading. Since January 1. Council Regulation 2100/94. to a policy of non-vaccination and slaughter in the event of an infection source appearing. customs value. OJ L96.1999 33 .1994 and Council Regulation 2506/95. while measures were taken to prevent outbreaks of food-borne infections and intoxications. Veterinary import procedures for animals and animal products from third countries have been computerised (Shift System). This is the objective of the Council Regulation on the mutual assistance between the Member States administrations and on their collaboration with the Commission to step up fraud prevention. after the elimination of controls at internal frontiers. Regulation 2913/92. ensure the proper application of customs and agricultural regulations.04. 1992. both directly and through the European Police Office (Europol). the reduction in number of plant health checks by setting up a Community inspectorate. Numerous problems have appeared. 25. established in Ireland. as well as of all establishments manufacturing meat products. while allowing the smooth operation of the internal market. customs legislation and origins of goods) A true internal market. The Community Plant Variety Office supervises the protection of plant varieties in the Community2. 19. veterinary checks at intra-Community frontiers have been abolished and are instead carried out at the point of departure. 22. and by initially moving the checks from the border to the place of destination. the customs officers of the Member States act in fact in the name of the Community and must apply the Community law. OJ L 227. the customs authorities of the Member States must be open to cooperation both among themselves and with the Commission in the spirit of Article 10 of the EC Treaty. Article 29 of the EU Treaty urges the Council to take measures in order to strengthen cooperation between customs authorities and police forces.05. Council Directive 91/683. 31.12.09. 07. which could act as an obstacle to the free movement of animals and products. As essential elements of these structures. A centralized system for automatic tariff quota management communicates electronically with national administrative departments (Quotas).4 Trade with non-member countries (CCT. The efficiency of a customs union depends as much on homogeneous rules as on the quality of its operational structures. it is necessary to have a system of identification of animals traded in the internal market. By regrouping some 75 Regulations adopted between 1968 and 1992. The electronic mail system known as Scent (system for a customs enforcement network) is designed to pass urgent messages concerning cases of fraud.1991 and Council Directive 93/19. the standards for the protection of the environment and human health against harmful or undesirable organisms. _________________________________________________________________________________________________________________ 1. Veterinary checks on animal products entering the territory of a Member State from third countries are organized at Community level.1995 3. origin of goods. 01.

19. stemming from the different products that each country wished to protect. OJ L 321. on the othe hand. given the different national interests. in order to indicate. ___________________________________________________________________________ 1. and manages a Common Customs Tariff (CCT). anti-dumping duties and countervailing duties 3. OJ L 302.1987 and Commisssion Regulation 2626/1999 Council Regulation 1715/90. not only for the collection of customs duties.1999. since 1975. 23. 3. required a complex striking of balances and compromises. Before effecting any customs operation. 07. This information indicates the tariff heading to be used for specific goods in all of the Member States and it makes a vital contribution to the legal security of economic operators and greatly facilitates imports and exports. it is first necessary to proceed to the “customs classification” of the goods concerned. the temporary suspension of autonomous CCT duties. instances of goods redirection or destruction. the customs tariff of the EU takes account of the outcome of the GATT Uruguay Round of negotiations negotiations.12.10. however. No member country can unilaterally decide on or negotiate tariff matters. OJ L 256. such as tariff quotas and preferences.1987 and Commission Regulation 2626/1999. the Integrated Community Tariff database was established. The customs instrument is very important. the Community clauses applicable to the goods of this code. Community rules fit into an international context of GATT and. 14. such as the preparation of foreign trade statistics and the proper application of various measures regarding commercial. rules relating to customs debt and appeals against decisions taken in customs matters.07. p.1990 and Council Regulation 2913/92. all changes to the CCT are decided by the Council following negotiation (if necessary) and proposal by the Commission.1992 Council Regulation 2658/87. and the option of carrying out an independent customs policy. 2. it is called the Combined Nomenclature (CN) because it meets the Community’s tariff and statistical requirements simultaneously2.09. 4. temporary admission.  rules relative to customs destinations with economic impact: customs systems with economic impact (free zones. henceforth.09. Reaching an agreement among European countries on a single external tariff. fiscal or monetary policy. processing under customs control). Since 1995. 07.06. but also for a number of Community spheres of activity. a customs union includes the harmonization of customs regulations on trade with non-member countries. OJ L160. the finalisation of explanatory notes or classification in the customs nomenclature1. The Community uses the same nomenclature as its main trading partners. 1-31 34 . The common customs tariff is therefore a major achievement by the Community. the Community has established. which. For the member countries. of the World Trade Organization must be transposed into Community law. Thus Integrated Community Tariff spans all the Community measures applicable to trade and provides national administrations with information on all Community measures relating to internal and external trade. has been a resource of the Community budget. Apart from removing obstacles to intra-Community trade. The common customs tariff A customs union is identified by the existence of a single external tariff applied by all Member States to imports coming from third countries. Economic operators can request binding tariff information from the authorities in the Member States with responsibility for the classification of goods under the customs nomenclature 4. the CCT meant the loss of both customs revenue. On the one hand.1999 See OJ C 212. thus facilitating trade negotiations. Council Regulation 2658/87. It incorporates import provisions not included by the CN. 26. All bilateral (between the EU and non-member countries) and multilateral (GATT/WTO) negotiations are carried out by the Commission. Such imports only have to clear customs once and can then move freely within the common customs area. This activity takes the form of the adoption of Commission regulations. in relation to each CN code. agricultural. The efforts aimed at implementing such regulations in the European Union are taking shape in two directions. In parallel with the introduction of the CN. The Commission and the Member States cooperate to ensure the proper and uniform application of the CCT 's nomenclature. OJ L256. Classification has a determining effect on the proper functioning of agreements between the Community and certain exporting countries on the trade of textile products.

Economic tariff matters
As of 1968, the Member States are not entitled to unilaterally carry out customs policy, suspend
duties or change CCT. Only the Council can waive the normal application of CCT by means of regulations
adopting various tariff measures. Such measures, whether required under agreements or introduced unilaterally,
involve reductions in customs duties or zero-rating in respect of some or all imports of given product. They take
the form of Community tariff quotas, tariff ceilings or total or partial suspension of duties.
The most important tariff concessions are granted by the Community in the context of the General
Agreement on Tariff and Trade (GATT). In the course of several international negotiations, namely: the
“Dillon Round” (1960-1962), the “Kennedy Round” (1964-67) and the “Tokyo Round” (1973-79), substantial
reductions of customs duties were made on most industrial products. The “Uruguay Round”, which was
launched on 20 September 1986 and was concluded on 15 December 1993, has achieved major tariff reductions
on the part of the 117 participating countries in the sectors of industry, agriculture and services. It has also
imposed new rules and disciplines to international trade.
The EU can raise customs duties on products whose protection has been bound “consolidated” under
GATT only if it offers its trading partners equivalent compensation. However, the Council may adopt unilateral
protective measures on imports when these present a serious risk to European production. Such measures may
not be directed at a single country or be limited to one or more member States. The EU can also protect itself
against unfair trading practices by applying the anti-dumping procedures included in GATT provisions. Pursuant
to these provisions, the EU can fix countervailing duties if goods are offered in the European market at a
substantially lower price than in the producing country.
As part of its development aid policy, the EU applies generalised tariff preferences to imports from
developing countries (LDCs). To the African, Caribbean and Pacific States (ACP), signatories of the Lome
Convention, the EU grants free access to the near-totality of their imports, with the exception of textile products
and of the agricultural products that are subject to common market organisations of the common agricultural
policy.
Following the accession to the EEC of the UK and Denmark, both former European Free Trade
Association (EFTA) members, free trade agreements were concluded between the Community and the EFTA
countries in order to avoid the erection of new obstacles to trade. As a result of these agreements, trade between
the two groups of countries tripled from 1974 to 1984. These bilateral agreements have been replaced, since 1 st
January 1994, by the Treaty on the European Economic Area (EEA), which, after the accession of Austria,
Sweden and Finland to the EU, brings together the Fifteen with Norway, Iceland and the Liechtenstein in a vast
economic zone guaranteeing, not only free trade, but also the fundamental freedoms of a common market. The
free trade arrangements are gradually being extended to the countries of Central and Eastern Europe in the
framework of “Europe Agreements”.
Several tariff quotas and ceilings are opened every year, under bilateral agreements with non-member
countries or on a unilateral basis in order to secure the Community supply situation for certain products. Tariffs
are also suspended on a number of agricultural and fishery products, to improve the supply of certain types of
food and honour preferential commitments entered into with certain non-member countries.
The legislation on preferential tariff measures resulting from agreements concluded between the EU and
States or groups of States with which contractual relations are maintained has been consolidated in a few main
multiannual Regulations. For the sake of simplification and efficiency, the publication of tariff suspensions in
separate Regulations with a specified date of validity has been replaced by publication in a comprehensive
multiannual form1.
The full application of CCT is thus limited to trade with North America, Japan, Australia and a few
other developed countries. Although CCT has become less important, customs union, supported by the
instruments of trade policy, which accompany it, ensures sufficient protection from the import of cheap industrial
goods. In the textile sector, customs duties are generally supplemented by agreements on voluntary restraint of
exports negotiated as part of the Multifibre Arrangement (MFA). In the steel sector, agreements on voluntary
restraint have also been concluded with the principal producing countries. As seen in the chapter on agriculture,
the agricultural market is protected by a special system, now based more and more on customs duties in
application of the GATT agreements.
_______________________________________________________________________
1.

Council Regulation 1255/96, OJ L158, 29, 06.1996 and Council Regulation 1381/1999, OJ L 165, 30.06.1999

35

General customs legislation
Customs union requires more than just having a common customs tariff, it must be applied according to
identical rules throughout all Member States. Failure to do this could result in different values for customs
purposes or different rules on the release of goods for circulation according to the importing Member State. The
Customs Code of the European Union, which groups together all the provisions of the Community’s customs
legislation, aims precisely at removing the risk of different interpretations of EU rules in trade between the
Member States and third countries1.
The customs territory of the Community is defined by a Council Regulation and now by the
Community Customs Code3. It states inter alia that the coastal Member States territorial sea is part of the
community’s customs territory. This is of particular importance to the fishing and offshore activities of Member
States. Another Regulation lays down provisions relating to the place of introduction to be taken into
consideration for the determination of value for customs purposes. Value for customs purposes can sometimes
have a greater impact on trade than customs duties. A Council Regulation specifies the method by which such
value is determined, the customs clearance criteria for goods finished or processed out of their country of origin,
and the conditions under which goods are temporarily exempt of import duties.
Transit systems (Community transit, common transit and TIR are at the heart of the customs union and
the common commercial policy, but these systems are subject to fraud.
A Regulation on checks for conformity of products imported from third counties with the rules of the
Community Directive on product safety, aims to ensure an efficient and coherent management of the common
external frontier and to equalize the conditions of competition between Community products and imports. It
enables the customs authorities of the Member States to temporarily suspend the customs clearance procedure in
cases where imported products present characteristics, which may constitute a direct health or safety hazard.
Agreements between the European Community and the United States and Canada provide effective market
access throughout the territories of the parties, since they authorize product testing and certification in the
exporting countries and no longer only in the countries of destination.
The Community Customs Code has harmonized the legislative, regulatory and administrative
provisions on: the customs treatment of goods entering the Community’s customs territory and on the temporary
storage of these goods, goods brought into the customs territory of the Community until such goods have
received a destination for customs purposes, returned goods in the customs territory of the Community,
admission to free circulation of goods, and relief from customs duties2.
The Community Customs Code now governs also the export procedures of Community goods, the
deferred payment of customs duties on imports or exports, the refund or remittance of these duties, and the postclearance collection of export duties not imposed on goods entered for a customs procedure3.
Of capital importance to the administration of customs union and to the legal security of individuals are
the common rules concerning the origin, liability and settlement of customs debt, those providing the definition
of persons liable for payment of a customs debt and those defining the conditions under which a person may
submit a customs declaration.
The close co-operation between national administrations, organized by the Commission, is needed to
prevent infringements of customs rules and other conditions for access to the Union market. Priority areas
include fraud prevention, protection of intellectual property rights-particularly trademarks, designs and
copyright-and measures to combat counterfeiting.
The action to combat fraud in trade with non-member countries is organized by a Council Regulation
on the mutual assistance of the administrative authorities of the Member States and on their collaboration with
the Commission to ensure the proper application of customs or agricultural rules. The Community, however,
lacks uniform penal provisions to prevent the infraction of customs legislation. Common protection against the
unfair trading practices of non-member countries is covered by a Council Regulation of 1 December 1986,
which lays down measures preventing imports and prohibiting the release for free circulation of counterfeit and
pirated goods infringing intellectual property rights including patents 4. The Community has signed agreements
on customs co-operation and mutual administrative assistance in customs matters, including fraud prevention,
with the Republic of Korea, Canada, Norway, and the United States. It is negotiating similar agreements with
China and the ASEAN member countries.
_________________________________________________________________________________________
1.Council Regulation 2913/92, OJ L 302, 19.10.1992 and Commission Regulation 1427/97, OJ L 196, 24.07.97
2.Council Regulation 2151/84, OJ L 197, 27.07.1984 and Council Regulation 2913/92, OJ L 302, 19.10.1992
3.Council Regulation 2913/92, OJ L 302, 19.10.1992
4.Council Regulation 3295/94, OJ L 341, 30.12.1994 and Council Regulation 241/1999, OJ L 27, 02.02.1999

36

Origin of goods
The rules of origin determine to what extent products coming from third countries may be exempt of
duty by determining the degree of processing or transformation they have undergone. These rules, which are now
contained in the Community Customs Code, are important for the proper application of preference systems and
several provisions of the commercial policy of the European Union. In order to prevent fraud arising from
irregularities of origin, it is necessary to determine uniformly the origin of goods obtained in a country after
substantial transformation of raw materials and semi-products originating in other countries.
Thus, goods admitted under preference agreements must come entirely from the exporting country or, if
imported from a third country, have undergone substantial processing or finishing. The Community Customs
Code defines for purposes of non-preference traffic, the concept of the origin of goods 1. The rules on origin are
now incorporated in the agreement establishing the World Trade Organization 2.
The origin of several categories of products has also been determined autonomously by Council
regulations. Such definitions are used for non-preferential traffic. Other provisions determine the rules of origin
on a conventional basis within the framework of preference agreements between the Community and certain
countries, namely the ACP.
The action to combat fraud in the field of rules of origin is mainly concerned with textile products
imported from developing countries. For Community exports, the Commission adapted the model certificate of
origin to the overall frame recommended by the UN3.
Customs procedures with economic impact
Common customs regulations, uniformly applicable in the Community’s trade relations with other
countries, involve setting up various customs procedures with economic impact. Using Directives, the Council
harmonized the legislative, regulatory and administrative provisions relative to customs warehouses procedures,
free zones procedures and usual forms of handling, which can be undertaken in customs warehouses and free
zones4. The CCC also governs the processing of goods under customs control before their release for free
circulation in order to avoid, by use of tariff measures, the processing operations of certain imports, such as
certain petroleum products, taking place in third countries rather than in the Community. To facilitate the use of
containers in, for example, combined road/rail carriage, the Council defined on 13 July 1987 a regulatory system
for the temporary admission of containers is defined 5. Bearing the mark of their Member State, the containers are
deemed to meet the conditions of free circulation provided by articles 9 and 10 of the EEC Treaty (Art 23 and 24
TEC).
Of particular interest are inward processing arrangements allowing for the temporary release for free
circulation of products coming from third countries processed in a member State and re-exported to a third
country. The Member states must properly apply these procedures especially when the inward processing deals
with agricultural products and when compensating products are released for free circulation in a Member State
other than where the processing took place. In an attempt to lighten the formalities for those involved a
Commission Regulation sets specific provisions applicable to certain inward processing arrangements or
processing under customs control carried out in a customs warehouse, free warehouse or free zone.
The reverse mechanism, outward processing arrangements, is of interest to many European
enterprises which, in the context of the international division of labour, export goods with a view to re-importing
them following processing, working or repairs. This alleviates the enterprise’s production costs and thus favours
production in the EU. Established in 1982 as part of the multifibre arrangement for textile and clothing products,
outward processing relief arrangements were expanded, in 1986, to standard exchange arrangements and, in
1988, to triangular traffic covering two Member States. The Member States can check the relevant documents
in order to ensure that the compensating products have been manufactured using goods temporarily exported.
The outward processing arrangements have been adapted to the internal market and cover tariff concessions for
the Central and Eastern European countries6.
___________________________________________________________________________
1.
2.
3.
4.
5.
6.

Council Regulation 2913/92, OJ L 302, 19.10.1992 and Commission Regulation 1427/97, OJ L 196, 24.07.1997.
OJ L336, 23.12.1994
Commission Regulation 2454/93, OL L 253, 11.10.1993 and Commission Regulation 1662/1999, OJ L 197, 29.07.1999
Council Regulation 3036/94, OJ L 322, 15.12.1994
Council Regulation 3036/94, OJ L 322, 15.12.1994
Council Regulation 3036/94, OJ L 322, 15.12.1994

37

Kluwer Law International. 1999 Trotignon Jerome.London-Boston. 8. 3. Hachette. 2001. A. The Hague. 4. pag 105-111.O.int 38 . Economie europeenne. Krueger. 1997 Free trade agreements and customs unions. challenges and constraints. 5084 Nicholas Moussis. Integration et politiques communes.wto. No. Maastricht. Inama Stefano..eu. 6. the Netherlands. 1997. pag 60-74.___________________________________________________________________________ References on Customs Union and suggested readings: ___________________________________________________________________________ 1.(1995). “Access to European Union”. 2. European Study Service. Customs and Trade Laws of the European Community. Customs Union Agreement (Decision No 1/95 of the EC-Turkey Association Council) OJ 1996 L 35/1 http://www. co-published by the European Institute of Public Administration.org/wto/english/tratop_e/dispu_e/distab_e. Paris. NBER Working Paper. experiences.htm The EU Market Access Database http://mkaccdb. 7. 5. Free trade Agreements versus Customs Unions. Vermulst Edwin.

They can set themselves up wherever they wish in the common market and can call on a multitude of sources of capital. legal and administrative requirements across the Community states. We saw in the previous chapter how the Member States effectively removed the customs barriers even before expiration of the period laid down by the Treaty and how immediately after tariff dismantling. by establishing a common market and progressively approximating the economic policies of Member States.3 The impact and effects of the Single European Market 4. it put the Community in a position to take decisions more efficiently and to act more rapidly and more democratically. persons. The SEA also introduced changes in the Community legislative system (designed to encourage the adoption of internal market measures by majority voting) and revised the terms of the third article of the Rome Treaty. capital. we shall look at how the Member States decided to take to eliminate technical obstacles to trade and to open up their public contracts. Underlying in there is a range of basic freedoms: the free movement of goods.4 Understanding the four freedoms: Free movement of goods. technical and fiscal) and a deadline of 31 December 1992 for the implementation of a series of liberalizing measures. they began erecting other barriers between them. to promote throughout the Community a harmonious development of economic activities. The common market is a stage in economic integration which. In the first section of this chapter. presented in the form of a White Paper. including divergent sales taxes. This was signed in February 1986 and entered into force on 1 July 1987. Single European Act 4. it outlined three different types of barrier to the completion of the internal market (physical. the “internal market”. By making significant changes to the Community 39 . an increase in stability. Businesses can manufacture and sell their products in accordance with a system of free competition in the Member State in which conditions are most advantageous to them. It is worth noting that the Treaty establishing the European Community ignores the concept of the “single market”. At the Milan Council of June 1985. aims to remove all the barriers to intra-Community trade with a view to the merger of national markets into a single market giving rise to conditions as close as possible to a genuine internal market. It refers generally to the stage of the “common market” and to the end result of it. Completing the Internal Market (European Commission. Consumers have a free choice of better quality and or lower price products. 1985). Single European Act The creation of a single European economic area based on a common market was the fundamental objective of the Treaty of ROME. in the words of a Court of Justice ruling. technical and fiscal barriers. 4. persons. was the end-point of five years of intensive Commission study of the deficiencies of the Community’s trading order.2 The removal of physical. the member states finally and formally endorsed a concrete plan of action proposed by the European Commission. Physical barriers were identified as those hindering the free movement of people. services and capital is ensured in accordance with the provisions of this Treaty”. The basis of the Milan agreement was quickly embodied in Community law by the Single European Act (SEA). is a very important stage in European integration. Article 2 of that Treaty set out that objective as follows: The Community shall have as its task.4. an accelerated raising of the standard of living and closer relations between the States belonging to it. excise duties and varying payment collection systems. which according to its Article 14 comprises “an area without internal frontiers in which the free movement of goods. They can establish themselves with their families in any of the member countries and take up employment there. which exist in every Member State. The key word for the common market is. Fiscal barriers were described as a consequence of diverse fiscal arrangements in Community territories. in particular technical barriers which were even more difficult to cross than customs ones. and “internal market” which are used almost synonymously but which have significant nuances of meaning. Their implementation first and foremost makes it possible to allow the production factors of work and capital to operate without hindrance. freedom. Workers have free access to jobs wherever demand is strongest and thus benefit from better working conditions and remuneration. labor and services 4. goods and capital.1 The Internal Market Programme. Also we shall examine the measures aimed at the free movement of goods. constitute the basic elements of the common market. This plan. It is useful to define here the concepts of “common market”. as we can see. In addition it provided for the European Parliament to play a fuller part in the decision-making process through the cooperation procedure. manufactured in the Member States. The Single European Market 4.1 The internal market Programme. The common market. a continuous and balanced expansion. Under the authorship of British Commissioner Lord Cockfield. services and capital. “single market”. By re-establishing majority voting by the Council. and technical barriers as those extending from national standards. which was completed in 1992. The establishment of the common market first required the elimination of all import and export duties in force between Member States before the foundation of the Community.

Yet the SEA had real potential for the Community’s rapid development. the removal of a frontier-controlled VAT and excise system would significantly reduce waiting times at borders and associated costs. First. such trading would then have been impossible. capital would be allowed to move freely out of national jurisdictions as a part of a basic deregulation under a new Capital Movements Directive. A central aim of the White Paper was to ease these border formalities and to move inland tasks relating to national customs. and other state laws and provisions that fragmented and segmented the EC market. Today fresh food can be collected from UK production points and sold in French supermarkets within twelve hours and with little interference. thus creating the Single Market. Checks arising from health protection. The removal of technical barriers The importance of removing technical barriers was underlined for the Commission by the inhibited nature of cross-border competition in several markets (goods and services) and by the dwindling international competitiveness of European firms in strategic high-tech markets. Further. foodstuffs and flora. cars and televisions. 40 . Within a short time. such restrictions endured in a number of southern EC member states. Third. the UK and the Netherlands had removed controls or taxes on capital movements. a successful single market program might advance European integration in related economic and social sectors. Second. provision for qualified majority voting could not only expedite the internal market but also encourage the Council of Ministers to be more flexible in areas where unanimity remained the norm. In the Commission’s view. for example of animals. national testing and certification procedures. firms wishing to export their products throughout the EC from a single production point and around a basic standard were heavily penalized. In several sectors. research and development and imposed serious restrictions in efforts at pan-European marketing of audio-visual equipment. proponents and opponents of greater European integration would know whether and how the SEA’s potential would be realized. could also be moved away from the border to the place either of departure or destination. for example in Greece and Portugal. encouraged many firms to produce their various products in plants based in end-user markets. The balance of customs-related administrative activities could be shifted to more efficient points within the Community system and in the process. passport checks for internal EC flights would be lifted (the Commission would seek their removal with the co-operation of the member states) and residual capital controls would be terminated. UK producers of perishable products like any others faced costly delays as a consequence of hold-ups at customs points accounting for up to one-third of total journey times. veterinary and phytosanitary controls. taxation. the introduction of a legislative “cooperation” procedures to coordinate foreign policy might enhance the Community’s international standing. This would further alleviate the burden at border points and enable the introduction of a tougher and more humane supervisory regime for livestock trade. Fourth. 4. One effect of this deregulation would be to facilitate the cross-border selling of financial products and to assist processes of cross-border capital investment. the SEA’s endorsement of the White Paper and formal extension of Community competence could strengthen the Commission’s position. some 60 million tax forms abolished. technical and fiscal barriers As a point to check compliance with national rules on indirect taxation and as a method of monitoring and controlling the movement of persons throughout the Community.decision making process (qualified majority voting in the Council acting in cooperation with the European Parliament) the Single Act succeeded in removing the technical barriers to trade. Practical difficulties associated with these frontier controls (including paperwork and stoppages) were estimated to cost EC industry the equivalent of 12 billion ECU per annum. seventy different administrative forms could initially be consolidated into a Single Administrative Document. Europe’s leading firms were confronted with different national product regulations.2 The removal of physical. These barriers which had been adopted over several years-prevented European businesses from reaping the full benefit of economies of scale in relation to production. internal customs posts frustrated companies attempts to move goods and services across national boundaries with speed and efficiency. This kind of duplication often resulted in sub-optimal plants and supported company inefficiency. the requirement for which would pass with internal market completion. Equally. national industry standards. Although countries including Germany.0% of average consignment value and providing a strong psychological barrier to cross-border business for many smaller firms. This frustrated the whole exercise of cross-border trade adding substantial costs estimated at up to 2. Although the process of ensuring free movement of persons would be complicated. Elsewhere.

In areas such as chemiodstuffs and pharmaceuticals. was to displace a traditional method of wholesale (product-by-product) legislative harmonization. o The select approximation of standards. which is now firmly established.1 A typology of costs resulting from divergent standards and regulations ___________________________________________________________________________ For companies    Duplication of product development Loss of potential economies of manufacturing scale Competitive weakness on world markets and vulnerability on European markets as companies operate from a narrow national base For public authorities   Duplication of certification and testing costs Not getting value for money in public purchasing whose non-competitive nature is often by national standards and certification reinforced For consumers  Direct costs borne by companies and governments means higher prices  Direct and larger losses due to industry’s competitive weakness and inefficiency structure _________________________________________________________________________ As with the physical barriers already discussed. 41 . which do not meet their essential requirements. The specifications being adopted by these organizations for repeated or continues application are being transposed at national level by local standards authorities such as AFNOR in France and DIN in Germany. and o The strengthening of common reporting and notification procedures. This means that products can be barred access on the grounds that they infringe local rules (essential requirements) on health. Second. a wide range of products and product risks may be sufficiently homogenous to allow for the identification of common essential requirements. This approach. Nevertheless. While holding out the attraction of uniform product regulations. Mutual recognition In order to facilitate the right of firms to sell and market their goods across the Community. the Internal Market paper proposed to tackle these barriers by pursuing a strategy of convergence. this ruling reduces the need for the Commission to make undertakings on an individual product basis. First. it proposed a three-tier approach based on: o Mutual recognition. standards have been different and goods are often required which are compatible with existing equipment and systems. which mean that mutual recognition alone is insufficient to eliminate all of Europe’s technical barriers: 1. Specifically. While this does not provide exacting standards for individual products. In effect. consumer and environmental protection. Historically. in principle. the legislation was becoming highly technical and extraordinarily complex as it looked to meet the individual requirements of each product category. Countries are still able to restrict access to those goods.Table 4. this approach had proven inefficient for two central reasons. The technical specifications of products meeting essential requirements are laid down in harmonized standards agreed by common professional organizations such as the European Standardization Committee (CEN) and the European Electro technical Standardization Committee. each member state must give access to goods accepted as fit for sale in another EU market. this approach permits a degree of harmonization to be achieved at a relatively quick pace. the adoption of technical harmonization directives was based on unanimity in the Council. mutual recognition of standards has been introduced. 2. This means that. safety. there remain two key issues. Standardization of essential requirements The Commission has undertaken to standardize the essential requirements rulings in a number of areas where a close approximation of technical requirements is beneficial.

particularly in specific high-technology sectors such as computers telecommunications and aerospace. This principle is implemented through the central requirement that contracting authorities shall publish all contract notices no the basis of a model notice and a periodical notice summarizing the most important information on the contracts planned for the twelve months ahead.  The greater innovation and investment of firms operating in a competitive environment. EU public authorities can sometimes limit the bidding (restricted tender) to satisfy conditions set by the purchaser (essential financial requirements) or may turn to negotiate procedures. although the opening up of public sector contracts to competitive bidding has been encouraged.wherein there is a downward pressure on prices as a result of competitive bidding by numerous firms for tendered contracts. transport. The Commission evidenced that less than 5 % of contracts were awarded to companies from other EU countries and highlighted closed bidding and exclusive trading in favour of national suppliers. Although this chapter will later highlight the continued failure of member states to do this.  The savings to be made by private sector buyers who benefit from the lowering of prices by firms serving the public sector. telecommunications and water) tightened the obligations on member states and established the principle that equal opportunities shall apply for national and non-national undertakings. Liberalizing public procurement Under the category of technical barriers. which require national authorities to inform the Commission of any changes in regulations and standards. In this sense. The Commission is empowered to block changes in national regulations if they are deemed to raise barriers to market entry and to competition. However. in the longer term. Directives 93/36 for public supply. The use of this negotiated procedure is just one of a number of 42 . Suppliers and services of other public services (400. the White Paper on the Internal Market also addressed the situation in the European market for contracts concluded by public authorities and by public sector firms.000 Euro). Such practices. by facing higher prices and limited choice. products manufactured in conformity with national standard which itself transposes a published harmonized standard benefit from a presumption of conformity with essential requirements throughout and cross the EU. there is now a clear incentive for producer firms to adapt their products so as to comply with EU-wide standards.  The dynamic trade effect-sometimes referred to as the competition effect.While these standards are not legally enforceable (they remain voluntary).encouraged by the social and political benefits of supporting local profit and employment worked against and spirit of EU competition and fragmented the European market. the various texts in this area were consolidated in 1993. Publication must be in the Official Journal of the EU and requirements shall apply above the following minimum thresholds:     Supplies and services (200. After an initial upgrading of Community texts on public contracts and the extension of rules to formerly excluded sectors. The cost savings and the Commission promoted a number of benefits including:  The static trade effect-which involves cost savings for buyers as they purchase from the cheapest source. 93/37 for public works and 93/38 for the formerly excluded sectors (energy. These gains were of the clearest importance given estimations of the sheer size of the EC procurement market. These involve a closed short-list of suppliers and may apply where tenders are not received under open tendering or where exceptional circumstances apply. National government purchasers were also paying the price of staying local. will allow economies of scale. the Commission has introduced mutual information-notification procedures. certain restrictions continue.000 Euro). This is generally referred to as the public procurement market. this is an important element of the new approach to standards in the EU. Works (5 million Euro). Purchasers can be forced to justify a decision to use negotiated procedures to the European Commission.  The restructuring effect-which. Telecommunications suppliers and services (600.000 Euro). Mutual information-notification procedures Finally. this was estimated somewhere between 10% and 15% of Community GDP although subsequent analysis has estimated a current contribution to Union GDP of some11% (&500 billion). At the time of the White Paper.

better resource exploitation and increasing economies of scale. Italy. Business can bid for public sector contracts outside their home state and operate more freely in internal EU markets. In addressing this problem. there would be immediate savings due to the removal of barriers and savings spread over time due to the exploitation of economies of large-scale production. in turn. Wine for example was not taxed in large-scale producer countries such as Greece. By removing non-tariff barriers. which. On excise duties. the Commission’s original proposal was for absolute harmonization. 4. Divergence with respect to excise duties (like sales tax) has narrowed as a consequence of the agreed convergence measures but remains sufficient to maintain major price differentials between countries. As example. would contribute towards increased output. Portugal and Spain. In the end. Europe would benefit from greater competition in product markets and from reduced production costs. there has been little progress towards a definitive origin based system despite successive Commission proposals. on other tobacco products (92/80/EEC). From 1 January 1993 a more flexible approach was introduced involving an all-party pledge to keep standard VAT rates at between 15% and 25%. the European Commission proposed moving towards a system which established two VAT rate bands. The lower or reduced rate was to be set at between 4 % and 9% and the upper or standard rate set at between 14% and 20 %. Under the agreement of EU Finance Ministers. research from the United States suggests that contiguous states can maintain differentials in sales taxes of only up to 5 % without the tax leakage becoming unbearable. these discrepancies afforded a degree of protectionism for domestic producers. Other weaknesses include excessively high thresholds. One consequence of this is a growing trend towards targeted cross-border shopping. Sweden and the UK. on alcoholic products (92/84/EEC) and on petrol. The potential gains of Single Market completion. The lower rate would cover foodstuffs. This plan was rejected by the member states because it implied too radical an attack on existing excise discrepancies. deficient transposition into national law and flawed application of the rules by the contracting authorities. many of which telecommunications and air transport services) have been significantly liberalized. fiscal harmonization is required to ensure a single market. as applying to mineral oils (petrol). the “booze cruise” phenomenon (familiar to British readers of this title) sees UK based consumers exploit the lower duties on beer and wine in France and a sizeable duty-paid allowance for personal consumption.3337 was required per liter of petrol. The removal of fiscal barriers The target of removing fiscal barriers related to the impact of divergent excise duties and indirect taxation regimes on cross-border trade in the EC. In the end. In many cases. Significant variations in comparable tax rates interfere with the optimal allocation of resources and distort otherwise normal trading relationships. With respect to the harmonization of sales taxes.problems with current legislation. at the time 53% of the tax-included retail price. with travel companies encouraged to expand their presence in the duty-paid market. minimum excise duty rates were established through directives on cigarettes (92/79/EEC). Analysts suggest that the elimination of the duty-free internal market on 30 June 1999 will add further stimulus to such cross border shopping. periodicals and passenger transport. The existence of differential sales taxes and excise duties between the units of an integrated economy. its proposed harmonized rate for cigarettes was calculated as an arithmetic average of national duty rates. who saw it as too constraining and was subsequently modified. Sweden and the UK. eliminating expensive re-testing and maximizing scale economies. and in income and corporation taxes can therefore provide major market distortions. water supplies. some scope is also provided for the application of reduced and super-reduced rates and for the zero-rating of specific items.3 The impact and effects of the SEM It is clear that the Single European Market has realized dramatic and positive changes to the European business environment. newspapers. The net welfare gain would be between 5% and &% of the EC’s GDP. Additional gains in terms of jobs. Technical and regulatory barriers have been reduced with the principle of mutual recognition of standards meaning that manufacturers can sell their products all over the EU. prices. books. trade and budgetary balances were projected by use of a variety of methods. In theory at least. Most of the physical and administrative restrictions on goods 43 . Falling prices (coupled with reduced x-inefficiency) would act as a natural stimulus to demand and investment. For example. minimum excise duty rates applied in Denmark. the White Paper made several proposals. alcoholic beverages and tobacco-based products. further elaborated by the European Commission in 1987. Although rates may not have to be completely equalized. with benefits accruing fully with appropriate and co-coordinated macroeconomic policies on the part of member states. The White Paper on the collection of VAT in the country of production or origin and the redistribution of revenues to the country where the good or service would be consumed While a transitional VAT system was introduced in 1993. while extremely high rates applied in Denmark. This proposal was rejected by the member states. energy products. The minimum tax of Euro 0. pharmaceuticals.

with the UK benefiting from 4. Much of this investment has been stimulated by concerns over future access to the EU market. these two member states sucked in about 30 % of all intra-EU cross-border investments. these include a number of measured results that would not have been experienced without internal market completion. for increased cross-border trade and for improved technological performance. particularly in highly nationalistic countries. foodstuffs.9% in 1998. gains have been most clearly felt in the UK and Holland. On trade. In the Commission reports. deregulation and technical progress. A reduction in EU average price inflation by at least 1%. The EU-15 enjoyed an external trade surpluses in services of Euro 8. . This insider advantages can be said to include:  Closeness to the market. qualifications. FDI assets held in the EU by foreign investors have steadily increased since the first efforts to complete the Single Market. gathering market information on which marketing strategies are based is easier at first hand. Firms with a local manufacturing presence often come to be considered as ‘local firms’. foreign investors are less concerned with EU markets barriers and are more concerned with the advantages offered by the Single European Market. the EU countries hosted FDI liabilities worth an estimated 422 billion. financial services.9 billion of this total.5 % hike to aggregate EU GDP (1987-1993) . The effect has been a stimulus to economic growth. During the period 1993-1997. construction and building materials. With respect to inward investment. Today. the EU attracted 94. In turn.1.The creation of 900. Internal as well as external trade in services has also expanded rapidly.A 1% increase in internal investment.this involves not only geographic proximity which makes delivery easier but also closeness in the sense of shortening the communication links between the market and the manufacturer for the diffusion of information. textiles.000 extra jobs.related to the above point. The impact on market structures The Internal Market Program has led to substantial restructuring of industry. On investment. The following estimates have been provided for the EU as a whole: .2 billion in 1998. benefiting from a general pattern of sectoral change. to investment and to employment creation. energy. have greatly dissipated. the period of the SEM has been associated with an increase in internal (intra-EU) and external (inward) investment. facilitating deregulation and market liberalization in many sectors. individuals can move freely (with residency rights attached) and with mutual recognition of their professional and higher education. The percentage of total merchandise trade constituted by intraEU dispatches has accelerated from 61. is their foreignness. With respect to intra-Community investment flows. consumer behavior.  Better market information. non – EU firms may only win contracts if they have a local market presence. the SEM appears to have boosted both the EU’s external trade performance and the volume of intra-Community or internal Community trade.3 billion Euro of inward investment (mainly from North America). competition) and adapt products and strategies accordingly. Deregulation has dramatically affected a 44 . In terms of external trade performance. Benefits of the Single Market are seen as being particularly pertinent in the sectors of telecommunications.1.crossing borders within the EU have been removed. the EU has moved from an external trade deficit in 1992 to a 19. This manifests itself in a lack of understanding of the local culture and also the image of the country held by local customers.  Raises image and local identity – one of the major problems for firms doing business abroad. and accelerating market concentration. Although. this also helps firms adapt more quickly to changes in market conditions (demand. encouraging greater competition in a wide range of markets.2% in 1985 to 67.A 1. Macroeconomic effects The abolition of customs and fiscal formalities and the gradual elimination of technical barriers have been a catalyst for greater competition in Community markets.21 Euro billion-trade surplus in merchandise goods in 1998 (Eurostat-Comext database). although in recent years fears of a fortress Europe. automobiles. transport services. clothing and pharmaceuticals.  Stimulating demand – there is often assumed to be a presence effect in foreign investment where the introduction of new competition into the market serves to raise overall levels of market demand. At the end of 1996.  Access to public procurement – similarly to the way that barriers to competition between the fifteen member states within the EU made it difficult or impossible for non-indigenous firms to gain access to public procurement. In 1998 alone. free movement of capital has stimulated cross-border investments and there is now much greater freedom to provide many services across internal frontiers. in the vast majority of cases.

firms may expect to rationalize their production and operations  The Single Market has led to the scrapping of customs forms and paperwork associated with internal frontier checks and with cross-border passage. to burden share and/ or to penetrate new markets at lower risk and shared cost. Threats and challenges Despite this gains. Given compliance with essential requirements. subject to few restrictions. with the establishment of new market entrants. business closure rates will accelerate among least efficient firms and sectors. they are better placed to raise the scale of their manufacturing units. This is the process wherein the market share of the largest N firms in a given industry is increased. permitting companies to gain from an exchange of ideas and expertise. opportunities exist for the sale of a standardized product across Europe.  By no longer having to adapt production and operations to national standards. European businesses (large and small) have been forced to confront threats to their operations and to respond to the challenges of enhanced competition. The trend towards market concentration in Europe deserves particular comment. the four freedoms of the SEM provide improved access to other member states for the purpose of acquiring cheaper raw materials and component parts. This has provided potential for reductions in costs of credit and insurance although advantages here will only be maximized with the elimination of exchange rate risk exposure under EMU. Benefits for the individual business  The removal of barriers to intra. Profits and margins in established markets may be squeezed as a result of increased market entry. As they take up the opportunities of expanding their European coverage and of increasing their output. Largely in anticipation of the advent of the SEM.  The mutual recognition of standards means that manufacturers can. Among other things.number of these sectors and may yet be further realized under detailed timetables for specific industries. to reduce their costs and to gain from economies of scale.  Closer market integration has provided freer access to ensure and financiers across the EU’s economic space.  Collaborative arrangements are encouraged within the Single Market. EU manufacturing and service sectors underwent a substantial amount of consolidation with significant increases in the volume of domestic and cross-border mergers and acquisitions. This assumption has been validated by an upward trend in inward investment since the advent of the SEM.  The internal market regime has also provided new incentives for innovation and to develop new technologies as a way of sustaining long-term advantage.EU trade has allowed firms to operate unhindered in a wider Europe of some 376 million consumers.  The SEM has contributed to a reduction in input costs for many firms. sell their products all over the EU. and with downward pressure on prices. Consequently. State assistance of competitors from other member states (state aid) may threaten an ability to compete in specific markets along with the potentially uneven enforcement of internal market rules and regulations. This has led to shorter border waiting times.      Increased competition in consequence of any EU firm being able to sell freely in any EU market may imply reductions in market share for company X. market access freedoms and the removal of restrictions on crossborder investments and capital movement. Taking the UK as example.  Lower transport costs combined with the free movement of goods have enabled companies to relocate production from their domestic market to areas where production id cheaper or for other targeted benefits. saving UK business around 135 million per year. some 10 million customs forms have been dispensed with. Expansionary strategies are encouraged by several factors including new rights of establishment. reduced transport costs and simplified border formalities. Underpinning the following concerns is an assumption that powerful Asian and US companies will tend to produce/manufacture locally in order to take advantage of SEM freedoms and to avoid paying import tariffs. 45 . previously regulated and protected national markets have become more international in character. Heightened competition will tend to encourage a downward movement prices. With domestic protection from external competition largely removed. lower prices and a greater level of competition. Smaller operators will be more vulnerable to take-over as market integration stimulates domestic and cross-border mergers and acquisitions.

in the short term at least. A key question of course is whether or not the completion of the Single Market has led to more or less protection for indigenous firms. but the differences between them and also the fact that those measures could be used to protect the national market from products from other Member States which were subject to different standards. Germany and the Netherlands). which committed the EU to various market-opening measures even in its most sensitive sectors. protecting the health of consumers and preventing or reducing environmental pollution. with countries continuing to operate their own standards against essential requirements prescribed in EU legislation. 27 November 1997) In a growing number of areas. the completion of the internal market undermined the ability of the member states to use national tools of protection and it became clear that those countries that favoured protection (such as France) faced a strengthened liberal coalition in the form of the Commission’s external relations directorate (DG1) and a cluster of liberal states (the UK. This issue is bound up with outsiders concerns that the creation of the Single European Market might lead to a fortress Europe. Despite product modifications by the exporting company and improvements to the instructions for use. raised the opportunity for European players to consider the whole market as their domestic back yard. member states are still putting in place an increasing number of technical rules without proper notification and approval. the interface between the single market and the international trading system now appears to be working together to the benefit of both the Union and its trading partners. Technical barriers to trade result from national regulations obliging industrial products and foodstuffs to satisfy certain criteria or to meet certain standards and technical specifications. Early action against many industrial imports. with single market completion…. the SEM has created opportunities previously denied to European firms to penetrate and to capture foreign markets and to realize significant efficiency gains. In short. firms will have to weigh up several factors including company resources. As the SEM took its final shape in the early-mid-1990s. Added to this belief were reports emanating from member capitals (and from Brussels) which seemed to suggest that. there is now a strong consensus that the formation of the SEM has not led to an increase in European trade barriers or to a picture of aggressively competitive inwardlooking regional trade blocs. fears of fortress Europe began to dissipate. Although the balance sheet may be mixed. which that represented. the removal of barriers between the fifteen member states of the EU has. In addition. would be designed to protect the EU from external pressures in an effort to allow firms and industries alike to strengthen their position in the new Europe. the Commission reports that French authorities continue to refuse sales authorization. The disparity that existed between countries in terms of technical requirements stemmed from historical and economic considerations. A country in which a product was imported rather than manufactured tended to impose stringent requirements on it and checks prior to its being placed on the market. product traits and life cycles.(WTO PRESS/TPRB/66.4 Understanding the four freedoms : Free movement of goods. cultural and regulatory practices. On the other hand a producer country of 46 .Whatever the actual or perceived threat for individual businesses. along with the new internal freedoms from competition across the EU. Has not reduced the EU’s involvement in the multilateral system nor increased its levels of overall protection. there remains much potential for argument and confusion. significant problems remain and. external trade policies. While EU trade defences remain significant. Denmark. French authorities blocked the sale of imported disposable barbecues. Several operators have reported delayed acceptance of standards and expensive ‘re-testing procedures for their products. persons. continue to trouble intra-EU exporters-importers. In practice. The completion of the SEM also coincided with the completion of the Uruguay Round GATT trade talks. the vagaries of notification. the patchwork of national product standards. The problem for the common market was not the existence of national regulations. services and capital Throughout the EU. particularly Japanese exports in high –technology sectors. in theory at least. market conditions. very few national restrictions (quotas. rejecting the standard of the product on the grounds of unacceptable fire risk. This legislation is necessary for various reasons: the rationalization of industrial production. The WTO’s Trade Policy Review Board has concluded that: The deepening of European integration. In one recent case. Nonetheless. 4. and the ambiguities of mutual recognition. guaranteeing the safety of workers. In constructing appropriate and efficient strategies for Europe. without concerning itself greatly about economic cost. the huge number of different technical standards has been massively reduced. suggested that the new Europe was not going to welcome further encroachment by competitive foreign imports. While the EU emphasized reciprocity on market opening. voluntary export restraints etc) were replaced with EUlevel trade restrictions and the number of EU anti-dumping measures stabilized at around 150 a year. although procedures exist requiring member states to notify new technical regulations to ensure that no new technical barriers to trade arise in the Single Market.

The Schengen Agreement on frontier controls. viz. an excessive stringency of which would penalize its industry. Schengen nationals and nationals of other EU member states need a European identity card (or valid passport) for the purpose of their identification when traveling throughout the Union. Freedom to provide services Article 49 (TEC) provides that restrictions on "freedom to provide services" within the Community shall be "abolished in respect of nationals of Member States who are established in a State of the Community other" than that of the person for whom the services are intended". passport-free movement is a reality only for EU citizens moving between the thirteen member states that have presently signed the accord – the UK and Ireland have refused to do so – or within the Anglo-Irish common travel area. In accordance with the principle of mutual recognition. that the provisions on the free movement of services cover all activities of an industrial or commercial character or of craftsmen and the activities of the professions.banks. Although customs formalities for the movement of goods were simplified during the period 1985 – 92 and then abolished on 1 January 1993. now integrated into Community law. as they constitute a vast market and are indispensable activities for the proper functioning of the other economic sectors. the various technical regulations could hinder trade even more than customs duties. the free movement of people throughout the EU remains no more than an aspiration. is the continued failure to ensure the free movement of persons throughout the Community. whereas if a product did not comply with the technical standards its entry to that country’s market was completely blocked. capital and persons. are particularly important. Despite the relaxation of internal border controls since 1995. not to mention data processing and management consultancy. particularly with the introduction of the euro. services shall be considered as such where they are normally provided for remuneration. except those concerning consumer protection. Under Article 50 (TEC). with non-EU citizens requiring only visa to enter any EU state. more flexible methods are required to adapt the rules to evolving market conditions and additional legislation is needed in a few targeted areas including pension funds and consumer redress 1. In any case. although not one emphasized in the stated survey. The free movement of persons Another enduring problem. Control has to be 47 . if financial service is lawfully authorized in one Member State it must be open to users in the other Member States without having to comply with every detail of the legislation of the host country. border controls on the movement of person remain. Aside from this impediment to the free circulation of EU citizens. is supposed to allow EU citizens to travel without a passport within EU countries. for the SEM to work properly. The European Union has to reconcile two contradictory requirements in these cases. from banks and insurance to transport and tourism. The result was that the industrialist who whished to export to the other EEC member countries was obliged to bear additional research. According to Article 39 (ex Article 48) of the Community Treaty. in so far as they are not governed by the provisions relating to freedom of movement for goods.an industrial product tended to take into consideration the economic implications of requirements and controls. As a consequence of this and of factors tied to cultural diversity and to restricted rights of residence. The EU financial services legislation. In fact. needs to be enforced effectively. Services represent almost 60% of the value added of the Community economy and cover a vast spread of economic activities.which are closely monitored by the official authorities. They therefore play an increasingly large part in the economy and employment and are a linchpin for smooth operation of the EU's internal market. Even within the expanded circle of the Schengen Group. detailed below. the need to maintain very stringent criteria for control and financial security and the need to leave the branch concerned enough flexibility for it to be able to meet the new and ever-more complex requirements of its customers throughout the European market. however. Indeed. Despite this. However. but does not need radical surgery. any European Union citizens has the right to enter the territory of any member state in order to work or to look for a work. Thus the disparity of the legislation within the Community compelled producers to manufacture different components. This Article specifies. diversify their stocks according to country of destination and to have specialized distribution and after-sales services for each country. even a high customs tariff could be paid and a product originating in one country could enter the market of another. certain restrictions on freedom of movement continue to exist. increase their production lines. insurance companies and stock exchanges . labour mobility between European nation-states is barely one-third the level found in the USA and a Commission survey has found that more than 80% of French and German workers would never seek work elsewhere in the EU. people must also have the tight to live and work where they can find suitable employment and business must be allowed to recruit and to post workers according to their requirements. Financial services . development and production costs in order to comply with all the national standards which his products had to satisfy.

of great interest to travelers in particular. and the issue of a "single bank licence" which is valid throughout the Community2. These cards are increasingly used in the Member States for obtaining cash from automatic cash dispensers or for paying for products or services directly and electronically at sales-point terminals or even at home. Harmonization of legislation is henceforth necessary only in very specific instances.12.07.1997.07. financial institutions. It is designed to ensure the free movement of insurance products within the Community and give European citizens the opportunity to take out insurance with any Community insurer. ________________________________________________________________________ 1.1989 and Directive 92/30. after adopting. with the authorities of the country in which the service is performed merely ensuring that certain basic rules relating to commercial conduct are observed. In an interpretative communication concerning the second banking Directive.1995 48 . Thus. 18. regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions 1. 30. in 1987. The Council already.1998 2. Council Directive 89/646. 10. companies providing services. the Commission issued Recommendations: on consumer protection in the field of the new payment systems. Achievement of the internal market requires Community action to ensure the interconnection of networks and the mutual opening-up of magnetic card systems. in 1988. 28. OJ L 322. the liberalization of electronic payments from all administrative constraints and an appropriate balance between the interests of the various parties (industries. including electronic money products. in 1977. such as pay television. in 1973.exercised by the Government in the territory of which the company providing the services is established. application of the principle of supervision of a credit institution by the Member State in which it has its head office. i. 21. COM (97) 353 5. So as to encourage the interconnection of the networks. video or sound recordings on demand. 17. is that of the use throughout the Community of magnetic-stripe and microcircuit payment cards. the Council.07. This system applies both to the traditional fields of transport insurance and banking and to the new fields of services. A second Directive in this field.1992 3. The single licence authorizes a bank established in a Member State to open branches without any other formalities or to propose its services in the partner countries. A related area. consumers and traders). a first Community Directive on the coordination of the laws. OJ L 386. adopted. to facilitate the exchange of services.Council Directive 77/780. OJ L 204. a second Directive amending the first to facilitate the effective exercise of freedom to provide insurance services 6. the Council. permits the mutual recognition of supervision systems. a first Directive on the coordination of laws. in the light of the case law of the Court of Justice. together with adequate protection for minor consumers. 4.e. 16. adopted by the Council in 1989. It also maps out the legal framework within which a Member State may invoke the concept of "general good" in order to restrict the provision of services by a credit institution benefiting from mutual recognition3. As regards banking.OJ C209. OJ L 168. the Commission clarifies. In the field of insurance too. An Insurance Committee set up by a Council Directive has been given the brief of helping the Commission exercise the implementation powers conferred on it by the Council in the field of direct insurance. after abolishing restrictions on freedom of establishment and freedom to provide services in respect of self-employed activities of banks and other financial institutions adopted. whose remuneration -and often viability -relies on "conditional access" techniques such as encryption or electronic locking.1973 and European Parliament and Council Directive 95/26. It provides in particular for very liberal arrangements for covering major industrial and commercial risks. It also contains provisions relating to the reciprocity governing the opening in the Community of subsidiaries of banks from non-member countries.08. the exact scope of the freedom to provide banking services. thus finding the coverage best suited to their needs at the lowest cost. marketing and audio-visual services. and in particular the relationship between cardholder and card issuer.04. A third coordination Directive in the area of direct insurance other than life insurance provides for a single authorization system enabling a company with its registered office in a Community Member State to open branches and operate services in all the Member States without the need for authorization procedures in each country6. such as information technology. and on transactions by electronic payment instruments. while enjoying an adequate level of protection. on the transparency of bank charges relating to cross-border transactions. First Council Directive 73/239. regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life insurance5.1977 and Directive 98/33. OJ L228. adopted two Directives supplementing and clarifying the provisions of the first coordinating Directive as regards credit insurance and suretyship insurance on the one hand and legal expenses insurance on the other.12. and in particular the relationship between issuer and holder4. a Directive seeks to harmonize the legislation of Member States concerning measures to combat illicit devices which allow unauthorized access to protected services. OJ L 110.

although monitored.07. Such measures must. 11. OJ L66. 16. subject to specific prudential provisions. OJ L228. the Treaty does not allow any restrictions to the free movement of capital. but in cooperation with the authorities of the host Member State. adopt such measures itself as interim protective measures. ___________________________________________________________________________ 1. the collateral security provided in connection with participation in payment and securities settlement systems will be realized first and foremost in order to satisfy the rights of these systems vis-a-vis the insolvent party. in particular in the field of taxation and the prudential supervision of financial institutions. operations in current and deposit accounts and operations in securities and other instruments normally dealt in on the money market) in particular are liberalized. established the single market in securities. based on uniform rules. In addition.must be able to obtain capital where it is cheapest and best tailored to their needs. 11. which have replaced Articles 67 to 73 of the EEC Treaty. while investors and suppliers of capital must be able to offer their resources on the market where there is the greatest interest. in cases of insolvency. The equity capital of investment firms and credit institutions must be adequate to guarantee market stability. in fact. all restrictions on capital movements between persons (natural or legal) resident in Member States were removed in the beginning of the nineties. that all restrictions on the movement of capital between Member States and between Member States and third countries are prohibited. in all circumstances. Monetary and quasi-monetary operations (financial loans and credits. adopted in 1993. so that the national authorities may exercise effective supervision in order to prevent infringements of their laws and regulations. That is why it is important that the Member States free capital movements and allow payments to be made in the currency of the Member State in which the creditor or beneficiary is established.6.07. A 1988 Directive ensures the full liberalization of capital movements. OJ L 141. According to the Court of Justice. authorized to provide services throughout the Union under the condition that it can prove to be able to honour its debts4. 3. but the Member State may. go even further than the 1988 Directive in the liberalization of capital movements.03. Minimum transparency rules designed to guarantee investors a sufficient level of protection must be respected on regulated markets. Under this Directive. OJ L 172. Two Council Directives. Prudential supervision. 23.1979 and Council Directive 88/627. OJ L84. A Parliament and Council Directive on investor compensation schemes provides for minimum compensation for investors in the event of the failure of an investment firm.12. the second 1993 Directive lays down minimum initial capital requirements and sets the equity capital which must permanently be held in order to cover position. Freedom of capital movement is another essential element for the proper functioning of the large European internal market. investment services in the securities field can be freely conducted. The principle of the free movement of capital and payments is now expressly laid down in the Treaty.1992 Community law on stock exchanges and other securities markets is directed towards widening the range of investments at Community level while protecting investors. A specific safeguard clause allows Member States to restore restrictions on short-term capital movements if their monetary or exchange rate policies are disturbed.03.1988 and Council Directive 92/49. By virtue of the first of these Directives. exchange and interest rate risks 3. throughout the EU financial area 2.1993 and Parliament and Council Directive 97/9. but the export of important amounts of money may be subjected to a prior declaration. 11. OJ L 204. An investment firm in any Member State can carry out its activities anywhere in the European Union on the basis of a single authorization (called a "European passport) issued by the Member State of origin.Council Directive 88/357.notably SMEs .1997 Council Directive 93/6.1998 49 . guarantee an identical level of protection against bankruptcy to investors throughout the European Union and to ensure fair competition between banks. It stipulates that. settlement. Articles 56 to 60 of the EC Treaty. on the grounds of urgency.06. OJ L141. is carried out by the authorities of the home Member State. 17. In order to fulfill these objectives. Article 58 authorizes Member States to take all requisite measures to prevent infringements of national law and regulations. and investment societies on the securities market. The liberalization of payment transactions is a vital complement to the free movement of goods. Investment firms have right of access to all the regulated markets in the EU. Borrowers .1993 and Parliament and Council Directive 98/33. persons and services. be authorized by the Commission.08. Another Directive is intended to reduce the systemic risk inherent in payment and securities settlement systems and to limit the perturbations caused by the insolvency of a participant in such a system. However. Nevertheless. OJ L 348. Article 59 authorizes temporary safeguard measures to be taken where they are justified on serious political grounds or where capital movements to and from third countries cause serious difficulties for the functioning of economic and monetary union. 04. A 1979 Directive coordinated the conditions for the admission of securities to official stock exchange listing1. The conditions governing authorization and business activity have been harmonized for this purpose. Council Directive 79/279.1988 Council Directive 93/22. Article 56 declares. 2.06. The main change as compared to the previous situation is the extension in all but a few cases of the obligation to liberalize capital movements to and from third countries. 21.

Brussels.1997 On the basis of these provisions and of those liberalizing banking. apply the appropriate measures to ensure that these provisions are fully applied. the Council adopted a Directive on June 10. Luxembourg 1999. The European financial area must not. 4. an Introduction to European Community”. mortgage loans. fourth edition. Under the terms of this Directive. “European Business”. 2. EUR-OP. 2001. including life insurances. European undertakings and individuals have access to the full range of options available in the Member States as regards banking services. furthermore. “Ever Closer Union. pag 5-6. 1997 European Commission. 8. policies”. advocates better protection for members of the schemes combined with more efficient fund investment. the informing of the relevant authorities of suspected laundering operations and the obligation for the institutions covered to set up training programmes for their employees and apply internal checking procedures. With a view to nipping such practices in the bud. Parliament and Council Directive 97/9. “How does the European Union work?”. pag 336-340. 3. European Commission. European Commission. 112-113. Cen-Cenelec. applicable to credit establishments and financial institutions. 99-105. thanks notably to the determination of applicable sanctions. 7. the freedom of movement of workers and the euro. Woolcock Stephen. 2000 Desmond Dinan. the Community financial market has been completely liberalized since January 1. economics. European Committee for Standardization. therefore. stock-exchange and insurance services. ”Single European Market”. law. 1997. The Member States must. Technical Barriers to trade.1993. pag 89-96. the Member States must make provision for measures such as identification of customers and economic beneficiaries. They are able to choose what is best suited to their specific needs or requirements for their daily lives and for their occupational activities in the large market.03. 6. A contact committee will have the task of contributing to the harmonized implementation of national measures through regular con sultations between representatives of the Member States and of the Commission. According to the European Commission. “The EU Market Access Strategy”. 9. it is also necessary for funded supplementary pension schemes to benefit from the single market. Prentice Hall. 26. however.1991. the Single Market Review III:1. be exploited for the purposes of laundering money generated by criminal activities.4. 5. OJ L84. It. 2001.eu.int 50 . European Study Service. the conservation of supporting documents and registrations of the transactions. 1997 Simon Mercado. The new approach. European Commission. European Trade Policy –Global Pressures and Domestic Constraints. Legislation and Standards on the free movement of goods in Europe. Nicolas Moussis. 2001. The Court has held that the free movement of capital and loans should not be restrained by national provisions which are likely to deter the parties concerned from approaching banks established in another Member State. ___________________________________________________________________________ Bibliography on the Common Market and suggested readings 1. 1996. Richard Welford. “Access to European Union. Oxford University Press. securities and insurance. Macmillan. pag 104-109. pp/208-226 Website: http://mkaccdb.

4 EMU impacts 5. This left in place only the agreed mechanism for exchange rate co-ordination. weak mutual support mechanisms. each member state’s currency enjoyed an exchange rate against the ECU.1 The European Monetary System and the birth of the ERM Economic and monetary union (EMU) is an advanced stage of economic integration involving a common monetary policy and closely coordinated economic policies of the Member States. There had been no mention of a unified monetary system within the original Rome Treaty but the idea had long circulated among European leaders. It was only as this system began to show terminal signs in the late 1960s that European leaders paid attention to the benefits of regional European schemes of exchange rate co-ordination and to seriously explore the possibilities of monetary union. This involved a system of cross-rate parities against the US dollar.2 Launching EMU: Maastricht Treaty 5. Within this system. This would fuel growth and ensure a high level of employment. The EU’s monetary integration begins with the establishment. Prior to . The advantages of stable exchange rates were identified by European leaders as early as the 1950s but for many years European leaders participated in the international post-war system of exchange rate coordination known Breton Woods. in the 1970s. coupled with internal Community tensions. of series of formal mechanisms designed to limit exchange rate volatility in the then EEC markets.5. It was to be revised from time to time in line with underlying economic criteria on the consent of all the members. That a strictly European system was both feasible and preferable (recalling failed links with the US dollar). the EMS was set up with three main elements. once again raised the issue of macroeconic policy integration with the EEC Council and called for a zone of monetary stability in Europe. Economic and Monetary Union in Europe 5. 3. Although these arrangements promised some exchange rate stability in a turbulent period. the idea of which was at least revived. the President of the European Commission.5 EMU and EU tax harmonization 5. In 1977. The Exchange Rate Mechanism The central element of the EMS was to be the ERM. ECU bank accounts were available and the ECU could therefore be used as an instrument of settlement between monetary authorities. The Commission pushed through complex proposals for exchange rate co-operation based on four assumptions: 1. In its first incarnation (the snake of 1971) and then as the snake in the tunnel (1972-1976) a mechanism was provided for the managed floating of EEC currencies (the snake) within narrow margins of fluctuation against the dollar (the tunnel). which had originally been perceived as an experimental arrangement. Consequently. continued dollar instability and a rolling oil crisis all contributed to system failures. the collapse of the Btretton Woods system and the decision of the US Government to float the dollar in August 1971 produced a wave of instability on foreign exchanges.3 Economic policy and convergence of national economic policies under EMS and beyond 5. 2. firms and even individuals. A complete grid of bilateral rates was calculated on the basis of these central rates and fluctuations against these had to be contained within tight margins. That currency movements had a destabilizing effect on the economies of member states and that exchange rate volatility was inherently damaging. In March 1970 the Werner Plan which formalized a number of proposals concerning macroeconomic policy cooperation and a managed currency arrangement as apart of three-staged move to full EMU within ten years. The ECU The ECU (a basket of all the member states currencies) was introduced as the denominator used for fixing exchange rates and for operations within the system. That the linkage of exchange rates would be beneficial for business confidence and make trade between countries more likely. This instability. That a European exchange rate mechanism and broader monetary system had independent merits and did not depend on the ability or choice of the member states to move towards EMU. called the central rate. Note that the market values of the ECU were adopted as the basis of Euro values in 1999 under a simple one-for-one rule. ended hopes of realizing monetary union according to the Werner Plan. 4. Roy Jenkins. Although the ECU did not exist in note and coin form. In March 1971.1 The European Monetary System and the birth of the ERM 5. institutions.

leading to an abandonment of ERM disciplines. Under these circumstances.25 % to 15% either side of the bilateral central rates. the assumption that co-coordinated efforts on the part of all member states would be made in order to prevent the breaking of individual currencies proved false with exits for the lira and sterling. have led to strong criticism of the operation of the ERM. Thus. however. in fact. While this arrangement provided benefits to the other members in terms of exporting German monetary virtues it did. of course. when the system came under its greatest pressure. prior to 1989. the Ministers and central bank governors of the Member States decided. For example. Specifically. Exchange rate realignments were infrequent and. The ECU also became established as a significant currency of denomination. The first stage. to support the general economic policies in the Community in accordance with the principle of an open market economy with free competition. It must be recognized.2 Launching EMU: Maastricht Treaty The Treaty on European Union provides for the introduction of a single monetary policy based upon a single currency managed by a single and independent central bank. The system was thus fairly described as a semi-fixed exchange rate system. currency turmoil and doubts surrounding the outcome of the Uruguay Round placed the EMS exchange rate mechanisms under severe strain. to widen temporarily the fluctuation margins within the exchange-rate mechanism from 2. the European monetary system contributed powerfully it exchange rate stability in Europe. came with the entry into force of the Directive on the complete liberalization of capital movements in July 1990. Financial support mechanisms The EMS also included short-and medium term credit or financial support mechanisms designed to assist member states with balance of payments difficulties. also have the risk that any German monetary troubles would be exported too. without prejudice to this objective. marking the beginning of the whole process.August 1993 (when bands were widened to +. Injury 1993. Member states were committed to supporting their own currencies within these bands and intervention points would be reached before currencies attained their maximum permissible spreads. on 2 August 1993. The central objectives of this stage were 53 . Despite this. Despite the countries of currencies under attack pushing up interest rates. three stages involved. For several years. Above all else. The Possibility of fluctuations and of formal re-alignments meant that some exchange rate uncertainly remained. we should not ignore the way in which the Deutchmark and not the ECU had become “the real core of the system”. the inflationary effects of German unification led the bundesbank to raise German interest rates higher… simultaneously making the DM a more attractive currency to hold and forcing other European currencies linked through the EMS to maintain the value of their own currencies (at enormous costs to official reserves).25% or at +-6% for high inflation states such as Italy and Spain. The primary objective of the single monetary policy and exchange rate policy shall be to maintain price stability and. during the second half of 1992. sound public finances and monetary conditions and a sustainable balance of payments (Art. leading to a period of divergence rather than convergence of macroeconomic indicators. placing undue weight on domestic German monetary policy decisions such as interest rate changes. 4 TEC). the experiences of 1992 and 1993 when speculators “ram raided” one currency after another. more severe pressures developed within the exchange rate mechanism with massive speculative attacks against the weaker currencies. These activities of the Member States and the Community shall entail compliance with the following guiding principles: stable prices. there are. In the realignments of 1992 and 1993 very little co-operation and co-ordination was evident. uncertainties surrounding the process of ratification of the Maastricht Treaty. inflationary pressures were cooled by the alignment of other member states monetary policies on those of the Bundesbank (in itself committed to price stability). speculators often pursued their relentless attack on the chosen currency in the certain knowledge that realignment would follow and a large profit would be made. The ERM/EMS provided a framework whereby member states were able to pursue counter-inflationary policies contributory to a sustained period of economic growth. The massive shocks to the German economy resulting from the unification of East and West Germany in 1990 were bound to product shocks for the European economy as a whole.15%). that these experiences cannot be separated from the recession of the early 1990s which affected different member states in different ways. the permitted limits of fluctuation were set up to +2. Although economic and monetary union has to be envisaged as a single process. 5.

the Council. carried out the preparatory work necessary to enable the European Central Bank and Member States' central banks to apply a single monetary and exchange-rate policy based on the euro from the start of the third stage. On this basis. to institutionalize a sort of market-induced budgetary control. "prudential considerations" and "public undertakings" 3. It examined the technical issues connected with the changeover to the single currency. on the basis of the composition of the basket (in amounts of each national currency) defined on 21st September 1989 at the occasion of the entry into the basket of the peseta and the escudo.Council Regulation 3605/93. Together with the prohibition on the direct monetary financing of public deficits and in order to submit public borrowings to market discipline. a government budgetary position without a deficit that is excessive. Indeed. During that stage. Luxembourg. the composition of the basket of the ECU was "frozen" on 1 November 1993. and monitored. the Committee of Governors of central banks and the European Fund of Monetary Cooperation were dissolved in January 1994. To this effect.12. Italy. the Treaty provided that public authorities should not have privileged access to financial institutions. acting on a recommendation from the Commission under Article 109j (present Art. The EMI also prepared the Target (trans-European automated real-time gross settlement express transfer) system. As provided for in Article 118 of the EC Treaty. OJ L332. OJ L 332. for at least two years (Art. the name given to the European currency should be the euro. 121 TEC and Protocol on the excessive deficit procedure). In preparation for the move to the third stage. 31.Council Regulation 3604/93. In the process leading to the independence of central banks. "financial institutions". the Netherlands. unless this was based on prudential considerations (Article 102 TEC). concluded that Belgium. on 1 May 1998. The Treaty sought. Following the provisions of Article 109f (present Article 117 TEC). The European Council. the Council. Spain. a Council Regulation defined the terms "privileged access". 114 TEC). following the procedure and the timetable set out in the EC Treaty. ____________________________________________________________________________________________________________________ 1.1993 3. a name that symbolizes Europe and must be the same in all the official languages of the European Union. Portugal and Finland satisfied the necessary conditions for the adoption of the single currency. A Council Regulation clarifies certain implications of this prohibition2.greater convergence of economic policies and closer cooperation between central banks. meaning a government deficit not exceeding 3% of GNP and total government debt not greater than 60% of GNP (subject to an appraisement by the Council deciding by qualified majority). which enables domestic and cross-border payments to be executed in euro. taking into account the existence of different alphabets. 31. meeting at the level of Heads of State or Government on 3 May 1998 decided that the 11 Member States referred to above satisfied the necessary conditions for the adoption of the single currency on 1 January 1999. the Treaty required the Commission and the European Monetary Institute to report to the Council on national legislation linked to the achievement of economic and monetary union and progress towards a high degree of convergence assessed by reference to four specific criteria. the progress made in the banking and financial spheres on preparations for the changeover to the single currency. They were replaced by a European Monetary Institute (EMI). incorporating greater consistency between monetary practices in the framework of the EMS. the date of the entry into force of the Maastricht Treaty. as of the start of stage three. Ireland. including the definition of public debt. Germany.1993 2.Council Regulation 3603/93. the Treaty on European Union compelled each Member State to endeavour to avoid excessive public deficits and initiate steps leading to independence of its central bank. in cooperation with the national central banks. the durability of convergence achieved by the Member State being reflected in the long-term interest rate levels. and the observance of the normal fluctuation margins provided for by the Exchange Rate Mechanism of the European Monetary System. so that the future monetary union encompassed only countries which were well managed economically. The second stage of economic and monetary union began on 1st January 1994 and ended on 31 December 1998.1993 54 . meeting in Madrid on 15 and 16 December 1995. Austria. as well as rules for the reporting of data by the Member States to the Commission 1. OJ L332. The conclusions of the Council were endorsed by the European Parliament on 2 May 1998. Its task was to monitor the functioning of the European Monetary System and facilitate the use of the single currency. decided that. 121 TEC). The Member States and the Commission each appoint two members of the Monetary Committee (Art. 101 TEC). thus. France.12. A Council Regulation laid down detailed rules and definitions for the application of the excessive deficit procedure. A Monetary Committee with advisory status was set up in order to promote coordination of the policies of Member States to the extent needed for the functioning of the internal market. 31. with its seat in Frankfurt.12. a rate of inflation which is close to that of the three best performing Member States in terms of price stability. the Treaty prohibited them from granting governments overdraft facilities or any other type of credit facility and from purchasing public sector debt instruments directly from them (Art.

. and collect statistical information in order to carry out its tasks3. The total independence of the European Central Bank is the cornerstone of the Community's new monetary policy. 108 TEC). 14. are members of the ESCB from the start of the third stage. was compatible with the Treaty and the Statute of the European System of Central Banks (ESCB). The president. legitimately worried about unemployment. Council Recommendation 98/318. 5. to conduct foreign exchange operations consistent with the provisions of Article 111 (TEC). 03. 2.namely that: national legislation. and to promote the smooth operation of payment systems (Art. The ECB will be consulted on any proposed Community act and may submit opinions to Community institutions or to national authorities on matters within its field of competence (Art.11. The basic tasks to be carried out through the ESCB are: to define and implement the monetary policy of the Community. OJ L8. excessive deficit. who are judged by their governments to have failed in their task. It did not examine whether the United Kingdom and Denmark fulfilled the conditions given that. the Community has a single monetary policy and a single currency . the average rate of inflation in the year ending January 1998 was below the reference value. these countries were not subject to a Council decision on the existence of an excessive government deficit.) is determined by the Council after consultation of the ECB (Article 111 TEC). The primary objective of the ESCB is to maintain price stability. The Governors of their central banks will be members of the ECB General Council..) designed to facilitate their future participation. OJ L 189.. 03.1998 55 . which has shown its worth through the independence of the Bundesbank. National authorities must consult the ECB regarding draft legislation within its field of competence 2. which do not meet the criteria from the outset.1998 Council Regulation 2533/98. central banks of the Member States. members of the ECB board. The ECB and the national central banks may issue such notes 4. The Council also stated that Greece and Sweden did not at that stage fulfill the necessary conditions for the adoption of the single currency. 27. OJ L 318.99 Council Decision 98/415. OJ L 154. A Council decision defines the scope and conditions of consultation of the Bank by national authorities concerning draft legislation within its field of competence 5.1998 and Decision 98/345. 122 TEC). ______________________________________________________________________________________________ 1. will nevertheless participate in all the procedures (multilateral surveillance. to hold and manage the official foreign reserves of the Member States. However. From the start of the final stage of EMU. these countries had been members of the exchange rate mechanism (ERM) for the last two years and their currencies had not been subject to severe tensions. The ECB can adopt regulations and take decisions necessary for carrying out the tasks entrusted to the ESCB (Art. the vice-president and the other members of the Executive Board of the ECB were appointed by decision taken by common accord of the governments of the eleven Member States adopting the single currency. They are which replaced the EMI and formed together with the monitored by the European Central Bank (ECB).1998 Council Decision 98/415. 28. Democratic control can and must be exercised a posteriori by the dismissal of the governors of national central banks. All central banks. Member States not able to adopt the single currency from the start were given a derogation implying that the provisions on monetary policy and on sanctions with respect to excessive deficits do not apply to them (Art.07. Member States may issue euro coins subject to approval by the ECB of the volume of the issue (Art. from 1 January 1999. exchange policy with regard to the currencies of third countries (US dollar.e. the ESCB must support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 (TEC). after their appointments were endorsed by the European Monetary Institute and the European Parliament1.1998 Decision ECB/1998/6. Neither the ECB nor national central banks shall seek or take instructions from governments or Community institutions (Art.05. i. 3. In addition. currency is something much too serious to leave in the hands of politicians who. Countries benefiting from an "opt-out" and those. in the year ending January 1998. 105 TEC). the United Kingdom notified the Council that it did not intend to move to the third stage of EMU on 1 January 1999 and Denmark notified the Council that it would not participate in the third stage of EMU. 4. The ECB has powers to: apply minimum reserves and specify the remuneration of such reserves. Japanese yen.the euro. The ECB will have the exclusive right to authorize the issue of euro banknotes within the Community. including the statute of the national central bank. OJ L 139. in accordance with the relevant Treaty provisions. 110 TEC). the European System of Central Banks (ESCB). 106 TEC).05. OJ L 189.01.. are tempted to manipulate the exchange rate or the interest rates to kickstart the economy without drawing on the lessons of the past.07.. impose fines and periodic penalty payments on firms for infringing its regulations or decisions. 11. 105 TEC). including those not participating in the single monetary policy. the long-term interest rates in these countries were below the reference value1. According to the German concept.

The capital of the ECB (initially 5 billion euro) will be held by the national central banks in proportion to the
individual countries' demographic and economic weight 1. The external foreign reserves of the national central
banks will be pooled at the ECB within certain limits. The decision-making bodies of the ECB will be the
Governing Council and the Executive Board. The policy of the ECB aiming at ensuring price stability will be
formulated by the Governing Council, which will be composed of the fifteen Governors of the central banks of the
Member States and of the members of the executive Board. The executive Board, consisting of the President of the
ECB, the Vice-President and four other members, will implement the ECB monetary policy and will give the
necessary instructions to the national central banks.
At the start of the third stage, on 1 January 1999, the Monetary Committee was replaced by the Economic
and Financial Committee (EFC). The Member States, the Commission and the ECB may each appoint two
members to the Committee, which therefore has a total of 34 members. This has the following tasks: to deliver
opinions at the request of the Council or of the Commission, or on its own initiative for submission to those
institutions; to keep under review the economic and financial situation of the Member States and of the Community
and to report regularly thereon to the Council and to the Commission, in particular on financial relations with third
countries and international institutions; to contribute to the preparation of the work of the Council on EMU; to
examine, at least once a year, the situation regarding the movement of capital and the freedom of payments and to
report to the Commission and to the Council on the outcome of this examination (Art. 114 TEC). According to its
statutes, the EFC prepares the Council's reviews of the development of the exchange rate of the euro and provides the
framework for the dialogue between the Council and the European Central Bank.
At the starting date of the third stage, on 1 January 1999, the ECU was replaced by the euro and this became a
currency in its own right (Art. 123 TEC). The euro is, in fact, the currency of those Member States which participate
fully in the single monetary policy. As mentioned above, the exchange-rate mechanism (EMS II), which replaced
the European Monetary System (EMS), limits the fluctuations between the single currency of these Member States
and the currencies of the Member States with a derogation, i.e., Greece and Denmark. The voting rights of the latter
are suspended for all questions relating to the single currency. A Commission communication on the reinforced
convergence procedures and the new exchange-rate mechanism in the third stage of EMU is intended to clarify the
relationships between the Member States having adopted the euro and the other Member States so as to encourage
the latter to participate in the euro zone and to guarantee the monetary stability of the single market 1.
The Amsterdam European Council of 16 and 17 June 1997 adopted a Resolution laying down the firm
commitments of the Member States, the Commission and the Council regarding the implementation of the Stability
and Growth Pact. In this Pact Member States commit themselves: to respect the medium term budgetary objective
of "close to balance or in surplus" set out in their stability or convergence programmes, to correct excessive deficits
as quickly as possible after their Emergence, to make public, on their own initiative, recommendations made in
accordance with Article 104 (TEC); and not seek an exemption from the excessive deficit procedure unless they are
in severe recession characterized by a fall in real GDP of at least 0,75%.
The Amsterdam European Council also agreed two Regulations that form part of the Stability and Growth
Pact for ensuring budgetary discipline in the third stage of EMU. These Regulations set out a framework for
effective multilateral surveillance and give precision to the excessive deficit procedure. The first, which is based on
Article 308 (ex Article 235) of the EC Treaty, concerns the continuity of contracts, the replacement of references to
the ECU in legal instruments by references to the euro at a rate of one for one, the conversion rates and rounding
rules2. In addition to this Regulation, the Directive on consumer protection in the indication of prices of products
offered to consumers, mentioned in the section on consumer protection in the chapter on the EU and its citizens, sets
down requirements concerning conversion rates, rounding rules, and the clarity and legibility of price displays. On
top of this Directive, the Commission calls on trade organizations to reach agreement on good practices for dual
displays of the euro along the national currency. It also recommends that banks do not charge for the conversion of
incoming and outgoing payments, accounts and banknotes denominated in euro or national currency 3.
The second Regulation, which was formally adopted by the Council on 3 May 1998, concerns the
introduction of the euro and provides in particular for the conditions in which the currencies of the participating
Member States will be replaced by the euro from 1 January 1999 . It also provides that, as from 1 January 2002, the
European Central Bank and the central banks of the participating Member States will put into circulation banknotes
denominated in euros and that, from that date, the euro notes and coins will be legal tender. As from that date, the
participating Member States will issue coins denominated in euros or in cents.
______________________________________________________________________________
1. COM (96) 498, 16 October 1996
2.Council Regulation 1103/97, OJ L 162, 19.06.1997
3.Parliament and Council Directive 98/6, OJ L 80, 18.03.1998

56

Banknotes and coins in the national currency unit will remain legal tender within their territorial limits up to six
months after the end of the transitional period at the latest. A Regulation on denominations and technical
specifications of euro coins intended for circulation provides that the first series of euro currency will consist of eight
coins (1 cent, 2 cent, 5 cent, 10 cent, 20 cent, 50 cent, 1 euro and 2 euro).
Stage three of EMU thus began on 1 January 1999 with the irrevocable fixing of conversion rates between
the currencies of the 11 participating countries and against the euro (Phase B). From that date, the euro is the
currency of the participating Member States, monetary policy and the foreign exchange rate policy are conducted in
euros, the use of the euro is encouraged in foreign exchange markets and new tradable public debt must be issued in
euros by the participating Member States. During a transitional period lasting until 1 January 2002, private economic
agents are free to use the euro, but they are not obliged to do so and are able to continue to use the national currency
units1.
It is quite remarkable that the transition to the third stage of economic and monetary union was achieved
smoothly in spite of turbulence on the world financial markets. This is the result of prudent economic policies in the
context of EMU. It is also the result of careful technical and legislative preparation. As seen in the preceding
paragraphs, all Community legislation necessary for the introduction of the euro were adopted before 1 January
1999. The introduction of the euro is a major event for the (international monetary system, whose cornerstone
is the International Monetary Fund (IMF). The EU sought pragmatic solutions for introducing a major international
currency into the system which did not require a change in the Articles of the IMF. Thus, the IMF Executive Board
agreed to grant the ECB an observer position at that board. The views of the EU/EMU are presented at the IMF
Board by the relevant member of the Executive Director's office of the Member State holding the Euro-zone
Presidency, assisted by a representative from the Commission. The President of the ECB attends meetings of the G7
Finance Ministers' and Governors' Group for the discussions which relate to EMU, e.g. multilateral surveillance or
exchange rate issues. At those meetings a Commission representative is a member of the Community delegation in
the capacity of providing assistance to the President of Ecofin/Euro group.
By 1 January 2002 at the latest, euro banknotes and coins will start to circulate alongside national notes
and coins, which will start to be withdrawn (Phase C). At most six months later, the national currencies will have lost
their legal tender status and will have been completely replaced by the euro in all participating Member States.
Thereafter, national banknotes and coins may still be exchanged at the national central banks. The continuity of
contracts initially denominated in a national currency or in ECU will be assured, but new contracts will have to be
denominated in euros. Any reference to a national currency unit in a legal instrument will have to be read as a
reference to the EURO2.
The European institutions are aware of the practical and psychological problems of an upheaval of this
magnitude and without precedent. On 8 November 1999 the Council stated that the cash changeover in the euro zone
is an unprecedented logistical challenge. According to the Council, Member States will make their best efforts to
ensure that the bulk of cash transactions can be made in euros by the end of a fortnight from 1 January 2002.
Member States consider that the period of dual circulation of the old and new notes and coins will last between four
weeks and two months. Member States may facilitate the exchange of old notes and coins after this period.
The Member States, which have moved to the third stage of EMU, have undoubtedly lost the autonomy of
their monetary policy, since they are no longer at liberty to use the two main levers of this policy, the exchange rate
and the interest rate (a freedom which they had already lost to a large extent, due to the interdependence of the
European economies). At the same time, however, they lost responsibility for the parity of their currency and the
equilibrium of their balance of payments, while enjoying shared responsibility for the parity of the euro against the
currencies of third countries and the equilibrium of the collective balance of payments of the countries entering the
third stage of EMU. The countries moving on to this stage have in fact already got their economies under control as
regards inflation, external debt and public sector deficit and can thus collectively share the advantages of belonging
to a strong currency zone, the euro zone.

______________________________________________________________________________
1.
2.

COM (96) 499 and Council Regulation 974/98, OJ L 139, 11.05.1998
Council Regulation 974/98, OJ L139, 11.05.1998

57

5.3 Economic policy and Convergence of national economic policies under EMS and beyond
The Member States signatory to the Treaty of Rome were not prepared to abandon their sovereign powers
in economic or monetary matters in favour of the Community. Accordingly, the Treaty was confined to defining the
objectives to be pursued in national economic policies, including full employment, a stable level of prices and
currency and equilibrium of the balance of payments. Elaboration and implementation of economic policy as such,
however, remained exclusively within the jurisdiction of the Member States.
However, the Treaty of Rome had considered it desirable that the Member States regard their conjunctural
policies as a matter of common concern. Article 103 stipulated that they should consult each other and the
Commission on the measures to be taken in the light of the prevailing circumstances. Pursuant to that provision of
the Treaty, the Council set up an Economic Policy Committee for Short-term Economic and Financial Policies 1.
That Committee, which consists of one representative for each Member State and a Commission representative, has
the task of preparing the meetings of the Economic and Financial Affairs (ECOFIN) Council. It is also responsible
for the exchange, on a reciprocal and continuing basis, of information on decisions or measures envisaged by the
Member States which could have a considerable effect on the economies of the other Member States or on the
internal or external equilibrium of the Member State concerned or which could give rise to a considerable gap
between the development of the economy of a country and the jointly defined medium-term objectives.
The Community's economic policy did not really get off the ground until the Member States decided to
undertake the attainment of economic and monetary union. More than other Community policies, the economic
policy is indispensable to attainment of such union, as it constitutes one of its two aspects. The task assigned to it by
the Resolution of the Council and of the Representatives of the Governments of the Member States of 22 March
1971 on the attainment by stages of economic and monetary union was the convergence of the economies of the
Member States, which was an extremely difficult task considering the structural disparities between the economies
which were to participate in that major undertaking. In fact, the first attempt to create an economic and monetary
union failed. However, the experience acquired during this effort is precious for the second attempt based on the
Treaty on European Union.
This fresh endeavor, like the first, twenty years before, has started in an environment of economic and
monetary crisis.
The persistence of the crisis between 1991 and 1993 exacerbated an already difficult labor-market situation.
The need to face up to the crisis and to the deterioration in employment and working conditions led the Commission
to draw up a White Paper on the medium-term strategy for promotion of growth, competitiveness and employment ,
which contained a clear presentation of the structural problems facing the Community and proposed concrete
solutions for addressing the issues raised . According to the Commission, the sustainable development of the
European economies and the increase of labor intensity require a strategy based on three inseparable elements: (a)
the creation and the maintenance of a macroeconomic framework which, instead of constraining market forces, as
has often happened in the past, supports them; (b) determined actions in the structural area aimed at increasing the
competitiveness of European industry, at removing the rigidities which are curbing its dynamism and preventing it
from reaping the full benefits of the internal market; (c) active policies and structural changes in the labour market
and in the regulations limiting the expansion of certain sectors (notably the service sector) making it easier to employ
people and increasing the employment component of growth.
Largely following the ideas of the Commission, the European Council, in December 1993, decided to
implement an action plan disposing of around ECU 20 billion per year which should, in particular, stimulate the
setting up of big equipment and communication networks, in order to improve the competitiveness of the economy
and the functioning of the internal market. Both, the White Paper and the action plan of the European Council were
vital elements in the EU's strategy for steering the economies of the Member States back onto a path of growth and
employment creation, as well as for allowing them to attain the objectives of economic and monetary union.
Economic convergence in the European Union
In contrast to monetary policy. Member States retain ultimate responsibility for economic policy within the
economic and monetary union provided for by the Treaty on European Union. They are, however, required to act in
such a way as to respect the principle of an open market economy where competition reigns, to regard their
economic policies as a matter of common concern and to conduct them with a view to contributing to the
achievement of the objectives of the Community (Art. 98 and 99 TEC). Herein lies the originality of the model for
European Economic and Monetary Union; a union of independent States with significantly different development
levels but which want to be partners in the pursuit of common goals.

58

acting by a qualified majority on a recommendation from the Commission. 17. acting by a qualified majority. 99/4 TEC).1990 2. 100 TEC). acting on a qualified majority endorses the broad guidelines of economic policy. The regular monitoring of economic and monetary policies of the Member States by the European Monetary Institute. in particular if severe difficulties arise in the supply of certain products. Close coordination should. The Council recommendations designed to bring to an end the excessive deficits are adopted by qualified majority in accordance with Article 104(6) of the EC Treaty. since the 1st January 1994. Council Regulation 3604/93. public finance. Since the second stage of EMU.08. and reports its findings to the European Council.1999 This is particularly true for those Member States which participate in the new exchange rate mechanism. which lay down the common objectives in terms of inflation. Through its expenditure side the budget has a direct influence on public investment and an indirect influence.12. decide upon the measures appropriate to the economic situation. Clearly. the Council may. in addition. It is for this reason that the introduction of the single currency requires closer Community surveillance and coordination of economic policies among euro zone Member States. a draft for the broad guidelines of the economic policies of the Member States and of the Community. they influence monetary conditions in that zone. Community financial assistance to the Member State concerned (Art. Since national economic developments have an impact on inflation prospects in the euro zone. subject to the provisions of Article 104 (TEC) and the Stability and Growth Pact. Where it is established that the economic policies of a Member State are not consistent with these guidelines. The move to the third stage of economic and monetary union has linked the economies of the Member States adopting the euro more closely together. On this basis. under certain conditions. make the necessary recommendations to the Member State concerned. the Commission recommends and the Council. mentioned in the previous part of this chapter. This multilateral monitoring is based on convergence programmes presented by each Member State which specifically aim at addressing the main sources of difficulty in terms on convergence (Art. acting unanimously on a proposal from the Commission. however. each year in the spring. A Council Decision of 1990 is directed towards the attainment of progressive convergence of economic performance of the Member States 1. A State's budgetary policy may pursue short-term economic objectives (avoidance of a recession or stemming of inflation) or structural improvement objectives pertaining to the national economy and implemented through productive investments. certain restrictions on financing public deficits came into force on 1 January 1994. non-participating Member States must be included in the coordination of economic policies. This stems from the fact that the budget is the most characteristic manifestation of national sovereignty in economic terms. The Council. through aids of all sorts. Economic policies and wage determination. Through its revenue side the budget acts on savings and on the circulation of currency. In order to ensure further convergence and the smooth functioning of the single market.03. contribute to the achievement of the Community objectives set out in Article 2 of the EC Treaty. etc. on private investment. exchange rate stability and employment (Art.Budgetary policy is perhaps the area in which differences between Member States are still at their strongest. To this effect the Council (ECOFIN). 23 April 1997 4. 24. COM (97) 169. 31. OJ L 332. monitors economic developments in each of the Member States and in the Community as well as the consistency of economic policies with the broad guidelines (Art 121 TEC)3. although it is difficult. with particular reference to the size and financing of deficits. is an integral part of the general monitoring procedures. The budget is in fact the main instrument of orientation of the economy in general and of individual government policies. They share a single monetary policy and a single exchange rate. if possible prior to the drafting of national budgets. OJ L78. It also involves a review of budgetary policies. the Council may. industrial policies. social. As the secondary legislation necessary for implementing the second stage of EMU was adopted in full in 1993. remain a national responsibility. The Council may. economic policies of the Member States are coordinated at Community level. coordination of budgetary policies is extremely important for economic convergence sought by the Treaty on European Union and for participation of a Member State in the third stage of EMU. 99 TEC) 2. 102 TEC)4. 99/3 TEC).1999 3. Council Decision 90/141. on the basis of reports submitted by the Commission. It may decide to make its recommendations public (Art. formulates. i. ____________________________________________________________________________ 1. The Luxembourg European Council of 12 and 13 December 1997 adopted a Resolution on economic policy coordination in stage three of EMU in which it defined the arrangements for enhanced economic policy 59 . grant. 101 TEC) and on any form of privileged access by the public to financial institutions (Art. Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control. such as regional. Council Regulation on the broad economic policy guidelines for 1999 in OJ L 217. This discusses a conclusion on the broad guidelines of the economic policies of the Member States and of the Community.e. including the bans on direct financing of deficits by central banks (Art. acting unanimously on a proposal from the Commission.

alternatively. the Commission shall prepare a report. the Council looks closely into actual and prospective developments in Member States' budgetary policies. neither the Community nor any Member State is liable for the commitments of public authorities. mentioned under the heading of the monetary system of the EU. taking into account all relevant factors. establishing a durable basis for social cohesion. It also provides for the establishment of an early warning system to monitor budgetary developments with a view to detecting any significant divergences from the planned adjustment path. including the medium term economic and budgetary position of the Member State. The Regulation on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies requires Member States to submit stability programmes (or convergence programmes in the case of the countries not participating in the single currency) presenting the medium-term objective for a government budgetary position that is close to balance or surplus1. decide after an overall assessment whether an excessive deficit exists. It asserts that social protection systems should be modernized so as to contribute to competitiveness. acting by a qualified majority on a recommendation from the Commission. before issuing bonds and securities. unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace (Art. In particular it should examine compliance with budgetary discipline on the basis of the following two criteria: a) whether the ratio of the planned or actual government deficit to Gross Domestic Product exceeds a reference value (3% of GDP). If the Member State fails to comply with the decision of the Council. the budgetary policies of the Member States are constrained by three rules: overdraft facilities or any other type of credit facility from the ECB or national central banks to public authorities (Community. adding that the ministers of the Member States participating in the euro area would be able to meet informally to discuss issues connected with their shared specific responsibilities for the single currency. If there is no effective action in response to its recommendations within the period laid down. the latter may decide to apply or intensify one or more of the following measures: to require that the Member State concerned publish additional information. Implementing the new arrangements for economic policy coordination. Where the existence of an excessive deficit is decided. both between Member States participating in the euro and between those Member States and the ones not yet able to participate. national or regional) are prohibited (Art. unless either the ratio has declined substantially and continuously and reached a level that comes close to the reference value or. The Council shall. the excess over the reference value is exceptional and temporary and the ratio remains close to the reference value. 104 TEC). to be specified by the Council. It specifies more fully how the relevant provisions of Article 104 of the EC Treaty will be applied in the third stage. the Council shall make recommendations to the Member State concerned with a view to bringing that situation to an end within a given period. The Stability and Growth Pact. any privileged access of public authorities to the financial institutions are banned (Art. If a Member State persists in failing to put into practice the recommendations of the Council. The Resolution of the Amsterdam European Council of 16 June 1997 on Growth and Employment aims to strengthen the links between a successful and sustainable EMU. 103 TEC). been corrected. within a specified time limit. 104 TEC and Protocol on the excessive deficit procedure). in particular as regards the sanctions to be imposed on Member States which fail to take appropriate measures to correct an excessive deficit. the Council may decide to give it notice to take. however. in the view of the Council.coordination. The purpose of the second Regulation is to speed up and clarify the implementation of the excessive deficit procedure 2. to invite the European Investment Bank to reconsider its lending policy towards the Member State concerned. to require that the Member State concerned make a non-interest-bearing deposit of an appropriate size with the Community until the excessive deficit has. and that Member States remain responsible for their national budgetary policies. the Council may make its recommendations public. a well-functioning internal market and employment. The Commission should monitor the development of the budgetary situation and the level of government debt in the Member States with a view to identifying gross errors. and having considered any observations which the Member State concerned may wish to make. From the third stage of EMU. either in the first group or at a later date. employment and growth. This "Euro Group" takes account of the special needs of coordination for Member States participating in the euro area. bodies or undertakings of a Member State (Art. and it lays down the deadlines which must be observed for the different stages of the procedure. both for prevention and deterrence through two Regulations. to impose fines of an appropriate size (Art. measures for the deficit reduction which is judged necessary in order to remedy the situation. If a Member State does not fulfill the requirements under one or both of these criteria. 102 TEC) 1. which began on 1 January 1999. 101 TEC). It pointed out in particular that the ECOFIN Council was the central decision-making body for such coordination. To this end. It provides. asserts that it does not change the requirements for participation in stage three of EMU. the close coordination of the Member 60 . b) whether the ratio of government debt to gross domestic product exceeds a reference value (60% of GDP).

Thus. However. particularly insofar as they affect the chances of achieving sustained non-inflationary growth and job-creation. A common. In addition to various other measures. step up its interventions in the area of large infrastructure networks by granting very long-term loans 3. the exchange rate of the euro. growth and wealth creation. will make a contribution to a healthier economic environment that inspires greater confidence. employment and growth conditions in the Community. the independent Fiscal policy powers of individual EMU members will e much diminished.4 EMU impacts The move towards EMU requires that national governments give up independent control of a separate national currency. progress towards sounder public finances should create scope for tax reductions and should stimulate investment. Moreover. For example. also lead to significant reductions in the traditional costs associated with credit-financing and debt-servicing in the domestic economy. the Growth and Employment Resolution calls upon the European Investment Bank to: examine the establishment of a facility for the financing of high-technology projects of small and medium-sized enterprises in cooperation with the European Investment Fund. 5. Without such stability pact loose financial discipline in a single member state could force interest rates up for all other members. under the combined effects of EMU and the Stability and Growth Pact. A common interest rate regime characterized by low rates of interest will. 61 . the smooth functioning of the single market. nations will lose much of what remains of their independence. Clearly. In turn. any assessment of these implications must be considered in the light of the main benefits associated with the move towards EMU and with the exercise of joint monetary authority. each participating state takes a stake in the joint exercise of monitory policy authority (including the fixing of a single interest rate) and adopts a common unit (the Euro) as its official currency. this rate cannot and will not be set according to the specific demands or requirements of any one member. when a national economy goes into a recession or inflationary boom not shared by other countries in the EMU zone. the stability and growth Pact constrains fiscal policy freedoms by setting out fines for deficits in excess of 3 % of GDP. examine its scope of intervention in the areas of education.the monitoring of nominal and real wage developments with reference to the broad economic policy guidelines. In particular. as well as investment. dealing in particular with active labour market policy in accordance with the employment policy guidelines. In practice. exchange rate and interest rate. its response will rest largely with various fiscal policy tools. . Individual states will no longer be able to use competitive devaluations as a way of enhancing national export performance or lower or raise their own interest rates as and when local conditions require it. health and environmental protection. . economic policy coordination includes: -the close monitoring of macroeconomic developments in Member States to ensure sustained convergence. seen as the outcome of all other economic policies. sound and independent monetary policy may also contribute to a stable low-inflation environment and facilitate the emergence of conditions necessary for sustained non-inflationary growth throughout the EU. pressures are also exerted for fiscal responsibility on the part of member authorities. 98 and 99 (TEC) should be focused in particular on policies for employment. for many participants. These massive implications for economic policy management (and for economic sovereignty) are at the very heart of continuing debate over EMU. . and a single currency. as well as of cost and price trends. Reducing government deficits by 1 percentage point in Europe releases an estimated €60 billion a year for investment and consumption. Therefore. .the close examination of national employment action plans (NAPs). disinflation benefits will be felt in countries that hitherto have not enjoyed the benefits of price stability. through EMU. On the basis of the Treaty and specially agreed instruments. the independent policy records of individual member states have been less than impressive and. It can be argued that common European monetary authority. -the close monitoring of exchange rate developments of the euro and other EU currencies.States' economic policies referred to in Arti-cles4. Under the combined effects of EMU and the Stability Pact.the strengthened surveillance of budgetary positions and policies in accordance with the Treaty and the Stability and Growth Pact. product and services markets. economic policy coordination concentrates on those national policies which have the potential to influence monetary and financial conditions throughout the euro area. including important instruments of monetary policy making.the monitoring of Member States' structural policies in labour. mentioned under the heading of "employment policy" in the chapter on Social Progress. Although the single interest rate regime is managed within the European System of Central Banks in which the member state has representation.

as such. However. the forces of competition will be strengthened in many product markets. firms should have more choice and flexibility in raising finance and. The introduction of the Euro should also favour the development of new financing methods. Lower borrowing costs It is axiomatic that with a single currency and a single central bank that there will be a single interest rate regime across the Community'. the costs of transporting products from factories. In turn. This may provide scope for a reduction in total borrowing costs.Foreign exchange As a consequence of a common currency. Despite the SEM. For example. 1997. The costs of hedging alone are estimated to be between 1% and 2% of the sales and purchases of small companies in Europe (AMUE. foreign exchange transaction costs are also eliminated on all internal (intra-Eurozone) dealings. in many cases. cutting out the need to convert currencies when comparing wages across markets. Transparent price differences With the Euro it will be possible to directly compare prices for the same goods and services in different EUR-11 countries and to spot the best prices. Salary denomination issues will also surface during the transition perod. in theory. Cross-border trade and investment will be stimulated and. benefits. Putting these 'gains' together. This is referred to as 'wage transparency'. more competitive markets The Euro. just as intra-national variations in salary and remuneration exist today. Cost savings may be greatest in countries where Euro interest rates fall below previous rates. Under a single-currency regime. pp. banks will be able to lend in Euros throughout the Community and enterprises will be able to borrow from outside their home countries without incurring the risk of exchange rate exposure. Overall. Bigger. by country and currency. differences in tax rates. ensures that companies will face a more integrated European market. In particular. by providing a common unit of account for commercial activities. the suggested benefits are predicted at as much as 8% on the total price of industrial goods. 'The pressure will be greatest in border regions and for high value goods which are easily transportable' (European Commission. national market structures. 1998). depending on where the product is sold (see Marsh. purchasing power etc. 1999). will face lower costs. Fundamentally. and perceived product values. anyone shopping for an excavator in the EU can end up paying 40% more. Treasury and finance 62 . Wage transparency It will now be easier for employees to calculate whether like workers in other countries are offered higher wages and to compare wages with payments made to other employees in different countries but within the same company. international variations are likely to persist. 20-1). New business start-ups may also be encouraged. businesses who currently see foreign exchange risk and transaction costs as major barriers to cross-border trade are more likely to move into new markets once these 'barriers' are removed. Eurozone firms are able to avoid the risk that exchange rate changes might reduce or wipe out the value of their future profits. firms can usually demonstrate differences in taxation. Transparency of wage and salary differentials will probably bring salary convergence closer to reality and should. Exchange rate movements do not necessarily impose a penalty but volatility in exchange markets and/or the unpredictability of rates can play a disruptive and costly role in multi-currency transactions. organizations will need to consider how to set fair and competitive remuneration packages in a Euro-denominated environment. The ability of consumers to compare prices more easily will tend to move prices towards the lowest market level and it will become harder for businesses to maintain differential pricing policies by country and currency. Although people will ask 'Why are they paid that much over there when I'm paid this much here?'. Many firms have opted to hedge these exchange risks for long-dated transactions and/or have included a margin in their prices to cover adverse exchange rate movements. result in increased labour mobility. substantial price disparities persist as a result of differential pricing policies.

According to government officials. although this debate configures around commercial. 1998). Euro functionality is unlikely without major changes. accounting and benchmarking. Financial Times.25% of company turnover. we may separate the unit-level impact of the Euro into two broad categories. The first such category refers to those effects which will impact on business and marketing environments and will therefore raise a series of strategic questions. 10 September 1999). a majority of the UK cabinet have. Pardo has estimated that the costs associated with the information systems challenge for firms may be between 0. Systems and software packages must also conform to EU rules on rounding. The present position of the UK government is that the conditions need to be right before the UK joins the single currency but that the principle of future membership is established. The Blair administration has now set up the prerequisite of measured economic convergence through an assessment of five economic tests. This directs attention to overarching management strategies and to key business functions such as marketing and procurement. while it is analytically convenient to think in terms of strategic versus practical issues. 1998. margins. cash flow management. Among other things. budgeting and costing systems. FEE. currency management and corporate finance. The BBC's Euro case study of electronics giant Siemens quotes the company's IT-IS conversion bill at DM100 million ($60 million). Information technology systems To be Euro compliant. Address of the UK position allows for a clarification of policy options in the United Kingdom and for a presentation of some of the main criticisms of EMU. Although Labour insiders and senior Cabinet figures have talked up EMU membership. p. While the Government has been encouraged to 'push' the Euro by many of the UK's leading firms. expenditures etc. No single public opinion poll has shown majority support for EMU entry (or anything like it) and the public may even be growing more doubtful as to the merits of the Euro. This concentration should be considered in light of the earlier statements made about the contribution of EMU to the stimulation of trade and competition in many market sectors. This point is clearly demonstrated in the subsequent focus on the marketing function and on the implications of the Euro for commercial and marketing departments. this directs attention to the Euro's effects on business accounting procedures. The Euro will alter balance sheets. This represents over half ($150 billion) of its total Euro conversion budget with over 80% of IT applications affected. to date. Such concerns have fuelled the debate in Britain about the merits and timing of UK participation. several systems may need to be adjusted or upgraded. the changeover to the Euro will provide significant opportunities in terms of procurement. 50). This raises the prospect of real business savings for those prepared to source on a pan-European basis. contract and payroll arrangements. IBM Europe has reported changes to over 700 different software applications in its drive towards full Euro compliance (Vowie. businesses with units operating in different corporate currencies (that is. been persuaded that EMU represents a 'difficult sell' to a skeptical UK public. The second class is of those effects at organizational level which raise more practical concerns and which impact upon internal business processes and/or technical systems. those different national currencies used for book-keeping and reporting) will eventually be able to record and to compare all accounting values. For many firms. Alternatively. Such transparency may greatly assist in processes of internal planning. this represents clear support for EMU (and the 63 . However. A poll by Salomon Smith Barney Citibank and Mori in late 1999 showed that 58% of the British public remained opposed to EMU membership and that only 27% proclaimed support for Euro adoption (Euro Quarterly Review. With the Euro it will be easier and cheaper to find and to work with new suppliers outside of the home market. 1998. IT and information systems etc.25% and 1. With respect to SMEs in a country like Spain. Extending our analysis here. the effects of the Euro on major business functions will be both strategic and operational in nature. 1999. even the business community has evidenced divisions on the currency issue. The UK perspective It would appear from the preceding analysis that businesses outside of the Eurozone may face a series of competitive disadvantages arising from relative exchange rate risk and higher costs of borrowing. constitutional and political arguments. In terms of business and functional strategies. costs. in one currency.While the complexity of treasury and financial activities may be heightened during the period of transition. conversion and triangulation. This includes electronic payment systems. AMLJE. for many European businesses the Euro will present opportunities for long-term savings. a company must prepare with internal and external focus in order to capitalize on new opportunities and to ensure support of essential business processes. (see Connor. databases and other commercial software packages containing references to financial information. This follows the UK's opt-out of first-wave entry. While some systems will have multi-currency capabilities (facilitating the use of two denominations during the transitional period).

Were Britain to shun the Euro then it would miss out on these advantages with the gain in competitiveness of the EMU group eroding our own ability to compete. Internal price stability. British business people. the Liberal Democratic Party. will be a zone of economic stability. when Britain's self-exclusion from the Euro (and the high rate of sterling) were cited by senior BMW executives as foremost among their reasons for selling off the Rover car company. it is now unlikely to be held until after the next general election which will take place at some point prior to May 2002.5% more than those in Germany. With doubts over Britain's long-term commitment to anti-inflationary disciplines outside of EMU and with the ECB's statutory commitment to low inflation and price stability. are deeply divided. The real task here rests with the demonstration of cyclical convergence and. for the last twenty years. For example.in early 2000. UK rates have averaged 3. According to its advocates. eliminating exchange rate risk on cross-border transactions in the EMU core. Of course. as Eurozone rivals benefit from lower interest rates. EMU will have to have a neutral or positive effect on the competitive position of the UK's financial services industry. divergent business cycles and untested EMU experience. or 'Euroland' as it is sometimes called. it traded at a low-spot of just 60 pence . pp. in sharp contrast to that of the third force in British politics. Indeed. Of course the focus of Britain's debate has shifted from the academic question of whether a future Euro might replace the pound (like other EU currencies) to the question of whether the established Euro should replace the pound.a falling currency is typically perceived as a weak one. This has put British firms which borrow in sterling at an immediate competitive disadvantage (see Simon. On this question. borrowing costs for British firms will likely remain higher and their customers will be penalized by higher relative mortgage repayments. So what are the arguments articulated by the 'pros' and 'antis' and of the commentators and economists on whom they can draw? The case for joining The case for joining rests with the economic advantages of EMU and with the competitive and political disadvantages that Britain may face as a consequence of 'staying out'.principle of UK entry) but reflects a reality of under preparation. For a sustained period. These tensions were exacerbated in early 2000. Fixed exchange rates also promise to put an end to the days of currency instability in Europe. within this. there is no certainty that Euro rates will be lower in the long term but. taking on larger loans and investing in future technology. of the capacity of the UK economy to live with Euro interest rates on a permanent basis. 1997. The Blair Government has also made a pledge to hold a referendum on any decision to take Britain into a single currency.its value declined by 10% in 1999 from a starting rate of 70. a lower external (Euro) risk premium and lower real interest rates as well as sustained economic growth are all conducive to business efficiency and to efficient business planning. within which effective business planning can take place and growth be enhanced. Depreciation of the Euro against sterling . 3. there must be evidence of sufficient flexibility in the operation of the stability pact and in Euro-markets to respond to economic shocks. EMU would have to be likely to promote growth and jobs in the UK.0% (January 1999) was less than half of that applying in the UK economy at the point of the Euro's launch. These five tests extend the limited usefulness of the Maastricht convergence criteria and highlight a number of issues for interpretive analysis. While the Euro may well recover lost ground . like the public as a whole. the context of any future referendum on the Euro will be one of deep political division. the Eurozone. the fact that the pound has been pushed to ever higher levels against the Euro has brought new problems for the UK government. its ailing British subsidiary. Although the timing of any such referendum remains unclear. Not only has sterling's dramatic appreciation against the Euro made life difficult for British manufacturers and exporters. accusing it of weak leadership. particularly the City's wholesale markets.4 pence . 4. 7-8). business cycles and economic structures in the UK and Euroland would have to be demonstrably compatible.also does damage to the assumption that the Euro will be a strong and stable currency. fears have been raised that a future fixed conversion rate for sterling against the Euro would be prohibitively high. UK interest rates have been higher than long-term continental rates and the initial Euro rate of 3. 5. Britain could for some time suffer an interest rate premium over Eurozone rates. The five economic tests which have to be met before Britain enters are as follows: 1. 2. 64 . The Liberal Democrats remain the most enthusiastic of the British parties for the single currency but have evidenced little unity with the Labour government on the currency question. EMU will have to create better conditions for companies to invest in the UK. Whatever the outcome of that ballot (should it occur). The official opposition (the UK Conservative Party) has hardened its policy of keeping Britain out of the single currency.

Although this claim appears to be have been exaggerated (London has a booming Eurobond market and is performing well outside of the Eurozone).has already been made. generating approximately £15 billion in annual invisible exports. lower borrowing costs for businesses and reduced exchange rate risk exposure) have received prior treatment in this chapter and can be grouped with the following 'positive' aspects of Euro changeover raised in unit-level examination: • reduced transaction costs • better information on input costs and competitor prices (transparency) • deeper financial markets and new capital options • simplified book-keeping and treasury management • speedier (cross-border) transactions • scope for pan-Euro marketing. 'a number of large multinationals have pulled out of the (North-East) region including Siemens and Gilette.000 people. its partners might retaliate with protection. a persuasive case for UK membership of EMU can be built on a number of broader arguments. it will become marginalized from economic policy decisions that will inevitably affect it. If it stayed outside of the Eurozone burdened by an overvalued currency.Most of these points (greater stability for business planning. Some commentators have also warned that. if Britain stayed outside the Eurozone. although it is contestable that the exchange rate was a primary factor in the company's decision to axe Rover. Already. its export performance would probably suffer. Note of the BMW case . [and] Toyota has also threatened to pull out of the UK if the UK does not adopt the single currency' (Floyd.with its sell-off and break-up of the Rover car group . 65 . 3). For example. Any threat to this industry arising from self-exclusion would have to be taken seriously. seeking to profit from competitive devaluation. it is to be emphasized that international financial services in Britain employ around 150. if Britain shuns the Euro. p. labelling and packaging Elsewhere. outside of the Eurozone. Another economic concern is that. the position of the City of London as Europe's premier financial capital might be undermined. The second of these concerns seems the more relevant at the time of writing with a number of companies (including major foreign investors) warning that their position is being eroded by the pound's strength. 1999.

any collectivization of fiscal policy. Second. the Austrians and Germans stamped their six-month presidencies of the European Union (1998-99) with calls for future EU tax harmonization. Such freedoms contribute to varying average tax levels . a 12. others in German and EU politics have taken up the cause of wider tax harmonization and have championed the case of qualified majority voting on tax issues in the European Council. given that cross-border flows of capital are more sensitive to differences in tax in the absence of exchange rate risks. For example. complete tax harmonization across a group of countries would be inevitable only if companies were completely mobile and there were no other differentiating factors between these countries. Consequently. 66 . it is possible to establish a solid argument that differentials in taxes (especially those applying to sales and profits) provide the basis for internal 'tax competition'. inward investment may be lured by lower taxes on corporate profits and. the Parent/Subsidiary Directive and the Merger Directive (see Hawksworth and Cussons. Third. the EU states signed a code of conduct pledging action on harmful tax competition in the ECOFIN Council in December 1997. Canada. Tax competition means competing for a larger share of productivity.5. Currently being debated by EU finance ministers are measures to eliminate distortions in the taxation of capital income. EMU may be predicted to accentuate tax competition in the Single Market. In fact. The Code of Conduct on Business Taxation requests member states to adopt certain principles and empowers them to 'discuss the tax measures of other member states and to evaluate whether they are harmful'. Although controversial German Finance Minister Oskar Lafontaine was ousted from his post in early 1999. EU initiatives on tax harmonization do appear fairly active.5% corporation tax rate on almost all trading activity. Ireland has been forced to abandon this 10% rate (Ireland's top corporate tax rate is 36%) and to apply. to bring about corporate tax convergence. Although evidence is unclear at time of writing. As Hawksworth and Cussons (1999. In a context of derestricted capital movements. which is the balance of government revenue through taxation and government expenditure. such as the application of articles of the Treaty on state aids. excise duties. First. measures to eliminate withholding taxes on cross-border interest and royalty payments. the EU has little control over tax policies with national governments retaining broad control (subject to some harmonization) of sales taxes. the average corporate tax rate in the EU has been reduced by about 3% to 36% (KPMG International. Member states can then be asked to amend taxes with a view to eliminating any harmful measures. in the absence of agreed minima. Already since 1996. it is costly to relocate existing companies and tax is only one of many factors influencing investment location decisions. p. With respect to taxation. it is clear that the Commission remains committed to setting up a definitive VAT system with standardized rates. Switzerland and even Germany. and measures to regulate the use of preferential tax regimes..5 EMU and EU tax harmonization As is clear from the terms of 'the British Debate' one important question is the extent to which monetary union will lead to tax harmonization in the EU. 9) contend this is not the case either in theory or in practice: From a theoretical perspective. 10). An apparent stimulus to EU initiatives on tax harmonization is therefore unsurprising although it is probably erroneous to claim that the averaging out or banding of rates is an inevitable consequence of a single currency. It is worth stating here that the EU already operates a system of harmonized VAT rates (see Chaper 3) and has three significant directives with important tax implications: the Mutual Assistance Directive. 1999). this shows that there is still considerable scope for state and local governments to vary corporate tax rates within a single currency zone. by 2003.from 36% of GDP in the UK to around 60% in Denmark and Sweden -and to a patchwork of tax measures and treatments. there may be a spiral down to ever-lower levels. implies a further strengthening of political union and the possibility of higher (standardized) tax rates.S. This has led to the formation of a Code of Conduct Working Group on harmful tax competition along with a number of EU subcommittees focused on various tax issues. A number of other recent developments are also noteworthy. This view is confirmed by practical experience in countries with federal structures such as the U. The status of its VAT Committee was upgraded in early 1998. 1999. As considered. p. It is also clear that support of tax harmonization has been growing in certain member states. the Commission appears to be using indirect methods of enforcing harmo-nization. At present. income and corporation taxes. The number of measures now being raised in the Code of Conduct Working Group appears to be growing rapidly. A limited number of projects specified on a list agreed with the Commission will be entitled to the 10% tax rate until the end of 2005 or 2010. This has already happened with Ireland's special 10% tax (applying to manufacturers locating in designated enterprise zones) judged in contravention of EU rules on state aids. markets and investment by cutting tax rates.

0 21. tax issues were able to be decided under QMV then the prospect of far-reaching tax harmonization would be much greater. Desmond Dinan. 1998. 12.00 Note: Corporation taxes are calculated taking account of standard corporate income taxes and effective municipal taxes. tax harmonization impacts on the very foundations of a government's control and management of its economy. 7. 8. tax is one of the few remaining areas where one of the 15 member states can actually stop the whole show by just saying "no. 5. Consequently. 1997. 2000 Simon Mercado. Finally. This complexity is growing and wide disparities exist in the effective rates of taxation in the member states. N6.The scope for fiscal harmonization in the EU is.31 (retained profits) 43.00 (listed) 40. London. 2001. Foreign Affairs.25 37. If. 3.00 31. This can be demonstrated in the past rejection of Commission plans for VAT standardization and.00 (limited liability) 28. “Economic and Monetary Union in Europe”. Mc Namara Katheleen R.00 28.0 17. 4. Economic convergence of the CEECs with the EU. 122-124.40 35.6 16. Financial Times.60 (distributed profits) 35.0% in Italy. The role of the Euro in the world: past developments and future perspectives.0 19.0 25.00 40. businesses tend to like diversity. it is improbable that concerted pressure for harmonization of tax rates will extend from the business community despite the fact that businesses may benefit from the elimination of discriminatory tax measures.0 40. Between National Sovereignity and International Power: What external Voice for the EURO? Paper prepared for presentation at the European Community Studies Association’s 7 th Biennial International Conference. Laurence. 1997. 58-78 Kopits. Third. more recently. Madison Portes Richard. p.0 21. As Cussons (1999) puts it. “Ever Closer Union”. the EU involves the harmonization of developed countries with diverse and complicated tax and fiscal systems. Vol 76. KPMG Bibliography on EMU and suggested readings ______________________________________________________________________________ 1. 129-141 Orlowski. George.45 35. Corporate tax rates also show a significant range with the UK having a much lower headline rate than the likes of Germany and France (see Table 5. Exchange rate policies in Central Europe and Monetary Union< Comparative Economic Studies. IMF.4% of GDP in Germany to 4.00 37. CEPR. 'in that they can then pick the regimes that suit them' (see Cussons. These apply to both direct taxes such as corporation rates and to indirect taxes such as sales duties. as some have argued. Lucian. 1999. Second. Bruxelles. and of huge significance here. November/December.5 Corporate income tax rate (1 January 1999) 34.00 28. 9.0 25. The relative tax burdens imposed by different governments range from 1.0 22. EMU and International Conflict. p.0 20. 1999). tax harmonization measures continue to require the unanimous approval of all member states. 10. 11. in the tortured progress of the so-called 'Savings Directive'.17 32. A simple comparison of tax rates is of limited value given variations in the coverage of corporate taxation and in the nature of deductions and rate depreciations. May 31-June 2. Table 5. Boone.3 p.00 52. 1998. The harmonization procedure upsets the status quo and is likely to face serious political obstacles. 6. Press D’Éurope. p. Institut fur Donauraum und Mitteleuropa. 87-126. although standard VAT rates only range from 15% in Luxembourg to 25% in Sweden (see Table 4. The European Monetary Union in a globalized world. For example.0 17. limited by a number of factors. European Business. First. Luc. Frankfurt. sales tax rates for all goods actually vary from 1% to 38% when account is made of reduced and super-reduced rates applying to specific items. What impact Will the Euro have on the Candidate Countries of Central and Eastern Europe?. 27 Bernard. Source: European Commission.5 17. 11 May 2001 Feldstein Martin. Second Vienna Globalization Symposium. Issing Otmar. 2. Washington. 134-147 Nicholas Moussis “Acess to European Union”. and Meunier Sophie. however. pp.41. I won't agree to that measure"'.0 18.60-73 67 .1). 2001. p. Implications of EMU for exchange rate policy in Central and Eastern Europe.00 41. EU states apply reduced and superreduced VAT rates on certain items.1 Tax rates in Euopean Union member states Country Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom Standard sales tax rate (1 May 2000) 20. 1999.1). p.0 15.0 16.418-429 Martin Ricketts. p. 'Under the Treaty of Rome and the Maastricht Treaty (and now Amsterdam). This proposes a minimum 20% withholding tax on gains made by individuals in another EU member state and is being flatly opposed by the UK government. 2001.

The regional policy of the EU does not seek to supersede national regional policies. referred to as the "Nomenclature of Territorial Statistical Units (NUTS)" established by the Statistical Office of the European Communities in cooperation with the national institutes for statistics. namely per capita GDP below the Community average. and any facilities allowing for the creation or extension of towns) and financially supporting job-creation investments. The outermost regions (the French overseas departments. Common Transport Policy. At the beginning of the 1990s.1 Horizontal policies (Regional Development Policy.1 Horizontal policies Regional Development Policy Every Member State.Common policies of the European Union 6. high and prolonged unemployment and a continuous outward population flow. The consequences are common to all these regions. which these regions have in common. are the first ones who must solve the problems in their regions by promoting infrastructure (includes means of transport. the Azores. The feature. The Committee of Regions set up by the Treaty on European Union and consecrating the role of regional authorities in the institutional system of the Union. However. To do this. employment and income. 68 . communication and telecommunication. Energy Policy. The identification of the priority regions and areas at Community level is based on the common system of classification of the regions. Common Fisheries Policy) 6. which generally aims at favoring the development of the national territory's less prosperous regions by means of transferring resources from wealthier regions. The advantages of such measures are twofold: favoring the transfer of resources towards poor regions while halting the disproportionate expansion of congested regions. the ratio for basic infrastructure about I to 3 and the ratio for grants for research and technology about 1 to 7. certain governments also try to discourage investments in highly developed regions. implying the convergence of the Member States economies. The general objective of these measures is to create or re-establish a better distribution of economic activities and population over the national territory. All the Member States of the European Union are experiencing variations in the levels of development and living standards from one region to another and the gaps are wider still when measured across the Union as a whole. improving the infrastructure and the social and cultural development of backward regions. Regions whose development is lagging behind. itself necessary for the progress of economic and monetary union. Taxation Policy. some 52% of the total population of the Union lived in problem regions. The means normally used by Member States to remedy regional problems are of two types: firstly. Environment Policy) 6. termed "Objective 1 regions" in Community jargon are basically regions corresponding to level II of the Nomenclature of Territorial Statistical Units (NUTS level II) whose per capita gross domestic product (GDP) is less than 75% of the Community average. which are all below the 75 % threshold. each Member State carries out its own regional policy. subsidies and tax incentives for attracting private investment in these regions. presently has a regional policy aimed at enhancing the development of less-favoured regions by means of transferring resources from prosperous regions. Competition Policy.6. European regional policy has grown in importance since the Treaty made it an essential instrument of economic and social cohesion. The per capita gross domestic product (GDP) in the ten poorest regions of the Union was only about one quarter of that in the ten richest regions. and secondly. Since the beginning of the 21st century. should play an important role in the forecasting of regional tendencies and in the management of structural interventions of the EU.2 Sectoral Policy (Industrial and Enterprise Policy. along with the European Union itself. the Member States. housing. Unemployment in the ten regions worst hit was up to seven times greater than in the ten most fortunate regions. It must also coordinate the various policies and financial instruments of the EU to give them a “regional dimension” and thus more impact on regions most in need of care. through their own regional policies. the Community regional policy recognizes two main types of "priority" regions and areas: regions whose development is lagging behind and areas facing structural difficulties. Common Agricultural Policy. Community regional policy must coordinate national regional policies by formulating guidelines and establishing certain principles in order to avoid competition for regional aid between Member States. Social Policy. Of course. is their excessive dependence on a limited range of traditional economic activities that can no longer provide sufficient productivity. the Canary Islands and Madeira). The main objective of European regional policy is the reduction of existing disparities and the prevention of further regional imbalances by transferring Community resources to problem regions using financial instruments such as the European Regional Development Fund (ERDF). From one country to another the ratio of young people receiving vocational training was about 1 to 2. various premiums.

was introduced by the Single European Act 3.07. The exact list of regions eligible under Objective 1 was drawn up by the Commission and is valid for seven years from 1 January 2000 1. urban areas in difficulty. or country-specific economic shocks.transport. The new Community regional policy thus took off on 1 January 1989 with an endowment of some ECU 64 billion for the 1989-1993 programming period. which are. the Edinburgh European Council on 11 and 12 December 1992 agreed to devote a cumulative amount of over 140 billion ECU (1992 prices) to structural actions in the period 1994-1999. salaries in certain countries were much lower than in others. the Commission requested the doubling of the financial allotment of the structural Funds until 1993 in order to ensure the problem-free completion of the single market. The removal of the possibility of exchange rate adjustment. OJ L194. better information on respective situations. Economic and social cohesion The objective of economic and social cohesion. Those countries must invest most. relatively high. The total population of the Objective 2 regions must not exceed 18% of the total population of the Community. ______________________________________________________________________________ 1. The reduction of trans-frontier transaction costs and the elimination of exchange rate risk may promote regional specialization and intra-Community trade in goods and services. Of course. and depressed areas dependent on fisheries. The European Council of Brussels. At the same time.07. 5% in the case of the rural areas. If these businesses have to shut down. it facilitates short-term adjustment to general. 27. But in a common market. to offset a loss in international competitiveness in a relatively painless manner. therefore.1999 OJ L 169. 29. the Commission laid down a population ceiling for each Member State on the basis of certain criteria fixed by the Regulation2. declining rural areas. In pursuance of the new objectives for economic and monetary union set by the Maastricht Treaty and closely following the proposals of the Commission (Delors II Package).1999 Commission Decision 503. Furthermore. 2. The weaker regions can benefit from this specialization by exploiting more fully their comparative advantages.and the areas with very low population density (less than 8 inhabitants per km2). energy or telecommunications. therefore. agreed with the Commission by accepting the "Delors I Package" on the reform of Common Agricultural Policy. these regions constitute about 10% of the population of the Community in the case of the industrial areas. OJ L194. and even more in an economic and monetary union. agriculture where archaic structures prevail. through devaluation. those countries could lose the advantage of lower labour costs. 3. situated in the north and east of Finland and the northern half of Sweden. As such. which engenders inflationist tendencies and creates difficulties for businesses in areas where productivity is low. increased capital mobility encouraged by fixed exchange rates and the tendency towards quasi-uniform inflation rates may equalize interest rates for any given level of risk. a general expansion of trade is likely to be beneficial for economic growth. The regions with structural problems whose socio-economic conversion is supported under Objective 2 of the structural policy include in particular: areas undergoing socio-economic change in the industrial and service sectors. 2% in the case of the urban areas and 1% in the case of the fisheries areas. Exchange rate flexibility is important in that. freedom of movement for workers. On this basis. Accordingly. compensating for the lower productivity of a labour force that was not very qualified. Member States will lose certain fiscal and monetary policy options as well as the ability to adjust the exchange rate. According to the Regulation laying down general provisions on the Structural Funds. and trade union demands tend to align revenues towards the levels already attained in the more prosperous regions. implying the desire to reduce disparities between the various regions of the Community. it enables a country. This may be a positive result from a social point of view but it is one. In addition. which should favour the less developed regions where capital is often relatively scarce and capital costs. represents a more important loss to the least developed countries of the Union. in February 1988. while spending least so as to conform with the Maastricht criteria. which provides in turn favorable conditions for lagging regions to catch up.06. Commission Decision 502/99. the achievement of economic and monetary union promises enhanced prospects for the developed and the less favoured regions alike. the workers lose their jobs and their revenue increase is merely an illusion. however. which must carry out the most important structural changes. population exodus combined with urban decay. and high rates of unemployment particularly among young people and unqualified or poorly qualified workers. weak or outdated industrial structures whose production methods often fall short of the mark and whose products are ill-adapted to the marketplace.1987 69 . Community financing and the reform of the structural funds. but its limits could already be seen in 1992. in principle. 27. Finally. These regions are faced with a combination of handicaps: insufficient or rundown infrastructure . As long as markets were protected.

according to the Commission.From both an economic and social point of view. the policies of economic and social cohesion. It must also coordinate the various policies and financial instruments of the EU to give them a "regional dimension" and thus more impact on regions most in need of care. The Berlin European Council on 25 March 1999 reached an overall agreement on Agenda 2000 based broadly on the guidelines laid down by the Commission. a major role is. certainly. coupled with the decision to maintain overall expenditure on cohesion to 1999 levels. Estonia. among these criteria is. aiming. environmental measures and transport infrastructure. In the Community terminology "Structural Funds" or simply "Funds" mean the European Regional Development Fund (ERDF). at the same time. the one on curbing public deficits. including rural areas. Article 161 (TEC) and a Protocol annexed to the Treaty of Maastricht have provided for the creation of the Cohesion Fund. played by the Structural Funds (Art. to pursue and even increase public investments in order to close the prosperity gap with the other Member States. Community regional policy seeks to coordinate national regional policies by formulating guidelines and establishing certain principles in order to avoid distortion of competition between Member States through their regional aid schemes. concerning. the Commission set out three priorities for economic and social cohesion: reducing regional disparities. Poland. Therefore. Wide disparities are intolerable in a community. make it possible to meet the structural needs both of the actual Member States and those of the six countries which it designated in the same document as ready to join the EU after 2002. Portugal and Ireland) and which are implementing a programme aiming to fulfill the conditions of economic convergence announced in Article 104 of the EC Treaty. the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion. This must contribute financially to projects in the fields of the environment and transport infrastructure for trans-European networks in Member States whose per capita GNP is less than 90% of the Community average (Greece. the Structural Funds were again reformed and an Instrument for Structural Policies for Preaccession (ISPA) was established to contribute to the preparation for accession to the European Union of ten applicant countries (Bulgaria. as is stated in Article 159 (TEC). This model reflects the values of the social market economy. called "Agenda 2000" and dealing with the outlook of the European Union in the beginning of the 21st century. Romania. the European Social Fund (ESF). Taking into consideration these requirements. in particular. the less wealthy countries must apply very strict budgetary disciplines. disparities do not just imply a poorer quality of life for the disadvantaged regions. The Regulation establishing the Cohesion Fund was amended in June 1999 along with the new reform of the Structural Funds1. Slovakia and Slovenia) in the area of economic and social cohesion. To elude this contradiction. the Treaty on the European Union states in its Article 2 that the strengthening of economic and social cohesion is a fundamental objective of the Union. The prosperity of certain areas of the union cannot be paid for by the decline or stagnation of other areas. Furthermore. The basic principles of the Cohesion Fund laid down in 1994 continue to govern the Fund's activities until 2006. and the Financial Instrument for Fisheries Guidance (FIFG). Czech Republic. In order to satisfy this condition. at reducing disparities between the levels of development of the various regions and the backwardness of the least-favoured regions. Hungary. But indicate a failure to take advantage of economic opportunities that could benefit the Union as a whole. whereas they need. 70 . thus increasing the efficiency and visibility of the Community structural activities. in particular. the European Agricultural Guidance and Guarantee Fund (EAGGF) Guidance Section. supporting regions undergoing economic change. At the same time. would. Article 158 (TEC) specifies that in order to promote its overall harmonious development. Lithuania. the Union increasingly shares responsibility with the Member States for the maintenance of the European model of society. neither the weakest member countries nor the European Union can tolerate a substantial part of their patrimony being left to underdevelopment because of economic integration. To promote the goal of economic and social cohesion. In its communication of 15 July 1997. 161 TEC). These two wings of the Community regional policy are examined below. Spain. The Commission also advocated greater geographical concentration. It allocated a total of EUR 213 billion for structural and cohesion policies (EUR 195 billion for the Structural Funds and EUR 18 billion for the Cohesion Fund). reducing from over 50% to below 40% the population qualifying for structural aid. Indeed. which are linked with the objectives of the European model of society. are considered to be a factor in strengthening the productivity of European society and contributing to economic and social well being. freedom of opportunity and enterprise with a commitment to the values of solidarity and access for all members of society to social protection and services of general interest. With growing European integration. Although all Community policies can contribute to reinforcing economic and social cohesion. and developing human resources throughout the Union. These priorities had to be reflected in three objectives instead of the present seven. This approach. which seeks to combine a system of economic organization based on market forces. The situation in which certain Member States find themselves necessitates special efforts to promote economic and social cohesion and thus enable them to comply with the convergence criteria required for the passage to the third stage of Economic and Monetary Union. if the term is to have any meaning at all. Latvia.

Regional state-aid schemes and national-level authorities
The concentration of regional aid in the most disadvantaged areas forms a common objective of both the EU’s
regional and competition policies. In effect, if an aid or package of measures:
 Is a part of a coherent regional development strategy,
 Is directed towards a region eligible for Community assistance according to defined EC rules, and
 Is notified by the member state under Article 88 of the TEC (ex Article 93)
Then it may be exempt from the Community’s general restrictions on state assistance.
Member state also have a margin of room to direct aid payments to regions not eligible for Community
assistance ( or for EU structural funding) but where a region and state aid scheme falss one of the exemptions
provided in Article 87(3a) or Article 87 (3c). This establishes a complex relationship between regional policy and
competition law and highlights a lack of complete consistency between the EU’s policy on regional state-aid
schemes and its regional policy. In this context, member states are themselves granting regional aid through national
and subnational authorities to regions eligible under the Structural Funds and/ or to regions eligible under Article
87(3) specify that the following may be considered to be compatible with the common market: "aid to promote the
economic development of areas where the standard of living is abnormally low or where there is serious
underemployment" and, more generally, "aid to facilitate the development of certain economic activities or of certain
economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common
interest". In monitoring regional aid, the Commission should seek on the basis of economic criteria to determine
which are the least-favored regions of the EU and establish for each of them the level of aid. Intensity so that the aid
be targeted at those areas of the Union which are really experiencing difficulties. The monitoring of State aid thus
makes a considerable contribution to the economic and social cohesion of the Union.
The successive enlargements of the Community have boosted its regional diversity and accentuated the need
for new instruments to control regional aid. This is why article 158 (TEC) gave fresh impetus to the aim of stronger
economic and social cohesiveness and stipulated that the Community should attempt to close the gap between its
regions and help the less-favored regions to catch up. In response to these requirements, the Commission decided, on
16 December 1997, to introduce new regional aid guidelines for the application of Article 87, paragraph 3 (a and c)
of the EC Treaty (ex Art. 92)1.
The guidelines, which will be applicable in the period 2000 to 2006, lay down the aid ceilings to be applied
according to the severity of regional problems and are based on four fundamental principles: (a) aid should be
concentrated on the poorest regions for maximum effectiveness; (b) the total amount of regional aid should be
reduced and better distributed between the "cohesion regions" (Spain, Greece, Portugal, Ireland) and the more
prosperous regions; (c) the real effect of aid on employment should be taken into account and, to that end,
consideration given to the possibility of granting aid not only on the basis of investment but also in the light of the
number of jobs created; and (d) there should be consistency between the regional aid maps and those used for the
Structural Funds . At the same time, the Commission decided to introduce a multicultural framework for regional
aid for large investment projects aimed at reducing the excessive volume of regional aid for highly capital-intensive
investments.
EU Policy and financing
While there are some inconsistencies between the regions which are supported under national regional
policies and those which are supported under Community instruments, the latter are designed to support and to
bolster national efforts in their most disadvantaged regions. The Communication from the Commission to the
member states on the links between regional and competition policy of the Treaty (98/c 90/03) stresses a broad if
imperfect consistency in the number and identity of regions covered under national and Community measures.
Community efforts provide broad support for national development measures by part-financing schemes and projects
designed and implemented at national or at regional level. Funding comes predominantly from three sources:
1. the European Investment Bank (which grants cheap loans for special projects),
2. the EU Cohesion Fund (supplying finance to environmental and infrastructure projects in Spain,
Greece, Portugal and Oreland), and

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1.

Commission communication, OJ C 212, 12.08.1998, p.2-5

71

3.

the so-called Structural Funds (the European Regional Development Fund (ERDF), European Social
Fund (ESF), European Agricultural Guidance and Guarantee Fund(EAGGF).
The three Structural Funds (ERDF, ESF and EAGGF) have financed a number of European regional and social aid
projects drawn u\p by the member states and/ or the Brussels-based Commission. In the programming period 199499, fund assistance focused largely on specific types of problem regions identified by numbered objectives:
Objective 1. Regions whose development had been lagging behind as determined on the basis of relative
per capita incomes. Eligibility applies where average per capita income is below 75% of the EU average. In the
period 1994-99, regions of this nature included the West of Ireland and the Italian Mezzogornio. During this period,
financing of projects in objective 1 regions accounted for 67.6% of all spending under the Structural Funds.
Objective 2. Declining industrial areas, for example former coal and steel regions such as the Ruhr,
Piedmont and South Wales. In the period 1994-99, 11.1% of Structural Fund spending was channeled into these
regions.
Objective 5. Regions defined as vulnerable areas in law-income rural regions and not designated as
objective 1 areas (no region may receive assistance under more than one objective). Accounting for 4.9 % of the
Structural Fund budget between 1994 and 1999.
Objective 6. Areas defined as thinly populated such as those of the new member states, Finland and
Sweeden. Accounted for 0.5 % of the programming budget, 1994-99.
Taken together, the regions covered by objectives 1,2,5 and 6 accounted for just over 80 % of the
Community’s total ECU 154.5 billion assistance under the Structural Funds between 1994 and 1999. The remaining
money was targeted on a number of cross-regional issues such as:
 long-term unemployment and the socio-economic integration of excluded groups (objective 3),
 unemployment associated with industrial change (objective 4),
 the structural adaptation of fisheries and agriculture (objective 5).
and on four broad Community Initiatives (Cis):
 INTERREG (developing cross-border and inter-regional cooperation);
 URBAN (revitalizing depressed urban areas);
 LEADER (focused on rural development);
 EQUAL ( combating inequalities in the labour market).
Most of the money paid out to objective 1 regions actually comes through the ERDF, which focuses on
infrustructure, human resources and productive investment. The ESF has had the principal aim of encouraging job
creation in area of high unemployment (objective 2 areas) and of providing assistance for the development of new
and appropriate skills. EEGGF money (Guidance section) has been spent on intervention and export subsidies in the
agricultural sector.
For the period 2000-2006, a new system of European regional and social aid has been introduced with
expenditure targeted on a streamlined list of three objective areas (Regulation 1260/99). An average of 26.2 billion
Euro (at 1999 prices) is to be spent per annum, as against 24.1 billion Euro over the period 1994-99. An agragate
total amount of 213 billion Euro is to be complemented by 46.80 billion Euro worth of regional spending in the
Candidate countries of Central and Eastern Europe.
European Regional Development Fund
The reform of the Structural Funds in 1988 clearly brought a need for revision of each of the individual funds,
including the European Regional Development Fund (ERDF). The new reform of the Structural Funds in June
1999 dictated a new Regulation on the ERDF1. This was the fourth major overhaul of the ERDF since its creation in
1975, demonstrating both the Community's growing commitment to regional development and its increased
experience on this matter.
The beginnings of the Regional Fund were relatively modest. Quite apart from its insufficient budget during
its first years of operation, the ERDF had a handicap which was unique among the Community's financial
instruments: the allocation to the Member States of quotas, which had to be respected in the sharing out of the
Fund's aid and which turned it into a financial instrument at the service of the regional policies of the Member States
rather than the Community's regional policy. The Commission had no qualms about putting its finger on this
weakness of the Regional Fund and fighting to adapt its means to its targets. The first unambitious reform of the
ERDF in February 1979 gave the Commission a "non quota" section for the financing of specifically Community
measures, designed to supplement or reinforce the application of other Community policies.
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72

When the ERDF was reformed for a second time, in June 1984, the system of national quotas was replaced by
a system of brackets which defined, for each Member State and for a period of three years, upper and lower limits of
aid which could be granted. This led to greater flexibility in the management of the Fund and therefore to higher
concentration of its operations in the less prosperous countries.
The third reform of the ERDF, in December 1988, an offshoot of the structural fund reform, abolished the
compulsory breakdown of ERDF resources, replacing it with an indicative
allocation decided upon by the Commission. This policy is pursued by the new reform of the Regional Fund in June
1999. The new ERDF Regulation is characterized by considerable flexibility at operational level. The Fund can make
use of all forms of financial operation, such as co-financing of regional operational programmes, regional aid
systems and major projects for infrastructures and productive investments, the granting of global subsidies and
support for technical assistance and for preparation and assessment measures.
The Regulation laying down general provisions on the Structural Funds provides that the main task of the
ERDF is to contribute to the attainment of Objectives 1 and 2 defined by that Regulation 1. As part of its tasks, the
ERDF contributes namely towards the financing of:
(a) productive investment to create and safeguard sustainable jobs;
(b) investment in infrastructure; and
(c) the development of endogenous potential by measures, which encourage and support local development
and employment initiatives and the activities of small and medium-sized enterprises, involving in particular:
— assistance towards services for enterprises, in particular in the fields of management, market studies and
research and services common to several enterprises;
— financing the transfer of technology, including in particular the collection and dissemination of
information, common organization between enterprises and research establishments and financing the
implementation of innovation in enterprises;
— improvement of access by enterprises to finance and loans, by creating and developing appropriate
financing instruments;
— direct aid to investment where no aid scheme exists;
— the provision of infrastructure on a scale appropriate to local and employment development;
— aid for structures providing neighborhood services to create new jobs but excluding measures financed by
the European Social Fund (ESF);
— technical assistance measures.
In the regions designated under Objective 1, the ERDF may contribute towards the financing of investment
in education and health that is beneficial to the region's structural adjustment. It also contributes to the
implementation of the Community initiatives for cross-border, transnational and inter-regional cooperation
("Interreg") and for economic and social regeneration of cities and urban neighborhoods in crisis ("URBAN").
Finally, the ERDF contributes to the financing of innovative measures, notably studies, pilot projects and exchanges
of experience.
Social Policy
The Community’s social policy builds on a long history and a strong tradition of social legislation in the member
states. Only the UK, during nearly fifteen years of Conservative government, disputed the philosophical
underpinnings of Western Europe’s social policy agenda. Thus, the Brussels became the battleground for ideological,
political, and economic disputes over such issues as women ‘s rights, workers’ rights and especially “industrial
democracy”- employee participation in company decision making. Because legislation on social issues potentially
affects the everybody existence of almost everybody in the Community, a progressive social policy is an invaluable
means by which Brussels can stress the relevance of European integration and, attempt to close the democratic
deficit.
The Treaty of Rome contains a number of social policy provisions. The Community built the first phase of
its social policy in the 1960s almost entirely on Articles 48-52. Buoyed by the heads of governments’ endorsement of
an active social policy, in 1974 the Commission proposed and the Council accepted the Community ‘s first Social
Action Program. The program included wide-ranging measures to achieve full employment, better living and
working conditions, worker participation in industrial decision making and equal treatment of men and women in the
work place. Apart from its legislative agenda, THE Community established two institutions-the European Foundation
for the Improvement of Living and Working Conditions and the European Center for the Development of Vocational
Training- to conduct research on social issues.

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1. Council Regulation 1260/1999, OJ L 161, 26.06.1999

73

and attaching declarations. access to vocational training and dialogue between the two sides of industry. They feared “social dumping”. An outline of the main themes (and principles) of the Social Charter is given below. who came to power in 1979. Meeting in Hanover in June 1988. it was necessary to improve working conditions. TEC) bringing final coherence to the various provisions on social policy affecting the fifteen member states. this agreement was concluded between the other eleven member states so as to allow for further progress towards a strengthened social policy.The infamous Vredeling draft directive of 1980 showed how politically out of touch the Commission had become. These twelve areas. Popularly known by the name of the thencommissioner for social affairs. the Commission produced a new document entitled 'Community Charter on the Fundamental Social Rights of Workers'. The SEA went farther. protection of health and safety. provided an echo of many of those essential principles enshrined in the European Social Charter of the Council of Europe. not only the issue of worker participation but on social policy in general. As of 1999 and the final ratification of the Amsterdam Treaty. this agreement has been fully incorporated into the main Community Treaty (new Articles 136-145. equality of treatment. the Charter specified twelve areas of entitlement (for workers and citizens) and encompassed a commitment to translate agreed and guiding principles into concrete and legal measures.the following presentation reflects the extension of Community Charter principles into the Social Chapter and the resulting 'Agreement on Social Policy' (as annexed to the Maastricht Treaty). At the Strasbourg Council in December 1989. that firms would relocate from the former to the latter. the directive proposed to expand workers’ information and consultation rights in multinational companies. such as EMU and the events in Eastern Europe. The Charter listed twelve categories of workers fundamental social rights: On 17 May 1989. employment and remuneration. the heads of government stressed the social dimension’s relevance for the 1992 program. The presidency conclusions noted that. information and consultation (on management decision-making). living and working conditions. the possibility that Community countries with higher labor costs would lose market share to Community countries with lower labor costs or. Given British obstructionism on social regulation ahead of and throughout the 1990-91 IGC. but also the majority voting provision for health and safety legislation opened a loophole through which the Commission tried to enact other social measures. eleven of the twelve heads of government adopted the Social Charter at the December 1989 Strasbourg summit (Thatcher was the lone dissenter). These were to cover such ground as freedom of movement.and of the resulting compromise . In an effort to ameliorate the possible adverse effects of economic liberalization and to counter criticism that 1992 was for the benefit of businesspeople only. Although future analysis will be made of this attempt . All of the Community governments except Britain proclaimed support for this Charter. including those outside the Community. living standards. In October in 1989 the Commission produced a final draft. affirming in its preamble the need to “improve the Community’s economic and social situation by extending common policies and pursuing new objectives” and by including a new title on economic and social cohesion. the approved Social Charter listed fortyseven actions to be taken at Community level . ”Community Charter of the Fundamental Social Rights of Workers”. with six governments (including those in Bonn and Paris) immediately calling for the preparation of detailed legislation. most heads of government enthusiastically supported Delors. Margaret Thatcher. With the obvious exception of Thatcher. and health and safety in the workplace. the UK was again isolated as the other EC governments adopted the draft Charter and agreed to the principle of a new Social Action Programme. embodied prevailing political opinion about government intervention in economic and social affairs. as the internal market had to be conceived “ in such a manner as to benefit all our people”. calling it one of the SEA’s priorities and a key to the success of the large market”. In its detail. It should be clear that it was a wish to continue along the path laid down by the Social Charter (which itself did not have legal force) that motivated eleven of the twelve member governments to attempt subsequently to import a 'Social Chapter' into the Community Treaties. The 1985 White Paper touched on social policy only in relation to the free movement of people (workers and professions). worse. In all. The Vredeling directive went well beyond existing provisions at the national level by requiring multinationals to give employees details of the company’s entire operations.about half of them needing legislation. Moreover the Single European Act introduced qualified majority voting for legislation on “the health and safety of workers” Article 118a. Despite other pressing issues. Not only did the health and safety area produce the largest and most important body of social policy legislation in the late 1980 and early 1990s. which was signed at Turin on 18 October 1961. in 1998 Delors began a “careful consideration of the single market’s social consequences”. Delors explored the social dimensions of 1992. 74 . This Charter set out a set of basic social rights (to be guaranteed under Community law) and committed the Community to the improvement of living and working conditions within the SEM. That helps to explain why the single market program initially lacked a social dimension.

This right implies entitlement to equal treatment in all fields.Right of freedom of movement According to the Social Charter. social protection must be extended to all citizens of the EU engaged in gainful employment in a country other than their country of origin on terms identical to those enjoyed by workers of the host country. is implicitly barred. for example. Therefore some governments and some firms which did not allow trade union membership for certain occupations have been forced to reassess their restrictive practices as these principles have acquired legal status. Workers who are unemployed or otherwise excluded from the labour market shall receive appropriate benefit. would encourage people in Portugal never to work again. where justification might rest with concerns over public security or public health. Luxembourg. It also relates to the right to renounce the aforementioned rights without any personal or occupational damage being suffered by the 75 . they shall be able to receive a minimum income and appropriate social assistance. full. The Social Charter provided significant prescription on the organization of work. this means treating workers moving in the EU much as one would treat workers moving from one part of a member state to another. their pay and their financial contribution to the social protection system. Furthermore. with an emphasis on flexible working time arrangements and on establishing a maximum duration of working time per week. France. all have an effect on our general quality of life and of the efforts we make at work. The principle established is that all workers. including social and tax advantages. Right to freedom of association One of the basic statements of the Social Charter was that every employer and every worker in the EU shall have the right to belong freely to any professional or trade union organization of his/her choice. Portugal. A general aim of the single European labour market is to lead to an improvement in the living and working conditions of workers in the EU. and the search for work. Greece. shall enjoy social security cover proportional to length of service. Essentially. whatever their status. The payment of unemployment benefits at the German level in Portugal. As of 1999. Discrimination in terms of low wage rates and a lack of social benefits. We all spend a large part of our lives at work. The later summary of legislative action demonstrates the significant attention of the Commission. Employment and remuneration In general. the way we are treated and the extent of our own self-determination at work. Right to social protection Since the Social Charter agreement. the work we do.and part-time work. In effect. This contrasts with the idea of a minimum wage which is normally defined as a minimum level of remuneration guaranteed by law. It has long been recognized by the best employers that it is not in their best interests to treat labour as a mere factor of production and that time spent on considering employee utility in the workplace is often rewarded by higher productivity and lower absenteeism. each citizen of the EC (now EU) should have the right to freedom of movement throughout the territory of the EU and to 'establishment' for the purposes of work or training. There has been no firm proposal for a uniform minimum wage across the EC/EU and the UK's national minimum wage was only introduced in 1999. Improvement of living and working conditions Living and working conditions are not discrete entities. This right shall entail recognition of the right to belong to a trade union. The quality of the workplace. a key principle of the Social Charter (and of the Agreement on Social Policy) is to establish fair remuneration for all employment in the EU. At an operational level. social partners and member states to improving conditions in all forms of employment including: contracts of fixed and unfixed duration. This freedom established in the Rome Treaty itself . and temporary work. the right to freedom of movement must enable any citizen to engage in any occupation or profession in the EU under the same terms as those applied to nationals of the host country subject to the provision of Community Law (see also Chapter 3). the Netherlands. this means establishing an equitable wage defined as 'a wage sufficient to enable a worker to have a decent standard of living'. the member states have been in agreement that social security arrangements should be harmonized in their structure but not in their value across the EU. the UK and Spain). Where this is not unemployment benefit and where such a person does not have adequate means of subsistence. This general right to trade union membership also extends to the freedom to negotiate and conclude collective agreements rather than to have conditions and pay awards imposed. legal national minimum wages were in place in eight member states (Belgium.should only be subject to minor restriction. say against south Europeans working in northern European states.

is to be encouraged. Right to information. the Commission has been happy to promote the role and importance of participatory arrangements such as profit-sharing and share-ownership schemes. Right of men and women to equal treatment As considered. The establishment and utilization of procedures of conciliation. and from a number of sources. advance the principle of worker participation. 76 . Both the ETUC and ECOSOC had supported the specific targeting of European transnationals and. Every EU citizen shall have the right to enrol for occupational training courses. some trade unions have been wary of co-operative arrangements. the evidence also shows that it is in the interests of businesses themselves.person concerned. vocational training and career development would be intensified. including those at university level. taking account of the laws. the Social Charter states that 'information. Not only does it seem to be in the interest of workers to have a share in profits and/or a role in planning in their workplace. Such ideas are also expressed in the Social Charter. particularly as a result of technological developments. access to employment. according to Hall (1992. contractual agreements and practices in force in the member states. Many still choose to discriminate against women. show that there are benefits associated with these arrangements (see Weitzman. Following agreement on European works councils. it means that if workers refuse to join trade unions. Public authorities. Surprisingly. Although the issue of worker consultation was not central to the Single Market programme. The succeeding account of legislative outcomes reveals the role of the European Works Councils Directive in satisfying this particular aim. taking their skills with them. However. 1988). When it comes to discrimination (either active or passive) or through negligence. 1984. Experiences of worker participation in a number of forms. Existing Community-wide provision was limited (and largely ineffective) with restriction to decade-old directives on consultation vis-a-vis collective redundancies and on the safeguarding of workers' rights in conjunction with the transfer of undertakings. the Commission had long held the belief that a common market needed generalized rules on information and consultation of the workforce (see the Vredeling Proposal of 1980). then they have a right to do so. perhaps. the Commission's Second Action Programme provided for an instrument on the increase in worker representation and consultation (on a works council or parallel board) in 'European scale undertakings'. the scope for avoidance of legislation is enormous. 550). companies and trades unions are thus encouraged to set up and operate continuing and permanent training systems. enabling every citizen to undergo training and retraining throughout his/her working life. Right to vocational training The intention in the Social Charter was that every European worker should have the opportunity to continue vocational training during his/her working life. consultation and participation of workers Among those principles rejected by the UK Government pre-1997. TEC) and envisaged that action on remuneration. as such. social protection. despite having had Equal Pay Acts for almost twenty years. With a view to the implementation of the Charter. p. profit-related pay and worker share-ownership schemes which. consultation and participation of workers must be developed along appropriate lines'. Protection of children and adolescents According to the Social Charter. An involved workforce is likely to judge atmosphere at work in a better light and. as has been seen in the UK. education. equal opportunities for men and women have been a central platform of EC/EU social policy since its very inception. Since a basic aim of the EU is to stimulate growth and employment. Cable. on the same terms as those enjoyed by nationals of the member states in the country in which the courses take place. as discussed later in this chapter. mediation and arbitration for the settlement of industrial disputes are encouraged. ostensibly at least. The Internal Market strengthened the case for relevant EC legislation and the Commission's favour for new provisions found support among several governments. this was influential in ensuring that all provisions not specifically connected to transnational circumstances were excluded. leave for training purposes and for periodical training. consultation and participation in national scale undertakings. the degree to which this is workable depends largely on the responses and behaviour of employers. be absent less and be less likely to move to other firms. This implies that closed shops may not be implemented. The Social Charter reiterated the basic principles of Article 119 of the Rome Treaty (now Article 141. attention has shifted again to the establishment of procedures for information. especially those accustomed to works councils at national level. is likely to work harder. In other words. appropriate measures must be taken in the workplace with a view to providing basic protection for children and adolescents with a minimum employment age to be fixed at no less than fifteen years. Moreover. This is a continuing feature of the female employment experience in Europe.

These objectives were restated in the Social Charter. This shall include citizens who.1). Another is that they should receive equitable remuneration (in accordance with national practice) when in gainful employment. the Council also proceeded with discussions on main contractual terms. the member states negotiated a new 'Social Chapter' for inclusion in the EC Treaty. • extend the scope of qualified majority voting (QMV) to several new areas. Fears were also raised that the United Kingdom could be outvoted on a wide range of damaging legislation which could be adopted by qualified majority voting ( see Box 6. 77 . Fourteen new directives would extend from this particular agreement with progress enabled by the groundbreaking provision for qualified majority voting (on health and safety issues) under the new Article 118a of the SEA. are not entitled to a pension (because they have never been part of the labour market) and those who have no other adequate means of subsistence. it was envisaged that this Chapter would: • bring amendments to Articles 117-122 of the 1957 Treaty. • extend EC/EU competence into new areas such as social security and the protection of employees (allowing for unanimous decisions in the Council).One aim is to ensure that young people get a thorough preparation for employment via the provision of vocational training.the UK government would refuse to endorse the draft Social Chapter. having reached retirement. a Second Action Programme had been submitted to the Council of Ministers and two General (or Framework) directives had been concluded. difficulties in converging national laws and in achieving unanimous political support for social measures. However. protection of pregnant women's rights and benefits and maternity leave. and • provide for greater consultation with the 'social partners' in the development of employment and social policies. rights of association and the right to strike. signaling a breadth of focus consistent with the solemn declarations of the Social Charter. were all left out . thereby encouraging the adoption of new minimum requirement directives as a development of existing health and safety provisions. Despite this and indeed because of the EC's lack of legal muscle in the field. every EU citizen in retirement shall be entitled to receive a minimum income giving him/her a decent standard of living. First. Objectives on disability include greater access to employment and training opportunities. The attempt to transform the Social Charter into legislation began quickly. despite these limited ambitions and a number of exclusions . Second. meant that many proposals made by the Commission were not enacted. The SEA states that there should be greater effort to improve workers' health and safety and a harmonization of conditions across the member states.pay. Health protection and safety at the workplace The Single European Act (1986) gave the EC new powers in the area of health and safety. However. the Council concluded agreement on a new framework for the protection of health and safety in the workplace (Directive 89/391). In the aftermath of the Strasbourg Council. the Council concluded a General Directive requiring all member states to recognize as equivalent regulated professional qualifications obtained in any and all member states (Directive 89/48). • give a Treaty basis to the objectives of the Social Charter. Rights of the disabled The Charter also refers to the combating of social exclusion and to the fullest possible integration of the disabled into working life. By the point of the Maastricht Council in December 1991. Before the end of 1989. transport and housing. The UK's central argument was that the costs of the Social Charter/Chapter were prohibitive and would cause the costs of businesses to increase while suffocating them in over-regulation. improved mobility for disabled persons. Rights of the elderly According to the Social Charter. just as prior to the SEA.

which would ultimately impose increased costs on jobs leading both to uncompetitive industry and to higher unemployment. this 'Agreement on Social Policy' established a second route to binding social legislation at EU level with provision for qualified majority voting on working conditions. Lang was to claim that the adoption of the parental leave directive in maternity or adoption cases would have cost British companies £200 million if the Maastricht opt-out had not protected them. the burden of proof in cases of sexual discrimination. flexible workforce. Significantly. lan Lang. For Mrs Thatcher and her supporters. under the Agreement on Social Policy) and to smooth the way for the incorporation of the Social Chapter into the main body of the Community Treaty. The claim was also made that the imposed directive limiting working hours (the so-called Working Time Directive) would cost UK industry over £2 billion (Daily Telegraph.Box 6. Measures now applying in the UK and previously avoided under the Social Chapter opt-out concern the consultation of workers in European-scale undertakings.understanding the UK position Until 1997. which might later be turned into EC law. Intervention in labour markets and in the relationship between employers and employees was seen as unnecessary regulation. where unanimous agreement could not be secured on a social proposal or where decisions could not be reached by a qualified majority under the Treaties (as under Article 118a). the 'social partners' . Freedom from Social Chapter constraints would boost the competitiveness of United Kingdom firms in world markets and increase their capacity to create and to maintain jobs. These groups would enjoy the power to conclude independent collective agreements. In this view. Moreover. and re-affirming the commitment of the eleven to develop the rights set out in the Social Charter. Even her successor John Major. (FCO press ' release of 4 May 1997) The effect of this policy shift was to immediately extend a small number of measures (adopted f.the European Trade Union Confederation (ETUC). While in opposition. the UK's position remained largely unchanged from the influence of Thatcherism. Her infamous Bruges Speech in late 1988 berated a socialist. In both these cases. The strategy devised to apply this measure to the UK (identifying it as a health and safety measure and thereby bringing it under Article 118a of the modified Rome Treaty) was the source of an ill-fated legal challenge and of wide condemnation within Conservative and industry ranks.1 A social Europe . partnership between innovative management and a committed workforce is the key to a competitive company. through strengthened works councils) and would leave Brussels in control of new and important powers. the Union of Industries in the European Community (UNICE) and the European Centre of Public Enterprises (CEEP) .would have to be consulted on all proposals under consideration. determined to place Britain 'at the heart of Europe'. Indeed. the information and consultation of workers.. as good as those who work on the Continent. centralist agenda threatening to reverse the direction of domestic market and trade union reforms and to steal further powers from the British Parliament. At this stage. The direction of British policy was changed dramatically with the election of a Labour Government in May 1997. with senior ministers condemning the plan as a 'jobdestroying machine'. 1 October 1996). equal treatment of men and women. Major's erstwhile Trade Secretary. the Labour Party had repeatedly attacked Conservative warnings as alarmist and had suggested that the Commission was only offering improved standards of worker protection and the prospect of German-style worker participation. a succeeding Council Directive gives legal validity to the 78 . financial and legal constraints in a way which held back the creation and development of SMEs. In so doing. voluntarism and flexible working practices. Immediately after their election victory. the 'social dimension' also threatened to revive and to extend the power of the unions (e. becoming co-actors within the social area. The first practical results of this evolving Euro-corporatism were the adoption of Framework Agreements on parental leave and on part-time work. committing itself to extend the rights and benefits of the Chapter to the British people. the idea of a social Europe (and of harmonized social and employment measures) was entirely misguided and was symptomatic of the centralist and corporatist tendencies she associated with the Community. among the other member states. We will test all future proposals under the Social Chapter by whether they promote competitiveness and help us to meet our goal of a skilled. the rights of part-time workers and the right to parental leave.. and the integration of people excluded from the labour market. Before his government's eviction in the General Election of May 1997. once described the Chapter as a 'socialist virus' and accused its supporters of wishing to 'sign a blank cheque' {DTI press release 96/725 of 30 September 1996). the social dimension represented a continental approach to labour market management based on regulation and statutory obligation that contrasted with a British approach based on low burdens on business. This process was completed at the Amsterdam European Council in June 1997. annexed to the main body of the Treaty on European Union in the form of a special protocol.g. could not endorse the Social Chapter. The result was a separate agreement. In essence. discussions could now bypass the United Kingdom. about their company and parental leave to be with their family. The Labour party was also able to highlight that Article 2 of the Social Chapter provided assurances that legislation would avoid imposing administrative. We want our people to enjoy the right to information . it established a more pragmatic approach to the issue encapsulated in the words of a post-election press release by the Foreign and Commonwealth Office: We do not accept that the British People should be second class citizens with less rights than employees on the Continent. often for the same companies . Britain opted in to the Social Chapter.

In other words. If. However. while lowering their customs duties in accordance with the timetable led down by the Treaty. Recognizing this difficulty. A product was therefore taxed less heavily if it was manufactured by a vertically integrated undertaking (firm. were replaced by a new turnover tax. In addition. What it wanted above all was the introduction and observance of the rule of fiscal neutrality in Community trade. If the rule of the tax of the country of origin were adopted. But pending such unification. and fiscal frontiers could be removed. but at the price of maintaining tax barriers. under that system the tax barriers would have to be maintained in order to levy the taxes of the country of destination on imported goods and the Member States would not be encouraged to approximate the rates on their taxes. The full text of the Framework Agreement is attached as an annex to the final Directive. as it would be very difficult to monitor each product at every stage of manufacture and distribution in order to ascertain the exact amount of the tax it had borne. which was the case in five of the original six Community countries. fiscal neutrality between domestic production and imports from the partner countries was needed. Taxation Policy The EEC Treaty was very cautious as regards tax harmonizations. to the alignment of VAT and excise duties. tax has to be imposed on them in the country of origin or in that of destination. and to achieve this. equal tax treatment for domestic production and imports from other member countries. The principle of fiscal neutrality was thus guaranteed. in light of the low level of integration of their economies. they could very quickly replace the customs barriers to trade by tax barriers. on the other hand. It was therefore necessary that indirect taxes. Having economic and social structures which differed in many ways. fiscal neutrality could still not be ensured if some countries in the common market applied a system of cumulative multi-stage turnover tax. which did not guarantee fiscal neutrality. In the short term there was no question of tackling those disparities themselves. To secure fiscal neutrality in a common market the turnover tax of the country of origin or of the country of destination would have to be imposed on all goods. have no influence on intra-Community trade flows. some urgent measures in the taxation field were needed for the common market to work properly. It is immediately evident that such a system would distort competition in the common market by favouring integrated large companies originating in certain member countries or third countries. there would be a danger of creating trade flows based artificially on the difference in the taxes rather than on the difference in comparative costs.terms of agreement without itself containing any further or substantive provisions in relation to individual rights. This was the price which the Founder Member States. which were necessary for the collection of VAT and excise duties in the country of destination of goods. They could in fact. Article 97 (now repealed) of the EEC Treaty allowed Member States which levied a turnover tax calculated on a cumulative multi-stage tax system to establish average rates for products or of 79 . both as regards financial policy. whether of domestic origin or imported. It was a matter of little by little trying to level out the underlying economic and social differences before aiming at the final objective of Community fiscal policy. production could be concentrated where the comparative economic advantages were greatest rather than where taxation would be lower. but there would be pressure on the Member States to approximate the rates of their taxes. Cumulative multi-stage taxes. would be uniformly subject to the tax on consumption in force on that market. and the structures of that tax were harmonized in all Community Member States. At the same time the harmonization of direct taxes has begun. raise their domestic taxes in such a way that the total burden on imports remained unchanged. The fiscal objectives of the Treaty were attained rapidly. there would be a danger of creating trade flows based artificially on the difference were adopted. as imported goods would already have paid taxes at the rate of the country of origin. especially those on companies and savings. If the Member States of a common market has absolute freedom in the fiscal field. the system of the tax of the country of destination were applied. in order to make the growth of companies and capital movement independent of tax considerations. The Treaty did not call for any harmonization or other Community action with regard to direct taxes. Under that system tax was levied on the product for each transaction and therefore its total size was not only a function of its rate but also of the number of transactions which had been carried out up to the stage of final distribution. in particular turnover tax. such a system would not make possible genuine fiscal neutrality in intra-Community trade. value added tax. at the end of the 1980s. making a single fiscal territory of the European Community. paid in opting for the system of taxation in the country of destination. This led. Even if the system of the tax of the country of destination were imposed uniformly. business) than where it was manufactured and distributed by various small firms. The approximation of the Member States tax systems can be completed only through the approximation of their economies. as all products in competition on a market. the States which were to form the Community also had rather dissimilar tax systems. In the single market goods must be able to move completely freely. that is to say in particular the composition of the tax burden as between direct and indirect taxes and the technical organization of taxation.

95 EEC. impede concentrations. Tax barriers. as they do not lead to optimum use of financial resources and production factors in the EU. 91 TEC). by various means. illegal traffics might develop between the two countries frustrating the objectives of both. Those were at liberty to establish the average rates of their multi-stage taxes. energy and transport objectives. For that purpose they use holding companies. in order to restrain their consumption. Some mainly apply indirect taxes. a large proportion of the profits of their subsidiaries established 80 . Thus. the differences between Member States in excise duty structures could rise to significant disturbances in conditions of competition. such as alcoholic drinks. But the Treaty did not provide any rule for establishing average rates. First. the same rates wherever possible. Given that the main reason of existence of excise duties was their yield. Moreover. whereas another country preferred to attack other products. transfer prices within the group and international debenture loans. the structures of those taxes needed to be harmonized. fiscal neutrality exists. present Art. when some States have much more recourse than others to direct taxes. which are necessary to enable Community small and medium-sized undertakings to adapt to the dimensions of the common market and to make them competitive in the world market. but the terms of trade and productivity offset to a large extent the fiscal disparities of Member States' companies. Countries which have high taxes on company revenue or which do not give favourable treatment to reinvested profits may. such as tobacco products. indeed. to ensure that conditions of competition are not distorted in the European Union. but also very approximate rates or. the different rates of taxes could have a different influence on the consumption of various products in the common market and could distort the conditions of competition between the undertakings of the Member States. It is true that such States tax the products of their partners less than do those which have more recourse to indirect taxes. It is obvious that in order to create completely impartial conditions of competition in the common market a common system of taxes on consumption is needed. whose structures and levels varied greatly in the countries of the Community. However. In such instance consumption naturally moved towards alternative products. which is incompatible with the common market. 96 EEC. They group. but also from economic and social ones. as they are able to concentrate their profits in the State which taxes them least. as they can have increased demand and high profits in their principal market. Those differences stemmed not only from historic reasons. Harmonization of direct taxes can therefore only be a long-term objective of European tax policy. Such capital movements are undesirable. in spite of the harmonization of tax structures and the alignment of indirect taxation. if there is no monetary equalization. It merely prohibited the application of such average rates from resulting in products imported from the other Member States being liable to taxation in excess of that imposed on similar domestic products. if the other conditions of competition are identical in both countries. present Art. Capital movements and the sitting of businesses can also be influenced by the disparate levels of direct taxation in the countries of the EU and by the more or less strict application of the rule of deduction at source.repayments allowed be they on exported products. which is fairer from the social viewpoint. whilst others have greater recourse to direct taxation. Be that as it may. In addition. The holding companies are established in countries with low taxation. Moreover. (Art. some harmonization of direct taxation is necessary for several reasons. such as the taxation of an appreciation of assets in the event of a merger or double taxation in the event of deduction at source.90 TEC) and from resulting in the repayment of taxation on products exported to Member States at a rate that exceeds the taxation actually imposed (Art. lose capital to countries in which company taxation is more favourable. known as excise duties. Taxation and conditions of competition Just behind the harmonization of the structures of all indirect taxes came. there existed important specific taxes on consumption. States clearly apply certain categories of tax on the basis of historic habit. The European Union States still need to have sufficient autonomy in the tax field so as to have enough room for manoeuvre to act in the light of their economic situations. In the interest of the proper functioning of the common market and the attainment of the Community agricultural. Some goods were regarded as luxury products in some States but not in others. there are grounds for questioning whether. as is the case with wine and beer. In effect. States had a tendency to impose higher levels on certain products of major consumption. of course. which are easily collected. lower company taxation in one State than in the others is tantamount to a subsidy. production costs and the profitability of invested capital must not be influenced too differently from country to country by taxation. and those products were not necessarily the same in every State. especially where products heavily taxed in one State mainly came from the others. if a Member State of the Single Market taxed heavily certain products which are dangerous to health. comprising not only the same structures. the undertakings which manufacture the product in the first country are in a much more favourable competitive position than their counterparts in the second country. Moreover. Disparities in direct taxes work to the advantage of multinational companies. known as tax havens. the harmonization of their rates. Where the tax burden on a product is lower in one country than in another. sociological structure and economic conditions.

particularly. in a common market and even more so in an economic and monetary union gradual harmonization of levels of those taxes and even of direct taxation are also necessary. OJ L145. As a result. Such a system was the tax on value added. component parts and finished products each time they were sold by one firm to another. in the countries which applied that system of indirect taxation. 22 October 1996 2. 14. According to Article 2 of the first Directive of 1967. That is why. It can be seen from the foregoing that the requirements for tax harmonization increase together with progress in economic integration. following the removal of customs barriers in a common market. Acting on the basis of Commission proposals. i. which enjoyed advantages under the tax system.1977 81 . Those two Directives laid the groundwork for the common value added tax system and a third one. excise duties and other forms of indirect taxation. VAT is a general tax on consumption.which are collected without regard to the realization of profits. Articles 95 to 98 of which contained provisions to obviate it. The result was that the taxes on the various stages of production of a product burdened its consumer price all the more inasmuch as it had taken numerous transactions to manufacture and distribute it and. in France in 1954. That was an incitement to an artificial concen tration of undertakings. the Commission assisted by two committees of experts.04.1967 and Council Directive 77/388. including countervailing measures applicable to trade between Member States. adopted in 1969. or indeed income. that its interest for the Community was understood. which was practiced by five of the six countries of the original Community.Council Directive 67/227. which called upon the Commission to consider how the legislation of the various Member States concerning turnover taxes. One means of concentrating profits in low-taxation countries is the practice of transfer prices between units within the same group. COM (96) 546. the fixing of average levels for compensation measures at frontiers in respect of such taxes did not rule out the unfavorable treatment of imports and the favourable treatment of exports. that the only radical solution to the problems arising from cumulative multi-stage taxes was the adoption by all Member States of a system of turnover taxes which did not distort conditions of competition either within a country or between Member States. Whilst fiscal neutrality in a customs union is ensured by the harmonization of the structures of turnover and excise duties.e. Harmonization of indirect taxation Indirect taxes are those on turnover. consequently. had the specific characteristic of levying turnover tax on raw materials. Member States could be tempted to replace them with fiscal barriers. semiprocessed products. at the beginning of the 1960s. production or consumption of goods and services . a tax on all expenditure on goods and services. 13.06. value added tax (VAT) was regarded as merely another tax on turnover or on consumption and did not attract the attention of other countries. Value added tax When it was adopted for the first time. with internal taxes. with the publication of two reports ordered by the Commission recommending its adoption by all Member States. the Commission was already convinced. That is why. introduced it in the tax systems of the Member States2.in countries with normal taxation and reinvest them in the same or other companies. which can vary greatly from actual market prices. Moreover. That danger was foreseen in the EEC Treaty. i. Customs duties are a form of indirect taxation. to ensure fair competition throughout the single market. job creation and environment protection in the Union1. but for its tax advantages. the Council adopted on 11 April 1967 two Directives on the harmonization of the legislation of Member States concerning turnover taxes 1. as such a concentration was often sought not for its genuine economic merits. The long-term goal is to reach a taxation framework conducive to enterprise. the system burdened more the production of small and medium sized enterprises (SMEs).regarded as components of cost prices and selling prices .e. That system. examined the harmonization of indirect taxation and. together with Article 99. ______________________________________________________________________________ 1. of cumulative multi-stage taxes. OJ 71. there was a tendency to integrate vertically every stage from the production of the raw material up to and including the retail trade in a product. could be harmonized in the interest of the common market. given the inherent complexity of cumulative taxes. could oust its small competitors from the market. It goes without saying that the integrated undertaking. It was only from 1962. but which are deductible when determining profits. Indeed.

and that basis is particularly important in that VAT is a basic source of revenue for the Community. With regard to small undertakings. the taxable amount. _________________________________________________________________________________________________________________ 1. In Community jargon all these rules are known as "the uniform basis of assessment of VAT". lays down the common arrangements for the refund to taxable persons not established in the territory of the country of VAT borne by them on imports or purchases of goods or services in a Member State 1. The sixth Directive firms up the definition of the provision of services and establishes the place in which they are to be taxed: as a general rule this is the place where the person supplying the services has his principal place of business or the permanent establishment from which the services are provided. and the tax paid on imports.Council Directive 1999/85. with the implementation of the sixth Directive. as it appears on all invoices and documents accompanying the product. This Directive established a package of common rules making it possible to define the scope of the tax and the method of determining tax liability. However.06. the sixth on the harmonization of turnover taxes. Tax paid at previous stages. adopted in 1986. for three years. except for the final sale to the final consumer. since it cannot favour domestic products. they left in existence the possibility of many significant differences as to the scope of the tax. OJ L326. who purchases the product or service for his private use.10. The sixth Directive on the harmonization of the laws of the Member States relating to turnover taxes. cleaning and hairdressing2.The tax is levied at each stage of an economic activity on the value added at that stage. 21. 28. particularly as regards taxable persons.1999 3. i. it lays down that the Member States may apply simplified schemes for charging and collecting tax. the taxable persons. It took some ten years plus a new Directive. is reduced by the amount of the taxes previously paid on the cost of the various components of the cost price.Council Directive 77/388. on deliveries made or services rendered to the taxable person. the methods of calculating basic taxable amounts and the special schemes. a reduced rate of VAT on two or.08. the chargeable event. Given this deductibility of taxes already paid. exportation and international trade in goods. which have taken place at the stages preceding that to which it is applied. It is paid by all those involved in the production and distribution of a product or service. OJ L145. three categories of labour-intensive services. calculated on the price of the good or service. However. the work on harmonizing the Member States' laws on turnover tax structures was not at an end. 03. the sixth Directive provides for a complete system of exemptions both for activities within the country and for transactions linked with importation. The tax is proportional to the price of the products and services irrespective’ of the number of transactions. the exemptions and the special schemes. but the end consumer. which was adopted on 17 May 1977. but the amount of the tax is recovered at each sale. the place of applicability of such transactions. agricultural production.1977 and Council Directive 1999/85. Article 19 of the second Directive of 1967 merely stated that those differences should be progressively restricted or abolished. a flat-rate scheme to offset the deductible tax on their purchases and the services supplied to them by third parties.e.10. but it is not an element in the costs of those intermediaries and does not appear as an item of expenditure in their accounts. But VAT is also neutral from the point of view of international competition. the amount of VAT. as it is not they who bear the tax. Thus. In addition. OJ L277. An amendment to Directive 77/388 allows Member States wishing to do so to apply on an experimental basis. 28. i. including the acquisition of gold for investment purposes. the latter does not bear the burden of the VAT. OJ L 208.1999 2. the detailed procedures for applying rates of taxation.1984 82 . does likewise for refunds to taxable persons not established in Community territory3. it does not favour vertically integrated undertakings. 13. is deductible from the turnover tax of that taxable person. the sixth Directive had laid down the principle that any taxpayer was entitled to the deduction or refund of VAT in whichever country he incurred expenditure subject to tax. The replacement of cumulative multi-stage taxes by value added tax eliminated the main source of discrimination within the meaning of Articles 95 and 96 of the EEC Treaty. The tax is paid to the State by the vendor in each transaction. OJ L277. But. A number of the provisions of the Directive still needed to be thrashed out. as did the cumulative multistage taxes. such as minor repair services. The total sum which changes hands at each stage in the production or distribution includes the VAT paid up to that point. adopted by the Council in 1979.e. to achieve that goal. repealed the second Directive of 1967 and filled the gaps it had left. At the time of each transaction. repairs to private dwellings. Calculation of the tax paid is easy. small undertakings and exempt activities and operations1.Council Directive 86/560.11 1986 4. as his purchaser has advanced the full amount of the VAT to him.Council Directive 84/386. The tenth Directive applies VAT to the hiring out of moveable tangible property4. notably in the fields of the provision of services. the taxable transactions. The thirteenth Directive. As regards farmers. taxable or exempt transactions. as the two Directives of 11 April 1967 did not resolve all the structural problems of value added tax. in accordance with a common method of calculation. the territorial application of the tax. An eighth Directive on the matter. VAT is neutral from the point of view of domestic competition. in exceptional cases. it confers on the Member States the right to apply to them.

along with reduced rates on housing other than subsidized housing. it considered that conditions could not be fulfilled for a system of taxation in the country of origin and that it was therefore necessary to continue. Commission proposal. The preservation of the zero and extra-low rates (below 5%) is authorized on a transitional basis. either free of tax. Examples include foodstuffs.09. p. so as to collect the revenue due to them and. Community guidelines on electronic commerce and indirect taxation.Since some non-Member countries do not impose VAT on telecommunications services. 18% in Greece. In fact. The tax was paid to the country in which the goods arrive at the final consumption stage.1992 Council Directive 91/680. 30. while services rendered by Community operators to consumers in non-Member countries are not subject to VAT in the Community. books. 20.10. OJ L376. proposed by the Commission and endorsed by the Council on 6 July 1998. depended on the frontier controls. but also a source of serious distortion of trade. such as automobiles. these services are subject to VAT in the Community at the place of establishment of the recipient of the services. hotel accommodation.12. it was vital that cross-border trade be treated in the same way as purchases and sales within a State. One of the main challenges to the completion of the single market was in the tax field. 22% in Finland. Intra-Community trade in goods between taxable bodies is subject to taxation of the goods acquisition in the country of destination. at the same time. On exportation the product benefited from full tax remission and was in return subject to the VAT of the country of import at the crossing of borders. amending the Directive of 17 May 1977 stipulates that. 21% in Belgium and Ireland. frontier controls were used to tax imported goods at the rates prevalent in the country in question.5% in the United Kingdom and the Netherlands. The amendment establishes the basic rules for the transitional VAT system. passenger transport services. the standard VAT rate varies between 15 and 25% in the Member States.12. and the resultant controls. it would be all too easy for dishonest operators to invoice goods at the zero rate for exportation and subsequently resell them on the internal market. OJ L316. on the other hand. That would not only have constituted a loss of tax revenue for the exporting State. but keeping its amount for themselves. equal to or higher than 5%. The sixth Directive on VAT was amended in 1991 to supplement the common system of VAT3. applicable only to certain goods and services of a social or cultural nature. 31. one (or two) reduced rates. alongside the normal rate. or by including the tax component in the price. To remove those frontiers. goods and services moving within a Member State were taxed differently from those that were exported. leading to a significant fall in consumer prices in some sectors. which that system afforded against tax evasion and avoidance. Without a check at the border to ensure that the goods which were the subject of an application for the reimbursement of tax had actually been exported. aim at ensuring the certainty. A transaction whereby a product is offered to the customer in digital form through an electronic network must be considered for VAT purpo ses as an instance of provision of services to be taxed at the place of consumption and no new or additional tax should be envisaged. constituted the so-called "fiscal frontiers". simplicity and neutrality of the Community VAT system with regard to electronic commerce. All the higher VAT rates existing in several Member States have been abolished. 19% in Italy. For the authorities of the importing State. provided that conditions exist for monitoring and preventing abuses.1991 and OJ L 384. to levy VAT and excise duty in the State of consumption. Prior to 1992. Electronic billing which does not require the use of paper must be authorized when establishing the amount of VAT due in respect of transactions within the EU. pharmaceuticals. museums and the like. 17% in Portugal.6% in France. The Commission actually proposed that as from 1 January 1993 all sales of goods and services should be taxed at the rate of the country of origin 1. make sure that these products did not unduly compete with national products. catering and children's clothes and shoes. The Directive on the approximation of VAT rates completes the common VAT system. 17.1992 83 . for a limited period. Thus. 2. In conclusions of 9 October 1989 adopted unanimously (necessary condition in order to counter the proposal of the Commission). social activities and medical care in hospitals.1987. publications and copyright. ______________________________________________________________________________ 1. which would place their competitors in a disadvantageous position with regard to price. entrance to shows. The new scheme dispenses with customs procedures. 20% in Austria. 19. the export refunds and import taxes which accompanied intra-Community trade. the Member States shall apply a standard VAT rate of at least 15% 2. during the operational period of the transitional VAT arrangements (from 1 January 1993 to 31 December 1998). 31.2 Council Directive 92/77. with a view to promoting its growth. it was 25% in Sweden and Denmark. 3. The protection. The Member States however enjoy the option of applying. OJ C 250. newspapers and periodicals. 16% in Spain and 15% in Germany and Luxembourg. However. in 1997. subsidised housing. But the Council did not follow the Commission's lead.

Such cooperation got off the ground in 1992.) are able to purchase goods in other countries. the total of his exempted intraCommunity sales. However.000 kilometers are taxed in the country of registration. whereas allowances for travelers arriving at the Community from third countries can be as high as ECU 1751. the new system should afford equal treatment to domestic and intra-Community transactions.07. Individuals traveling from one Member State to another pay VAT there where they purchase the goods and are no longer subject to any VAT-related taxation or any border formality when they cross from one Member State to another. demonstrating that enterprises and consumers still do not enjoy all the expected advantages of the single market. 03.. i. he indicates. On 1 January 1993. the charging of VAT on imports within the Community and the associated customs-based formalities ceased to exist.. the vast majority. In his VAT return. boats. The Fiscals programme seeks to ensure the effective and uniform application of Community indirect tax legislation by exchanging information and helping officials working in this area to achieve a high common level of understanding of this legislation and its implementation through effective initial and continuous training. termed an "acquisition". 09. In the framework of the transitional system. For second-hand goods. It revolves primarily around regular exchanges of data between the relevant authorities of the Member States on intra-Community trade. OJ L60. as a result. This is why.Council Directive 94/4. In another return (usually quarterly). He must declare the total amount of these acquisitions in a separate box in his normal VAT return and can request the deductibility of this VAT in the same return.03.1994 84 . some mechanisms of the transitional VAT arrangements have proved to be complicated. the Member States will be able to authorize duty-free sales until July 1. VAT is counted at the rate in force in its Member State.1998 2. The abolition of frontier controls and the resultant fraud risk require cooperation between government authorities in the area of indirect taxation. the Commission suggests the creation of a genuine Community tax area through an approach which is consistent with the policy objectives set in the context of economic and monetary union. The Commission has set out a step-by-step timetable for the formal proposals for the introduction of such a system consistent with the programme for the introduction of the single currency. 1999. the vendor exempts the deliveries made to clients in other Member States. Under certain conditions. OJ L177. OJ L60. particularly for small and medium enterprises. in the purchaser's country of origin. tax-free purchases in intra-Community travel are limited to ECU 90. he lists the VAT number of his customers in the other Member States and the total amount of his sales to each of them during the period in question. 31. whereas second-hand vehicles are subject to the VAT rates practiced in the country of the vendor. provided that their purchases do not overstep a certain threshold to be set by each Member State. Being based on the principle of taxation at the place of origin. ______________________________________________________________________________________________ 1. i.1994 3. the seventh VAT Directive has introduced certain special systems. sales between individuals are free of VAT and those realized by second-hand dealers and tradesmen are taxed in the Member State of destination on the dealer's profit margin and not on the total value of the goods 2.e. The transitional VAT arrangements are functioning satisfactorily overall.Commission Recommendation 94/390. Likewise.Council Directive 94/5. The purchaser applies VAT to his purchase in another Member State. effective monitoring of transactions. provide legal certainty for operators. New vehicles (cars. and the deterrent effect of some of the rules remains an obstacle to the development of trade between Member States. The system of travelers' allowances is thus abolished as far as intra-Community traveling is concerned.12.03. The backbone of the system is an on-line network linking the relevant administrations of the Member States ("SCENTtaxation"). 03. except when its sales in the Member State of destination are above a certain limit (generally. collectors' items and antiques. Institutional non-taxable bodies (government authorities) and exempted taxable bodies (banks. paying the VAT applicable in the country of origin. the justification of the intra-Community nature of operations and the burden of identification and declaration are real difficulties encountered by traders. ECU 100.000 per year) or if it prefers taxation in that State. simple rules and uniform application. However. insurance companies.1994 and Council Directive 98/94. aircraft) which form part of the operating stock of the vendor and which do not have a mileage of more than 3.e. the Commission recommended to the Member States a simplification of the taxation on small and medium enterprises 3. works of art. in a separate box. OJ L 358. Noting the complex nature and cost of the present system of VAT and the fact that it is poorly suited to the new economic challenges. maintain a level of tax revenues commensurate with consumption within a Member State. the new arrangements provided for in the transitional VAT regime came into force and. enabling rapid and efficient information exchange designed to combat fraud in the VAT and excise-duties fields. For remote sales (mail order) of an undertaking to individuals and other non-taxable bodies.The case of sales between companies subject to VAT.

Denmark. which can easily be maneuvered if further tax revenue is needed. the resultant losses of revenue would have to be offset by increasing VAT rates. the Commission forwarded to the Council on 7 March 1972 five proposals for Directives on the harmonization of excise duties. Moreover. The appropriate provisions are taken to enable the exchange of information between all the Member States concerned by the movement of goods subject to excise with a view to ensuring effective fraud control. must be maintained alongside VAT. Article 99 of the EEC Treaty gave the Commission a brief to consider how the legislation of the Member States concerning excise duties could be harmonized in the interest of the common market. For commercial operations. Was it pure chance that excise duty in the United Kingdom was five times higher on wine than on beer or that brandy in France enjoyed rates.Excise duties In a fiscally integrated Community a number of major special taxes on consumption (excise duties). the Court of Justice sided with the Commission to condemn such practices. Examination by the Council of the Commission proposals revealed that the Member States were much less willing to harmonies their specific taxes on consumption than they had been as regards their turnover taxes. without major drawbacks. within the overall context of a tax scheme. the movement of products subject to suspended excise duty is through interconnected bonded warehouses and is covered by an accompanying document. 90 TEC). which on average yield more than 10% of the tax revenue of the EU States. but also economic and social disturbance. in trade between Member States. on the 85 . the Commission utilized the judicial process. which were at least 30% lower than those applied to whisky? On 27 February 1980. i. social and structural requirements. The tax is payable when the product is put up for consumption and must be acquitted in the country of actual consumption. 95 EEC. Lastly. Then. taxation and tax refunds as well as frontier controls. Excise duties are paid by the consignee in the country of destination and the appropriate provisions are taken to this effect. Individuals can purchase the products of their choice in other Member States. In fact. before VAT) must constitute at least 57% of the sales price. for their personal use. The taxable event takes place at the stage of manufacture in the Community or of import into the Community from a third country. however. excise duties can easily be adapted to the various economic. excise duties constitute flexible components. which has very few. and fairly low. very high taxes. such as tobacco products and alcoholic drinks. Directive 92/79. If the various excise duties in the Community States were abolished. To replace that revenue by other revenue would entail not only fiscal. First their structures had to be harmonized so as to remove taxation indirectly protecting national production or in excess of that imposed directly or indirectly on similar domestic products (Art. Directive 92/78 harmonizes the excise-duty structures on manufactured tobaccos in the Member States. stipulates that total excise duty (specific duty plus proportional duty calculated on the basis of the maximum retail sales price. In 1978 it brought five cases against various States under Article 169 of the EEC Treaty for failure to fulfill their obligations under Article 95 in the field of alcoholic drinks. whether distilled like spirits or fermented like wine and beer.e. which would be certain to have an inflationary effect on their economies. with the retail sales price taken as the calculation basis. Despite the Commission's efforts and several fresh rulings against various Member States by the Court of Justice/ a political compromise for excise harmonization only emerged in the early 1990s as part of the removal of fiscal frontiers necessary for the achievement of the Single Market. they can be levied specifically in order to reduce consumption of certain products. The 92/12 Directive defines the general arrangements for the holding and movement of products subject to excise duty from 1 January 1993 1. rates. The payment of the excise due in the State of destination can be assumed by a fiscal representative established in this State and designated by the consignor. the Community system is similar to that applied within a State. authorized by the Council to continue restricting the quantities of certain alcoholic drinks and tobacco products which individuals purchase in other Member States and import for their own consumption. taxes on the consumption of certain products. Excise duties make it possible to impose a much larger tax burden on a small number of products than that borne by the vast majority of goods which are only subject to VAT. for public health reasons. which disturbed the free movement of goods within the common market. Directive 92/80. the general arrangements for excise are definitive. inclusive of tax. alcoholic drinks belong to a single family. their rates had to be harmonized so as to eliminate. as integration progressed. yielding substantial revenue to the States. In contrast to the harmonized VAT system. on the approximation of excise-duty rates on cigarettes. But if some excise duties had to be maintained in the Community two conditions had to be met so as not to disturb the common market. As they are separate taxes. In fact. manufactured tobacco products and mineral oils bear. Faced with that situation. Finland and Sweden are. for example. which has been harmonized at Community level. present Art. and petroleum products for reasons of energy savings and reduction of energy dependence. Thus. The Member States have the option of introducing or maintaining taxation on other products and services/ provided however that this taxation does not give rise to border crossing formalities in trade between the Member States.

Harmonization of direct taxation Taxes on the revenue of undertakings and private individuals. generally makes them subject to specific excise duty calculated per 1000 litres of the product (or. For that reason it was amended to facilitate the contribution of risk capital to undertakings by reducing their fiscal burden 2. and 0 ECU for liquefied petroleum gas.1992 2. Examples of these are taxes on insurance policies and taxes on motor vehicles intended for the carriage of passengers. methane and paraffin used for heating 4. per 1000 kilograms). however. 31. as their diversity can give rise to double taxation and distortions of competition and constitute obstacles to the free movement of capital.10. In order to prevent such problems. the harmonization of direct taxes did not appear indispensable in the common market. the application of remissions and repayments in respect of exports to other Member States. sets minimum total excise duties for these products. Directive 92/83 covers the harmonization of excise-duty structures on spirits and alcoholic beverages. Other indirect taxation Various indirect taxes whose harmonization is important for European construction also exist in addition to value added tax and special taxes on consumption. Council Directives 92/78. countervailing charges at frontiers. when used for specific purposes.1992 86 . The Directive on taxes which affect the consumption of manufactured tobacco was consolidated in 19953. 0 ECU for wine. tobacco for rolling cigarettes and other tobaccos for smoking).1992 3. Council Directive 95/59.approximation of taxes on manufactured tobaccos other than cigarettes (cigars. 13 ECU per 1000 kilograms for heavy fuel. The two important categories of direct taxes are income tax and capital gains tax.87 ECU per hectoliter per degree of alcohol in the finished product for beer. 100 ECU per 1000 kilograms for liquefied petroleum gas and methane used as fuel. 92/79 and 92/80.10. but grants the Member States the option of applying them either as specific excise duty per unit.e.Council Directives 92/81 and 92/82. 45 ECU per hectoliter for intermediary products. It gradually became clear that the free movement of capital and the rational distribution of production factors in the Community required a minimum degree of harmonization of direct taxes. OJ L 291. which are not incorporated in cost prices or selling prices and the rate of which is often progressive. Directive 92/82 stipulates minimum excise duties for mineral oils at the following levels: 337 ECU per 1000 litres for leaded petrol. i. Article 92 of the EC Treaty prohibits. reduced rates of excise duty or exemptions from excise duty. ____________________________________________________________________________________________________________________ 1. 23. when that Directive was applied it became clear that capital duties could be set at too high a level. 245 ECU per 1000 litres for diesel and paraffin used as fuel. which vary greatly between Member States.03. 287 ECU per 1000 litres for unleaded petrol. The most significant from the point of view of competition. Whilst the harmonization of indirect taxes was necessary from the outset to avoid obstacles to trade and to free competition and later to make the removal of fiscal frontiers possible. Council directive 92/12. diesel and paraffin used for fixed engines. The Member States are authorized to apply to certain mineral oils. Directive 92/81. may be regarded as direct taxes. A 1995 Directive establishes common rules for the tax marking of gas oil and kerosene which have not borne duty at the full rate applicable to such oils when used as propellants. Derogations may not be granted unless the measures contemplated have been previously approved for a limited period by the Council. cigarillos. 18 ECU per 1000 litres for domestic oil. a 1969 Directive concerning indirect taxes on the raising of capital provided for the harmonization of capital duties and the abolition of stamp duties. are capital duty and stamp duty levied on shares in registered capital (shares and securities). one must also coordinate the fiscal instruments used by them. 36 ECU per 1000 kilograms for liquefied petroleum gas and methane used for fixed engines. on the harmonization of excise-duty structures on mineral oils. OJ L 76. or a combination of the two 2. especially in certain company-restructuring operations. If one wishes to approximate Member State's economic policies. for heavy fuels. Apart from that provision the EC Treaty does not deal with direct taxes and does not call for them to be harmonized. OJ L 316. which were deemed to be undesirable from the economic point of view1. However.1995 4. 06. 31. Directive 92/84 sets minimum excise duties on spirits and alcoholic beverages at the following levels: 550 ECU per hectoliter of pure alcohol. or proportional excise duty calculated on the basis of the maximum retail sales price. liquefied petroleum gas and methane.12. 1. OJ L316. as regards such taxes.

This action would take the form of either a general obligation to abolish all cross-border double taxation or a phased approach the priorities for which would have been set by mutual agreement with the Member States.Likewise if the wish is to facilitate the creation of internationally competitive industrial businesses.10-24 2. a share package) to the value entered in the balance sheet. the taxation of companies operating in several Member States must not place them at a disadvantage in relation to those restricting their activities to the purely national level. These measures enjoy the support of economic operators since they would make a significant contribution to improving the tax environment in which cross-border activities are planned and executed. to corporation tax and. tax benefits granted only to residents of a Member State can constitute indirect taxation by reason of nationality.SEC (92) 1118. representatives of the Member States also signed a Convention providing for the introduction of an arbitration procedure in the event of disagreement between the tax authorities of the Member States relating to a cross-border operation2. The second Council Directive of July 1990 relates to the common fiscal system applicable to parent companies and subsidiaries situated in different Member States1. set in an artificial manner. rather two companies from different Member States are forming closer links. National regulations consider this type of operation as a total or partial liquidation of the company making the contribution and subject it to capital gains tax. adoption of these measures would only go part of the way towards resolving the problem of double taxation. the Court of Justice found that. and in particular with the rules governing the free movement of workers. This ensures the avoidance of double taxation arising when an adjustment to the profits of a company carried out by the tax authority of one Member State is not matched by a similar adjustment in the Member State of the partner company. but only where different rules were applied to comparable situations or the same rule was applied to different situations.I-0225 87 . vital for transnational cooperation and company mergers. case C-279/93. The Council needed 21 years (!) of debate before it could approve these proposals. Thus. so that lengthy delays lasting for several years and generating additional costs cannot develop. _____________________________________________________________________________________ 1Convention. This solution encourages the formation of "European companies". contribution of assets or exchange of shares between two companies operating in different Member States. Such a calculation is unjust insofar as no liquidation is taking place in effect.08. 26 June 1992 4. The Directive abolishes withholding taxes on dividends distributed by a subsidiary to its parent company established in another Member State. land. since it compares the market value of the good in question (the company itself. the powers retained by the Member States must nevertheless be exercised consistently with Community law. p. The guiding principle of Community policy in the field of direct taxation is to eliminate the double taxation of cross-border activities whilst ensuring taxation at least once. which require the abolition of any discrimination based on nationality 4. or a building. traditionally underestimated. The Community solution consists of no longer taxing the capital gain at the time when the merger or contribution of assets takes place but rather when it is collected.OJL225. Business taxation The first Directive adopted by the Council in July 1990 relates to the taxation system applicable to the capital gains generated upon the merger. Such double taxation would penalize European transnational cooperation. 26 June 1992 3. The company concerned by the measures in question becomes rapidly a party to the procedure and consequently has an opportunity to put its viewpoint forward. although direct taxation does not as such fall within the competence of the Community. In the "Schumacker" case. insofar as such companies usually result from the merger of companies originally established in different Member States. However.1990. to a non-recoverable withholding tax. There can be little doubt that the decision by a company to set up a subsidiary in another Member State of the Community is adversely affected by the fact that the dividends of the latter would be subject to tax in the country where it has its domicile for tax purposes. SEC (92) 1118.20. division. A time limit has been placed on the procedure. Concrete measures. The guidelines laid down in the Commission communication to the Council and Parliament in response to the Ridding report provides a detailed blueprint for further Community action in this field 3. such as the proposed Directives for interest and royalties. in the Member State where the subsidiary is domiciled. transfer of assets. In July 1990. Judgment of 14 February 1995.p. The Commission tabled proposals in this connection as long ago as 1969. the offsetting of losses and the extension of the parent-subsidiary and merger Directives have been tabled by the Commission.

or spontaneous. however. as a rule comparable and. However. Since. the States have a tendency to displace the tax burden towards less mobile bases.1-2 4. In fact.1975. That Directive introduced a procedure for the systematic exchange of information directed towards enabling them to effect a correct assessment of direct taxes in the Community. in certain cases decided upon by mutual agreement between the authorities concerned. especially through the manipulation of transfer prices between undertakings in the same group. The code defined "harmful tax measures" and provided for the establishment of a Group within the framework of the Council having as tasks to assess the tax measures that may fall within the scope of the code and to oversee the provision by the Member States of information on those measures. which is a problem outside the European Union's remit.1998. where one com petent authority feels that it has certain information likely to interest another Community tax authority. Council Resolution. Effort to combat tax avoidance The most important and urgent problems for the Community in the area of direct taxation were posed by international tax avoidance. the implicit tax burden on capital in the EU has decreased by more than one tenth while the implicit tax burden on work has increased by one fifth 4. The possibilities of avoidance open to multinational companies. would be at variance with the optimum allocation of resources. In a 1975 Resolution the Council had already agreed to make correct assessments for taxes on income or profits and to support prosecutions of persons guilty of tax avoidance 3. Such capital movements. In addition to the substantial budgetary losses for States and the fiscal injustice. which are necessary to reduce distortion in the single market. Community residents can henceforth freely transfer their savings to bank accounts in any Member State without the corresponding income necessarily being declared to the tax authorities of the State of residence. as in the global economy capital has become very mobile. there is no "withholding tax" on bank interest paid to non-residents. the liberalization of capital movements as from 1 July 1990. the Court found that the situations of residents and nonresidents are not. in several Member States. motivated purely by tax considerations. the Council agreed to a package of measures intended to tackle harmful tax competition. In order to implement this Resolution. the Commission proposed a "coexistence model". 2-5 2. such as work.SEC (96) 487. but it is also provided for where that State has no grounds on which to base its request. On 1 December 1997. The exchange of information may take place at the request of the Member State concerned. Thus. Responding to this invitation. and the tax arrangements for holding companies. The package included a Resolution on a code of conduct on business taxation comprising a political commitment not to bring in any tax rules which constitute harmful tax competition and to phase out existing rules including withholding taxes on interest and royalty payments between companies forming part of a group 1.Where direct taxes are concerned. For that purpose the Directive established a procedure for cooperation between the Member States and the Commission which enables them to inform each other of their information and experiences notably in the field of transfer prices. a non-resident can be taxed by a Member State more heavily on his income than a resident in the same employment. Moreover. to prevent increasing losses in tax revenue and to enable employment-friendly tax policies to be pursued. The particularly important aspects from the international point of view are: the concealment by some taxpayers of their taxable activities beyond the borders of their States in countries in which the level of taxation is low or the risk of discovery small. Resolution.COM (1998) 295. Thus. international tax avoidance generates abnormal capital movement and distortions of conditions of competition. 20 May 1998 3. ____________________________________________________________________________________________________________________ 1.e.01. whereby each Member State would have to apply either a withholding tax of at least 20% in the case of individuals residing in other Member States or to provide information on such payments to the Member States in which the beneficiaries are resident2. OJ C2. i. the Council adopted a Directive concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation. in accordance with the Directive of 24 June 1988 has increased the risk of tax evasion. the exchange of information without request may be automatic. investment would tend towards those States. p. Any new increase on the tax burden on work could drive economic activity towards the black market and/or aggravate the effects on the costs of labour and employment. OJ C 35. as a large number of those companies are established in tax havens outside the Union. p. The Resolution invited the Commission to draft a proposal for a Directive on the taxation of income from savings. which is the objective of establishing a Community financial area. therefore. 06. thus avoiding any taxation. between 1980 and 1993. for example where there are grounds for supposing that there are artificial transfers of profits within groups of enterprises. 14. interest paid in one Member State to individuals who are resident in another Member State.02. 20 March 1996 88 .

The EU's Merger Control Regulation has been in place since 1990. it must work alongside national competition authorities in ensuring that restrictive and anti-competitive practices are forbidden and to prevent the formation of EU-wide or regional oligopolies that impede competition and penalize consumers. Despite UK misgivings. The Treaty assumes in Article 87 that any aid granted by a state or through state resources in any form shall be incompatible with the Common Market if it distorts or threatens to distort cross-border competition. 4064/89 (as modified by Regulation no. the basis of this policy rests with Articles 81-89 of the Community Treaty and with the European Merger Control Regulation. no. This does not preclude all categories of state assistance to 89 . the Vienna and Cologne European Councils (December 1998 and June 1999) emphasized the need to make tax systems in Europe more employment-friendly and urged the Council to continue its work on the proposals for a directive on the taxation of savings and for the taxation of energy. The question of greater harmonization of direct taxes will doubtless be placed on the EU's agenda after the achievement of economic and monetary union. The Commission is. cartels and other collaborative strategies. tasks encompass the policing and regulation of concerted practices undertaken by commercial entities (Article 81) and the abuse of dominant trading positions (Article 82). This is aimed at limiting the competitive advantages gained by 'supported' firms over unsupported counterparts and at ensuring that firms are not shielded from the real competitive pressures bearing on their markets. p. discriminatory pricing and fidelity rebates. This provides an important complement to Articles 81 and 82 and gives the Commission specific power to police mergers and the acquisition of more market share by undertakings where there is evidence of a Community dimension. indeed. ownership and the way in which it is financed. evasion and avoidance. It has established legally binding rules and obligations in order to: • Prevent firms from colluding by price-fixing.It would therefore be necessary. • Restrict state aid to indigenous firms. be extended to all energy products2. the regular meetings between the Directors General of direct taxation represent a cooperation instrument. On the one hand. These instruments forbid a number of measures and practices that impair competition within the Common Market and which distort intra-Community trade. the European Commission) can be said to have 'a double mandate'. 1310/97). These have provided Commission jurisdiction over national and international anti-trust concerns where there is a distortion in competition in the Common (or Internal) Market. the Helsinki European Council (10-11 December 1999) has agreed on the principle that all citizens resident in a Member State of the European Union should pay the tax due on all their savings income. its actions must reflect the realities of global competition and the need for Europe to possess larger. which erodes their tax revenues and even their fiscal sovereignty. Accordingly. In the meanwhile. This is aimed at ensuring that acquisitions do not seriously (and adversely) effect competition within defined markets and at preventing monopolies from reaping supernormal profits. Interest received by Community residents is to be subject either to withholding tax at a minimum rate of 15% or to notification of the tax authorities of the country of residence. In legal terms. • Control the size to which firms grow through acquisition and merger. which is currently limited to mineral oils. EU competition policy: defending and facilitating the Single Market There is little benefit in removing tariff and non-tariff barriers to internal trade if firms are then faced with restrictive practices or with other anti-competitive activities permitted by the absence of effective anti-trust rules. An undertaking is defined as any entity engaged in commercial activity regardless of its legal form. In satisfying these aims. which could be used for the gradual coordination of national fiscal policies. 277). In addition Member States should act in concert to prevent tax evasion towards third countries. This is in order to stimulate competition and to prevent oligopolists from behaving in a quasi-monopolistic way. to lessen the risk of tax distortion. which can do damage to competition and to consumers. That is. That twin objective is aimed at by the Council in its conclusions of 13 December 1993 on the taxation of savings. A more radical proposal of the Commission is based on its Confidence Pact for Employment and on its tax strategy presented in October 1996 and endorsed by the Dublin European Council 1. Anti-trust rules. 1996. associated primarily with Articles 81 and 82. As considered. proposing that the Community system of minimum rates. On the other hand. cross-border undertakings in order to compete in global markets. Agreeing with the Commission. to control such actions as monopoly pricing. the EU has looked to tackle private and public barriers to competition through regulation and the construction of a broad legal framework. • Prevent firms from abusing positions of market dominance. This is just one of the challenges posed in framing EU competition policy and requires a policy of sufficient flexibility (see Story. to intensify the exchange of information between tax authorities on the basis of the Directive of 19 December 1977 and to remove the encouragement to invest in a Member State which applies a more favorable tax scheme than the Member State of the investor by introducing in all the Member States a relatively low withholding tax. the EU (through its executive arm. Articles 87-89 constrain the flow of public capital to domestic industries. have been in operation since 1962.

As Burke et al. efforts at profit maximization by independent firms and the absence of barriers to the movement of goods or factors of production. suggesting how firms behave differently under different competitive forces. put it (1991. 8): 'people in business usually subscribe. are all assumed to make positive contribution to the effective functioning of the market. These four market structures are: 90 . The Austrian and Chicago Schools have taken a more tolerant view of monopoly power (arising when there are serious imperfections in the market) but competition has remained the prevailing ideal of Western society and economy. Welfare economics suggests that competition is 'good' and. free markets and efficiency Although it is tempting to move directly to these legal instruments.state aid granted for specific purposes may be compatible with the Common Market . The existence of many buyers and sellers. an examination of the EU's anti-trust rules and performance is best oriented around an understanding of competition itself. both intellectually and financially. p. economic theory distinguishes between four main types of market structure. to an ideology of competition'. Market structures In actuality.indigenous firms . competition is seen to promote an optimal distribution of resources in society. in the neo-classical view.but imposes clear controls on the support of domestic industry by public authorities in each of the member states. Competition.

monopolies are 'bad' be they in the public or private sectors in that they result in a higher price charged and lower output produced than under perfect competition. Unlike perfect competition. a factor prompting several European nations to embark on wide-ranging privatization programmes in the 1980s and 1990s. Even in the absence of such collusion. the predominant concerns of firms are with the actual and potential actions of others. Prices are only distorted by variance in transport costs and by forms of government intervention (e.• perfect competition • monopolistic competition • oligopoly • monopoly Perfect competition Perfect competition. (2) no entry or exit barriers. The European automobile industry (dominated by a small number of high-volume manufacturers) provides example of oligopolistic competition in Europe. like Deutsche Telekom (prior to 1998). each good is slightly different in composition and/or brand image. although their number has been greatly reduced by processes of market deregulation and privatization. Most. Monopolistic competition Monopolistic competition is the name given by economists to that form of imperfect competition that takes place between competitive companies supplying similar but differentiated (non-identical) products. the satisfaction of its full condition is nigh impossible. the industry were to be taken over by a single firm (a monopolist) and costs and demand are initially unchanged. Firms are interdependent in the sense that alterations to output or pricing by one in the industry will induce a response from the others. as do the European aerospace. capital requirements.1. differentiation. Under these conditions. X-ineffi-ciency can be significant. A number of European markets for consumer and electrical goods are of this type. If. Only one firm (or a group acting as one) is producing in the market. for example for commodity products such as eggs.g. Several monopolies have characterized the European business environment over the last twenty years.causing other firms to remain outside of the industry . however. exercising substantial or total control over market supply. and with the risk of substitutes. is there any approximation of these conditions. (4) complete information and (5) firms acting independently of one another (and seeking to profit maximize). Markets of this type are expected to consist of a large number of firms entering and exiting the market with a good measure of freedom. firms may be inclined to collude (e. Only in a small number of markets. Monopolies also tend to be less efficient. oligopolists tend to eschew aggressive price competition and rely heavily on product innovation. with the threat of new entrants. paper and pulp industries. Oligopoly Under oligopoly a smaller number of larger firms enjoy a greater degree of market power and where there is no longer complete freedom of entry into the industry. rice or wheat. Dynamic and technical efficiency The theoretical comparison of a firm facing no competition (a monopolist) and a firm operating in a perfectly competitive market is shown in Figure 6. the marginal revenue curve 91 . According to welfare economics. Here then. advertising and promotion. Perfect competition dictates that the price for the industry (and thus for the firm) is determined by the intersection of the supply curve (which is also the marginal cost curve) and demand (which equates with average revenue) and is shown as Pg in Figure 6. although price leadership is possible.1. Competition applies to price. product quality. especially where public policy controls are weak or absent. to fix prices or output) and may progress to do so.and supernormal profits may exist to be exploited from a protected position. labeling. Monopoly Monopoly provides the opposite extreme to perfect competition. the concept of branding emerges as a core feature of competition. (3) a homogenous product. Entry barriers are high . With state-owned examples in particular. as an ideal market structure. Given that 'perfectly' competitive markets have (1) many buyers and sellers (who cannot fix prices). Therefore. provides a yardstick against which to judge the nature and efficiency of other market forms. in the form of price supports). have encompassed governmental control of the business and protection by refusal to grant licences to other potential suppliers. These products will sell on a market based on their comparative costs and are essentially undifferentiated. patent rights etc. branding and advertising.g.

As the firm is a profit maximizer it will set MC equal to MR and produce output Qo at price Pp. Equally. as new entrants are encouraged to enter markets and stimulate competition. demand for each individual firm will fall along with their corresponding level of market share. The monopolist therefore charges higher prices to the market and has no incentive to increase levels of output. however. Such X-inefficiency (the gap between actual costs and those theoretically attainable) is often postulated as a problem specifically associated with large nationalized organizations. The 92 . Where they do. An increase in the number of firms in the industry will shift the demand curve for each firm to the left as market share falls.2) as products are differentiated from their competitors' and thus not complete substitutes. In reality. the firm's demand is reduced. The small scale of firms also means limited scope for generating scale economies in production.for the industry must lie within the original average revenue (demand curve). that is competition is imperfect (monopolistic). Private monopolies unlike their public counterparts are not compelled to provide goods and services which are unprofitable and without some form of compulsion by regulation. the only firms that could feasibly be considered as perfect monopolies are the enduring nationalized industries. higher than under perfect competition. there is no incentive to reduce costs and promote internal efficiency to raise price/cost margins as the firm is already earning supernormal profits. may fail to do so. The industry demand curve reflects total demand for industry output at all prices assuming all firms in the industry charge that price. are renowned for their inefficiency. Turning public monopolies into privately owned monopolies is likely to be more detrimental than beneficial to the public good. Much depends on whether or not the monopolist benefits from economies of scale.1 Perfect competition versus pure monopoly Within the EU. bureaucratic systems and poor management by civil servants rather than trained business people have all been cited as factors resulting in poor productivity. the price charged by the monopolist may or may not be higher than under perfectly competitive conditions. These firms. Figure 6. Thus the price charged by the profitmaximizing monopolist is P.2. and the output Q lower than under competitive conditions. often regarded as political policy instruments. profits and overpriced goods and services. firms face a downward-sloping demand curve (see Figure 6. is not merely a question of privatization. the marginal cost curve moves to MC and the price charged would be lower than under perfect competition. in the EU. Figure 6. Overcoming these problems. the firm's marginal revenue curve is shown as MR. Diseconomies of scale. With new competitors entering the market (which is likely given the above-normal profits being earned by established companies). Thus. Where the industry is characterized by a large number of small players. its marginal cost curve MC and its demand curve D.2 Imperfect competition versus new entry In Figure 6.

all contribute to enhancing the competitive potential of firms to compete both in the EU and in other international markets. is essential for firms to keep one step ahead of their rivals in highly competitive markets. because oligopolized firms are not exempt from competition they do not ignore efficiency altogether. More commonly. dynamic efficiency concerns the ongoing evolutionary development of the organization. Paragraph 1 of the Article explicitly prohibits those agreements and concerted practices which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions. This is intended to distinguish the scope of Community law from that of national law. which. and output to Q. Twenty per cent marketshare on specialized products and combined turnover of €500 million are the current thresholds. Whilst technical efficiency involves establishing the most appropriate processes to facilitate best practices. performed continuously. and agreements cannot be made between competing firms as this will lead to market sharing. Improvements in organizational form. (b) Exclusive distribution agreements . Any attempts to hinder parallel importing therefore render the group exemption inapplicable. as traders other than exclusive distributors who buy from third parties in other markets provide competition for the firm that has been granted exclusive rights. have no connection with the subject of such contracts. EU competition law It is to be recalled that the EU's rules on competition are in direct relation to: • concerted (or restrictive) practices. As collusion and cartels curb the extent to which firms engage in price competition and promote heightened technical efficiency the Commission has specifically targeted these practices as detrimental to competition and the achievement of a Single European Market. Instead. It asserts that such practices are 'incompatible with the common market'. by their nature or according to commercial usage. production techniques. The concept of parallel imports is critical here.completing explicit or implicit agreements with their competitors to actively avoid competition. (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which..several European examples will be established in this text . in oligopolized markets decisions are made on the understanding that any change in strategy is likely to meet competitor reaction. no restrictions may be applied in respect of prices or customers. These are sometimes considered beneficial as a result of their ability to promote efficiency in distribution as well as facilitate unification. except where one or both parties have an annual turnover of less than €100 million. firms in oligopolized markets do not. Collusion of this kind involves explicit agreement and a high degree of co-ordination. oligopolized markets are characterized by competition based on differentiation rather than on prices. This raises the likelihood of firms colluding . Delimiting the effective coverage of Community controls. Dynamic efficiency. Profit-maximizing firms under these conditions are likely to reduce their costs and improve their internal technical efficiency as a way of preserving cost price margins and thus levels of profitability. Consequently the exemption only covers agreements between small and medium-sized firms based on market share and turnover. forbidding all agreements between undertakings which have as their object (or effect) 'the prevention. which refers to the rapid development of new technologies and products. Both are fostered through competition which means that firms who do not continue to develop in line with other competitors will either be taken over or simply fail to survive.where stipulations are made by the manufacturer on the permissible sales territory and the sale of competitor products. 261). ex Article 85) Article 81 (ex Article 85) bans cartels. involve themselves in aggressive price competition which can potentially lead to price wars and be damaging for all players. The articles concerned (and associated regulations) apply only in so far as the behaviour or practice at stake affects trade between member states. these operate as a form of 'economic constitution' guaranteeing the maintenance of liberal order and ensuring that competition in the internal market is not distorted. technical development or investment. Paragraph 2 declares such agreements to be void unless exempt under the 'group' or 'block' exemptions set out in the Article's third paragraph. management systems. Equally. (c) share markets or sources of supply. price-fixing and other forms of collusion. The justification for permitting this kind of activity is to allow small and medium-size firms the potential to rationalize production efforts. the theoretical model of intensified competition predicts increased efficiency. The stimulation of differentiation and new product development are also critical elements in the promotion of efficiency through competition. improve their efficiency and strengthen their competitive position vis-a-vis larger firms. is hard to sustain. (b) limit or control production. as a matter of course.demand curve moves to D). as the number of players increases. (d) apply dissimilar conditions to equivalent transactions with other trading parties. these exemptions can be seen to cover: (a) Specialization agreements . by co-operating on levels of shared output oligopolists may behave as monopolists aggregating marginal costs and equating them with marginal revenue for the whole industry. products and services.horizontal production agreements which involve the participating firms each specializing in the production of a particular product or product group. Concerted practices (Article 81. Alternatively. Quite unequivocally. There has been some infringement of 93 . • concentrations (by merger or acquisition). • abuse of dominant positions. marginal revenue curve to MR^ and price falls to P. Therefore. In the terms of Wilks and McGowan (1995. markets. p. and distribution systems. where such has the effect of restricting competition within the common market. Other stipulations dictate that agreements must be reciprocal and must only apply to the nature of products and not to the volume of production or prices. and • state aids. Any increase in output by one player will immediately depress prices and prevent the realization of optimized profits. restriction or distortion of competition'. However.

Franchise operations are seen as being very different from exclusive distribution and purchasing agreements as a result of the advantages offered. Where the aggregate turnover of the involved parties is less than €200 million. they may not actively sell or manufacture. These restrictions can make it difficult for competitors to penetrate the market and consequently there are limitations on the duration of such obligations (five years) and on the nature of products covered (applying only to those which are connected to each other). to observe technological secrecy and use the technology only in connection with production of the designated product. which have always been regarded favourably by the Commission. are permissible so long as competition in the final consumer market is preserved. Dominance itself is not prohibited but abuse of it is. and where the goods or services covered by an agreement represent less than 5% of the total market. a degree of competition must exist in a substantial part of the goods and services supplied. (European Parliament. Article 81 shall not apply and notification is unnecessary. They are regarded as having a generally positive effect on competition allowing franchisors to develop a wide and uniform distribution network without major investment. Territorial restrictions cannot be enforced. (g) Know-how licensing. Dominant positions (Article 82. at least if it affects trade between member states. obligations that the licensee divulge any experience gained in exploiting the know-how and the granting of non-exclusive licences to the licensor when improvements and new applications are revealed. only agreements which actively contribute to the additional benefits will be permitted. such as those for beer and petrol (EEC/194/EEC). Article 81 also excludes concerted practices (with a Community dimension) below agreed thresholds. This means that controls are applied to competing firms who jointly exploit technologies (limiting them to 20% joint market share for products which may be improved or replaced by the new technology). This has the potential to introduce new competition (particularly for small and medium-size firms). (f) Franchising agreements. although the block exemption applies only to distribution and service franchises and not to those in the manufacturing sector. the Commission was keen to provide greater legal certainty for involved parties on how agreements fit into existing competition policy. efficient distribution. where a fair share of the benefits accrues to consumers (be they final consumers or trading companies) such as lower prices or the improved quality of goods and services. 4. 1999a) With similar aim. 2. assurance of effective competition and intra-EU trade for patented products and legal security of the contract partners. allows rapid expansion and extends interbrand competition. (d)Patent licensing agreements.these rules in the European motor vehicle industry. As a result of the irreversible nature of knowledge transfer (once attained it cannot be retracted). and market access for small innovating firms lacking the capacity to sell on a pan-European scale. ex Article 86) Article 82 addresses a rather different problem: the abuse of a dominant trading position. the place of Article 82 is important in that there will always be a fear that large firms (enjoying a dominant market position) may make it hard for smaller firms to compete. (c) Exclusive purchasing agreements. which may pose restrictions in terms of territorial rights and the exclusivity conferred on the licensee. do provide access to technologies for those firms without the potential to innovate. As explained in the European Parliament's fact-sheet on EU competition rules: (in aggregate) these exemptions are designed to simplify the Commission's administrative task so it does not have to deal individually with too many concerted practice cases and make it easier for companies to fulfil their obligations by giving certain types of action a general prior exemption. (e) Research and development agreements. and given the desire to promote co-operation amongst and between smaller enterprises. usually involve licences covering industrial or intellectual property rights (trademarks. benefits the economy by facilitating technology transfer and innovation although territorial restrictions can stifle competition. Three main principles cover the group exemption in this case: a degree of protection afforded to both the licensor and licensee to ensure continued R&D effort by the innovator and ensure a favourable environment for technology transfer. where improvements are made in production. which have become more prevalent in the EU in recent years. By permitting such arrangements the potential to maintain a degree of monopoly over know-how is designed to facilitate its licensing (and implicitly its sharing). and all parties are afforded right of access to results and freedom of distribution. As these activities involve one economic unit. Article 81 identifies four conditions for the granting of such exemptions: 1. the Article asserts: 94 . they fall outside of the scope of Article 81 except where the subsidiary is deemed to have freedom to determine its own course of action. This is the so-called 'de minimus' principle further detailed in the Commission's 'Notice on Minor Agreements'. 3. although licensees may only sell in other licensees' territories in response to unsolicited orders. Also exempt are activities between parent companies and their subsidiaries or between the subsidiaries themselves. To guard against what might be termed 'abuse' of market advantage. distribution or economic progress such as cost reductions or capacity increases. Regulations do not exempt obligations for licensees to buy materials and components from the licensor (often undertaken to protect the invention) to pay a minimum royalty. Special exemptions may also be awarded where the harmful effects of restrictive agreements are more than compensated for by particular benefits. involve the reseller agreeing to buy exclusively from a specific manufacturer. like patent licensing. In the basket of EU competition rules. This clearly benefits consumers as it offers them wider choice and the advantages which result from standardized. brandnames or know-how). The policies which apply to patent licensing also apply here with provision being made for restrictions which are not considered to be damaging to competition: obligations to maintain the secrecy of know-how by the licensee after termination of the agreement. where a block exemption covering distribution and servicing agreements continues to apply.

As regards the number of cases instituted by the Commission on its own initiative. p. The Article gives examples of abusive practice. the Commission must take the necessary steps to put an end to the infringement. 45) The first stage of assessment normally involves the collection of information through either direct requests or formal investigations.3 locates these figures as part of a six-year trend towards increased complaints. This involves not only firms suspected of infringing rules but also third parties who are in a position to clarify 95 . Applying Articles 81 and 82: the role of the Commission The Commission is responsible for application of the rules under Articles 81 and 82. investigations and formal decisions. If the complainant has a legitimate interest in the termination of the behaviour under question and can show why and how the alleged infringement prevents fair competition. including: • low pricing with the object of eliminating a competitor • discriminatory pricing between or within member states • retaining customers by granting fidelity rebates • limiting production. then the Commission is obliged to investigate the situation. the ability to eliminate competition 4. the Commission is obliged to inform the complainant of its decision and the reasoning behind it and give him or her the chance to provide further information. It investigates cases on application by a third party (complainant) or on its own initiative. the number received by the Commission in 1998 pursuant to Articles 81 and 82 was 192. Most of these were of manifest Community relevance with only a small number of notified cases referred back to member state authorities. As regards complaints. the same number as in the previous year (European Commission. an undertaking's independence from its competitors 3. four principal criteria for establishing market dominance can be discerned from the decisions of the Commission and the ECJ: 1. Where no proof of infringement can be found. there are numerous instances where such investigation is necessitated and where formal decisions are reached. Where investigations show that the complainant has a legitimate claim. an undertaking's relative market share (greater than 40% implies dominance) 2. 1999a). A formal obligation to act is provided where a 'complaint' is made by a third party (say a company or trade association) normally through a national competition authority.3 New EU anti-trust cases. Despite notification procedures and the welter of exclusions considered previously. 1993-98 Source: European Commission (1999a. markets or technical development to the prejudice of consumers • unjustified refusal to supply • imposing supplementary obligations which have no connection with the purpose of the contract In recent practice. Only where the complaint relates to behaviour falling within the scope of Community jurisdiction will the national authority pass the matter on to the European Commission. Figure 6. dominant relationships with customers and suppliers These criteria provide the acid test in assessment of cases and some flexibility in assessing a firm's impact on its market. these numbered 101 in 1998.Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. Figure 5.

keep prices high. fines should start at no less than €20 million with the Commission taking into account the different roles and resources of the undertakings concerned. 5 July 1999). For example. for example. Those engaged in this sort of behaviour. Investigation teams have complete freedom to enter company premises and to consult company documents.7 million). the Commission also prohibited an agreement between four sugar producers who had developed a collaborative strategy of higher pricing. Collusion and market-fixing . customers are often able to hand on price rises to end-users and demand tends to be inelastic. To encourage companies to co-operate more closely with the Commission when it is probing alleged breaches of ELJ rules. while the first responsibility of business managers with regard to competition policy is to ensure compliance. 50). Such assistance . 21 April 1999). ICI (UK) and Societe Artesienne de Vinyle (France) from a combined total of €6. and without such co-operation it is difficult and time consuming for the investigating unit to unravel and to expose the full extent of secret dealings. Tip-offs in the building industry.leading to further success for a now formalized Commission cartel unit. Certain characteristics of the industry perhaps contribute to this tendency for collusion: 1. Where there is evidence of violation of Community rules.British Sugar. material costs are a relatively small proportion of total development costs which means that customers are more concerned about delivery schedules than price. In reaching its decisions (and in determining its penalties). 4. the European Commission imposed fines totalling ECU 248 million on thirty-three cement producers found to have participated in secret arrangements to rig markets over a period of more than ten years. Further cases were concluded in the areas of stainless steel and of ferry services in the Adriatic waters. However. which followed exposure of a price-fixing cartel between twelve European chemicals companies.certain information as a result of their proximity to the market. More recently. The decision affected suppliers in the then twelve EU states as well as in Norway. 2. A wide variety of other industries have also faced the same kind of analysis -carton-boards. Another price-fixing agreement involving sixteen steel makers (including British Steel) was also broken around this time. Napier Brown and James Budgett. For very serious infringements. In 1998. many of the materials are bulky. dangers in such action exist. 1998. Cartels. leading to total fines of £78 million. 'damage not only their customers but also themselves by restricting efficiency and innovation'. are mostly secret agreements between companies.1 billion to €4. sugar and plastics to name but a few .5 million). the European Court of First Instance cut fines for Elf Atochem (France). resulting in confiscation of documentation. Evidence suggests that DG-IV (the Commission's Competition Directorate) has had increasing success in busting cartels tied to the building industry with. p.29 billion. the parties were judged guilty of breaching competition rules over a ten-year period by fixing prices of beams supplied to the building industry and sharing out the market among them. Former EU Competition Commissioner. In July 1994. 3. In this case.000 million or 10% of the annual turnover of the parties concerned. 96 . The original Commission fines. localizing competition and severely restricting cross-border trade. failure to do so will result in the Commission ordering the firm to comply by a formal decision and a daily penalty of between €50 and €1. gravity and duration of any infringement where discovered. making it easier to negotiate co-operative market sharing and price fixing. Therefore. have resulted in industry scrutiny and dawn raids on suspected firms. Interest is added to the value of the fine if any appeal is unsuccessful. Fines totalling ECU 50. Sweden and Switzerland. weaken the production process and inflict considerable damage on the economy in general. on 30 November 1994. were rejected on the grounds of 'flawed calculation of company market shares' (Financial Times. Visits are usually unannounced to prevent documents being destroyed in the interim.8 million) and Blue Circle (ECU 15. 'business managers must be also alert to competitors acting in contravention of the policies' (El-Kahal.2 million were imposed on the participating companies . Guidelines authorise a 'starting point' for fines at €1 million but the Commission is at liberty to impose fines of up to €1.after an investigation has been started and where a company does not substantially contest the facts on which the Commission bases its allegations .000 can be imposed in addition to a lump sum fine. In April 1999. whichever is the larger. while these firms enjoyed success in their appeals. offenders are often flagged by customers faced with continual price rises from all producers and by rival firms being squeezed by the actions of large groups of market players. the institution has now introduced a 'leniency' system under which firms involved in anti-competitive practices may have their fines reduced by assisting with a Commission investigation.21 million in 1998 for running an elaborate cartel in insulated heating pipes . Tate & Lyie. Lafarge Coppee (ECU 22. he claims. la Societe de Ciments Francaise (ECU 24. taking copies of any records they consider pertinent to the case. van Miert has described them as 'pernicious arrangements'. stainless steel and ready-mixed concrete all provide example of market sectors which have come under scrutiny. raising transportation costs.the application of Article 81 In the Commission's view. cartels keep the least efficient companies in the market. hearings will be held with the companies for the purpose of subsequent assessment and to establish the facts of the case before verdict. of course.should encompass cooperating with officials and supplying them with information relevant to their investigations (European Voice. in many cases. the Commission must weigh up the deliberate nature. Although private cartels are by no means easy to uncover. Although companies do not have to admit investigators.8 million). the European Commission fined ten companies a total of ECU 92. reducing individual levies by between 33% and 66%. Thermal insulation. One case where Commission-imposed fines were successfully contested was in the case of the European chemicals cartel. The largest fines were imposed on Italcementi (ECU 32. the Commission announced fines totaling over £100 million on nineteen companies found to have fixed prices over several years in the market for cardboard packaging. fines resulting of up to 10% of company turnover. Fines should be paid within three months although they are subject to possible appeal. there is a relatively small number of suppliers in each national market.

It is also clear that in the decentralization process envisaged by the Commission for the future execution of anti-trust cases. the Commission concluded six cases under the Article in 1998 and launched a number of fresh investigations. Case investigation concluded in 1998 with fines totaling DM280 million. As in its management of AOL Europe's complaint against Deutsche Telekom . These included complainant Virgin Atlantic.Abuse of a dominant position .the application of Article 82 Preceding analysis has made clear that while a dominant position is not. 1995). the Commission fined AAMS ECU 6 million and ordered it to put an end to the infringement. so it has acted to apply Article 82. competition authorities in the member states play a crucial rule in detecting breaches of Community competition rules within their own territory. abuse of that position. the Bundeskartellamt. The effect was to protect AAMS's own sales and to limit the access of foreign cigarettes to the Italian market. the UK carrier was fined €6. and these are important to anti-trust regulation inside individual EU countries. the following examples of recent national action may be considered: 1.in early 1999 AOL accused the German giant of predatory pricing and discriminatory practice through its own Internet subsidiary company . In the Amministrazione Aiitonoma del Monopoli dello Stato (AAMS) case. runs contrary to EU objectives. national competition authorities are to be central players. Much as the Commission has acted to invoke Article 81. Although EU law is binding on all member countries. governing those many competition infringements that lack a Community dimension. the Finnish Competition Council imposed on Finland's major dairy products company Valio a competition infringement fine of FIM5 million. Thus. Where national authorities are approved by the Commission and where they can guarantee effective protection of individuals' Community competition rights. In fact. Volvo has given assurances that it will not support price-fixing cartels operated by its dealers. According to its XXVIIIth Report on Competition Policy. national competition bodies remain independent and important authorities in their own right. The Commission has warned that other airlines could face similar penalties where found to be operating anticompetitive loyalty schemes with travel agents. National courts and competition authorities also have a central role to play in support of the Commission's activities at EU level. Germany's competition authority. The role of the member states Treaty articles in the anti-trust field apply only to an agreement or dominant position in so far as they impede trade between member states. where an agreement has no perceptible effects on trade flows between the member states then domestic competition law applies. while some member states have remodelled their domestic competition policies on the principles of EU law. In 1997. considered to be detrimental to the economic health of the EU. and while there is close co-operation between national and supranational authorities. The upward trend in action has continued in 1999 with the Commission initiating a number of investigations focused on supplier-distributor relationships and examining various concerns relating to telecommunication and Internet services. The Commission ruled that the company was imposing restrictive distribution contracts on a series of foreign producers. In 1998. In 1997. 3. Meanwhile. while Finnish competition law now relies almost entirely on EU legislation. This admission followed an investigation by the United Kingdom's Office of Fair Trading (OFT) which uncovered evidence of an agreement by Volvo dealers not to offer discounts beyond set levels. Relating back to the basic ruling. detected a cartel of power cable manufacturers in the German market. hindering the maintenance of effective competition by acting independently of competitors and customers. German competition rules (especially on market dominance) remain strongly influenced by preceding domestic codes. In the British Airways case. In the summer of 1999. To illustrate this point. 2. while domestic legislation can be closely aligned with the principles of supranational law. Of those recently concluded cases.8 million in early 1999 when found to be creating an illegal barrier to airlines wishing to compete against it. the number of formal cases pursuant to the Article has increased steadily over recent years. national governments are free to operate their own national legislative frameworks and to determine the nature and scope of domestic anti-trust rules. This was for its abuse of a dominant position in the national liquid dairy products markets. significant differences in national rules on competition persist (see Turner. For example. two provide a quick illustration of the issues attaching to the application of Article 82. they may in future receive and execute decentralized anti-trust complaints pursuant to Article 81 (see Davison and 97 . it has to be proved that the firm is abusing its dominant position in the product market or a major proportion of it. The power to apply the provisions of Articles 81 and 82 are vested simultaneously in the Commission and the national courts (direct effect) and it is open for complainants to commence legal proceedings with reference to Community articles in their national courts. BA was found to be in breach of Article 82 by offering extra commission to travel agents that promoted its tickets over those of the airline's rivals. Volvo Car UK admitted supporting secret agreements to fix its car prices in the UK. in itself. Most member states have their own competition laws and authorities. Italian cigarette producer and distributor AAMS had a dominant position on the Italian market for the wholesale distribution of cigarettes. Indeed. Internet infrastructure and related services are of particular interest in that the Commission confronts substantial challenges with respect to market definition. Hence.the Commission must ask which aspects of Internet services constitute separate markets.

The two-thirds rule also applies to this second category of Community mergers of which fourteen cases were notified to the Commission in 1998 (amounting to 6% of all cases). With effect from September 1990. the total turnover of at least two of the companies concerned must exceed €25 million. in parallel mergers between USA metal packaging companies the product market has been defined to encompass metal containers. the Commission now has the competence to examine cases of a smaller scale and where multiple referral to the authorities of three or more member states • would otherwise take place. the task force has to decide what constitutes the market. Amendments made to Regulation 4064/89 by Regulation 1310/97 now ensure that mergers will be considered as having a Community dimension. the Commission is having to consider such a 'decentralization' of powers in an attempt to reduce and to focus its case burden. Indeed. • in each of at least three member states. Whereas the merged firm would have had a combined turnover of £2 billion in a packaging market worth £35 billion. The case of metal containers serves to highlight this point. plastic and metal packaging. This change to EU merger controls emerged as an alternative to a reduction in the global and Community thresholds set out in Regulation 4064/89. the Commission's Notification of Acquisitions form provides the following definition: A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products' characteristics. These cases will now benefit from the simplicity and legal security of Communitylevel control or 'a one stop shop' for merger approval. 1998). in the more narrowly denned metal packaging market it would have had a dominant position and thus have been rejected under new legislation. reputation and sophistication. Defining the market Again. 4063/89 was agreed in order to fill this void and to strengthen the Community's ability to regulate M&A activity. pulling it under its sole jurisdiction. as in anti-trust investigations. the market was. Calculations of market share. a European Merger Control Regulation (MCR) no. Similar 98 . highly dependent on the definition of market boundaries. As discussed with reference to Articles 81 and 82. the combined turnover of all the companies concerned must exceed €100 million. The French. • in each of these three countries. glass bottles and plastic containers. The Commission's argument for taking a narrower definition of the market centred on production switching difficulties in the context of glass. Articles 81 and 82 make no specific provision for the control of European concentrations (acquisitions or mergers) which will often create or strengthen a dominant market position. With many cross-frontier concentrations remaining below these thresholds. Incompatibility is established where that concentration creates or strengthens a dominant market position so as to impede effective competition. the Commission has traditionally taken a narrow view of what constitutes a market.as recently amended by Regulation 1310/97 . On the surface this appears to be an easy task whereas in practice it can be highly complex. efforts have been made to extend the scope of the MCR. • each of the companies concerned generates no more than two-thirds of its aggregate Community-wide turnover in one member state. acquisition or the creation of a joint company and where the concentration has a Community dimension. In December 1989. German and British governments all rejected Commission proposals to lower the aggregate worldwide turnover threshold to €2 billion and the aggregate EU-wide threshold to €100 million. taken to be metal containers. supply side factors have also been considered.allow prior investigation and thus prevent mergers that would give rise to an abuse of a dominant position on the Community market before they happen. In effect. Investigation applies to companies in all economic sectors when they are proposing a concentration by means of merger. Nevertheless. • the aggregate Community-wide turnover of each of at least two of the undertakings concerned must exceed €100 million. Conversely. Spanish. Although European competition authorities vary tremendously in terms of their experience.5 billion. building on the concept of demand side substitutability. showed a wide disparity in the Metal Box case. • the aggregate EU-wide turnover (of each of at least two of the undertakings) is in excess of €250 million. The rules under this regulation . their prices and their intended use. initially.Fitzpatrick. The Commission is empowered to declare a concentration with a Community dimension (CCD). and to assess its compatibility with the common market. where they fall below the (original) 'global' thresholds but satisfy the following requirements: • the merging parties must have a combined worldwide turnover of more than €2. In the takeover of the British company Metal Box Packaging by the French concern Carnaud. Where a concentration lacks a Community dimension it comes under national competition policy rather than EU regulation. this dimension has obtained where: • the combined turnover of all parties is in excess of €5 billion.

financial and Internet access services. the Commission may take account of potential competition from other geographical areas when assessing a transaction. for example. Questions of distinction also apply to services. Of course. and which could fall under the MCR. and in more traditional sectors. the Commission defined the product market ('regional turbo-prop commuter aircraft') and subdivided the market into segments in such a way that gave the highest market share possible to the concerned parties.g. 44): As globalisation of markets progresses. there are also geographic boundaries to be considered as with cases pursuant to Articles 81 and 82. in large part. In a number of concentrations tied to the automotive components sector (see DENSOMagneti Morelli and others) the relevant geographic market has been identified as that of the European Economic Area (EEA). In assessing the competition effects of the proposed concentration. should notify the European Commission in advance. 99 . [and] even where the market is identified as 'European'. with its methodology of describing and analysing the market. insurance. market entry barriers. with further formalization of initial stage I proceedings. The first imposition by the Commission of a financial penalty for a failure to do this was in 1998. the Commission's decisions have taken into account several factors. credit insurance (within commercial insurance) and 'universal connectivity' (within the realm of Internet services). Although the detailed nature of the questions included on the form has caused a certain amount of dissent among firms. Within a week of announcing the merger the firms involved must complete and return to the Commission a notification form which comprises detailed questions covering a wide range of aspects including prices charged in the EU and relative market shares. if markets are defined too narrowly this can prevent mergers which do not distort competition and which may actually increase efficiency. As is made clear by EU officials (European Commission. At this first stage. With respect to transatlantic airline services (e. Debates about identifying the 'relevant market' when undertaking an appraisal were also central to the de Havilland case (1991) in which the Commission vetoed Aerospatiale's (France) and Alenia's (Italy) attempts to take over Canadian aircraft maker de Havilland...g. Different cases have resulted in very different geographic market definitions. where the differing production techniques of natural rubber and latex meant they were treated as separate products resulting in a narrow definition of the market. Alternatively. the Commission has identified 'world markets' in a number of recent cases. Procedure and action Companies involved in agreements or mergers or considering mergers which could affect competition within the EU. Such a definition has been based on the reasoning that: • transportation costs within the EEA are not significant • there are no obstacles to intra-EEA trade • prices are similar throughout Europe • suppliers tend to serve the entire EEA from only a few plants located within it • similar conditions of competition apply throughout the EEA • suppliers tend to treat the EEA as a distinct product market in planning their production. Here. or (c) That the notified concentration falls within the scope of the Regulation and requires detailed consideration on the grounds that there are serious doubts about the concentration's compatibility with the common market. Among others. statutory auditing (within accountancy services). cultural preferences (which suggest whether or not goods stand a chance of penetrating foreign markets) and differing competitive conditions. the Commission has established (and employed) evidence of the existence of separate and distinct markets. transportation costs (which dictate the distance goods may be moved economically). In seeking to assess the homogeneity of competition within a geographical area. Atlas-Global One) and other markets such as steel and platinum. along with product market definitions. In other cases and in certain sectors of activity marked by global competition. the Boeing-McDonnell Douglas case). if markets are defined too broadly then they will permit mergers to go ahead which act against the public interest by permitting a dominant market position to be attained. the Commission may decide: (a) That the notified concentration falls outside of the scope of the Regulation. the Commission asserts that it is necessary if they are to make a stage I decision (within thirty days) once the prior notification requirement has been complied with. the Commission has carried out competition analyses on markets that it deems to be 'worldwide'. the Commission is increasingly Carrying out competition analysis on markets which are not confined to Europe . (b) That the notified concentration falls within the scope of the Regulation but does not raise serious concerns. telecommunications alliances (e. sales and marketing activities. In analysis of proposed concentrations in accountancy.claims were made by the Commission in the merger of Metallgesellshaft and Safic Alcan (1991). Its decision to block the acquisition therefore rested. 1999a. we can count the geographical distribution of market shares. The nature of the applications procedure has been very clearly outlined. p.

However. These points should be borne in mind when considering the bottom-line figures in Table 5. provided that such aid is granted without discrimination related to the origin of the products concerned. the following may also be considered to be compatible with the common market: (a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment (a platform for many national regional-aid schemes). At this stage. Since the end of the reference period for Table 6. (b)aid to make good the damage caused by natural disasters or exceptional occurrences. phase II investigation was already under way in 1998 when merger plans were withdrawn between publishers Reed Elsevier and Wolters Kluwer. unless the notification is withdrawn. Nestle-Perrier and Zeneca-Astra) have been authorized on strict conditions and subject to undertakings established at the point of stage I or stage II proceedings. tax concessions and other forms of aid (see Box 5. the Commission must ensure that national governments do not unfairly favour their own national businesses over those of other EU countries through the use of direct payments.just ten up to and including September 1999 -including those made in the cases of Bertelsmann-Kirch-Premiere and Deutsche Telekom-Beta Research. For example.1 (September 1999). (d)aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Community to an extent that is contrary to the common interest. Under Article 87(2) the following types of aid are permissible: (a) aid having a social character. for professional books on law and taxation (in a number of EU member states) and for various kinds of dictionary and business publications. Under Article 87(3). (c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany.1). insofar as such aid is required in order to compensate for the economic disadvantages caused by that division. The rules on state aid (Articles 87-89. 100 . These highlight only a small number of formal prohibitions . where such aid does not adversely affect trading conditions to an extent contrary to the common interest. it is clear then that many planned tie-ups have been scrapped or abandoned (following EU investigation) before a formal decision has been made necessary.1. two further mergers have been formally blocked: an all-Swedish merger of truck. In the second example (b). Such aid can frustrate free competition in the EU not only by preventing the most efficient allocation of resources but also by giving a substantial competitive advantage to domestic producers. The proposed merger cannot go ahead until the Commission's final decision has been taken. It is also clear that several mergers (e.In the first example (a). paragraphs 2 and 3 of Article 87 list various categories of aid which are permissible. the Commission has a further responsibility to prohibit state aids if they affect the EU in any way. bus and coach builders Scania and Volvo and a proposed merger between UK tour operators Airtours and First Choice. Amid growing concerns that it would either block the merger or demand large-scale divestments. Under the terms of Articles 87-89. There is a four-month time limit to such an investigation (second stage proceedings) culminating in a formal Commission decision. The Commission found grounds for concern about the merger's impact on competition in the global markets for academic journals and books. the parties are provided with fresh opportunity to modify their concentration plans (so as to avoid their rejection) and many plans are actually withdrawn in order to avoid an adverse final decision. (c)aid to facilitate the development of certain economic activities or of certain economic areas. Although the Commission has formally vetoed only a handful of mergers under the MCR. As a general rule. the £17 billion merger plan was abandoned. a detailed investigation is conducted in to whether or not the proposal creates or strengthens a dominant position on the relevant market. supranational authorities are uninvolved in any subsequent appraisal. This provides member states with some genuine scope for public intervention in support of regions and/or national industry and to support such wider Community goals as 'economic and social cohesion'. (b)aid to promote the execution of an important project of common European interest or to remedy a serious disruption in a national or regional economy. ex Articles 92-94) Although the EU has developed a role in the supporting of certain industries and regions by financial assistance. soft loans. Both of these merger plans were linked to the German digital pay-TV market and were blocked by the Commission in 1998. clearance is provided at stage I (perhaps subject to minor remedies). In the final example (c).g. Article 87 determines that all state aid to business is illegal insofar as it affects trade between the member states of the EU. grants. (e) such other categories of aid as may be specified by decision of the Council acting by a qualified majority on a proposal from the Commission.

where necessary. car makers. a wide range of national. 101 . 75): The benefits of competition between European airlines. been dissipated by governments that have merrily bailed out losers. improperly. It should be clear. p. This results in lenders charging high interest rates making socially desirable investments unprofitable for the private firm and providing a case for government-supported loans. The central task rests with monitoring and regulating 'assistance' and with defining (and amending) the conditions under which states may provide specific forms of structural and/or regional assistance. there may be cases where (on social grounds) help is needed to create jobs and to overcome barriers to future competitiveness. 1997. are compatible with the aims of the Treaty. which are consumptive of up-front capital and R&D costs. in high technology sectors. chemical companies and the rest have all.1 Types of aid instrument • Grants • Interest subsidies received directly by the recipient • Tax credits and other tax measures • Tax allowances. This statement highlights just some of the reasons why subsidies may not work even in the circumstances previously considered: 1. aim to restore long-term viability by resolving structural problems including. Strained public budgets are stretched further by the cost of subsidies. The first is where the social benefit may be greater than the benefit derived by the individual firm. but to ailing giants in industries such as ship-building. Arguments surrounding subsidies Economic theory has generally failed to advance a persuasive case in favour of state subsidies although there may be specific cases where state aid is justified as a result of market imperfections. which must be notified by member states under Article 88(3) of the Treaty.and Union-level investment subsidies are available under specific conditions and particular classes of aid (e. Cost control and efficiency go out of the window when firms expect state support if things go wrong. it is argued that some research and development (R&D) initiatives result in greater social benefits than returns to the individual organization. energy firms. 2. Government-supported R&D may simply replace private sector R&D and may not add to a net overall increase in activity. Accordingly. the Commission blocked DM240 million of a proposed DM780 million in 'regional' subsidies for Volkswagen to build two plants in the East German state of Saxony. to be acceptable. The most celebrated example here was the coming to blows of the Commission with the German federal government (and the regional German government of Lower Saxony) in 1995. At this time. a Commission decision prompted an immediate legal challenge via the European Court of Justice. the Commission has sole responsibility for checking that national aid schemes. banks. In all circumstances. However (and irrespective of the security of these claims). For example. as a result of imperfections in information in the capital market. it received the same sum of aid. As succinctly put by The Economist publication in a scathing attack on European subsidies (The Economist. therefore. When the carmaker scaled down its total investment.Box 6. at various times. there are instances where. aid measures must conform to Treaty obligations and must be limited to the minimum necessary to achieve the desired purpose. firms are more able to assess the risks of new projects and new investments than the credit institutions. Third. Second. that is where there are externalities (spillover effects). For example.g. exemptions and rate relief • Reductions in social security contributions • Sale or rental of public land or property at prices below market value • Equity participation (including debt conversions) • Soft loans from public or private sources • Participatory loans from public or private sources Hence. that state aid control at EU level is not about prohibition of aid but about attenuating action that unduly distorts competition in the European Union. any and all sectoral aid must. there are high returns to scale which make it difficult for firms to compete with incumbents (the infant industry argument). The Commission ruled that the aid was illegal because VW had first agreed to invest DM3. coalmining and motor vehicles. Governments tend to be less able to pick winners than the private sector because their decisions are often obscured by social pressures and a lack of expertise. In this case. State aids are quite capable of falling foul of these rules and the Commission will ban assistance that is not compatible with the SEM or that is being misused. regional aid measures) are given clearance where in accordance with Treaty terms. as in others. Finally. the reduction of capacity. the bulk of such subsidies in Europe go not to new industries with a future or to those generating positive externalities.5 billion to assist East German development if it received clearance for this sum.

At the heart of present argument. it is relatively unsurprising that state aids are such a sensitive area of ELJ activity. The economic costs of subsidies can be high. The Commission can also be expected to continue its crackdown on preferential tax rates. the EU's determination to rein in the granting of state aids (especially those given on an ad hoc basis) has come into sharp conflict with the determination of many member governments to use aid. has described this as a substantial problem resulting in serious market distortions in many sectors. 1993-97 (million Euro) 102 . In addition. pp.2 State aid to industry in current prices. in order to protect domestic industries (see Case Study 5. calculating the exact amount is difficult and can result in too much subsidy being paid which can worsen the distortion. Indeed. Many of its previous 'rescue' clearances (e. of French aid to Air France and to Credit Lyonnaise) have provoked legal challenge on the grounds that subsidies were without proper account of restructuring proposals or of previous subsidies. As governments find money for subsidies. at an average of €37. Given such debate. public budgets are stretched and/or tax policies impact adversely on incentives to work. to the many aid forms designed to encourage R&D and to measures in support of environmental protection. leading to a subsidy war which acts as a drain on national resources. van Miert. 6.7 billion a year between 1995 and 1997 (see Table 5. 1999b). The scope for discretionary assistance under Article 87 and the matter of consistent (or inconsistent) application of ED rules adds to this combustible mix. 4. Table 6.2). The EU's former Competition Commissioner. Controlling state aids: future issues The Commission is now looking at reform of notification procedures and to concentrate its vetting work on cases involving large volumes of ad hoc aid. 1999b. DG-IV describes this as 'one primary means by which the Commission is able to demonstrate that it is constantly keeping a close watch on public interventions' (European Commission. Export subsidies paid to firms in one country are likely to be matched by governments in others. This position is well supported by the European Industrial Employers Federation (UNICE) which says that companies damaged by unfair state handouts to competitors should be compensated. the EU is likely to take an increasingly tough view of failures to notify aids and of attempts to abuse the principle of rescue aid.5). to aid for SMEs. As considered briefly in Chapter 4. According to the findings of its seventh survey on state aid in the European Union (European Commission. the Commission continues to warn that current aid levels are dangerously high. in one form or another.g. and the financial and political investments associated with public aid decisions. Some 60% of applications for state aid are approved after fairly brief investigation and the Commission intends to use the device of block exemptions to limit and to concentrate its case work. looking to compile and to publish as much data as possible on aid volumes. 5. This suggests that predatory tax regimes are now a clear target. Even if there appears to be an economic case for a subsidy. the Commission ruled in July 1998 that Ireland's 10% corporate tax rate for investing manufacturing companies constituted a form of state aid. Brussels is also talking in terms of a more open policy on state aid. state aid volumes to industry (manufacturing) have been fairly consistent in recent years. These should apply to small amounts of aid. Aid is often a way for governments to delay or prevent the demise of failing industries and/or non-viable businesses with no long-term benefits as it simply puts off inevitable closures and redundancies.3. 1-2).

waste management.Austria Belgium Denmark Germany Greece Spain Finland France Ireland Italy Luxembourg Netherlands Portugal Sweden United Kingdom EUR-15 EUR-12 1993 0 784 561 19. Even if it were to succeed in significantly reducing and preventing pollution in its territory. The quality objectives that it lays down are incessantly thrust aside by economic development and urbanisation. there is no major conflict between economic growth and a healthy and clean environment. It is very difficult to evaluate the specific results of the European measures in this area. mechanisms are needed for handling complaints and carrying out environmental investigations outside the courts. the disposal of waste without danger to the environment or to human health and the systematic evaluation of the likely impact on the environment of any new economic activity. notably that of rainforests. Yet. Moreover. In any case. The cooperation and development programmes of the European Union must lend particular attention to these problems.325 41 509 376 0 1. the environment has graduated to the status of full-blooded policy and falls into the priority objectives of the Union. Likewise. In this area it is the third world which faces some of the most threatening environmental problems and the most serious at world level.798 656 2.930 46 687 705 405 1.668 36. The European Environment Agency. the "environment industry" is probably in a position to help the European economies to restructure themselves on new bases by directing them towards new activities that employ advanced technology and a skilled workforce. the new economic departure of the East European countries.773 434 9. must go hand-in-hand with increased consideration of environmental constraints. It may thus summon others to comply to a greater extent with standards agreed in international fora. the preparation of stringent safety standards applicable to potentially dangerous manufacturing procedures. the challenge facing those with responsibility for environment policy is to develop instruments which will make it possible painlessly to achieve the objective of growth which is compatible with the essential requirements of the environment. in particular fauna and flora. the European Union cannot work in isolation in this field. first because the quality of the environment is a highly subjective notion and therefore difficult to define. extinction of wildlife and destruction of the rainforests. and secondly because the policy to combat pollution is a Sisiphean task.306 368 11.860 Environment policy Thanks to the Treaty on European Union.966 426 5. excessive urbanisation. Environmental constraints must be integrated into the 41. soil degradation and management of natural resources. Thus.920 582 2.062 0 4. indispensable not only for the preservation of Europe's environment. in fact. for example by encouraging the selection of new chemical products before they are launched on the market.298 1995 489 952 648 15. In a European economy that undergoes structural change. a permanent vigilance is required of citizens. namely that of the management of resources. particularly in respect to monitoring of chemicals. viz. It is true that the annual reports of the Commission to the Parliament and the Council on the implementation of the European Community's environment programme show a reduction of ozone-depleting substances and improvements made in water quality and waste management. the state of the environment overall remains a cause for concern.367 1997 616 701 797 11. This involves foreseeing the ecological problems of technological development and limiting them from the outset.167 355 1.050 36. The uniform application in all Member States of environmental standards is.750 454 9.272 34.594 35. assisted by the countries of the West. Promoting a sustainable economic growth in Europe entails the combination of more competitive industrial production with less environmental degradation.675 646 1. but also for the good functioning of the internal market and for economic and social cohesion.794 723 1.354 42 531 571 0 1.356 definition and implementation of Source: European Commission (1999b) other EU policies.745 327 3.482 38. population explosion. which is open to the other obvious as regards the second aspect of environment policy. it would still be open to water and air pollution from the other countries of Europe and the other regions of the world.826 47 661 428 366 1.149 727 12.812 39. more efficient use of energy and raw materials resources and higher 103 . For that reason the Union must play a leading role in international negotiations and take more visible action in the framework of international organisations such as the Council of Europe and the United Nations. But.621 1996 495 1. which constitute one of the planet's most important natural resources. who can lodge complaints with the Commission whenever they observe that European standards are not being complied with by an undertaking or by public or private works in their country or a neighbouring country.110 307 9. On the other hand. which have been tragically neglected in the past.124 1994 0 998 558 20.443 45 670 467 369 2.127 0 5.: desertification.243 313 10.568 401 3.877 37.

However. private and public companies and consumers to move towards cleaner. In addition. there can be a synergy between environmental policy and employment policy so as to rectify the overuse of environmental resources and the underuse of human resources. more environment friendly and more labour intensive production methods and products. but has to be induced by certain measures. first and foremost being the restructuring of tax systems by reducing non-wage labour costs and by incorporating environmental and resource costs into the market prices of goods and services. environmental education and training coupled with financial incentives should encourage public authorities. 104 . this synergy is not automatic.employment rates. Indeed.

Industrial policy (at least in part) is designed to offset other sources of market failure which arise in the production process. is the issue of industrial policy-making in Europe. the EU's role is largely restricted to coordination and to setting an overall framework for industry to operate within. Even as a tug-of-war developed between supporters of more (e. these are to be taken within the context of an open and competitive Community market. Competition policy aims to offset market failures arising from scale economies and market power.6. To complete this overview.g. the Treaty defines four central challenges: • speeding up industry's adjustment to structural changes. The Treaty on European Union describes the task as ensuring that 'the conditions necessary for the competitiveness of European industry exist' and the detail of Treaty provision makes clear the need for co-operation between EU. Common Transport Policy. no mention was made of industrial policy in the Rome Treaty. • fostering a better exploitation of the results of innovation and of research and technological development which are of potential value to industry. in the build-up to the IMP. EU industrial policy gathered speed around such objectives and found clearer direction. Although a framework for an integrated industrial policy is really yet to emerge (such a project still runs the serious risk of political defeat). support for greater Community competence failed to swell. national and subnational authorities. national authorities tended to look to domestic measures in support of their ailing industries (e. • encouraging an environment in which initiative can thrive and in which undertakings. The amended Article 157 TEC (ex Article 130) highlights the need for policies to: • encourage an open and competitive industrial sector. and to target measures to ensure the competitive functioning of markets. • smooth adjustments to structural change. • promote small and medium-sized enterprises. Despite this. EU industrial policy originated with the sectoral concentration of the Paris Treaty (1951) which initiated a series of interventions in the coal and steel industries. where national governments had ceded powers and where promotional activities to the advantage of Community undertakings could be jointly pursued. these have stressed the further need to: • eliminate institutional and regulatory barriers to the development of venture capital. textiles. For many member states. 105 . there were already important sectors. the UK and the Netherlands) interventionist policies. and • modernize the industrial role of public administrations. All member states of the EU have their own industrial policies and there has been little effort to substitute these or to erode sovereign authority in this field. but with no less importance to the shaping of competition in Europe. steel. to develop industrial co-operation and strategic alliances. and with the purpose of responding to inherent industrial weakness and to new forms of competition. and • to reinforce intangible investment in research.g. In the period after the completion of the single market. Common Agricultural Policy. coal. While 'industrial planning' is far from a redundant concept.g. France and Italy) and less (e. Common Fisheries Policy) EU industrial policy Our focus on EU regional policy measures was launched by questioning the very legality of regional state assistance in the EU member states under the EU's competition rules. the EU's industrial policy is now strategically designed to help European business and industry to compete in the global marketplace (not to shield it from global market pressures) and to maximize the potential benefits of the SEM. EU industrial policy appears to have consolidated around these established principles and the further objectives of promoting the access of European enterprises to the global market and of achieving success in the new information markets. in seeking to address the challenges of global competition and in order to promote fair and liberal competition in the major industrial sectors. Competitiveness and Employment (European Commission. the European Commission regards industrial policy not as an end in itself but as a means of facilitating and defending the Single Market. coal and ship-building). the member states have distanced themselves from many of the principles of the 1970s. European authorities now largely subscribe to a mix of non-interventionist and (strategic) interventionist measures. In principle. • encourage co-operation in R&D. The 1993 White Paper on Growth. Supplementation has followed in the form of successive communications by DG-III (the directorate responsible for EU industrial policy). Today. The EU's approaches to industry and competition are hardly unified but competition and industrial policy are closely related. Consequently. In 1999. The lack of a clear mandate at Community level provided little scope for co-ordinated efforts towards reform and restructuring at a time when protectionism and other forms of government paternalism were widely employed.g. like competition policy itself. although pressures for the development of a coherent European approach intensified during the 1970s. However.2 Sectoral Policy (Industrial and Enterprise Policy. With respect to the EU's own tasks. e. Moving us away from this field. the Council of Ministers adopted a Transnational Plan' designed to improve the competitiveness of European industry through technological and industrial innovation and through enhanced cooperative arrangements. can develop. revisions to the Treaties have established a reasonably clear and coherent mission for common efforts. With respect to industrial policy. particularly small and medium sized. 1993) identified a number of issues concerning European competitiveness including the need to capitalize on the Community's industrial strengths. • encouraging an environment favourable to co-operation between undertakings. therein rejecting insularity and blanket protectionism. skills and training. steel and agriculture. Energy Policy. and. Moreover.

4 Fifth Framework Programme budget 1998-2002 (in million Euros) Source: European Commission The horizontal programmes attract a €3. Since the early 1980s the development. such as RACE (telecommunications). Specifically. 1999d).Backing research Perhaps top of the agenda for improved competitiveness is the continued promotion of research and technological development (R&TD). sponsorship. transport and energy. research institutes and public bodies throughout the EU.usually to about 50% of the total cost .1 billion was spent on research and technological development in information and communications. tax rebates and other incentives to firms prepared to engage in collaborative R&D) and to give momentum to EU-based research. co-ordination and financing of such research .5% in real terms on FP4 . Focus is on: • expanding Europe's socio-economic knowledge base (one key action).Confirming the international role of Community research 363. The funding for FP5 . there has been some evidence of success in this regard with an increased total of some 34. throughout industry.has been pursued through a series of Framework Programmes dating back to 1983. ex Article 130f). capitalization and exportability and. involving some 28.Competitive and sustainable growth 3104. innovation is the key. The EU directly undertakes its own research activities (through its Joint Research Centre) and promotes and finances shared-cost or contract research between private companies. well up on previous years. Knowledge-based industries are now outstripping traditional sectors in growth. According to the Commission's research and technology directorate.600 European patent applications filed by EU countries. R&TD has enjoyed its own Treaty Title and EU policy has expressed the clear objective of 'strengthening the scientific and technological bases of Community industry' (Article 163 TEC.is divided between what the Commission calls 'horizontal' and 'thematic' programmes. 1999). Since the SEA.4). industrial technologies. EU action is designed to complement national policy (all EU governments provide clearance. biotechnology. the environment.000 collaborative links (European Commission. these figures confirm 'the central position now occupied by [the EC] Framework Programmes in the landscape of European research' (European Commission. In present shape. 1999c). ECU 13. funding was attached to technological co-operation with non-EU countries (ECU 790 million).96 billion budget (see Figure 5. 2705 2413 -Quality of life and management of living resources 3 600 . and to the training and mobility of researchers (ECU 785 million). As noted in Chapter 3.200 new projects were launched under the Community Framework. If not all of this improved performance can be attributed to the EU Framework Programmes. In information technology. 106 . in 1998.User-friendly information society 2 705.up 4.6. BRITE (industrial technology) and ESPRIT (information technology). Elsewhere. environment and sustainable development 475. Several research development projects have also been in place. The fourth framework programme (1994-98) Under the fourth framework programme.138 million share of the FP5 budget. These priorities have been identified on the basis of a set of common criteria reflecting the major concerns of increasing industrial competitiveness and the quality of life for European citizens. 78% of revenue comes from products that did not exist two years ago (EUR-OP News. dissemination and application of results to small and medium-sized enterprises (ECU 600 million). twenty-three key actions are to be resourced under a €14. for example.Promotion of innovation and encouragement of participation of SMEs 1280-Improving human research potential and the socio-economic knowledge base 1020-joint Research Centre Figure 6. technological development and demonstration (RTD) activities for the period 1998-2002.000 partners and creating more than 90.Energy. it is nonetheless noteworthy that. The fifth framework programme (1998-2002) The fifth framework programme (FP5) sets out the present priorities for the European Union's research. The overriding aim was to make the Community activities more selective so as to increase the economic spin-offs from Community research and to enable European industry (and subcontractors) to go back on the offensive in international competition. policy aims to encourage industrial competitiveness by the promotion of R&TD activities and to co-ordinate Community-wide research efforts.

The most recent of these was adopted on 14 November 1996 to cover the period 1997-2000.are working on six biotechnology projects involving lactic acid bacteria (micro-organisms that develop in milk) and the improvement of food product qualities and safety. • to enhance SME competitiveness and improve access to research. At its meeting in Luxembourg on 2 and 3 December 1985. thanks to the support of the ESPRIT programme and of two German lens and glass companies. The first measure establishing Community enterprise policy was the organization in 1983. The EU is encouraging European firms to take full advantage of collaborative research activities and. individual action areas include the acquisition of critical technologies for aeronautics (aerodynamics. and • developing the EU's own Joint Research Centre. 1996): • to simplify and improve the administrative and regulatory business environment. made persuasive claim that.) and the development of economical. the Dutch company ASM Lithographies has become a global market force in the printing of the integrated circuits found in microprocessors. following a proposal from the European Parliament. A new SME 'task force' was set up in June 1986 and a concerted programme was launched later that year with two overriding aims: creating a favourable environment for SME activities and providing services to support growth and to maintain their flexibility. enterprise policy objectives have been pursued through three multi-annual programmes adopted between 1994 and 1996. Pirelli is now positioned to exploit new commercial advantages from a steel cord-rubber adhesion technology developed with Rhone Poulenc Chimie and scientific partners in the BRITE-EURAM Euro-tyre project. Within this framework. This now provides the legal and budgetary basis (€127 million) for the Community's SME policy actions with the following principal objectives (European Commission. innovation and co-operative agreements. Despite this. two elements of enterprise policy are considered subsequently. For example.int/en/comm/ dg23/guide_en/index2. Since these foundations were put in place. Participation in such projects may also sow the seeds for profitable collaborations and/or for independent corporate growth. is putting up the money. since the inception of Community R&D activities. Its insistence on transnationality promotes cross-border activity (at least two partners from different EU countries must participate in a project) and proposals are evaluated on merit. It was also at this stage that the new Directorate-General XXIII for Enterprise was established. In Starlab for example. thereby creating a technical distinction between industrial policy and enterprise policy. services and initiatives here are comprehensively profiled by DG XXIII at the following URL location address: http://europa. innovation and training. In the context of present analysis. On the first point. • to improve the financial environment for enterprises. Focus is on: • life science (six key actions). there is renewed optimism that Community R&TD efforts are now more commercially driven and better targeted. The different elements. growth and co-operation. Of course the failure of high-profile projects such as High Definition Television (HDTV) has added fuel to the critics' fire.htm. For some. The single clearest manifestation of this has been the establishment of a separate Directorate-General (and Commissioner post) for Enterprise. improving the administrative. the EC has concentrated unduly on precompetitive research (lying between basic research and applied commercial development) and has been slow in moving R&D close enough to the market. and with modifying company law.thirteen of them industrial companies . competitive and regulatory environments of smaller businesses. Critics of the EU's technology policies have. Enterprise policy The Commission has addressed many of its recent communications in the different policy fields towards the specific needs of small and medium-sized enterprises (SMEs).822 million share of FP5 funding and encompass twenty-two of the twenty-three new 'key actions' and the areas of research that they cover. in many cases. On the second. Pirelli claims that tests have demonstrated the superiority of the new wire-rubber adhesion system and that it will be incorporated into its next generation of top-end car types. however. In another case. The thematic programmes attract a €11. company formation and growth. and given earlier commentary on SMEs in Europe. and the allocation of more resources to the policy. fifty-six partners . flight mechanics etc. • to promote entrepreneurship and support special target groups. there has been lots of research and little development.eu. 107 . and • energy and the environment (eight key actions). not proportional to member state quotas. of the European Year of Small and Medium-Sized Enterprises and Craft Industry. tax and regulatory environments. • confirming the international role of Community research. particularly in relation to export procedures. Critics also point out that the EU's research budget continues to represent only about 5% of overall civil R&D spending in Europe. These and other projects are significant in their promotion of innovation and adaptation in European commercial sectors and directly involve a small community of innovative firms. The 1986 initiative was followed up in 1989 with a new Council Decision on the improvement of the business environment and the promotion of enterprise. the Commission concerned itself with fostering entrepreneurship. • to help SMEs to Europeanize and internationalize their strategies. efficient and clean technologies for road and rail vehicles. • the information society (four key actions). the European Council decided to institute an assessment of the impact of Community proposals on SMEs and the preparation of measures to simplify their administrative. • sustainable industrial growth (four key actions). The broad aim has been to initiate further expansion and to create the optimal competitive environment for SME business success. training and information initiatives figured large.• ensuring SME research promotion.

at the end of 1973. Research and Development: Integrating SMEs In the light of the preceding analysis. BC-NET handles both confidential and non-confidential requests and takes the inexperienced or building enterprise through a series of stages. This policy has been a considerable success. The Member States. This has resulted in organizational contact schemes such as 'Europarternariat' and the establishment of 275 European Business Information Centres (EICs) across the EU. oil and nuclear energy markets have been largely achieved thanks to Community policy. The Treaty rarely set objectives in areas not viewed as vital for the completion of the common market and at the time oil did not swing the economic weight which it acquired in the coming years. horizontal programme number two. with the Community attaining its main objective of reducing to around 40% dependence on imported oil. the threat of crisis passed unnoticed until 1973. it is also noteworthy that the Commission has actively encouraged the inclusion of SMEs in the Community R&TD programmes. This impression arises chiefly from confusion between energy policy and oil supply policy. reflecting different national energy situations. The Community adopted mea sures to give it a clearer insight into the oil market. It must also be acknowledged that the system of production licences for international oil companies lulled everyone into the idea that energy supply security was not a problem as such. But it is only a part of energy policy. at Community level.000 SMEs in the R&TD activities in the first four framework programmes. However. financed technological development projects to work the oil resources in the North Sea and rationalised energy consumption. after 1974 supply security moved to the top of priorities in the Council's Resolutions on energy policy and targets were set for the reduction of dependence on imported oil. It cannot be denied that the common coal. But even after the illusion was shattered. Indeed. Co-operation initiatives have in fact been paid reasonable attention since the early days of EC enterprise policy with the formation of the BRE correspondents network in 1983 and the BC-NET network of business counsellors in 1988. This implies that the EICs will refer businesses to other specialized networks or organizations when very specific assistance is required. The latter is clearly of vital importance and is still lacking. and this is their main failing. Brussels Enterprise and Research staffs have published statistics claiming that Europe's SMEs are innovating twice as much (per employee) as large companies. Some theorists argue that research monies should be channelled into larger grants and concentrated on fewer advantaged players. 'Promotion of innovation and encouragement of participation of SMEs'. The Europarternariat scheme is designed to encourage small and medium-sized businesses from all over the Community (and third countries) to establish business relationships with their counterparts in less-favoured regions or those suffering from industrial decline. at the peak of the Gulf crisis in January 1991. On average. the Commission has placed great emphasis on the record of involvement of over 12. often linked to existing organizations such as chambers of commerce. this typically encompasses the design of a co-operation profile and the registration and circulation of various details via the BC-NET database. have proven unable to conduct a coherent policy towards their main oil suppliers. Energy Policy There is a general impression that Community energy policy is nonexistent or at best inefficient. biannual events are organized where heads of SMEs from external regions which meet the specific criteria for participating in the scheme are brought into contact with those in the host region. the advantages of which cannot be denied. in a system diametrically opposed to the one existing for agriculture.and full-cost services in their search for financial. The European Commission. there is no proof that larger institutions are better placed than smaller ones to develop or to profit from new technologies and this kind of thinking has been flatly rejected by the Commission. The fact that the EEC Treaty did not provide for such a policy is often forgotten. 30-40% of enterprises in the host region conclude co-operation agreements as a result of a Europartenariat conference. Under FP5. set up mechanisms to defuse crisis both before and after the horse had bolted. Nonetheless. has appointed EICs as 'first-stop shops' providing a first port of call for expert service and advice. technical and commercial partners across Community borders. Although varying from case to case. Another fact often overlooked is that in thel960's. It was a political decision. even with hindsight of the post-1973 events. will also make better use of research results by smaller firms and create a single entry point for SMEs to EU programmes (EUR-OP News. the Commission has taken it upon itself to co-ordinate information provision to ensure that firms are fully aware of their rights and opportunities in the European marketplace and to put Europe's SMEs in easier contact with one another. As a consequence. tightened up compulsory storage provisions. the Community had at its disposal oil reserves 108 . which is anxious to exploit the potential of EICs for the maximum benefit to SMEs. Under the programme.Communication and SME co-operation In achieving many of its enterprise policy aims. and despite the Commission's warnings to the contrary. 1999). part. notably oil supply. But their exist ence tends to be taken for granted and similarly significant achievements are expected in the area of supply. These initiatives assist SMEs (of any kind) with defined free. the policies conducted by the Member States separately and by the Community as a whole were for many years fragmented. Technology stimulation measures for SMEs were actually introduced in twelve of the specific RTD programmes under FP4 and there is a specific SME unit within the Commission services responsible for RTD. all the Member States chose to boost industrial growth through low energy prices rather than promoting indigenous energy production by high prices. This preference for the industrial rather than energy sector culminated.

with possible implications for fuel prices. in the foreseeable future. Its case was at least partially upheld by the Court of Justice in its ruling of May 22. The absence of a single market in energy is a serious competitive disadvantage for the businesses of the European Union as compared with those of its main trading partners. The Council's failure to act was chiefly due to an absence of political commitment to pushing economic integration in this field. prosperity and quality of life in the industrialized world. were likely to 109 . both as regards the alignment of competition conditions and as regards social policy and traffic safety. Thanks to the increase of internal production . the EU should use its international weight to persuade other major industrial competitors to follow suit. national experts. This is why a policy framework is needed in which Member States are working towards agreed common objectives. closely coordinated with other Community policies. Given the different energy situations and energy policies of the Member States. the problems have not gone away. Economic progress in the developing world will lead to major increases in global energy demand. The 1998 energy framework programme is a good instrument for the development of a more focused and integrated Community energy policy. However. As a consequence. sustainable and competitive sources of energy is essential to economic growth. These problems can only be mitigated through concerted international effort to develop promising technologies and new energy sources. the Community policy succeeded in harmonising admission conditions to the profession of transport operator. who prepared the Council meetings. whereas all polluting industries of developed countries should be equally concerned. Transport Policy Until the end of the 1980s. However. notably the development of nuclear. The availability of secure. The intemalisation of external costs could be achieved through fiscal measures such as the C02/energy tax proposed by the Commission. the Community's Fifth Action Programme for Sustainable Development takes the view that the best and most efficient way of integrating environmental concerns would be the intemalisation of external costs and benefits. despite these improvements. Thus at the beginning of the 1980s. Therefore. in abolishing fare. by their very nature. but since such a tax would risk to penalize the European industry alone. transport policy did not correspond to the evolution in the economic integration of Europe.and to the diversification of fuels and suppliers. It is true that in the first thirty years of its existence. but also by the welfare of citizens taking account of the employment situation and the state of the environment. the railways were undermined by State intervention. economic performance is not measured only by industrial competitiveness. the Community achievements in the transport sector did not correspond to the energy invested in it or to the clear need for progress on a policy expressly mentioned in the Treaty of Rome as a crucial cornerstone of the common market. played a very important role in examining the Commission's proposals. These difficulties were further complicated by the often very technical nature of the questions discussed. it is probable that. fiscal and other such discrimination. a commitment to make more systematic use of energy sources with low or no C02 emissions and a reduction in the impact of the use of energy sources with high C02 emissions. Viewed from this angle. It will certainly be called to make a greater contribution than it has done in the past to the achievement of the main objective of the EU Treaty. However. and could increase the already adverse effects of energy consumption on health and the environment of the planet.representing more than 100 days of consumption and therefore enjoyed a breathing space of several weeks before it would have been obliged to take the binding measures provided for in the crisis mechanism of the International Energy Agency. the ever-closer union of the peoples of Europe. with notably the introduction of compulsory maximum driving periods per day and per week. renewable sources and clean technologies. it must be admitted that this field was particularly rough. Community social regulations in the area of road transport represent considerable progress. the market for goods carriage by road remained boxed in by a quota system. such as a sustained commitment to energy efficiency and energy saving. In view of the expected growth in demand for energy worldwide. However. This point was forcefully made by the European Parliament's proceedings against the Council for failure to act. while harmonising to a certain extent competition conditions for inland transport. It is also probable that the Community energy policy will be faced with major challenges in the near future. a sharp shift away from the present favourable world energy situation could have a catastrophic impact on the internal market and on the economies of the Union. Energy is certainly an important factor determining the economic performance of a country or of a group of countries such as the EU. which still charge the society at large with a large part of the cost of polluting activities. the Union is now in a much more comfortable situation than the one the Community has experienced in the mid-1970's. notably the environment and enterprise policies. assisted by Community financial and fiscal measures. increasing use will be made of all potential energy sources. Since these proposals. This fact helped to prevent any upsurge of panic in the Community. The diversity of structures in the five modes of transport was further heightened by the variety of situations in which they operated in each of the Member States. transport infrastructure was not planned at Community level and sea and air transport remained outside the Community's action scope.1985. The reduction of greenhouse gas emissions requires common policies.notably in the North Sea .

As regards air transport. transport liberalisation involving the arrival of new entrants and greater competition between operators. no one would have dared hope that within the next decade. The main concern for the future is even greater saturation of the Community's airports and air corridors. the European Union must find the answer to several challenges in the field of transport. In general. the external costs. as are generally viewed by the public the successes of European integration. which is the carrier for 85% of the EEC's external trade. most companies have achieved considerable productivity improvements. Additional routes have been opened. therefore. be expected soon concerning in particular transport pricing and environmental costs. This internalization of external costs would ensure the development of an environment-friendly and therefore sustainable transport system. basic fares are still too high if compared to those in other regions of the world. which should be environmentally and socially acceptable and should provide a high level of safety for users and transport workers. air safety should be enhanced through the creation of a European aviation safety authority. it must face the problems caused by the saturation of existing networks. particularly in three fields: road haulage. access to the market is still too difficult. transport policy stepped on the accelerator in the middle of the 1980s. In view of the Amsterdam Treaty obligation to integrate the sustainable development and the protection of the environment into all Community policies. maritime transport and combined transport. largely because of heavy infrastructure charges and airport fees. At the same time. including safety and environmental protection. Following the completion of the internal market. the costs of air transport remain high. To meet this challenge. but which need to be coordinated at Community level. achieving more equitable working conditions and better environmental protection. airport runways capacity is limited due to a substantial increase in air traffic. adopt a global approach consisting of going beyond the internal market and promoting an integrated transport system. the Community should have competence to negotiate and act in areas which concern the internal market. To answer these challenges the Community should adopt an overall approach combining: improvements to infrastructure and means of transport and their more rational use. all. very often there was exaggerated defence of national interest and sectoral perception of the problems which did not make sufficient allowance for the requirements of Community integration. Whether under pressure from the European Parliament and public opinion or the need to integrate transport into the post-1992 Single Market. while guaranteeing free access to ocean trades and progressively to cabotage. These developments should also tend to improve the accessibility of peripheral or disadvantaged regions in the interest of the economic cohesion of the Union. with the most efficient cabotage hauliers being the most active. have created jobs and have seen a return to profitability. new companies created. which are now largely paid by society. In any case. good developments. They also agreed to fight unfair tariff practices and unsafe seafaring methods. 110 . Common transport policy must. The fact that the liberalization introduced gradually since the early 1990s has had little impact on the road haulage market. To give a fair chance of success to this new approach. the liberalization measures completed in 1992 have had a major impact on competition between air carriers.upset the apple cart in transport systems and the economic policy concepts of the Member States. engenders important structural changes. Nevertheless. Despite the fall in fares. revitalization of rail transport and promotion of inland waterways. At the beginning of the 1980s. Developments of this policy should. such as access to this market of third-country operators and rules applicable to international transport. In the area of maritime transport. liberalization and integration serve each other. the uneven modal split and increasing pollution caused by most means of transport. On the external front. new services introduced and monopolies put under pressure. since road transport is one of the essential cogwheels of the Single Market. especially the United States. technical innovations and new investments. maritime transport and air transport. the sustainable development of air transport and environmental considerations in external transport relations. The greatest breakthrough for Community transport policy has undoubtedly been in the area of liberalizing international road haulage services. certainly. this is viewed as something totally normal. enhancing the safety of users. In particular. the Member States undertook to apply the rules of free competition and the principle of free provision of services to this sector. should be internalized. a situation which is not expected to change following the Cabot age quotas in 1998. mainly due to bilateral agreements between the Member States and third countries. shows that the fears of some Member States of the common transport market upsetting their national markets were exaggerated. environmental requirements should be integrated into the common transport policy. thus. all the quotas applicable to cross-border transport within the Community would be replaced by a system of Community licenses issued on the basis of qualitative criteria.

Since this date. The Commission's proposals fired the starting gun for the hard-hitting negotiations in the Council. 92 to 94 EEC. which became known as "agricultural marathons". the common agricultural market was able to be an integral part of the customs union created on July 1. The Treaty was also prudent as regards the applicability of competition rules to the agricultural sector. despite their different points of view and different situations as importers or exporters of agricultural produce. they must be set above world prices but not at a level encouraging over-production2. fruit and vegetables and wine were in place. succeeded in reaching a general agreement on the protection of the common agricultural market against distorted external competition. 85 to 91 EEC. It stipulated that a conference of the Member States was to be called by the Commission as soon as the Treaty had entered into force to enable the Member States to compare their agricultural policies and consequently come to an agreement on an outline of the common agricultural policy. guarantee of a fair standard of living to farmers. however. after many "marathon sessions". aid to agriculture has been treated by the Commission in the same way as all other national aid. but that the family nature of European farms should be preserved. market stabilisation. In order to attain these objectives. The Member States became obliged to notify the Commission of all aid granted to agriculture as early as 1962. and its first proposals for common market organizations in June 1960 were built on the foundations laid at Stresa. In order to press its points of view France under de Gaulle practiced for seven months an "empty chair" policy in the Council and thus blocked any new Community initiative. Thanks to these decisions. the Commission turned its attention to structures. beef and veal and dairy products. It is interesting to note that it is always this last and most stringent concept that has been applied to the common organisation of agricultural markets. certain common market organisations assigned specific functions to producers' groups. Article 40 of the EEC Treaty (actual Art. Each of these negotiating rounds produced a common market organization for the various agricultural products: at the beginning of 1962. the Council was able to make fresh progress on the common market organization for practically all-agricultural products. Work on the common agricultural policy only got back on track after the Luxembourg compromise of January 28. The other Articles of the Treaty devoted to agriculture were chiefly transitional provi sions. which shook the whole Community. 34 TEC) called for the common organisation of agricultural markets which. its structures should be overhauled. Indeed. that for common farm prices to offer a decent standard of living. Agricultural officials from the six signatory States. compulsory coordination of the various national market organisations or European market organisation. in a Council agreement on Commission proposals for the financing of the agricultural policy1. was of special importance. in May 1966. however. as it turned out. eggs. Art.1968. The Commission's first drafts of the common agricultural policy. The Stresa Conference clarified the agricultural objectives of the Treaty. supply security and reasonable prices for consumers. Article 43 EEC (Art. submitted to the Council at the end of 1959. 81 to 86 TEC) should also be applied to agricultural undertakings. the Council decided that the Treaty competition rules applicable to undertakings (Art. could take one of three forms: common coordination rules. the applicability of the general Articles on competition was subordinated to specific provisions of the common agricultural policy. 87 to 89 TEC) became applicable to agricultural markets as and when common market organisations were established. Many of the market organisations consequently incorporate specific provisions on national or Community aid. As early as 1962. on the need for a structural policy and a farm price policy and on the principle that farmers should be paid in a manner comparable to workers in other sectors. adopted in April 1972 the Directives of the first reform of . However. 39): higher agricultural productivity. stipulating that for European agriculture to be internationally competitive. it was to the credit of the young Community that by the end of 1963 a common market organization existed for almost 85% of the agricultural output of the then six Member States. Competition rules for State intervention (Art. those for cereals. CAP reforms With most of the major decisions on the common market organisation thus taken. It culminated. Three years later. otherwise known as the Mansholt Plan after the Commissioner who had inspired it. 36 TEC). This conference was called by the Commission in Stresa in July 1958. thus coinciding with the customs union for industrial products. 1968. In December 1968 it submitted to the Council a "Memorandum on the reform of agriculture in the European Economic Community: Agriculture 1980". the Council. Art. however. On this basis.1966. pigmeat and poultry meat. the completion of the common agricultural policy required the Community to take control of the Member States' expenditure under the common market organizations. thus involving them in the common policy1. Only cooperatives and farming associations could be granted a special regime. Despite the difficulties encountered in satisfying all the varying interests. 37 TEC). The Commission suggested in March 1965 that the common agricultural market be completed on July 1.Common Agricultural Policy CAP foundations and reforms The objectives of the common agricultural policy are specified in Article 33 of the EC Treaty (ex-Art. According to Article 42 (actual Art. they were followed at the end of 1963 by those for rice. the Council failed to meet its deadlines and the Community lived through the most serious crisis in its history. the CAP came upon its first and only serious crisis. depending on the product. This agreement under its belt. a sector where State intervention was rife.

the desire for a more environment-friendly and quality-oriented agriculture. reached a political agreement on the Commission's proposals for the third reform of the CAP. has made possible the liberalization of international trade through the GATT Uruguay Round of negotiations. encourage the early retirement of certain categories of farmers with the transfer of their land to other uses and facilitate the use of farmland for other purposes. OJ L106. . After several agricultural "marathons". To face these problems. the interest of the consumer for lower prices and safer food products. withdrawal of part of the land for major crops. But other problems also emerged. and structural measures in favour of afforestation. this approach was justified for a variety of reasons: the danger of further market imbalances. the Commission considered it necessary to continue the 1992 reform of the CAP and press ahead with the transition to world market prices. Through this profound revision of its agricultural legislation. 1988. in 1991. 23.the integration of new Member States and the reinforcement of the European Union's position in the future multilateral trade negotiations at the WTO. The reform package included a set of regulations that aimed to develop a more modem and sustainable European agricultural sector.04 1988 113 . the prospect of a new round of trade negotiations within the WTO. which gave the green light to the "Delors package". because technical progress allowed a large increase of agricultural output despite the restrictions. The agricultural budget should be restricted to an average of EUR 38 billion annually for market policy (including veterinary and plant health measures) and EUR 4. . contributing to the preservation of natural resources and the natural and cultural heritage of the countryside. the third reform of the CAP was not the last. 2.the CAP dealing respectively: with the modernisation of farms. budgetary discipline. At the same time.1972 Council Regulation 1094/88. 2.an agricultural sector that is sustainable in environmental terms. The other structural measures which were adopted later on covered mountain and hill farming and farming in certain less-favoured areas. such as afforestation or leisure. capable of generating employment opportunities for the rural population. the Council decided to increase measures to conserve the environment and landscapes. the Council. The Council upheld the three guidelines proposed by the Commission: a substantial cut in the target prices of agricultural products in order to make them more competitive on internal and external markets. resulted in the fourth reform of the CAP. Thus the new CAP seeks to promote: . Council Directives 72/159. including the EAGGF Guidance section. the diversification of agriculture and incentives for the set-aside of farmland. Acting on this European Council agreement. the Commission. The political agreement of the Berlin European Council on Agenda 2000 in March 1999. the processing and marketing of agricultural produce and producer groups and associations thereof. __________________________________________________________________________________________ 1. while at the same time ensuring a fair standard of living for the agricultural community. such as permanent surpluses of the main agricultural products and continuing imbalances in the Community. proposed a much more radical reform of the market mechanisms.04. in April 19882: market related measures.a competitive agricultural sector which is capable of exploiting the opportunities existing on world markets without excessive subsidy. According to the Commission. last but not least. However. In its outlook document of 15 July 1997 called "Agenda 2000". the Council of Ministers adopted the measures necessary for a new reform of the common agricultural policy.an agricultural policy that establishes a clear connection between public support and the range of services. . the level of agricultural expenditure. thus ensuring that agriculture can be maintained over the long term at the heart of a living countryside. This package covered. full and sustained compensation of this drop in farmers' income by use of means of production (set-aside of arable land. limits on livestock numbers per hectare of fodder area). measures to encourage the cessation of farming and the reallocation of utilised agricultural area for the purposes of structural improvement and the provision of socio-economic guidance for and the acquisition of occupational skills by persons engaged in agriculture1. OJ L 96. in addition to reform of the common agricultural policy. But since the impact of this set of measures proved to be too small.1992. . which is the world's biggest trading entity. consumers and society as a whole.the maintenance of vibrant rural communities. particularly through a substantial drop in the common support prices for cereals and beef and veal offset by an increase in income premiums for Community farmers 1. 72/160 and 72/161. the system of own resources and the reform of the Structural Funds. . This means that the CAP is henceforth targeted not just at agricultural producers but also at the wider rural population. such as the system of stabilisers (maximum guaranteed quantities) and the co-responsibility levies. the second CAP reform recommended by the Commission was approved by the Brussels European Council on February 11-13. on May 21. the Community.3 billion for rural development measures. the prospect of enlargement to the countries of Central and eastern Europe and.production methods which are safe and capable of supplying quality products that meet consumer demand and reflect the diversified and rich tradition of European food production.

a highly important factor for building a consensual policy in a sector involving very different interests. Once a Commission proposal for a Regulation in the area of common agricultural policy has been put before it. the most important of which are: the Committee of Agricultural Organizations in the European Community (COPA). which takes a decision without consulting either the European Parliament or the Economic and Social Committee. The Commission. The socio-economic interest groups represented in these committees are: agricultural producers. However. The advisory committees give an opinion on the proposals put before them during the drafting phase within the Commission. in particular. 114 . which are applicable on average for a few weeks or a few months. independence and transparency. whereby the Commission acts after having received the opinion of the relevant management committee. as for other areas of Community activity. joint management. common external protection. In the area of agriculture. is based on the three principles of excellence. an umbrella body for farmers. the advisory committees enable the Commission to learn the views of interested parties on the major sectors of farm policy (arable crops. The European Centre for Promotion and Training in Agricultural and Rural Areas (CEPFAR) seeks to promote information and the basic and advanced vocational training of agricultural experts. The implementation provisions for basic regulations and management measures in the strict sense of the term. farm workers and workers in the food industry. The Commission rapidly felt a need to be better informed on specific problems in each agricultural sector. The Commission. After adoption of the basic regulations by the Council comes management of the common organisations.g. the power to make proposals. Management committees comprise representatives of the Member States dealing with a specific sector. One of its tasks is to coordinate the work of the scientific committees to provide an overall view of consumer health matters. Management is either the joint responsibility of the Commission and Council or that of the Commission alone.) and they are often seen by their members as opportunities for dialogue and participation in decision-making. However. and whenever a matter of special relevance to one of them arises. There is a management committee for each category of product: cereals. it has set up an advisory committee for each product or product group falling under a common market organization. and consumers.e. common support instruments for these prices. the Commission cooperates closely with farmers professional bodies to ensure that allowance is made for their interests in the drafting of common policy and the management of the common market organizations. agricultural cooperatives. animal products. This is why a large number of professional farming bodies operate at European level. acting in accordance with the Treaty. Scientific committees are advisory committees of a different type.CAP management and financing The unity of the European Union's agricultural market requires common prices. the Council entrusts the preparation of its proceedings to a committee of senior officials known as the Special Committee on Agriculture (SCA). for which the European Commission has responsibility. as part of the process of implementing the common market organizations. e. and the Commission of the Agriculture and Food Industries (CIAA). the full procedure is used: the Commission after consulting professional organisations submits a proposal to the Council. which takes a decision after consultation with the European Parliament and very often the Economic and Social Committee as well as the Committee of the Regions. They give their opinion on the Commission's plans for the management of agricultural markets. etc. joint financing and. and the Commission consults them whenever there is a legal requirement to do so. A Scientific Steering Committee (SSC) has a multidisciplinary role. which represents farm cooperatives. the agricultural products and foodstuffs trade. a medium-length procedure is used: the Commission proposes measures to the Council. For long-application management provisions. The genesis of any agricultural policy measure is a Commission proposal. In addition. such as adjustments of market mechanisms or of basic criteria. A vast number of experts are involved in drafting and implementing the common agricultural policy. For general policy decisions such as the annual setting of farm prices. i. on transmissible spongiform encephalo-pathies. is also invested with the power of initiative. naturally consults the European Parliament and the Economic and Social Committee. are adopted by the Commission using a procedure known as the "Management Committee" procedure. As a consequence. since they give advice to the Commission on the very important matters of consumer health and food safety. which is in no way binding for the Commission. the SCA assumes the role normally fulfilled by the Committee of Permanent Representatives COREPER. representing these industrial sectors. undertaken in application of the basic regulations. and to deliver scientific advice on matters not covered by the mandates of the other scientific committees. the General Committee for Agricultural Cooperation in the EEC (COGECA). the agricultural and food-manufacturing industries. Eight committees meet about ten times a year. consultation of these large general organizations tends to be on the mainstream policies of the CAP. of the SSC. The operation of the scientific committees and. The ESC is made up of representatives of the various socio-professional categories and farmers are therefore also in its midst. No vote is taken for the advisory committee opinion. in general.

In cases where the Commission is empo wered by the Council to take decisions after consultation of a management committee. Thus. the Regulation on the financing of the common agricultural policy provides for rural development measures to be financed by either the Guarantee Section or the Guidance Section of the EAGGF. within the time limit. the committee's opinion is binding on the Commission. etc. EAGGF management falls to the Commission. At the end of the financial year. it must pass the proposal on to the Council immediately. common veterinary or plant health standards. etc. which it intends adopting. which fall under the EAGGF Guarantee Section). beef and veal. the Guarantee Section provides for co-financing of rural policy in rural areas covered by the new Objective 2 and in rural areas outside Objectives 1 and 2 of the Structural Funds. If the Council has not acted by the end of the period. The EAGGF Guidance Section co-finances the Community initiative for rural development. according to the regional context . Management of expenditure in the EAGGF's Guarantee Section is anchored in a system of advance payments to the Member States. the Commission may not take a decision.milk products. which cannot adopt the measures unless the committee's opinion is favourable. Although the Commission has sole responsibility for EAGGF management. Regulatory committees play a role similar to that of the management committees for decisions about the regulations that apply in general areas such as food law. 1962 during the first agricultural marathon. pay the expenditure required under the EAGGF Guarantee Section. CAP financing Article 40 of the Treaty of Rome (Art. or when no opinion is delivered. which has one month to adopt a different decision by a qualified majority1. The Fund's Guarantee Section finances. 34 TEC) .declared that one or several agricultural guidance and guarantee funds should be created to enable the common organisation of agricultural markets to fulfil its goals. with annual clearing of accounts. Indeed. the measures initially proposed are adopted by the Commission. to the relevant committee in good time. which deals exclusively with matters relating to the guarantee section of the European Agricultural Guidance and Guarantee Fund. it must submit a draft of the measures. wine. even a provisional one. The Commission places at the disposal of the Member States the funds necessary so that the agencies appointed by them can. on the same proposal or different measures. The composition and the voting arrangements are the same as for management committees.devoted to the gradual development of the common agricultural policy . the Commission can proceed with the adoption of the planned measures. the Member States forward to the Commission their annual statement of expenditure together with an attestation regarding the 115 . or amend it by unanimity. early retirement. The committees vote by qualified majority. which assists the Commission with the management of the EAGGF guidance section. and the Committee on agricultural structures and rural development (STAR). it nevertheless passes through the channel of state organisations or agencies in the Member States for the payment of intervention expenditure on the Community's agricultural markets. described above. Only expenditure incurred by accredited paying agencies may be the subject of Community financing. expenditure on the agricultural market organisations. such as regulations applicable to agricultural markets or price and income support policy. fruit and vegetables. which is assisted by the EAGGF Committee. Should a negative opinion be given. When the committee delivers an unfavourable opinion on the Commission's proposed measures. but the arrangements on the financing of the common agricultural policy were finalized in 1970 . made up of representatives of the Member States and chaired by the Commission. On January 14. known as LEADER and measures covered by Objective 1 programmes (excluding agri-environmental measures. the Council rejects the proposed measures by a simple majority. The paying agencies make payments to beneficiaries in accordance with the Community rules. If. the rural development measures that accompany market support and rural measures in certain regions. the Commission cannot take any decision. however. The Committee is consulted on either an obligatory or optional basis on all matters affecting the EAGGF in the framework of the "management committee" procedure. The Fund was set up in 1962. However. the Commission can adopt the measures but must notify them to the Council. If the committee issues a favourable opinion or no opinion at all. The Council must act within a period laid down in each instrument to be adopted by it. in particular. Very important management committees are notably: the Committee of the EAGGF. in accordance with Community rules. forestry-related measures and the aid scheme for agriculture in less-favoured areas. as well as the dissemination of information on the common agricultural policy. the Council opted for the creation of one single fund to finance all Community market and structural expenditure in the various agricultural sectors: the European Agricultural Guidance and Guarantee Fund (EAGGF). It may adopt the proposal by a qualified majority. it may consult the committee again. These advance payments take the form of a lump sum for each Member State and are paid into a special "EAGGF Guarantee" account opened by each Member State with its Treasury or another financial institution. but this period may in no case exceed three months. The Guarantee Section finances also specific veterinary and plant-health measures.

it is essential for the credibility of the CAP that proper systems are in place to ensure that these funds are spent correctly and to prevent fraud.completeness. but also through the simplification and transparency of aid schemes for farmers. However. who can use their national currency (the dollar) for export transactions. the Commission must. The introduction of the euro. It may also make available data which is important for the management of the meat market. Like their American counterparts. there is no need to stress the importance of this last point. not only by simplifying its procedures and reducing its budget costs through the abolition of the green rates. European enterprises now have the Euro and 116 . the euro exchange rate is used for the necessary conversions into their national currencies. The financial consequences of irregularities are. price stability and increased competitiveness in Community agriculture. led to a major reform and simplification of the agrimonetary system. the EAGGF must cover half of the compensation actually paid. If the systems put into place by a Member State prove to be unsatisfactory. In the case of the other Member States. Under the IACS. it has reinforced physical checks at the export of agricultural products having obtained a refund and provided for customs checks to be targeted on high-risk sectors. who therefore have the main responsibility for administering payments and checks on payments. The use of the euro benefits the CAP. Approximately half of the EU budget goes towards financing the CAP. the euro ended the need for a system to dampen currency fluctuations in the agri-food sector. matching the amount that the Member State actually contributes. facilitating both sanitary and veterinary checks with a view to protecting consumers and run checks on the correctness of payments made to farmers. The 1992 reform of the CAP includes provisions for each Member State to set up an integrated administration and control system (IACS) for direct payments. The Member States. aid too is paid and collected in euros 1. European taxpayers have a right to expect that all public money is spent efficiently. and even to count olive trees. advanced software can be used to identify and measure individual parcels. Fraud often hits the headlines in the Member States and fuels the criticism of the CAP'S opponents. Their conversion into the national currency unit uses the irrevocable exchange rate fixed on 1 January 1999. whether this be under national or EU budgets. A response to the problem has been given by a Council Regulation which requires the Member States to themselves scrutinize the transactions forming part of the system of financing by the Guarantee Section of the EAGGF. In the case of compensation for a drop in prices or other aid. The Council has also established a legal framework making it possible to identify unreliable economic operators in the field of export refunds and of sales at reduced prices of products held in public storage ("black list") and to make them known to the national authorities concerned. the Community co-finances action programmes by the Member States designed to improve their struc tures for monitoring EAGGF Guarantee Section expenditure. under the clearance of accounts procedure. have introduced advanced techniques to map land surfaces and verify land use. however. the Council established a control system using satellite pictures and air photographs of agricultural land benefiting from EAGGF subsidies.with the help of the EAGGF Committee mentioned above . Agricultural prices and aid in the participating Member States is paid in euros. After the disastrous experience of the mad cow disease. Thus. on 1 January 1999. most of this expenditure is managed by the Member States. Commission auditors verify that Member States' payment and audit systems are reliable and that they meet Community standards. notably export refunds. Once satellite images and aerial photographs are placed on computer file. The knowledge that at any time a "spy in the sky" can check a claimant's fields acts as a powerful disincentive to fraud and irregularity. the identification and registration system also facilitates veterinary health surveillance. As seen above. Indeed. However. Agricultural conversion rates have been discontinued. Electronic animal identification may contribute greatly to the efficient traceability of animals in the EU. using tamper-proof ear-tags. Bovine animals must be identified with a number shortly after birth or entry into the Community. Given the size of the agricultural budget. Member States set up computerized databases to enable electronic crosschecks and on-the-spot checks of holdings. refuse to finance all or part of the expenditure concerned. For those Member States the value of a payment is determined by the exchange rate on the date of the operative event (a price or an aid) and not on the date of actual payment. In this context. Computer analysis of the aerial or satellite photographs can check the information in a beneficiary's claim form. in co-operation with the Commission.to make sure that efficient systems and procedures are set up at national level that the accounts presented by the Member States are correct and complete and that expenditure complies with specific rules and regulations. borne by the Community.6% of Community GDP. unless they decide to make payments in euro. The Commission clears the accounts of the paying agencies and presents a financial report on the administration of the Fund to the Council and Parliament. or around 0. to verify the crops grown. the health of the livestock and hence the health of European consumers. unless government departments of the Member States are responsible for the irregularities or incorrect payment of sums. In the case of livestock. accuracy and veracity of the accounts transmitted. Recovery can be made for individual cases where irregularities have been found or where systematic failures are revealed. and on-farm inspections can thus focus on land parcels where discrepancies are detected. it is clearly the Commission's responsibility .

The third basic principle of the common agricultural market is that of financial solidarity. Market unity supposes common agricultural prices throughout the EU. Community preference and financial solidarity. in order to protect the common market against low-price imports and fluctuations in world prices. It is implemented through the intermediary of the European Agricultural Guidance and Guarantee Fund (EAGGF) and signifies that the Member States are jointly liable as regards the financial consequences of the common agricultural markets policy. 38) defines agricultural products as products of the soil. The market organisation of each agricultural product uses different mechanisms defined by its basic regulation and adopted by the Council using the full-blown procedure but all of them are underpinned by. which came into force in 2000 as a result of the last reform of the CAP. thanks to the abolition of quantitative restrictions to trade (quotas. The reform takes full account of increased consumer concerns over food quality and safety. the common agricultural prices should be attained through the free play of supply and demand so that the only variations in the prices paid to farmers in all regions of the Union result from natural production conditions and distance from main centres of consumption.. along with products of first-stage processing which are directly related to these products. The price gap between the world market and the minimum guaranteed price in the EU was traditionally covered by import levies. there is now one regulation where previously there were twentythree.. The European Union tries to bring the prices of imports into the EU at the prices practiced on the common market. But whereas this was practically always the case with the import levies. sets common agricultural prices expressed formerly in ecu and. taxes and measures having equivalent effect. which are progressively replacing them. These regulations introduced gradual cuts in institutional prices . import monopolies. it is much less certain with the customs duties. spread throughout the world. the second bulwark of the common agricultural market.compensated by income support . it is not to the advantage of European traders to buy supplies from outside the EU and they therefore give preference to Community products. the horizontal rules for direct support schemes and the financing of theCAP. 117 . compliance with minimum standards in the fields of environment. Since the end of the seventies. more often than not relating to price setting and support. The other side of the coin is that the customs duties (which have replaced levies) collected at the Union's frontiers on imports from third countries do not go into the coffers of the Member States but are a source of revenue for the Community budget. which is in conformity with the Agreement on agriculture concluded in the context of the GATT Uruguay Round. Market unity means that agricultural products move throughout the European Union under conditions similar to those in an internal market. on the other. beef. hygiene and animal welfare is a requirement. on the one hand. for instance. At present. thus. Since the European Union organises agricultural markets and defines and applies the intervention measures on them. This principle. in order to support the common prices should there be insufficient demand or external supply at lower prices. The common agricultural market is underpinned by common market organisations (CMOs) which remove obstacles to intra-Community trade and create common protection at the external borders. Both in market support and in the new rural development policy. concern the arable crops. milk and wine sectors. Article 32 of the EC Treaty (ex-Art.are able to invoice their products in the currency in which their costs are also denominated. acting on a proposal from the Commission. since 1999. To the extent that external prices taxed with import duties are at the same level as internal prices. These changes of the common market organisation should also contribute to the progressive integration of the candidate countries from Central and Eastern Europe. The market organization regulations. the new rural development framework. the force of which varies according to product. which after the GATT Uruguay Round are progressively replaced by customs duties. The EAGGF Guarantee Section therefore covers all the expenditure rendered necessary by the common market organisations. Community preference.) and the removal of duties. But in reality. in euro1. The CAP reform contains important elements of simplification in various sectors. The principles of the CAP Three basic principles defined in 1962 characterize the common agricultural market and consequently the common market organizations: market unity. early in each marketing year. livestock products and fishery products.. the common market organisations incorporate intervention measures.with the objective of bringing Europe's agricultural prices into closer touch with world market prices. thereby avoiding an exchange risk. internal market measures. the principle of co-responsibility of producers has been added. and. it is logical that it is responsible for the financial consequences of these measures. almost all the Community's agricultural production is regulated by common organisations. thus helping improve the competitiveness of agricultural products on domestic and world markets with positive impacts on both internal demand and export levels. environmental protection and animal welfare in farming. signifies that products of Community origin are bought in preference to imported products. as will be seen below. by a trade regime with third countries. The Council. In principle. In the wine sector. is enacted through import and export measures.

It is set each year by the Council in accordance with evolution both of the cost of living and of supply and demand on each market1. large quantities of food from intervention stocks are supplied both to designated organisations for distribution to the most deprived persons in the Community and to the undernourished populations of numerous countries in the world. This system was amplified by the 1999 reform. which varies according to the product and helps attenuate the impact of cyclical production variations on prices and guarantee supply continuity3. The guiding principles of the new policy are those of decentralisation of responsibilities . concerning in particular aid for private storage of veal. As decided by the European Council in June and by the Council in July 1996. the reduction of price support was compensated by the support of the revenue of the farmers. in order to face the consequences of the mad cow disease (Bovine spongiform encephalopathy -BSE). For fruit and vegetables. in their role as intervention organisations. the Community provided a total of ECU 850 million to help those farmers affected by the crisis3. to charities or for destruction until such time as more sluggish supply triggers a recovery of the market prices. the creation of a computerised database in each Member State and the labelling of beef and veal and of products derived from them. The intervention arrangements are very often tied into a storage system. wine). introduced a mixed system: price support was reduced. sugar) or the norm price (tobacco). in addition to veterinary measures measures were taken in order to limit the negative consequences of banning beef exports from the United Kingdom to third countries. in order to face particular problems. is the price at which intervention organisations in each Member State must buy products of Community origin which farmers put in for storage. The intervention price (cereals. The other Regulation introduces an instrument for 118 . which cannot be stored. It seeks to complement the reforms introduced into the market sectors by promoting a competitive. there are withdrawal prices below which producers' groups. Connected with the question of agricultural prices is the question of the quality of agricultural products and foodstuffs. the provision of a passport for each animal. Generally speaking. which is also known as the target price (cereals. The new policy for rural development seeks to establish a coherent and sustainable framework for the future of Europe's rural areas. This is due to the various different roles which agricultural prices play and to the need for them to be adapted to specific conditions on different markets. part-financing exceptional elimination measures involving incinerating certain meat in the United Kingdom 1 and laying down conditions for the grant of various premiums. It spells out with what requirements a product or foodstuff should comply in order to qualify for a protected designation of origin (PDO) or for a protected geographical indication (PGI). Each of these three functions will be analysed in turn. The quality and characteristics of these products are often linked to their geographical origin. has affected the fundamental principles of the CAP. The Commission also adopted various supplementary market support measures. Intervention measures may be specific to a certain market organisation. It is only when stock levels remain abnormally high that structural surpluses and consequently serious imbalance between supply and demand exist. butter. This question will gain in importance in an internal market characterised by the overabundance of most agricultural products. In November 1996. The guide price (beef and veal.thus strengthening subsidiarity and partnership . involving. supplemented by lists of some 480 names of agricultural and food products drawn up by the Commission. trigger intervention mechanisms and secure common external protection. stop selling and send surplus quantities for distillation. public intervention purchases . but the farmers' revenue was maintained at its previous level by subsidies. tobacco) or the basic price (pigmeat).The 1992 CAP reform. in particular. Two Council Regulations are designed to raise consumer awareness of the producers' efforts to improve the quality of their products. The first establishes a Community system for the protection of geographical indications and designations of origin for agricultural products and foodstuffs. which made possible the 1993 GATT Agreement. is the price that the common market organisation seeks to guarantee to producers. the Council introduced a higher ceiling on intervention purchases and instituted a system of premiums for the processing and early marketing of calves 2. prices play three roles in the common agricultural market: they guide production. in fact. multi-functional agricultural sector in the context of a comprehensive. integrated strategy for rural development.and flexibility of programming based on a "menu" of actions to be targeted and implemented according to Member States' specific needs. Thus. which is a certain percentage lower than the guide price. since it has supplemented the original price support with a direct income aid system. To increase consumer protection by improving information on the origin of meat. sugar. In the context of various food aid programmes. It has. In other words. It therefore guides the production of each of the agricultural sectors for which such a price exists. which must in principle be corrected by lowering the intervention price. The stocks in the system are often necessary for normal regulation of the market. Agricultural prices and product quality Prices are a central component of the common market policy and the terminology surrounding them is very complicated. the Council established a system for the identification and registration of bovine animals. beef and veal.

flax. — General mandatory environmental requirements. the reduction of support to a farmer resulting from the application of the above measures may not exceed 20% of the total amount of payments granted to the farmer. intervention at the external borders tries to prevent low priced imports from upsetting the European market. reafforestation) in accordance with the Regulation on rural development. sheepmeat and goatmeat. — Specific environmental requirements constituting a condition for direct payments. Rather than protecting European farmers' interests. notably: arable crops. Member States may decide the criteria and the rate of reducing the amounts of payments which would be granted to farmers in respect of the calendar year concerned in cases where: — The labour force on their holdings falls short of limits (to be determined by Member States). the precautionary principle seems. identifies agricultural products and foodstuffs whose names are registered under the rules on the protection of geographical indications and designations of origin. In order to ensure that the Member States take account of environmental and employment issues when granting direct aid to farmers under market organisations. milk and milk products. quality. beef and veal. a Regulation lays down horizontal rules. and environmental and animal protection. where appropriate. the Member States must ensure that farmers receive equal treatment and avoid market and competition distortions. thus enabling producers who so wish to obtain certificates of the 'specific character' of a traditional product (or foodstuff). It therefore follows the precautionary principle and defends it on the international stage. hemp. Another Regulation concerns organic production of agricultural products and indications referring thereto (labelling) on agricultural products and foodstuffs". — The overall prosperity of their holdings rises above limits (to be decided by Member States). In the same way as intervention on the internal market attempts to prevent the market prices falling too far below the intervention prices. the threshold price is determined in such a manner that the sales price of the imported product.registering the names of products. Direct support schemes for farmers A number of common market organisations provide for support to be granted to farmers in the form of direct payments. With a view to better integrating environment protection into the common market organisations. Member States must define appropriate environmental measures in view of the situation of the agricultural land used or the production concerned. to be applied by farmers. seeds. cereals. grain legumes. the specific character being defined as the feature which distinguishes the product or foodstuff clearly from other similar products or foodstuffs belonging to the same category. For products for which there is no guide price (fruit and vegetables. Indeed. For products for which a target price or guide price exists. — The total amount of payments granted under support schemes exceed limits (to be decided by Member States). However. olive oil) or the sluice-gate price (pigmeat. is on a par with this price. Member States may also decide on appropriate and proportionate penalties for environmental infringements involving. bananas. This policy has already been denounced by external competitors as protectionist and will certainly lead to fierce battles inside the World Trade Organisation. the reference price is 119 . consumers have the right to decide whether they should eat uncertain foodstuffs at lower prices or high quality products at higher prices. In general. eggs and poultry) is a minimum price above which imports from third countries enjoy free access. olive oil. table wine). based on the 12 stars symbol of the EU. The Community is aware that the new technologies have great potential for reducing the cost of feedingstuffs and even for improving the quality of foodstuffs. less-favoured areas and areas subject to environmental constraints. Amounts not paid to farmers because they fail to comply with the environmental requirements and employment limits remain available to the Member States concerned for use as additional Community support for rural development (early retirement. However. The threshold price (cereals. After all. tobacco. therefore. The external wing of the common market organisations seeks to protect European agricultural prices against low price imports. This has led to higher costs for European farmers and harmed their competitiveness. sugar. to be very demanding on them as well as on their external competitors. applicable to various market organisations. The Community claims that the precautionary policy is not intended to protect the incomes of its farmers but the health of its citizens. allowance made for transport costs. in recent years the Community has constantly refined its standards in the areas of food safety. but it is also mindful of certain risks that have to be carefully examined. rice. A European Union symbol (logo). Member States have three options at their disposal: — Support in return for agri-environmental commitments. dairy products. A new subject of concern for the common agricultural policy is biotechnology and genetically modified organisms (GMOs). the reduction or even the cancellation of direct payments. by applying environmental and employment criteria. In order to stabilize the employment situation in agriculture and to take into account the overall prosperity of holdings. agri-environmental measures.

As the second-largest agricultural exporter and by far the largest processed food exporter. As part of the Union's international commitments to the WTO. rice. in particular the need to strengthen the multifunctional role of agriculture as a means of ensuring the vitality of rural areas.the minimum price at which a third country product can be imported and a tax is collected if the reference price is not respected. are only part of the commitments weighing upon the EU's agricultural relationships. concluded between the Community and 70 developing countries. Measures designed to support the improvement of agricultural structures were introduced into the common agricultural policy as early as 1972. known as "refunds". for all export credits to be subject to compliance with agreed trade rules.e. the number and size of farms. certain supplementary mechanisms that do not involve the collection of fixed customs duties are introduced in the basic regulations of the CAP by a Regulation. a Regulation sets out a common framework for introducing an integrated administration and control of direct aids under the reformed common agricultural policy. As consequence. wine and fruit and vegetables. It is true that. the level of farmers' qualifications. socio-structural policy could remain more in the realm of the Member States in that it had to be adjusted to the specificities of the different regions. as was already agreed in principle in the Uruguay Round. twelve years after the signature of the EEC Treaty. this gap is now partially closed by customs duties. in order to avoid disturbance of the Community market and safeguard supplies at reasonable prices for consumers in the European Union. required uniform provisions and centralized management. It calls. the technical equipment on farms. The gap between the world price and the threshold price was originally bridged by an import levy. the subsidized exports of certain groups of agricultural products are limited each year in terms of both volume and value . The EU seeks. and animal and environmental protection. the socio-economic situation of people working in agriculture was lagging far behind that of other economic groups. which provide for concessions in the agricultural sector. The across-the-board tariff concessions which result from multilateral trade negotiations. Tariff reductions have. in particular. to ensure that in the next round of negotiations greater attention is paid to the justified interests of consumers and that the WTO is not used as a pretext for placing products on the market where there are legitimate concerns about their safety. unlike market and pricing policy which. In the past. when internal prices were higher than world prices. But policy blueprinting and supervision had to be brought under the wing of the Community to promote economic and social cohesion and prevent uneven competition conditions for Community producers. There are in addition preferential bilateral agreements with the majority of Mediterranean countries. attempts have been made to integrate agricultural structural policy into the wider economic and social context of rural areas. the Commission stated in its Memorandum on the (first) reform of the CAP that in no other sector of the economy had traditional production structures clung on so tenaciously as in agriculture. Export taxes may be imposed on certain products. which lays down the adaptations and transitional measures required in order to implement the agreements concluded in the GATT framework. Since the Community had initially turned all of its attention to establishing a common agricultural market. it had barely given a thought to structural policy. the EU certainly takes a keen interest in the smooth functioning of world trade and believes that WTO negotiations are the ideal venue for creating stable conditions and rules for fair international competition in agricultural trade. producers' groups. should make it possible to export without subsidies. exporters received subsidies. The Community supplies the Russian Federation agricultural products free of charge from intervention stocks or purchased on the EU market. marketing and processing of agricultural products and so on. Similarly. Structural policy and rural development "Agricultural structures" are taken as meaning all production and work conditions in the sphere of agriculture. the number or age spread of people working in agriculture. for certain product groups such as cereals. however. such as those of the GAIT and now the WTO. in the form of association agreements or cooperation agreements. Following the Blair House pre-agreement with the United States and the GATT agreements of December 1993. i. in exceptional circumstances. It also maintains that its new CAP addresses important non-trade issues that cannot be negotiated at world level. However. the Lome Convention. been granted by the Community under the Generalised System of Preferences (GSP) to almost all the developing countries notably in the framework of the United Nations Conference on Trade and Development (UNCTAD) and in the framework of the Europe Agreements with the countries of Central and Eastern Europe. to offset the difference between their purchase price on the European market and their sales price on world markets. finally. and therefore without quantitative ceilings. Thus. A Community socio-structural policy was required to rectify this situation. For almost two decades. grants free access to the EU for the products of these countries. The 1992 policy reform 120 . In December 1968. Aligning Community prices with those on the world market as a result of the 1999 CAP reform. by its nature.

The 1999 reform drove agriculture to adapt to new realities and further changes in terms of market evolution. The FADN relies on the services of farm accountancy offices in the Member States and on the participation of specially selected agricultural holdings to produce objective and practical data on the economic situation of the various categories of agricultural holdings. The FADN's conclusions form part of the prior study to any major Commission proposal. including those upon which a close watch needs to be kept at European level. dealt with in the Chapter on Regional Development the financing of the EAGGF's Guidance Section falls into the general framework of the Community's structural policy. is granted under the Community support frameworks (CSFs) and the single programming documents (SPDs). therefore. In implementing the structural fund policy. unwilling to share the bounty. even if internal problems hindered these negotiations and held up agreements. consumer demand and preferences and the Community's next enlargement. the Community began to turn its attention to the need to protect its resources in the Atlantic and the North Sea. The Community had declared equal access to the fishery zones of the Member States (12 miles) when there were six states. third countries made no difficulties about accepting the Community as sole negotiator for the EEC Member States. succeeded in writing 121 . This is the task of the Farm accountancy data network (FADN) 1. Little by little. the rural development policy currently aims at restoring and enhancing the competitiveness of rural areas. agro-environmental measures and afforestation are financed by the EAGGF Guarantee Section throughout the Community. but rural policy was still carried out through a range of complex instruments. The latter. depending on their regional context. thus contributing to the maintenance and creation of employment in those areas. Thus. the Community has sought to guarantee its own fleet access to the waters of countries with surplus resources and to restrict access to Community waters for foreign vessels. When the European Agricultural Guidance and Guarantee Fund (EAGGF) were set up in 1962. enjoy one-third of the Fund's available resources. These changes affect not only agricultural markets but also local economies in rural areas in general. A Community policy to conserve fishery resources was necessary to protect the most threatened species in Community waters. Through an external fisheries policy. in as much as this were feasible. Its concern was heightened by the creation of exclusive economic zones. Agricultural structural policy requires exact information on farm income and on production parameters of the agricultural economy in the Community. Towards the end of the sixties. however. Fisheries Policy The Treaty of Rome did not provide for a fully-fledged fisheries policy. Therefore. Community support for other rural development measures is financed by the EAGGF Guidance Section in areas covered by Objective 1 (integrated into the programmes) and Guarantee Section in areas outside Objective 1 The EAGGF also covers measures for the development and structural adjustment of rural areas relating to the renovation and development of villages. it was stipulated that the "Guidance" Section would fund structures policy and should. the FADN can carry out detailed analyses which make allowance for the variety of European agriculture. the diversification of farm activities and the improvement of infrastructure relating to the development of farming which are not financed by the European Regional Development Fund (ERDF) under Objectives 1 and 2 and in areas in transition. the specific characteristics of the fisheries sector pushed for a separate common policy. market policy and trade rules. for it included fishery products in the products to be covered by the Common Agricultural Policy.stressed the environmental dimension of agriculture as the largest land user. Parallel to the FADN is the European forestry information and communication system (EFICS). Thanks to the use of individual data. Community support for early retirement. like that from the other Structural Funds. decided upon within the United Nations Conference on the law of the sea. EAGGF financing of rural development The principle of partial financing of agricultural structures policy by Community funds won early recognition. which had begun to turn a jealous eye towards the rich waters of applicant countries. These internal problems took many years to iron out. the allocation of catch quotas between the Member States and technical management and surveillance measures. Polish and Japanese factory ships. Financing from the EAGGF Guidance Section. rural development and accompanying measures during the period 2000-06 are financed by the EAGGF Guarantee Section or Guidance Section. notably Soviet. Its main manifestations have been the setting of total allowable catches (TACs). Curiously enough. less-favored areas and areas with environmental restrictions. However. under serious threat from overfishing. The Commission has fixed an indicative allocation by Member State of the allocations under the EAGGF-Guarantee Section for the rural development measures for the period 2000 to 2006. The reformed rural development policy covers all rural areas in the Community through a single instrument utilizing both sections of the EAGGF. the protection and conservation of rural heritage.

makes use of common measures to restructure. 1999 p. Measures to conserve and manage fishery resources thus came to join the "common organization of the market". Paris.230. along with measures governing access to the waters of the Member States.int/dg16_en. on January 25. to the imperatives of freshness and hence of conservation and to operating constraints. p. In light of the lasting nature of restrictions on authorized catches. 14. policies”. Proposed regulations governing the reform of the Structural Funds 2000-2006. inaugurated in 1970. 4. 1998 Cini Michaelle. dividing them up into a freshness grading and seeking to ensure that products which do not reach a satisfactory quality level are not marketed. European Commision. make the entire European fisheries sector extremely vulnerable from the economic and social viewpoint. 1999 http://www. “Ever Closer Union”. p. 6. 12-17 European employment and social policy: a policy for people. 3. 373-375. many firms in the sector are. “Access to European Union. Schroder Birgit. actions should be taken to improve resource management and restructure the industry within the framework of the new structural rules. was added to the common fisheries policy. Comparitive analysis. Structural policy. p16-23. which sets common marketing standards for fisheries and aquaculture products. fishery concerns should seek to raise the qualitative value of their production. Regional Policy and Planning in Europe. This system introduced measures to restrict fishing and set conditions under which it could take place. If socio-economic upheaval in the fisheries sector is to be minimized. be taken. Routledge. 10.htm 122 . a Community system of resource conservation. Producers' interests are not neglected either in the common fisheries policy. 160-192 Balchip Paul. Maastricht.inforegio. 1983 the Community reached one of its "historic compromises". an objective that is consistent both with the common fisheries policy and with consumer protection policy. In order to redress this situation. European Commission.into their Act of Accession a ten-year derogation to the rule of equal access. To remedy the crisis. to develop aquaculture. Integration financiere europeenne et fiscalite des revenues du capital. 325-335 Nicholas Moussis. 1998. Six years of negotiations were required before. 2000 Frnacois Souty. 1998 Symansky Steven. combining Community means and instruments in favour of the least developed regions and those most heavily dependent on the fishing industry. 12. 5. 1998 Demmke Christoph. European Commission. Bull Gregory. 502-520. but account should also be taken of the development of regions dependent on fishing. International Monetary Fund. 1998 The European Union: cohesion and disparities. 1998 Regional Policy and Cohesion. Competition Policy in the EU. endeavoring to protect the biological resources of the sea under severe threat from modem fishing methods. social support measures must. 282-294. Desmond Dinan. This policy therefore helps protect consumer interests. economics. p. The aim of these actions should be to avoid the collapse of fisheries by achieving a better match between resources and fishing capacities. The depletion of resources. France maintained that its fishermen had "historic rights" to fish in certain British fishing grounds. even if these rights were relatively recent. 1997 Emonot Claude.eu. Simon Mercado “European Business”. however. 11. Macmillan. European environmental policy: a handbook for civil cervents. 2. indeed. facing a shortage of financial resources and a lack of profitability. Macmillan Press. London. 7. 8. 13. which was to remain at the crux of discussions on the common fisheries policy and brought the United Kingdom to blows with the other Member States. DC. This does not mean that the Community fisheries sector is riding on the crest of a wave. 469471. The United Kingdom wanted to exclude vessels from the other Member States within a 12-mile zone around its coasts. This crisis situation is tending to become entrenched because of the growing share of imports. Due to the fall in prices for the majority of species. 9. Fiscal Policy Rules. 1999 How European Union Manage Agriculture and fisheries. Economica. Basingstoke Hampshire. _________________________________________________________________________ Bibliography on Common Policies of the EU and suggested readings: ___________________________________________________________________________ 1. Montchrestien. law. modernize and develop the fishery sector. ducts and to apply sanctions to any infringements. particularly France. 1999. due notably to the over-fishing of juveniles combined with fleet over-capacity.cec. 2001. Le droit de la concurrence. Koptis George. upon which the Community market is already dependent for over 50% of its supply. McGowan Lee. European Commmission. there must be more balanced and rational exploitation of resources and consequently a reduction in both fishing and fishing capacity through more stringent regulation of access to resources and closer monitoring of vessel movements in order to respect the general interest. Sykora Ludek. encourage experimental fishing and adapt Community fishing capacities to disposal possibilities. It obliges the Member States to carry out conformity control checks on these pro. European Commission. Washington. 2001. On this date.

or at least to the absence of any discrimination. the imports of the EU (fifteen) accounted for around 10% of its GNP and for 16. The Common Customs Tariff (CCT) is the key to the Community’s commercial policy. As seen in the Chapter on customs union and as will be seen later in this Chapter.4 The emergence of regional trade blocs and global Triad 7. notably to nip unfair trading practices in the bud.1 Commercial Policy and the multilateral trading system (GATT. which means that it takes part in the negotiations. conclude customs and trade agreements. one of the central principles of GATT and WTO is that of balance of mutual advantages (global reciprocity). The EU. the Community as such. represented by the Commission. compared with 15% for the United States and 9% for Japan. The implementation of the common commercial policy therefore falls into the Community’s sphere of competence. This implies a case-by-case approach for third countries. The Single Market obliges the latter to show a united face to third countries. Instead of becoming a “Fortress Europe” when the single market was completed in 1992. rights and obligations arising from agreements concluded by the Member States before their accession to the Community are not affected by the provisions of the EC Treaty. the conclusion of tariff and commercial agreements and the harmonization of liberalization measures export policies and trade defence measures.1. On the contrary. the Treaty of Amsterdam provides that the Council will be able.2 External relations and the EU’s hierarchy of trading preferences 7. 123 . as feared by some of its trade partners.WTO) 7. Its exports accounted for 17% of world exports. but to the extent that such agreements are not compatible with this Treaty. which then authorizes it to open negotiations. The Commission is the Community’s negotiator and consults a special committee appointed by the Council to assist it in this task. If agreements have to be negotiated with third countries. signs the agreement and if necessary participates in their management a s a member of the organization in question. the Community Institutions cannot act alone. which is the world’s biggest exporter. need to comply with only one set of standards in order to market their products anywhere in the Single Market. the Community made important concessions in order to allow the conclusion of the GATT Uruguay Round in 1993. It should be borne in mind that the Commission.However. including those to be taken in cases of dumping and subsidies. This means. traditional trade agreements. association agreements)1. the blueprinting and evolution of the CCT have taken place against the backdrop of the General Agreement on Tariffs and Trade (GATT). In international agreements. Commercial Policy and the multilateral trading system (GATT-WTO) The common commercial policy was founded on uniform principles. Indeed. However. The level of protection in the Community did not rise with the advent of the internal market . a fact that considerably complicates the negotiating process ant the conclusion of international agreements. preferential agreements. harmonize measures to liberalized trade with third countries. the Community powers occasionally spill out the framework defined in Article 133 (TEC). Given the complexity of international relations and of external policy instruments in the broad sense of the term. They have been cut even further in the framework of successive GATT negotiations.6% of world imports. the Commission submits recommendation to the Council.7. the Commission negotiates and manages the agreements on the basis of a negotiating brief delivered by the Council (world commodity agreements. is the Community’s negotiator in the GATT/WTO arena. specify export policy and take protective measures. the globalization of the economy is creating a state of interdependence and a growing realization that trade problems need to be solved wherever possible in a multilateral framework. is highly dependent on international trade and therefore it is in its vital interests to keep trade open and free. for the European Union . External Economic Relations of the European Union 7. the Member States concerned must take all appropriate steps to eliminate the incompatibilities established. CCT tariffs were low at the outset. In exercising the powers granted to it by Article 133 (TEC). as the firms of the Member States. is more often than not a party alongside the Member States. companies) in the country in question.3 European Union external trading relations: Japan and the US 7. in 1997. the Member States are not at the forefront. and not the Member States individually. that it can tie access for third country economic operators to the benefits of the Single Market with the existence of similar opportunities for European undertakings (businesses. It works within the framework of guidelines issued by the Council. notably as regards tariff charges. the Council acts by a qualified majority. In such cases. but a common approach by the Member States. They must draw in the Member States. unanimously. According to Article 307 (TEC). exporters from third countries. responding to the central objective of liberalization of international trade. including the conclusion of agreements. fisheries). In areas for which the Community has exclusive responsibility (agriculture. to decide to extend the application of Article 133 (commercial policy) to international negotiations and agreements on services and intellectual property rights in addition to those already covered by this provision. acting on a negotiating brief issued by the Council. The European institutions draw up and adapt the common customs tariff. At the same time.

A product is considered as having been dumped if its export price to the Community is less than a comparable price for the like product. it is apparent to the Commission that there is sufficient evidence. the Community can take trade protection measures. prices and so on. in the ordinary course of trade. The regulation strives to establish a balance between a Community market normally open to the world following the conclusion of the Uruguay Round and more rapid and simplified procedures in case of a risk of serious injury caused by imports of a product to Community producers. regardless of the Member State issue. or where such sales do not permit a proper comparison. Consultations may be held either at the request of a Member State or on the initiative of the Commission. Apart from those exceptions. including the views of the interested parties. by independent customers in the exporting country. as established for the exporting country. giving a summary of the information received and asking for any relevant information. Since 1979. the normal value of the like is calculated on the basis of the cost of production in the country of origin plus a reasonable amount for selling. The Commission seeks all information it deems to be necessary and. traders. if any. When. c) and the consequent impact on the Community producers of similar or directly competitive products as indicated by trends in certain economic factors such as production. to be taken. market share. The Commission then passes on forthwith this information to all the Member States. They apply to imports of products originating in third countries. notably through the application of antidumping duties. endeavours to check the information with importers. On the jurisdictional level. anti-dumping and anti-subsidy cases must be brought before the Court if First Instance1. import of that product may be subject. capacity utilization. economic operators must now comply with only one set of rules. agents. Trade protection The Community can introduce surveillance and protection measures in the framework of the common rules for imports when imports at prices viewed as normal are causing or risk causing serious injury to Community producers. These consultations must take place within eight working days of the Commission receiving the information. where it considers it appropriate. It should be noted that these definitions as well as the anti-dumping procedures are. in the ordinary course of trade. Normal value is generally based on the prices paid or payable. The examination of the trend of imports. This information must contain all available evidence. with the exception. When trends in imports appear to call for surveillance or protective measures. anti-dumping duty may be applied to any dumped product whose release for free circulation in the Community causes injury2. discussed under the heading of sectoral measures of the commercial policy. producers. as appropriate. imports into the Community are free and not subject to any quantitative restrictions. Where the trend in imports of a product originating in a third country threatens to cause injury to Community producers. after consultations have taken place. In cases where the export price is lower than the normal value of a like product (dumping). The Regulation establishes a Community information and consultation procedure. on the one hand. mentioned below. of textiles subject to specific import arrangements. According to the Regulation on protection against dumped imports from countries not members of the EC. import trends and the various aspects of the economic and commercial situation as regards the product in question and b) the measures. drawn from certain specific criteria. after the Uruguay Round. North Korea and the People’s Republic of China. Community rules being compatible with those of the GATT. after consulting the Committee.Common rules for import The new common rules for imports were established by Council Regulation of 22 December 1994 1. This consultations concern notably: a) the terms and conditions of import. including Russia. of the conditions under which they take place and of serious injury or threat of serious injury to Community producers resulting from such imports covers the following factors in practice: a) the volume of imports. Community rules in this area are broadly inspired by the provisions of the Anti-Dumping Code and the Code on subsidies and Countrvailing Duties of the General Agreement on Tariffs and Trade (GATT). the Commission must be informed of this fact by the Member States. They take place within an advisory committee consisting of representatives of each Member State and chaired by a representative of the Commission. Products under prior Community surveillance may be put into free circulation only on production of an import document endorsed by the competent authority designated by Member States and valid throughout the EU. similar in the EU and in other GATT Member States. The term like product means a product that is identical in all respects or has characteristics closely resembling those of the product under consideration. In order to determine the dumping the normal price and the dumped price must be defined and these two values must than be compared. 124 . and on the other products originating from certain third countries. Where there are no or insufficient sales of the like product in the ordinary course of trade. to prior or retrospective Community surveillance. trade associations and organizations. stocks. b) the price of imports. it initiates an investigation within one month of receipt of information from a Member State and publishes a notice in the Official Journal of the European Communities. sales.

Here again the Community legislation is compatible with GATT rules and therefore. must be made in each case for differences in factors which are claimed and demonstrated to affect prices and. after consultation with the initiation of the proceedings. for the manufacture. or the price from such a third country to others countries. price comparability. degree and effect of any alleged dumping is initiated upon a written complaint submitted to the Commission or to a Member State by any natural or legal person.Where there is no export price or where it appears that the export price is unreliable because of association or a compensatory arrangement between the exporter and the importer or a third party. fiscal incentives. irrespective of whether a definitive anti-dumping duty is to be imposed. if they are given: for research activities. at the rate specified and according to the other criteria laid down in the Regulation imposing such duties. export or transport of any product whose release for free circulation in the Community causes injury. a provisional or definitive countervailing duty is imposed following procedures similar to the ones described above concerning the imposition of anti-dumping duties. Provisional or definitive anti-dumping duties must be imposed by Regulation. insurance. therefore. If the definitive duty is lower than the provisional duty. Where. and b) the consequent impact of these imports on the Community industry. A fair comparison must then be made between the export price and the normal price. normal value is determined on the basis of the price or constructed value in a market economy third country. A countervailing duty may be imposed for the purpose of offsetting any subsidy granted. Even when they are specific. transport. Subsidies. to promote adaptation of existing facilities to new environmental requirements. Where all conditions are met. pursuant to a general framework of regional development. A subsidy is deemed to exist if: 1) there is a financial contribution by a government or by a private body entrusted by it (directed transfer of funds. The determination of the serious injury caused to the Community industry or the threat of such injury must be based on positive evidence and involve an objective examination of both a) the volume of the dumped imports and the effect of the dumped imports on prices in the Community market for kike products. which is found to exist during the investigation period. loan guarantees. the export price may be constructed on the basis of the price at which the imported product is first resold to an independent buyer or on any reasonable basis. including duties and taxes. The export price is the price actually paid or payable for the product sold for export to the Community. discounts. in the absence of any complaint. general expenses). Where the normal value and the export price as established are not taken on such a comparable basis due allowance. in the form of adjustments. handling and ancillary costs and the cost of any credit granted. import charges and indirect taxes. and collected by Member States in the form. An investigation to determine the existence. Where dumping margins vary. In the case of imports from non-market economy countries. If the definitive anti-dumping duty is higher than the provisional duty. Investigation may be terminated without the imposition of provisional or definitive duties upon receipt of satisfactory voluntary undertakings from the exporter to revise his prices or to cease exports to the area in question at dumped prices. the difference must not be collected. production. cannot be subjected to countervailing measures. rebates and quantities. or where these are not possible. provision of goods or services other than general infrastructure. the Council decides. or any association acting on behalf of the Community industry. the Community producers as a whole or as major proportion of the like products. which are not specific to an enterprise or industry or group of enterprises or industries. Another Regulation establishes the rules on protection against subsidized imports from countries not members of the European Community1. In such cases. The final conclusions of the investigation must be adopted within a further six months.general and administrative costs and for profits. a weighted average margin may be established. notably: the physical characteristics of the product concerned. The amount of subsidies to be subjected to countervailing duties is calculated in terms of the benefit conferred to the recipient. the duty must be recalculated. it must immediately communicate such evidence to the Commission. 125 . a Member State is in possession of sufficient evidence of dumping and of injury resulting there from for the Community industry. business must comply with only one set of rules. the export price is unreliable because of association or a compensatory arrangement between the exporter and the importer or a third party. what proportion of the provisional duty is to be definitively collected. This comparison must be made at the same level of trade and in respect of sales made at as nearly as possible the same time and with due account taken of other differences which affect price comparability. Where a provisional duty has been applied and the facts established show that there is dumping and injury. payments to a funding mechanism and 2) a benefit is thereby conferred. directly or indirectly. The dumping margin is the amount by which the normal value exceeds the export price. subsidies cannot be subjected to countervailing duties. or any other reasonable basis. insurance. including the Community. The amount of the provisional anti-dumping duty must not exceed the margin of dumping as provisionally established. and for a reasonable profit margin. allowance must be made for all costs incurred between import and resale (transport.

in light of the international commitments of the Community or of all its Member States. the Commission. b) the raising of existing customs duties or the introduction of any other charge on imports. to any trade practice adopted or maintained by a third country in respect of which international trade rules establish a right of action. when exceptional market trends. and country cover policy and notification procedures.Authorization must be refused if there are grounds for believing that the products in question could be used to develop or manufacture chemical weapons or could be delivered directly or indirectly to belligerent nations in area of high international tension. Common export arrangements By virtue of a Council Regulation of December 20. 27. and Brazilian practices in the area of import licensing as applied to stainless steel flat products2. the Council adopted a Regulation destined to improve Community procedures on commercial defence and to ensure the exercise of the Community’s rights under international trade rules. which cause scarcity of an essential product. Article 132 of the EC Treaty stipulates that the aid arrangements applied to exports by the Member States should be gradually harmonized to ensure that there is a level competition playing field for the Community’s exporting undertakings. China according for 32 measures and Russia for 14. OJ L324. 3. Thus. These guidelines confine official support to the interest rates for export credits to certain countries. can make exports subjects to the granting of an export authorization. 31. notably: a) suspension or withdrawal of any concession resulting from commercial policy negociations.Reports on the Community’s anti-dumping and anti-subsidy activities supplied by the Commission every year to the Council and Parliament suggest that less than 1% of Community imports are affected by such activities.1969. at the request of a Member State or acting on its own initiative.1969 and Council Regulation 3918/91. ___________________________________________________________________________ 1. As regards export credits. Consultations take place within an Advisory Committee and cover notably the conditions and terms of exports and. 58 (41%) related to State-trading countries. Concerning export credit insurance for transactions with medium-and long. They must give due consideration to the volume of contracts concluded at normal terms. in other words. issued if certain provisions and restrictions defined by it.term cover. causes of loss and exclusions of liability and indemnification of claims). are not subject to quantitative restrictions. following the Community examination procedures and after consultation with the Member States . In December 1994. It lays down the common principles which must be observed by export credit insurers and which concern the constituents of cover (general principles and definitions. exports as well as imports of certain chemicals are subject to prior authorization by the relevant authorities in the Member States1. Should the Community market be in a critical situation due to a lack of essential products and should the interests of the Community demand immediate action. Of the 141 anti-subsidy measures in force at the end of 1997. 23. are satisfied. Export restrictions may depend on political or security reasons. with the exception of a few products for certain Member States and of petroleum oil and gases for all the Member States 3. before bringing in a protective measure. 31. The Commission has thus initiated procedures concerning the US Anti-dumping Act of 1915 and US practices with regard to cross-border music licensing. Thus. it can set in motion the Community information and consultation procedure. a Community Directive aims to harmonies the various public systems for such insurance in order to prevent distortion of competition among EU firms3. premiums. the measures which should be adopted. OJ L 41. Quantitative export restrictions can be limited to specific destinations or to the exports of certain regions of the Community.1991 126 . c) the introduction of quantitative restrictions or any other measures modifying import or export conditions or otherwise affecting trade with the third country concerned.1997 Council Regulation 2603/69. Council Regulation 3286/94.06. The Council can uphold or invalidate the Commission’s Decision.1994 and Council Regulation 356/95.12. 27.12. if necessary. scope of cover. notably as regards trade in primary products. OJ L 349. However. the Community has applied since 1983 the arrangement concluded in the framework of the OECD and providing guidelines for officially supported export credits2. This Regulation allows the Community to respond to obstacles to trade. while waiting for a Council Decision.02. the Commission may take any commercial policy measures which are compatible with existing international obligations and procedures. 2. in particular those established under the auspices of the World Trade Organisation (WTO) 1.1995 OJ C 197. OJ L 372.12. Community exports to third countries are free or. justify protective measures in the opinion of a Member State. Japanese conditions governing imports of finished leather.

The cooperation with trade federations and with national export promotion organizations pursues two aims: first of all. Having asked Member States and business circles to inform it on the most persistent trade and investment barriers on the main export markets. Japan.10. OJ L 282. the countries of ASEAN (Association of South East Asian Nations) and the countries of Central and Eastern Europe. OJ L 148. they participate as “the Community” in the GATT’s work. studies concerning the implementation by other countries of their obligations under international trade agreements and the production of information packs on the legal and economic aspects of removing these barriers 2. the Community committed itself wholeheartedly to the process of launching a new cycle of multilateral trade negotiations under the GATT. The Uruguay Round negotiations involved 117 countries from all over the world and covered a large range of subjects.during the successive negotiating rounds between 1960 and 1979 under the aegis of the General Agreement on Tariff and Trade. the world economy went through the worst period in its post-war history causing protectionist pressures to flare up. but its Member States must lend a supporting hand in combating trade barriers by joining forces with the European Commission. GATT was charged with overseeing international trade in goods and in particular. such as: identification and analysis of trade barriers in other countries. somewhat limited initially. the liberalization of this trade by means of a negotiated reduction in tariff barriers. The Member States of the EC are the contracting parties to the GATT. The scope of GATT was. However. generally confined to tariff questions. and an environment conductive to international exchanges and investments is still lacking in many Asian and South American countries. conferences. the list of which is topped by China. the establishment and development of databases and the dissemination of information on trade barriers. the Commission established an ongoing inventory of tariff and non-tariff barriers to trade in goods and services and the progress made towards removing them in the form of an interactive electronic database accessible to businessmen via the Europe server on the Internet 1.08. the “Buy American” clause still excludes European firms from public works and supply contracts in the United States. The European Community has the necessary power to redress these situations. Since 1985. OJ L 251. because of the common commercial policy.1998 127 . In 1993 the programme was expanded to cover the Gulf countries. ___________________________________________________________________________ 1. trade forums.02. 29.1992 and Commission Regulation 2247/98. In addition to the issues traditionally covered by trade talks. which provide ready outlets for an extensive range of products and are close enough to Europe to attract small and medium-sized enterprises from many Member States. whereas customs tariffs diminish thanks to the Uruguay Round and the rules of the World Trade Organisation impose in principle the freedom of international exchanges. seminars) in coordination with Community programmes and with Member States export promotion programmes. Thus. the customs tariffs of the States participating in the General Agreement were slashed by nearly 50% 3.1993 3. 19. was to improve market access to a significant degree. the Uruguay Round encompassed the revision of GATT rules and disciplines. to be implemented in eight stages the last of which was timed for January 1. 22. 220.Council Decision 93/112. Also on the agenda were to devise an agreement for their gradual incorporations into the GATT framework. European companies are still faced with obstacles to trade and investment in a large number of countries. the Uruguay Round’s main achievement.05. to ensure that any activities on a particular market strengthen the Community dimension and secondly. These tariff reductions made a considerable contribution to keeping the international trade system open. The Commission is the single negotiator and spokesman of the European Community.Council Directive 98/29. OJ L 44. but. Thanks to the Dillon (1960-19620 AND Kennedy Rounds (1965-1967). plus the adoption of disciplines for “new” areas: the trade –related aspects of intellectual property rights.Council Regulation 2455/92. trade-related investment measures and international trade in services. As stated in the Chapter on Customs Union. Along with the International Monetary Fund and the World Bank it was one of the institutions set up in the post-war period to help regulate the international economy and prevent a recurrence of the disastrous policies undertaken between the two World Wars. a fresh one-third reduction in customs tariffs was agreed upon. Following the Tokyo Round (1973-1979). despite the fact that in the first years of the eighties. A budget heading covers the Commission’s strategy to improve access for Community businesses to other to others countries market.1998 2. obtained in December 1993. GATT and WTO The General Agreement on Tariffs and Trade (GATT) came into being in 1947. Unprecedented in scope. 19874. the EC Member States and other industrial countries made major tariff concessions –particularly in favour of the developing countries.The Commission contributes from the Community Budget to export promotion and notably to closer cooperation at Community level and to research for joint action in favour of European exports (international exhibitions. but the conclusion of the Uruguay Round negotiations enlarged its field of activities and placed them under the auspices of the World Trade Organization. to focus activities on a number of target countries. therefore.

on the one hand. GATS establishes notably the principles: of the most favoured nation provisions. is open to all and is largely based on the Community rules on public procurement concerning. whereas prior to the Uruguay Round they had taken very few such commitments. The lowering of customs duties will be spread over a period of six years for industrialized countries. meaning that a company from a third country cannot be placed at a competitive disadvantage in relation to a domestic country. books and records. even though questions relating to the TRIP s Agreement fall largely within the jurisdiction of the Member Stats. Intellectual property concerns an ever-increasing part of world trade. patents and geographical appellations. computer software. whereas it stood at 40 % or more prior to the various rounds of GATT negotiations. specific provisions for given service sectors and national schedules showing the services and activities which each country agrees to open up to competition. agricultural machinery.Market access for industrial products has been considerably improved by a reduction of one third or more in the customs duties imposed by the industrialized countries and many developing countries on the following sectors: building materials. in achieving a better balance between supply and demand on world agricultural markets and on the other. As trade has increased so too have cheating. pharmaceutical products. steel. in February 1997. therefore. the thresholds 128 . It should be noted that trade is not limited to exchange of goods but also increasingly involves services. beer. there has been a strengthening of intellectual property rights concerning the protection of trade marks.5%. the EU has made no market access commitment nor. certain geographical appellations. The Agreement establishes for the first time a multilateral framework based on satisfactory rules and compromising sufficient commitments to trigger the liberalization process. the United States. The Uruguay Round resulted also on an Agreement on trade-related investment measures (TRIMs)1. which is responsible for 36% of direct investment in the world and receives 19% of such investments on its territory. of which are part the EU. depending upon whether the country is developed or developing. by bringing them within the ambit of the GATT dispute settlement procedures. insurance and securities sectors 4. The Agreement on Government Procurement. where a provision of the agreement is to be applied to situations covered both by national and by Community law. not bound to give equal treatment to all third countries. covering such things as local content rules. in particular. provides better market access to financial services covering more than 95 % of world trade in the banking. in a balanced package of measures respecting the most-favoured nation principle 3. the gradual reduction of production support and also the observance of export disciplines. paper. medical equipment. spirits. Very substantial results were achieved in the field of rules and disciplines thanks to the reform of the provisions on safeguards. A clear set of principles has been established for the enforcement thought the national courts of intellectual property rights. the “standards” and “public procurement” codes. The EU played a major role in pushing through the conclusion. as a result. The audiovisual sector was included in the GATS. of the Information Technology Agreement under which tariffs on information technology products of countries accounting for 92% of world trade will be phased out completely by 1 January 20001. it is in the Community interest to avoid any differences of interpretation and national courts should apply the Community trade mark law. subsidies. The conclusions of the Uruguay Round have reinforced existing international conventions. The Community has amended the Regulation on the Community trade mark. anti-dumping measures. based likewise on the most favoured nation principle. with possible limitations 2. any commitments on national treatment. It also took an exemption from the principle of most favoured nation conditions and is. The TRIMs Agreemetn is particularly important for the EU. However. a sector which contributes nearly half of the EU’s GDP. counterfeiting and copying. The Agreements provides for the first time for the liberalization of trade in agricultural products and the commitments cover market access. The average level of tariffs for industrialized countries fell from 5% to about 3. in ensuring that the results of the Uruguay Round were compatible with the mechanisms of the reformed common agricultural policy. the procedures. be it related to pharmaceuticals. industrial designs. Concerning agricultural products. Such measures must be phased out over a two-to seven year period. any breaches being subject to sanctions under the dispute settlement procedure. notably in order to comply with the national treatment obligation established by the TRIPs Agreement. of transparency on market access. Basic telecommunications services were covered by the fourth protocol to the GATS. A first step was taken towards the liberalization of world trade in services. and on national treatment. the principle that all third countries must be treated equally. toys and furniture. developing countries are to apply substantial reductions of their customs duties on these products. in March 1997. In total close to 40% of the EU’s industrial imports are to be duty free. which means that the rules relating to transparency and of progressive liberalization apply to it. The fifth protocol to the GATS. for example the Bern and Paris Conventions for the protection of literary and artistic works. Japan and a limited number of other countries on a reciprocal basis. the balance of payments. An illustrative list of non-permissible measures is included in the agreement. The Uruguay Round negotiations included also the protection of trade-related intellectual property (TRIPs)5. A further problem has been the appropriation of brand names and in the case of wines and foodstuffs. On their part. According to the Court of Justice. the European Union succeeded. trade balancing and local sales requirements. including the European Union (36% reduction) and ten years fro the developing countries (24% reduction). The General Agreement on Trade in Services (GATS) includes general rules for trade in this area. In addition.

The Multifibre Arrangement was revised in order to progressively liberalize the international trade in textiles as provided in the GATT Agreement of 15 December 1993. The European Community as well as all its Member States are members of WTO. concerning chiefly issues to do with agricultural products. with gradual growth of the authorized quantities. This increases the certainty of the world exchange system. while frozen its pre-Uruguay Round situation. A Community Regulation modifying the common rules for imports of certain textile products from third countries lays down a clear Community procedure for the selection of products to be integrated and notified to the WTO at each stage. The World Trade Organisation (WTO). the General Agreement on Trade in Services (GATS) and the Agreement on trade-related aspects of intellectual property rights (TRIPS). including the determination of “cross retaliation”. notably the countries of the Commonwealth of Independent States and the People’s Republic of China. concluding with supplier countries bilateral agreements revolving chiefly around the principle of voluntary restraint of export quantities by signatory countries for a limited number of products. has replaced GATT. The Agreement includes. in the framework of the GATT and owing its name to the fact that it covers most textile products. dumping. Sectoral commercial policy measures In the framework of the General Agreement on Tariffs and Trade. better known as the Multifibre Arrangement (MFA). The Agreement provides in particular for the strengthening of the GATT rules and disciplines. On the contrary. dairy products and civil aircraft. the WTO is open to those who agree to abide by the entire Uruguay Round package of rules. several agreements or arrangements had been concluded in particularly sensitive sectors. water. It eliminates the exceptions and derogations resulting from the remaining national commercial policy measures and establishes quantitative restrictions and surveillance measures applicable at Community level for a limited number of products originating from these countries. 129 . The Agreements to which the Community and/or its Member States were signatories sought to ensure the orderly growth of international trade in textiles. The WTO operates on the basis of a ministerial conference. signed in 1974. a code of conduct defining the participation of the Community and its Member States in areas of shared power. established in 1995.which apply and the recourse mechanisms if firms believe that they have been denied equal treatment 2. subsidies and counterfeiting. while 30 complaints have been lodged against it. the EU has lodged 40 complaints with the dispute-settlement body of the WTO. It contains a transitional safeguard clause in order to prevent any serious market disturbance in the importing countries. and of a General Council made up of representatives of all the member countries. The most important of these arrangements was that on international trade in textiles. Thus. The unique structure of the WTO allows an integrated system of dispute settlement. beef and veal. protocols or other agreements. A Dispute Settlement Board (DSB) oversees the proceedings. but their scope is limited both in terms of the measures taken and of their duration. spanning artificial and synthetic fibres. notably as regards market access. on their side. The parties must refrain from making rulings themselves regarding violations and must abide completely by the provisions of the dispute settlement procedure in dealing with all matters. Between 1995 and 1998. The Community had based its textiles policy on this clause of the MFA. for those countries that are not in a position to accept the entire package of its conclusions. A safeguards Committee monitors all measures taken and ensures that they are in conformity with the agreement. Safeguard measures are authorized. Under the terms of the Arrangement. This integration will be phased in three stages and will be completed in January 2005. public procurement contracts of over ECU 300 billion will be open to international competition for the first time. ports. the USA are leading battles inside the WTO against EU legislation on the common organization of the market in bananas2 and on meat produced with the aid of hormones 3. In fact. One of the first procedures initiated by the EU concerned the failure of the USA to repeal their Anti-dumping Act of 1916 1. the WTO Agreement on Textiles and Clothing (ATC) will govern trade between all Members of the WTO until such time as they have been integrated into normal WTO rules and disciplines. In fact. Under this Agreement which is founded on national treatment. electricity and urban transport. the WTO brings together under a single decision-making and administrative body the three agreements resulting from the Uruguay Round: the General Agreement on Tariffs and Trade (GATT). thus precluding unilateral action. cotton and wool. signatories had undertaken not to introduce new unilateral or bilateral restrictions on trade in textiles and to regulate their trade relations by bilateral agreements. airports. The Agreement establishes an appeals procedure providing for a review of the conclusions of the “panels” of first instance. and settling trade disputes on a multilateral basis 3. since all the members of the WTO are perfectly aware of their own rights and obligations and of those of their partners. taking all the agreements concluded under its auspices. in accordance with which foreign suppliers of goods and services must be dealt with in the same way as national suppliers. Another Regulation lays down common rules for imports of textile products from certain third countries not covered by bilateral agreements. which meet at least once every two years. The national law of each contracting party must be in conformity with the rules of the WTO. in principle. although not every country has made a commitment in each sector. the GATT continues to exist.

The aim of the EEA Treaty is to establish a dynamic and homogeneous integrated economic entity based on common rules and equal conditions of competition. it is clear that the EU has tended to group countries under common agreements or to extend a rough equivalence of treatment through like bilateral agreements. A characteristic of these relationships is the extent to which the EU treats certain trading partners preferentially and thereby deviates from the basic MFN principle of the WTO.2 External relations and the EU’s hierarchy of trading preferences The EU enjoys trading relations with nearly 200 countries.7. with countries which are not party to the WTO (based on preferential terms). including those like China who remain outside of the structure of the WTO. When the United Kingdom and Denmark switched allegiances from CEFTA to the EEC in 1973. minus Switzerland. the EEA Treaty associates to the EU only Norway. Discounting the first category of relationships which are not the subject of external EU trade. This trade. In effect. The EFTA States. subject to a few exceptions and transitional periods in certain sectors. with fellow WTO members (on the basis of mutual most-favoured nation treatment). with fellow WTO members (on the basis of preferential terms and agreements). These agreements abolished customs duties and restrictions on trade in industrial products. the Community agreed to certain compromises on the Common Agricultural Policy. trade ties with the US and Japan (among a small number of industrialized economies) come under the second category of MFN treatment. services and capital. and the accession to the European Union since 1 January 1995 of Austria. then President of the European Commission. with countries which are not party to the WTO (based on non-preferential agreements). by the end of the eighties. free trade agreements were signed in 1972 and 1973 between the Community and EFTA countries. education. fisheries and transport are provided in bilateral Agreements which accompany the EEA Agreement. which is made up of members of the Council of the EU and the Commission plus one member for each signatory EFTA government. The meaning of this is that the vast majority of the Union's trading partners qualify for some form of preferential treatment. the EU countries have five types of trade relationship: 1. SMEs and tourism. The institutional framework of the EEA comprises: the EEA Council. It is also clear that the EU does not always expect (or demand) reciprocal concessions from those trading partners to which it extends trading privileges. The Treaty on the European Economic Area (EEA) was signed in 1992 by the governments of twelve EU countries and six EFTA countries. and which provides political impetus for the implementation of the Agreement and lays down general guidelines. The negotiations got underway in 1990 and were completed in October 1991 between the Community and EFTA as a body on the basic. which thought that the Community was going too fast and too far along the path of European integration. Jacques Delors. the audiovisual sector. In 1989. 2. Sweeden and Finland. These are the “” horizontal policies” which have an impact on business activity. EEA EFTA countries participate in the decision –shaping process in the ambit of the Commission. and the fields such as research and development. Iceland. Special arrangements on agriculture. which provides a forum for representatives of social partners. as a result of the negative Swiss referendum. 5. the EEA Joint Committee and the EEA Consultative Committee. information. the scale of their commercial relations with other EFTA countries made it impossible to preserve customs barriers between two groups of countries. represented 25% of total Community trade and between 40% and 65% of that of the EFTA countries. proposed and the European Council agreed to further strengthen the relations between the two European trade blocks. Concerning this hierarchy. As a consequence. international trading relationships which are free from tariffs and from other impediments. Trade ties with other European economies and with most developing economies fall principally into the third category of preferential conditions. which was matched by reciprocal EFTA concessions in the agricultural field. Other Agreements cover inland transport. air transport. For example. although some of the developing markets that receive preferential treatment from the EU remain outside of the WTO framework. notably social policy. Furthermore. Apart from the implementation of the four freedoms of the common market. environment. 3. the EU can be said to discriminate in favour of certain countries and to operate a hierarchy of trading preferences. one-way (non-reciprocal) preferences are extended to a number of developing economies and to former European colonies under the EU's Generalized System of Preferences (GSP) and the EC-ACP Partnership (see subsequently). EEC-EFTA free trade has operated in a satisfactory manner and has brought about sustained growth in trade between the two groups of countries. As a consequence. 4. on 6 December 1992. The European Free Trade Association and European Economic Area The European Free Trade Association (EFTA) was set up in 1959 on the initiative of the United Kingdom. statistics and company law. persons. the EEA Agreement also provides for relations between the Community and the EFTA countries to be reinforced and extended in area which have an impact on business activity. consumer protection. within the EU customs union itself. undertook to take on board existing Community legislation concerning the free movement of goods. and Liechtenstein. free 130 . However. legal and institutional aspects of such a global agreement.

Iceland. Israel. encompassing all those areas where interdependence exists. This contains provisions designed to iron out economic. Relations between the Community and the Mediterranean countries have become ever closer in three phases. As a consequence. Portugal. Their Agreements provide for a customs union with the Community. In another communication the Commission proposed three areas of priority assistance: for economic transition. The Mediterranean policy has not only been staggered in time but has differed from country to country. immigration and the environment. with a view to a possible customs union or even accession. economic and social development. and although special arrangements are established for agriculture. Malta has thus been associated to the Community since March 1971. which are now fully-fledged members of the European Community. According to the Commission. It appears that the EEA will continue to exist and to govern relations with Norway and Iceland in particular.movement of persons. chiefly with the Magreb and Mashreq countries and Israel. whose process would begin with a gradual liberalization of trade. such as economic development and trade. scientific and technological cooperation. successive EEA Councils have concluded with affirmation of the agreement's value and functionability. Acting on the conclusions of the Courfu European Council. Therefore. and technological research and development. It provides for support measures in three areas: economic transition. public procurement. Nonetheless. Sweden and Finland). an enhanced economic and financial cooperation aiming at the creation of a free trade area. during a period extending from the sixties to the eighties. Cyprus. Spain and Portugal. Malta. social and regional disparities under the cohesion principle. there may be some doubt over the long-term survival of the EEA as a distinctive economic area. cultural and human dimensions. fisheries and transport. supported by a substantial financial aid package. Following the political choices of successive governments it has applied for accession to the EU. Not being a party to the EEA agreement.Norway. stability and prosperity in the region. Switzerland has negotiated with the EU sectorial agreements on the free movement of persons. agriculture. The three key components of the Euro-Mediterranean partnership are: a reinforced and regular political dialogue. Syria. air transport. the EU’s Mediterranean policy should become multi-faceted. Lebanon. Egypt. Most other Mediterranean countries have close relations with it. With the accession of new EU members from the ranks of the EEA membership and with the refusal of Switzerland to join the EEA. Turkey and the Palestinian Authority). security. And regional and cross-border cooperation. the transport of goods and passengers by rail and by road. Liechtenstein and Iceland At the head of the EU's hierarchy of trading preferences are the three parties still outside of the EU that are signatories to the European Economic Area (EEA) Agreement . In practical terms. the Commission in a communication of October 1994 proposed the establishment of a Euro-Mediterranean partnership. An Important Euro-Mediterranean ministerial conference took place on 27 and 28 November 1995 in Barcelona between the EU and its twelve Mediterranean partners (Algeria. The Community always took an open line towards the European Mediterranean countries. Malta and Cyprus The countries of the Mediterranean are of considerable economic significance for the EU. mutual recognition of certificates of conformity. constituting as a group one of its largest trading partners and having close historic and cultural ties with some of its member states. the EEA countries contribute to the financing of the Cohesion Fund in favor of Spain. Austria. freeze its application for some time and relented the negotiations foe accession in 1998. An association agreement with Cyprus was concluded in May 1973. Liechtenstein. Morocco. The long-term objective is the creation of a Euro-Mediterranean economic area with more than 800 million inhabitants from some 40 countries. Tunisia. Iceland and Liechtenstein. A new phase of close cooperation began in 1995. for it helped establish strong democracy in three Mediterranean countries: Greece. and a further strengthening of the social. Alone amongst the EFTA countries. and mutual recognition and conformity assessment. In July 1990. At the end of the proceedings. The European Economic Area Agreement: Norway. before moving on to closer political and economic cooperation and finally to close association. trade in agricultural products. for a better socio-economic balance and for regional integration. the two republics applied for 131 . Greece and Ireland. persons and capital. The EEA Agreement was concluded in 1994 between the then EU-12 and six of the seven countries constituting the membership of EFTA in 1994 (Norway. the ministers adopted a Declaration and a work programme instituting a regular political dialogue and enhanced cooperation fostering peace. Switzerland refused to ratify the EEA Agreement. the EEA is effectively an enlarged single market and has added services to the industrial goods free trade area established by the 1972-73 free trade agreements between the EC and EFTA. This policy has paid off. A Community budget heading called MEDA constitutes the single financial instrument for the implementation of all cooperation activities with the countries concerned. Norway and Iceland are associated in the implementation and development of the Schengen acquis under the Treaty of Amsterdam. services. the EEA establishes the mutual application of the four freedoms of the Single European Market as laid down by the Treaty of Rome -the freedom of movement of goods. and public procurement. Jordan. Customs Union Agreements: Turkey.

The EAs also provide for some concessions on agricultural trade and for the progressive elimination of barriers to commercial services trade. A customs union between Cyprus and the EU should be completed by the year 2003 and with Malta by 2004. that progress towards accession and towards a just and viable solution to the Cyprus problem will naturally reinforce each other. As a result. The agreement covers industrial and processed agricultural goods. including Turkey. the EU is making progress towards a series of new association agreements with nine economies in the Mediterranean basin. For a number of agricultural products. The core of these agreements . the Pacific and the Caribbean region. under a customs union. Each of these agreements will provide for a reciprocal free trade area in industrial goods (by 2010) with special arrangements governing trade in agricultural products. Palestine. Hungary. Textiles and agricultural trade are covered by special protocols removing most quota restrictions on Turkish imports. Cyprus and Malta have also made progress towards customs unions with the EU. the EU has extended a series of trading privileges to these states. It is to be recalled that. The Barcelona Declaration of November 1995 states that the association agreements concluded with the Community should be followed by similar agreements on free trade and co-operation among the Mediterranean countries themselves. to develop the region's economic and social infrastructure and to establish suitable regulatory systems. which have generally benefited from non-reciprocal free access to the EU market for most industrial products and for some raw materials and agricultural products. The effort now is to upgrade and (to some extent) to harmonize these privileges as a part of a structured effort to create a more cohesive and open Euro-Mediterranean Economic Area (EMEA). Bilateral Association Agreements are to be joined by a series of multilateral activities in the politicalsecurity. coal and textiles imports were removed in 1999. financial and commercial co-operation. Syria and Tunisia Somewhat behind the development of the Europe Agreements (and more limited in scope). indeed. This forms a part of a wide-reaching Euro-Mediterranean Partnership based on political and security dialogue. Poland. including the Turkish Cypriot community. 132 . European Association Agreements: Bulgaria.Community membership. In Israel's case. The conclusion of such agreements between the twelve 'Med' economies should result in a Euro-Mediterranean FTA of at least twenty-seven countries. textiles and clothing. Turkey's tariffs for third countries have generally been lowered. Egypt. Residual EU restrictions on steel. Turkey and the EU formed a customs union on 1 January 1996.in commercial terms at least . The creation of such a vast free trade area will be supported by multi-party efforts to promote private investment in the Mediterranean basin. Romania. economic-financial and social-cultural fields. Israel. Duty and quota free access to the EU market is already in place for industrial items. Malta and Cyprus. Malta and Cyprus. the Czech Republic. Lithuania. Euro-Mediterranean Association Agreements: Algeria. It trusts. Jordan. Lebanon. Such steps are generally seen as a precursor to the full integration of these countries into the EU. all of which should be in place by the year 2004. border charges apply but at reductions on standard MFN tariffs. tariffs and quotas are eliminated on trade between members and that they apply a common external tariff on those imports covered under the terms of the customs union agreement. Latvia. and help to bring about civil peace and reconciliation on the island. economic. ACP-EC Partnership Agreement: seventy-one developing economies The ACP-EC Partnership Agreement applies to seventy-one developing countries from Africa. As a part of this customs union. For a number of years. The Agreement provides non-reciprocal tariff-free access to almost all ACP products on the EU market. The Union believes that Cyprus’s accession to the EU should benefit all communities. social and human affairs. Morocco. While Lome I-IV have promoted the economic growth of the ACP states. Estonia. fisheries.is the creation of a series of industrial free trade areas. Slovakia and Slovenia Ten European Association Agreements ('Europe Agreements') concluded by the EU member states and reforming CEECs have served to create the beginnings of a free trade area joining the European Union to much of Central and Eastern Europe. The ACP-EC Agreement builds on the successive Lome Conventions which have regulated trade between the ACP countries and the EU for nearly thirty years. and partnership in cultural. These unions will involve the elimination of all tariffs and quantitative restrictions on all manufactured goods and on a number of agricultural products. The EU is in the process of developing customs union arrangements with three applicant countries Turkey. The pre-accession strategy for Cyprus took on added importance when the Luxembourg European Council in December 1997 started the accession process for that country. Turkey has adopted the EU's Common External Tariff on most products. their present level of development requires the continuation of preferential treatment. trade co-operation was enhanced by conclusion of a special Co-operation Agreement in 1975.

3%).1) and over one-quarter of international services transactions. Russia (2. without any formal agreement and without any involved reciprocity. The European Union is itself the world's largest trade grouping. argument has surrounded the extraterritorial effects of US trade legislation (e. Switzerland (6. Russia (3.1%). tariff reductions vary depending on the type and sensitivity of the product.2 billion in 1991. Relations with these countries are amongst the most important of the EU's external ties. Taiwan (2. Norway (3. Turkey (3. energy and manufactured goods. EU-US relations have always been characterized by dispute over trade questions.58 billion. Even discounting internal trade between the member states. In the same year (1998). establishing a merchandise trade surplus of just under €20 billion. the EU and the US have also worked together to conclude the Information Technology Agreement. These countries have complete exemption from duty for industrial products and admission of a wide range of agricultural products under zero-duty rates. For semisensitive products. Despite such co-operation.4%). Subsequent sections add a statistical profile to this trading relationship and that with the United States. with a low of ECU 70. all countries covered by the scheme face the same tariff rate on each product line irrespective of their relative competitiveness or level of development. relatively weak domestic demand (causing exports to rise faster than imports). The NTM plan is being realized under the auspices of a Transatlantic Economic Partnership (TEP) agreed between the EU and US in London in May 1998. Although market access remains a thorny issue.8%). The relationship between Japan and the EU has historically been more difficult. Norway (4. It should be noted that when a GSP beneficiary's exports exceed 25% of EU imports in specified sectors.g. An outline of a plan is in place which would see the elimination of mutual industrial tariffs by the year 2010 and the establishment of an EU-US free trade area in services. according to the Eurostat-Comext database. Rather. in turn. the Basic Telecommunication Services Agreement and the Financial Services Agreement. The biggest exporters to the EU were the USA (21. the proposals are intended to achieve a bilateral platform for free trade which would set an example for others. the Helms-Burton Act on Cuba). An imbalance of trade (in favour of Japan).9%). These agreements build on the GATS deal secured under the Uruguay Round and liberalize large portions of international trade in services. hormone-treated beef and genetically modified food products. the modulated preferential duty will be 35% of the CCT. the largest share of imports by value into the EU enters under non-preferential conditions. provide 9% of the Union's wealth. bilateral co-operation has developed on multilateral trade issues and the EU and Japan have strengthened a bilateral dialogue on trade and investment barriers. EU controls on Japanese imports and innumerable obstacles faced by European firms wishing to export to Japan have all been at the heart of longstanding tensions. However.4%). Member states trade The importance of international trade from a European perspective cannot be overstated. the EU countries imported €712. This reflects the status of countries such as the United States and Japan among the EU's most important trading partners. 7. Many imports are completely exempt from customs duty. The proposal for bilateral free trade in services is not dependent on multilateral agreement to completely liberalize global services trade. This improvement in external trade performance can be explained by a number of factors including the real depreciation of many EU currencies. aerospace subsidies. In 1998. Japan (9. a series of generalized duty reductions for imports originating from developing economies.9%). then its GSP benefits will be withdrawn.0%).37 billion worth of goods. In recent years.2%). In recent years. In the context of the WTO.3%). The trade of member states is dominated (in value terms) by merchandise trade consisting of trade in raw materials. the EU recorded major trade deficits. The NTM proposal has been carefully designed to be compatible with all multilateral commitments such that the elimination of industrial tariffs by 2010 must be multilateralized.8%).3% of EU total). it is responsible for approximately one-fifth of world trade in merchandise goods (see Table 12. special concessions apply to a small number the 'least advanced' of the developing countries such as Bangladesh. For very sensitive products (such as textiles and certain agricultural products) the preferential duties are as much as 85% of the CCT duty normally applied. The European Commission estimates that between 10 and 12 million jobs depend directly on exports which.The Generalized System of Preferences: 145 developing economies The GSP scheme has long seen the EU grant. China (5. In principle. Switzerland (7. the EU's export trade in merchandise goods (excluding intra-EU exports) totalled €731.6%) and Poland (2.2%). the EU's external trade performance has steadily improved. Between 1988 and 1992. A peak ECU 49 billion surplus in 1997 concluded five successive years of positive trade performance.9%)) and China (2. The EU's largest (individual) export markets were the USA (22% share of EU total). EU-US relations are currently dominated by proposals for a New Transatlantic Marketplace (NTM). However. Poland (3. The granting of these reductions (renewed multi-annually) has been to the benefit of over 100 developing countries. Yemen and Nepal. high-productivity growth and the opening up of 133 .3 EU external trading relations: Japan and the US It should be clear then that the EU has only a small number of purely MFN suppliers. Under the present arrangements. Japan (4.

0 4 5.1 171. China and the CEE markets).0 272.7 93.2 188. The list includes seven of the EU-15 and compares their individual (national) performance with other producer-exporters over the last twenty years.0 3 9.1 2.new export markets (e.4 70.1 78. a figure which falls to 26% if intra-EU trade is stripped out.7 Korea Mexico Taiwan Singapore 133. The EU is the world leader in this field and a list of the world's top ten commercial services exporters features no less than seven EU states (see Table 12.8 Source: World Trade Organization.7 99.0 683. Table 7.7 34.3 133. Russia.5 2.5 9 2.2 3.9 3. It is interesting to note that the top six countries have not changed their ranking throughout this time and that newly industrialized countries such as China. A narrowing in the EU's trade surplus in 1998 reflected the economic and financial crises that beset the Asian markets during this year.8 2 17.9 104.7 240.3 813.9 109.9 10 2.3 Leading exporters in commercial services.9 117. 1989 and 1998 1979 1 2 3 4 5 6 10 8 34 27 11 Rank 1989 1 2 3 4 5 6 7 9 14 11 10 1998 1 2 3 4 5 6 7 8 9 10 11 29 13 12 37 20 13 22 12 14 32 17 15 Source: World Trade Organization Exporters 1998 Value ($bn) USA Germany japan France United Kingdom Italy Canada Netherlands China Hong Kong Belgium-Luxembourg 683.2 183. Singapore.2 Leading exporters in world merchandise trade 1979.0 307. Mexico and Malaysia have made dramatic trade gains. 1998 World exports Rank Share (%) Country/Grouping Value ($bn) 1998 1 20.5 109.6 280.7 388.7 109.g.2 8 2. and as can be seen in Table 12.7 10 2.5 205.7 109.8 174. Table 7.1 22. the United States' share is just 18% and Japan's just 4% (based on WTO estimates for 1998).1 Leading exporters and importers in world merchandise trade (excluding intra-EU trade). European Union USA Japan Canada China Hong Kong Korea Mexico Taiwan Singapore World imports Rank Share (%) Value ($bn) 1998 2 1 3 4 6 5 10 7 8 9 801.1 6 4.6 34.5 6.7 48.5 2.6 4 5. 1998 Rank Share (%) Value ($bn) 1998 1 18.6 183.3 174.3.9 75. Table 7.9 214.0 140.5 3 6.7 4.3 8 3.7 5 5.2 Source: World Trade Organization Exporter USA United Kingdom France Germany Italy Japan Netherlands Spain Belgium-Luxembourg Hong Kong By comparison.8 6 4.5 19.4 Table 7.3 5 4.3 4. The EU's capabilities in this field reflect the maturity of its leading 134 .4 944.0 9 2.3).6 2 7.7 48. the EU states are responsible for 45% of all global services transactions.2 117.0 539. Together.2 101.3 128.8 Trade in services is of major importance to the EU economies.7 388.7 60.3 214.1 233.3 198.1 7 3.8 7 3.2 disaggregates the merchandise trade performance of the EU states providing a ranking of individual (national) exporters and incorporating intra-EU exports.

Group MERCOSUR Type Customs union Association of Free Trade Area South East Asian Nations (ASEAN) European (EU) Union Common Market Members Argentina Brazil Paraguay Uruguay Brunei Indonesia Malaysia Singapore Philippines Thailand Cambodia Laos Myanmar Vietnam Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg The Netherlands Portugal Spain Sweden UK Canada Mexico USA Population (million) 217 GDP (PPP) $bn 1. The EU runs a significant trade deficit in raw materials. industrial and transport equipment (including motor vehicle production). Population figures. printing and publishing. Development on the General Agreement on Trade in Services (GATS). Belgium in iron and steel. Germany's strengths rest with engineering. travel services. Spain in leather goods. estimates for 1998. machinery and transport equipment markets. Table 7. finance and insurance. telecommunications. 1999. These agreements mean that WTO rules will apply to over 90% of global trade in telecommunications. chemicals. Portugal in textiles. Source: CIA World Factbook 1999 7. Each country holds a presence in most sectors but is relatively specialized. transport and telecommunications. financial and business services especially) and with a number of high value added and high-skill manufactures such as chemicals. France's comparative advantage rests primarily with the food and beverages sector. agricultural produce. pharmaceuticals. It is also a major exporter of wheat and dairy products.759 376 7. production machinery. Its domestic services market is one of the most integrated and lightly regulated in the world. Accordingly. latest available estimate. Italy specializes in cement and clay products.4 The emergence of regional trade blocs and the global Triad The growth and consolidation of the EU as a regional trade grouping must be observed in terms of a trend towards 'regionalized' economic unification in the new global economy. that the EU has been a driving force behind the efforts to realize an open global market in services including computer and information activities. energy. motor vehicles and food products. food and beverages. which established a set of basic rules and obligations regarding world trade in services. Each country retains a presence in most industrial sectors but specializes in narrow product categories within each industry and with concentrations on high value added segments. paper and furniture. Among the four large EU states. plastics and metals. In this view.9 9. Ireland in food. other patterns of trade specialization include the Netherlands in electrical machinery. machinery and transportation equipment.752 North American Free Trade Area 403. textiles and clothing. chemicals. chemicals. refining and industrial chemicals.214 Free Trade Agreement (NAFTA) Note: GDP and population figures calculated from national statistical entries. CDP dollar estimates for all countries are derived from purchasing power parity (PPP) calculations rather than from conversions at official currency exchange rates. therefore. clothing and textiles. is crucial to the long-term interests (and growth) of many EU businesses. banking and insurance.457 500 1. GDP figures. It is unsurprising. cars and machinery. with significant progress towards tariff reductions. the EU has been a major influence in the conclusion of post-Uruguay agreements in the fields of telecommunications. Elsewhere in the EU. information technologies and financial services. fuels. the UK is relatively specialized in financial services.4 Major regional economic groupings (REGs). The EU's competitive advantage now rests heavily with a number of commercial services (transport services. the EU maintains a healthy trade surplus. In several commercial services. IT. aircraft. and Sweden in wood products. chemicals and glass.economies (each of which has a developed service sector) and the openness of EU markets. the EU bloc is seen as 135 .

0 47. Liberalization of trade between countries within these blocs promotes trade (trade creation) and supports efficient patterns of specialization.0 0.0 20. Most MNEs focus attention on attaining a global balance in their business activities but interest in diverse international 136 .2 63.6 27.2 0.2 28.7 0.8 United States 18.0 0. East and South-East Asia 24.6 0.5 0.7 20.7 14.1 0. In 1997. Various economic groupings and the degree of economic integration pertaining to each group in 1999 are shown in Table 7.2 0.5% of inward FDI flows went to the Triad economies who were responsible for 75. Trade creation effects have been apparent within the EU but perhaps more significantly.0 0. Any assessment of international trade and investment data would support this conclusion.5 35.4 4.5 Regional distribution of FDI flows.9 29.2 Central Asia 0.5% of all outward FDI in the world economy (see Table 7.1 The Pacific 0.3 14. Many observers have concluded that.1 14.2 1.3 26. quotas and non-tariff barriers. the development of the EU from a common market to an economic union has been brought much closer.7 27. the adverse effects felt by the Caribbean sugar industry following the UK's entry into the EEC in 1973) its extent has been limited by a lowering of tariffs (through GATT) and through preferential trade deals with former colonies and non-EU member regions.3 23.5 1. Common markets are those which.4 0.0 0. 1994-97 (percentage shares) Region-country Inflows Outflows 1994 1995 Developed countries 58.7 japan 0.8 37. the US and EU .2 14.0 1.2 1. a common fiscal and monetary policy.2 0. With the realization of a single currency in Europe.3 31.5 South.0 42. members have a common external policy on international trade with non-members.4 12. on balance.1 50. Over 75% of production and sales in automotives. Although a degree of trade diversion has been apparent (for example.4 3.6 -0. MERCOSUR and ASEAN.0 0.0 20. It may be recalled that a free trade area (FTA) sees a group of countries agree to removal all trade barriers .1 0.2 21.1 Asia 25.1 0.7 12.6 23.8 12.7 27.4.7 22.2 11.8 1. Japan.3 West Asia 0.1 4.1 12.9 0.5). an economic union is formed when the individual member countries agree to forgo unilateral control over economic-decision-making and policy.9 0.4 4.6 Developing Europe 0. The levels and forms of economic integration have been characterized in Chapter1.4 Developing countries 39.6 100 1994 85. steel and other major industrial sectors takes place inside the Triad.3 Other Western Europe 2. petrochemicals.8 46. Finally.2 22. chemicals.8 100 Considering the volumes of trade and investment now concentrated in the Triad it is unsurprising that such concentration of economic activity is changing the strategic focus of many multinational enterprises.9 0.2 100 1997 84.6 0.6 17.5 0.9 Western Europe 32.9 Africa 2.8 6.4 12. the expansion of trade within the bloc may potentially take place at the expense of trade with non-member countries (trade diversion).6 Latin America and the Caribbean 11. the enlargement of the Union and the expansion of the EU's preferential network of free-trade agreements.3 5.7 100 1997 58.each of whom he saw as dominating a regional economic theatre.7 0. The next stage of integration is a customs union in which as well as adhering to the removal of all trade barriers.0 14. 50.1 38.5 7.tariffs.4 15. Table 7.1 European Union 29. also feature additional provisions to encourage trade and integration through the free mobility of factors of production.3 1.3 2.3 22. There is no doubt that these economies dominate the global economy and anchor dynamic regional markets.just one (albeit perhaps the most important) of a number of regional economic groupings (REGs) including the North American Free Trade Agreement (NAFTA). Ohmae labelled these markets 'the Triad'.4 0.1 100 1995 86.1 0. Conversely.4 13.1 3. the creation of the EU has had a beneficial effect on world welfare.0 6.3 World 100 100 Source: World Investment Report 1999 (UNCTAD/WIR. the creation of the single market has also catalyzed inward trade from non-EU members.8 0.4 45. The balance between these effects determines to what extent the creation of a grouping is beneficial to its members and to world welfare.3 37.4 2. along with the removal of trade barriers and the adoption of a common external policy.8 0.2 Central and Eastern Europe 2. 1999) 1996 57. and a unified international trade policy.1 11. Ohmae (1985) argues that the economic world is now dominated by three major markets -Japan.1 100 1996 85.1 6.6 45.2 4.6 25. Despite this. is bound to give some concern to MFN trading partners in relation to potential trade diversion. Each country retains discretion in establishing trade barriers with non-members.9 49. Characteristically this involves a unified monetary system. which continues.7 0.8 9. the US and the EU account for 47% of all world merchanise exports (excluding intra-EU trade flows) and for three-quarters of the world's accumulated stock of FDI. The global Triad The growing trend towards the development of economic unions is having a powerful effect on the shape of international trade and investment.2 42.0 0.

100 53. links with nonbloc members and the potential rewards of business in other markets may encourage many companies to look outside of their regions.160 31. The data highlight the scale of the investment relationships between these partners.616 52. This is the world's largest investment relationship.005 2. Japan is opening up to foreign investment and tackling many of the legal impediments to inward investment.6 12.3 49.915 share on total EU inward stocks 7.9 Outflows Share of EU total Outward stocks US share on total EU outward stocks 1995 31.0 207.967 42.2 1.7EU foreign direct investment with japan (billion Euros) 1995 1996 Inflows 944 324 Share of EU total 2. This reinforces the need for openness between the trading blocs.310 210. it continues to run a sizeable deficit with Japan. and telecom industries. The US shows a trade deficit with both the EU and Japan (which has led to much of the US's concerns over access to European and Japanese markets).0 35.181 43.0 12. Tables 7.579 25.371 5. 1999 1997 27. Figure 12.062 1997 1. 1999 1997 2.9 232.7 7.334 7.6 EU foreign direct investment with the United States (billion Euros) 1995 1996 Inflows 28.585 US share on total EU 51.507 3.9 1997 53.6 Source: European Commission.3 Inward stocks 189.2 0.6 highlight a stock of cross-investment between Europe and the US exceeding €500 billion.2 gives some indication of the intra-Triad trade flows for 1998 (merchandise trade only).243 2.9 inward stocks Source: European Commission.3 2.7 highlight the direct investment stocks and flows linking the EU with Japan and the US.1 Outflows Share of EU total Outward stocks japan share on total EU outward stocks The data in Table 7.137 1.753 59. manufacturing. UN-Comtrade Table 7. While the EU enjoys a small trade surplus with the US. Nevertheless. Figure 7.? 270.6 and 7.583 45. For smaller firms from the developed world. There are relatively few restrictions on inward investment in the US and EU. Concentration on consolidating business or securing a broader position in the home region rather than attempting to expand on a global scale may theoretically be the most attractive option.8 Inward stocks Japan 28.3 1995 1. 1998 (in billion Euros) Source: EuroStat-Comext.8 Table 7.160 39. The inward stock of US investment in the EU had 137 .2 Intra-Triad merchandise flows. A characteristic of the Triad is the high level of trade and investment conducted across and between the members.167 45. the challenges are no less significant. cumulative stocks of cross-investment and recent (annual) FDI flows.9 1996 28.8 64.152 Share of EU total 67.047 1996 2.portfolios must now be balanced with the 'need' for competitive positioning in the three Triad markets.7 298.0 11. Although investment barriers in Japan have long been a problem for many Western firms. Increasing foreign investments is now evident in Japan's banking. Part of the reasoning for this is gaining access to the largest industrial and consumer markets in the world as well as benefiting from regionally initiated R&D programmes either internal to the firm or through government initiatives. This permits exploitation of the advantages being offered by greater integration in home regions and will generally entail less risk.

EUR-OP. White Brian. London. Kate Prescott.en. 2001. Asia and the Americas. Throughout the EU.457-470. Europe's Internal Market Programme (and fear of exclusion from SEM benefits) provided a further catalyst to Japanese investment in the late 1980s and early 1990s.htm) 138 . IBM and Hewlett Packard. Traditionally. n. Understanding European Foreign Policy. the Nissan plant in the North-East of England and the Toyota plant in the Midlands have provided direct and indirect employment opportunities (and altered status) for two ailing UK regions./en/info. Lemarvhe Unique et lÉurope de demain. European Business. Simon Mercado. EU investment in the US is valued at €298 billion (1997) with the US garnering 45% of the EU's total outward investment in 1997. and it is clear why Britain not only accepts Japanese investment but actively encourages it. By the end of 1996. http://europa. Coleman William. Key investors include Ford. 1999. European companies are the number one international investors in forty-one US states. FDI creates new jobs. Woolcock Stephen. on-line journal: http://theepc. 554-570 6.int/pol/comm. Royal Institute of International Affairs. Challenge Europe.be 16. In the 1980s. European Trade Policy.4. http://www. A more recent stimulus has been provided by the moves towards European Monetary Union. Palgrave. 2001. p.asp 15. Nicholas Moussis. it has generally been welcomed. Steil Benn.eu. Financial Times. impact sur la croissance en Europe. integration et specialization. London.eabc. the proportion of Japanese outward direct investment flows going to Europe had more than doubled. Over a ten-year period. Commission Europeenne. pp. The creation of the Single Market clearly had a marked impact on levels of US business activity within the EU. p. 1998 9. For American (and Canadian) firms. EUROP. Oxford University Press. all of which have benefited from major investment projects. Alessandra. making Sense of Europe’s Global Role) 4.ceps. 37-50 13. 556-568 8. Luxembourg. the inward stock of Japanese investment in the EU exceeded ECU 20 billion. 1997 12. Ever Closer Union? Macmillan. a significant proportion of all Japanese FDI assets abroad (€206 billion). direct investment was seen as a means not only of servicing local markets and of building global networks (a traditional view amongst pioneering investors) but of avoiding European trade barriers. Although Japanese investment in Europe remains relatively low compared with US levels (just 7% of total EU inward investment stocks). This is particular true of UK regions such as the North-East. 7.332-350 10. pp. 2001. Rather than face external barriers.be/Challenge_Europe/top.9 billion. technology companies such as Sony and Hitachi decided to locate their production within the EU and to bypass the barriers altogether. a major share of all US FDI assets abroad (€620 billion). 27-46 (Chapter 2. 1999. areas with high unemployment and declining industries have been bolstered by major industrial investments by Japanese firms. Access to European Union. p. 373-399 2. p. levels have grown significantly since the 1970s. While Japanese investment has been controversial (raising fears over the plight of domestic manufacturers). Regional Financial Market Integration: Learning from the European Experience. General Motors. As with Japan.eu.trade. Bibliography on the External economic Relations of the EU and suggested readings: __________________________________________________________________________________ 1. Competition Policy: What Chance for International Rules? In Revue de droit des affaires internationals. Dinnan Dinnan.org/). much of the investment activity of these and other firms has been concentrated in a small number of EU countries (France. Simon Mercardo.Commercial policy (http:// europa. European Union statistics show that annual outward investment flows into the US economy are rising dramatically. Economie internationale.com 14. Ouverture. Present levels of US investment represent approximately one-half of total EU inward investment stocks. 2001. Shelton Joanna. Wales and the Midlands. 1998 11.reached €210 billion by the end of 1996. Increasingly. London. For example. 1998 5. By 1993 (and the completion of the SEM). the stock of Japanese investment in the EU increased dramatically as Japanese firms positioned themselves to exploit insider advantages and as vertically integrated investment took off. Add to this the contribution of Japanese exports to the UK's weak balance of trade figures. penetration of this vast and integrating market was increasingly seen as essential to a company's competitive position in the European and global marketplace. Luxembourg. external restrictions imposed on Japanese exports encouraged many Japanese firms to invest inside the EU.Global Pressures and Domestic Constraints. Illicit Trade and Organized Crime: New Threats to Economic Security. Colecchia. 1999 3. European Commission. Regionalism and Global Economic Integration: Europe. and rank number two in the remaining nine states (http://www. Basingstone. Richard Welford. European Business. 2001. Germany. the Netherlands and the UK). Throughout this period. enhances the capital stock or production capacity of host countries and offers a higher tax revenue for host governments. fears that Europe would become a 'fortress' following the establishment of the Single European Market were also a reason why American investment increased in the region around the period of the IMP. p. the inward stock of Japanese investment in the EU market had reached €31.

Macedonia and the remaining Yugoslav republics. The approach taken here is to distinguish between three main groups of countries. human and natural resource endowments. population figures highlight the size and importance of the Central and Eastern European countries when taken as a group. Slovakia and the former Yugoslav republics of Slovenia and Croatia.6 Slovakia 5. A third group consisting of Russia.6 Romania 22. languages. economic structures. p. existing levels of economic reform and private enterprise.3 Czech Republic 10.0 Sub-total 105.1 Population of Central and Eastern Europe. European Communities' reports and statistics on the Central European Candidate Countries (CECCs) also aggregate Romania and Bulgaria with this group.1. This group of countries also includes Albania. A significant gap in real incomes between Western and former Communist Europe is matched by chasms in income and welfare throughout Central and Eastern Europe itself. however. and the state of macroeconomies.3 139 . levels of debt. Over time. CEECs have embarked on the road of reform from different starting points. Despite this. as markets develop and as living standards increase.1 the smaller countries of the region have populations similar to the size of Belgium and the Netherlands (the smaller EU states). delayed structural reforms and relative instability. The Central and East Europeans 8. the Ukraine. Trade re-orientation and entry into the international economic community 8. It is also clear that a small number of regional markets. While the reader should be clear that the former Soviet Union encompassed fifteen republics (including some in Central Asia). This practice is emulated in the present study. Transition: progress and challenges 8. historical identities.4 Slovenia 2.5 Lithuania 3. there are the countries of 'Central Europe'. Firstly. notably Poland. these four states constitute the remaining 'European' part of the old USSR.7 Poland 38. 3). Of this total some 89 million persons are already linked through the Central European Free Trade Area (CEFTA) providing for a degree of intra-regional trade and economic integration. Central and Eastern Europe is not a homogenous area. Russia and the Ukraine. given the dominant geographic feature of the region. Outside of this group.4. Hungary. industrial structures and economies.0 Others Albania 3. While separate reference is sometimes made to the Baltic states (Lithuania. past experiences of market economics.1 The Central and East Europeans Despite historical reference to the 'Eastern bloc'. have substantial domestic populations. populations of this scale will emerge as a serious variable in the investment equations of many international businesses. consisting of Poland.2.8. As can be seen from Table 8. Most obvious here are the growing differentials between the fast-reforming. Belarus and Moldova is referred to here as the 'European NIS' (newly independent states). 1997 (mid-year) Country Million EU Candidate Countries Bulgaria 8. THE TRANSITION ECONOMIES: CENTRAL AND EASTERN EUROPE 8. variations in initial conditions concerned the length of period of central planning. The countries of the region differ widely with regard to ethnic compositions. the ten countries that are 'candidate' EU members (hereafter the CECCs) have a combined population of some 105 million. and taking into account the majority of former Yugoslav and Soviet republics. In other respects. For example. Several factors have combined to preserve and to accentuate these differences. This reflects their strong orientation towards economic integration with the West (and with Central Europe) and their fellow status as prospective EU members. Table 8. and is frequently referred to as 'the Balkans'.4 Hungary 10. west-oriented countries of Central Europe and the ailing economies of the Balkans and former Soviet Union.2 Latvia 2.3. typified by lower income levels. Estonia and Latvia) these are generally included with this group. the Czech Republic. for a start. As noted by Stern (1998.3 Estonia 1. another 236 million persons may be counted. Romania and Bulgaria are more logically included with a range of countries in South-Eastern Europe. The nature of transition 8.

These recessions were marked by an extraordinary decline in industrial production.most notably the financial crisis in Russia and the conflict in Kosovo . It is also fair to say that differences in the success and progress of reform efforts have been influenced by a country's geographical proximity to Western markets with evidence of a broad distance decay effect on both trade and investment flows between Western and CEE markets. political and national fragmentation arising from the collapse of Communist authority. persistence with reform has been key to a revitalization of output (and growth) following the transformational recessions of the early 1990s. In others (as in Bulgaria and Russia) failures in implementation have contributed.most of the Central European states have sustained their economic growth throughout the final years of the 1990s. and the state sector. and the less educated. For people throughout the region.6 Sub-total 236. property-owners and select private sector workers (on the one hand) and a number of other social groups that have often seen little benefit from the transition to capitalist democracy. The gap between the aspirations to Western living standards and the reality of what is being achieved (and is likely to he achieved in the near future) is a source of popular discontent in CEE societies.g. p. Bulgaria and Russia. This represents a ten-fold increase since 1989 and hints at the emergence of massive inequalities of income in societies from Prague to Kiev. and in the focus of transition policies. except in the former Yugoslavia. This is why the Baltic countries suffered deep initial output losses. Although social experiences have varied from country to country. short-term difficulties extending from poor bank management and insufficient industrial restructuring should not mask the Czech Republic's strong macroeconomic performance since 1993. children. despite vigorous reforms.1 Ukraine 50. various indices of reform progress evidence a strong correlation between faster growth in transition economies and the pursuit of determined liberalization and structural reform. a gulf has opened up between entrepreneurs. millions of jobs have been lost and inflation has eroded savings and purchasing power. to ongoing economic and financial crises. Despite these tensions and disappointments. have also widened the gap between Central and Eastern Europeans. the Czech Republic. countries like the Czech Republic (with past experience of capitalism) and Hungary (with its early engagement with market-style reforms) have generally had a huge advantage over the Balkan economies and the European NIS.5 Yugoslavia 10. over 40% of the region's population live below the poverty line (Meth-Cohn. Indeed. Differences in reform efforts. outweighing the supposed gains of political and economic freedom. Ellman (1997) observes that: the losers have tended to include older (former) employees. 140 .2). Hungary especially has benefited from its shared border with Austria (and by implication with the entire EU) and Poland and the Czech Republic from their proximity to Germany and the core EU markets. those working in agriculture. manufacturing. In general. For these countries. forcing millions into impoverishment. coal mining.0 Moldova 4.7 Croatia 4. In the Central European states.and on the strength of political support for reforms .3 Source: UN/ECE Statistical Yearbook 1999 In this context. therefore. p. 14). similar economic packages were proposed and introduced at some stage between 1989 and 1992 in all of these countries. Romanians or Russians living outside Russia). a decline in real incomes. large families. those transition economies that have pursued reform most vigorously have recovered from the transformational recessions that characterized the region after 1989.is demonstrated in the varying cases of Poland. the newly unemployed. according to the World Bank. 1999.Belarus 10. 2) insists: the dislocation involved in the fragmentation of the Soviet Union was greater than anything that happened in Central and Eastern Europe. What this highlights is an initial period of economic contraction (transformational recession) and a subsequent period of reform-driven growth which has generally slowed towards the end of the decade. Indeed. Since most states began to liberalize their economies in the early 1990s. Today.2 Bosnia & Herzegovina 3. Where conditions and determination allowed for full implementation (as in Poland and the Czech Republic) economic recovery and the growth of private sectors have been impressive. despite adverse external developments in 1998-99 . with falls across the region amounting to average per annum declines of more than 10%.6 Macedonia (FYR) 2. As noted by Ellman (1997). Also relevant is the extent of social.3 Russia 147. governments realize that they must continue with the reform process and see it through to some sort of conclusion. As Wolf (1999. it is possible to talk of two 'developmental phases' in the post-Communist era. higher prices and unemployment have been the most obvious manifestations of the 'new Capitalism'. Although the crisis of the Czech Koruna in May 1997 has slowed down the Czech economy (see Table9. The importance of this factor . ethnic minorities (e. Throughout the region. along with other factors.

1 +4.7 -7.5 +0.1 -21.6 +3.9 -5.For most Central European countries.0 0 EU Candidate Countries Bulgaria 8. Hungary and the Czech Republic. In the following sections some of these features of transition are examined with address of the form and progress of reform in a range of Central and Eastern European states. Slovakia.1 -13. These countries have been dependent on Western largesse in preventing acute economic and financial crises and (with the exception of Romania) have failed to register any sustained positive economic growth since 1990. Output levels remain depressed at between 45% and 50% of 1989 levels.5 -3.5 -10. p.6 +3. Socio-cultural and political tensions. privatization.1 +3. therefore.6 +6.0 -1.9 +6.4 -34.2 -9.0 -5.10 Russia -3.2 -3.2 -11.5 -8.7 -1.4 +3.1 -11.8 -4.7 -9. as applying to Central and Eastern Europe.7 -8.0 +3.2 -9.5 -11.7 -12.encouraged by a 'big bang' reform effort .2 -10.9 +1.9 +1.0 -14.2 Real CDP change (% change against previous year) Country 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 -9.9 +4.1 -3.8 +6.9 +0. legal and institutional reform.8 +2.0 +2.3 -16.9 Slovakia -2.3 Romania -5.7 +6. the Ukraine and the Balkan states remain mired in recession.8 +3. 78). This process involves a range of policy reforms and institutional actions including market deregulation. such as those arising from ideological. refers to the movement away from a command to a market economy and to the creation of a new system for the generation and allocation of resources.5 -8.9 -12. although Poland's recovery .5 +2.9 +4.6 +3.0 +6. The nature of transition The concept of 'transition'.6 +2.7 -8.3 +4. and banking and financial sector reforms.5 +2.9 -5. The fundamental nature of these changes (coupled with the need for political reforms) makes the problem of transformation in Central and Eastern Europe quite different from the development problem of raising per capita incomes in poor market economies.5 -14. ethnic and national divisions.8 +2.5 +4.8 +5.9 +6.1 -11.6 +1.3 +0.2 +4.3 -3.2 -22. enterprise restructuring.2 +6. price liberalization.5 -3.9 Estonia -8.9 -14.3 +4. can also weaken the cohesion of central governments and complicate the process of economic reform (witness the case of Yugoslavia).5 +2.5 Others Croatia -7.9 -7.7 -2. the second of these phases appears to have started at some point between 1993 and 1994.3 +4.0 +11. The introduction of new market-based systems also entails concerted policy action directed towards macroeconomic stabilization and a massive reorientation of foreign trade and external economic relations towards Western markets and institutions.8 +4. 1997.1 -0.6 -12.5 +1.3 Lithuania -6.7 -21.0 Czech Republic -1.8 +4.9 -8.9 Hungary -3.0 +6.5 -4. Table 8.9 -6.0 +6.6 -14. Russia.2 +3. such as Poland.9 +6.1 -7. In contrast to these Central European states.8 +5.8 Slovenia -4. Slovenia.4 +4.8 +1.7 +4. Even in the more economically advanced countries of Central Europe.0 -3.9 -3.9 -10.8 +3.can be traced back to as early as 1992 (Carlin and Landesmann.6 -6.3 +8.5 +4.0 +5.6 +3.9 -14.1 Latvia -3.8 Ukraine -3. whose output levels have been restored to between 75% and 120% of 1989 marks.4 +4.5 +1.3 -1. there is unfamiliarity with the mechanics and institutions of market-based capitalism and a nest of challenges surrounding financial.0 +7.2 -1.6 -7.5 +4.7 -4.2 +7.8 Poland -11.6 -1.2. Market deregulation 141 .6 -0.0 -2-7 -0.4 +1.

Hungary and Yugoslavia. with only minor exception in Poland. and price liberalization (the release of previously fixed and unrealistic prices). Foreign economic activity was also limited to the exchanges of COMECON (at least in substantial part) and foreign ownership of enterprises was strictly prohibited. expertise and technology. in ownership change. macroeconomic stabilization programmes have usually consisted of measures designed to curb inflation and to balance government expenditure. Most of the governments and central banks in Central and Eastern Europe began the implementation of stabilization measures from the onset of market-based reforms. we have already identified the privatization of enterprises or the transfer of businesses from the state to the private sector. In the CECCs. governments in Eastern European countries exercised tight controls over prices and outputs (setting both through state planning) and. such as the introduction of VAT in Slovenia. structural measures aimed at creating private market economies have included privatization. continuing inflationary pressures relate primarily to the rapid growth of real wages. efforts were directed at controlling hyperinflation and at improving current account and fiscal balances. precluded private sector firms from operating in all sectors of the economy.000% in specific cases. in the early years of economic reform in Hungary. Consequently. the introduction of convertible currencies fand their consequent devaluations). Privatization has been seen to play an important role in improving state budgets (through sale proceeds and/or reduced subsidies). stabilization measures were quickly introduced as new enterprise laws.g. the inflationary consequences of price liberalization . These measures are central to the establishment of market conditions and to the facilitation of enterprise restructuring. combining these methods with conventional capital-based 142 . price and trade liberalization led to rising levels of inflation and to an initial deterioration in current accounts and fiscal balances. the legacy of the Communist era included over-employment (and high prospective welfare costs). large budget and balance of payments deficits. The more complete the initial price liberalization. These underscore the severity of inflationary pressures experienced in the CEECs following the abandonment of Communism.essentially as a source of financial gain and competitive efficiency . It has also been seen as central to the restructuring of enterprises. the introduction of competition policy (and the dismantling of state monopolies). and (in certain cases) high levels of sovereign debt. It is a process common to all transitional economies although one that has been managed variably and at different speeds. It should be recalled that before the collapse of Communism in 1989-90. Privatization Among the structural measures necessary to establish market economy. the reduction of subsidies. In Poland and Czechoslovakia. and other cuts in government expenditure. currency conversions. While the implementation of many structural reforms (especially enterprise privatization) can be realized over a number of years. Privatization has also been viewed among CEE governments as a means of reducing the state's administrative burden and of creating a broad basis of support for market reforms through mass participation. where a rapid 'shock therapy' model of transition was selected. foreign trade liberalization (permitting enterprises to engage in foreign trade). In fact. In Poland. the bigger the initial price explosion' (Ellman. repressed inflation. These included increases in taxes. goods and services were artificially low when compared with world prices. Poland and Czechoslovakia. where huge inflationary pressures were unleashed by quick moves to the market. Macroeconomic stabilization Measures aimed at structural transformation have generally had to be launched within the context of (national) macroeconomic stabilization programmes. It must also be recognized that stabilization measures were required regardless of the course and patronage of reforms.Market deregulation (or liberalization) involves removing legal restrictions to the free play of markets and to the establishment of private enterprises. and to bringing in Western investment capital. 1997). and in the breaking-up of state monopolies. Inflationary pressures also continue to emanate from further adjustments in administered prices and from indirect tax measures. In Hungary too. restrictive monetary policies extended to the creation of positive real interest rates and to the direct regulation of bank lending. in providing for efficient management of firms at the expense of former SOE stakeholders. reform of the banking and financial sectors. This established a margin for increase in consumer prices that contributed to early experiences of hyper-inflation. stabilization measures have generally been required from the onset of market-oriented reforms. Rigid incomes policies were also introduced during the early stages of reform. Other countries have pursued populist 'give-away' voucher-type programmes and/or 'insider privatization' to privatize swathes of industry.and the contingency of much Western lending on tight fiscal policies. subsidy cuts.e. For nearly all of the CEECs. which had for many years been taking gentle steps towards a prices for food. A continuing disinflation process is being supported by the operation of tighter monetary policies (partly through pressure from international bodies such as the IMF) and by the continued decline of input prices. it is only really in a number of states (in Hungary and Estonia for example) that governments have concentrated on the outright sale of state assets to strategic (Western) investors.has been promoted in the CEECs alongside a number of wider benefits. with peak (annual) rates reaching over 1. For example. the popular image of privatizations in Western societies . Thus. This reflects both the initial impact of the movement away from central planning . Although varied in their forms.

mass privatization by which 'free' vouchers transferable for shares in privatized firms or in investment funds are distributed to all adult citizens. when we examine the scale of operations and the spectrum of privatization schemes across the region. Adult citizens (who were eligible to receive 1. Several criticisms have applied both to the nature and scope of privatization efforts in the Czech Republic. Hungary By contrast. While such methods have sometimes facilitated speedy privatization. the different routes to privatization in CEE states can be seen to include: 1. outlets and factories. although the voucher system has succeeded in enabling mass privatization in Czech Republic. 3. it is clear that privatization has taken (and continues to take) a variety of forms both within and between countries. the focus of Hungarian (large-scale) privatization has consistently been the attraction of significant foreign investment through auctions and direct sale. 2. More recently. This privatization round proceeded on a similar basis. the country's big power producer (see Kapoor. Individual investors (and IFs) received confirmation of their share ownerships in the middle of 1993 (see Potts. resulting largely from the turbulence during the partition of Czechoslovakia. they have not always brought great budgetary benefits or deep-level enterprise restructuring. banking and petrochemicals sectors and has developed plans to accelerate industrial privatization. although the state retains 'golden shares' in strategic firms such as MOL (the main oil and gas importer-producer). because IFs are partly owned by leading state banks. the Czech government has embarked on the direct sale of stakes in strategic companies in the telecommunications. 5. Tungsram Tight. Compared with the Czech Republic. 1999). restitutions to former owners and the auction of small-scale enterprises took place quickly as a precursor to the privatization of large-scale enterprises. Following these auctions. The privatization processes underway in Central and Eastern European economies. many more will stay in state hands including firms such as Budvar (beer) and CEZ. 1999). gas and telecommunication sectors. 1999). the current shake-up of the Czech banking system is already seeing the return of many unreconstructed companies to state control adding to the volume of Czech 'corporate dross' that nobody wants to buy (see Kapoor. Significantly. Foreign strategic investors were also able to buy large blocks of shares in enterprises from the newly created National Property Fund (NPF). In Hungary. a second wave of large-scale transfers was commenced in late 1993 involving nearly 700 companies. there are relatively few (inefficient) enterprises left in state hands and a large section of control of important industries is now under foreign management. The evidence on privatization in the CEECs is that this is an aspect of structural reform that few countries have found easy. Third. 143 . it is only fairly recently that the state has turned its attention to the privatization of banking and utilities. the privatization of firms through employee or management buy-outs. although there are plans to sell around a dozen large state companies over the next few years (from a variety of sectors). First. 6. This fund retained significant stakes in nearly all major companies. the restitution of enterprises to their former owners. the Hungarian government sold the state lighting company. centered largely on small hotels. capital privatization (sale at full or significant price to strategic investors -including foreign investors). privatization has reached an advanced stage with movement into transport. insider privatization (selling firms or firm assets to enterprise insiders. As early as January 1990. Finally. Indeed. 4. the nature of the approach has meant that there have been no major revenues for the state (and for enterprise restructuring) as a consequence of the voucher privatization of nearly 2. Fourth. The Czech Republic In the Czech Republic. Indeed. Second. This programme was based on the issue of voucher point books at a symbolic nominal price.000 enterprises. privatization is virtually complete. These funds quickly attracted a large share of all voucher points and then bid for the shares on offer in the privatization programme. have evidenced a mix of these methods. often at reduced prices).000 Czech enterprises) was then completed in 1992 through a mass privatization programme. this creates a situation in which banks are often lending money to companies which they also 'own'. After some delay. that few have managed to complete and that has been marked by numerous and varied methods. to General Electric (of the US) and subsequent rounds of privatization have seen foreign investors establish majority or large minority stakes in key enterprises in the electricity. Privatization revenues have accounted for almost one-third of FDI and have promoted considerable organizational restructuring in privatized Magyar enterprises.privatization. the transfer of small state assets such as shops and restaurants by sale or lease (generally with favour to current employees). little restructuring of enterprises was undertaken before mass privatization. a first wave of large-scale transfers (involving nearly 1. Indeed.000 voucher point books) were thus able to become individual investors in single enterprises or in investment funds (IFs). banking and financial sectors.

privatization has also worked with a voucher scheme component (see Potts. 1998). The approach also created limited scope for restructuring of enterprises as it brought in little foreign investment (or expertise) and exposed few companies to increased (external) performance pressures. 1998. approximately 6. with managers often consolidating their control by progressing to buy shares from their employees. While it is not possible here to consider other states at length. for example. A second wave of privatization (which began in 1995) has included a controversial shares-for-loans scheme. Russia In Russia. Each N1F is listed on the Warsaw stock exchange and each is characterized by powerful outsider shareholders (see Potts. a deal expected to close early in 2000.) but for large-scale privatization to be achieved through such methods there has 144 . Direct sales through open auctions and public listings have the virtue of bringing in much needed resources (capital. As in other cases examined (e. national patrimonial bonds. In a first wave of privatization (1992-93). Swiss Air also became a strategic investor in Poland's national airline Lot. The Russian government now appears to be turning its attention to the auction-based sale of partial shares in highprofile companies such as Svyazinvest (the state-holding company in the telecommunications sector) and in various energy-sector-related concerns. although small-scale privatization has been completed swiftly and successfully. however. The major methods of privatization in the Czech Republic. buying a 10% stake for $180 million with plans to increase that to 38%. Alternatively. expertise etc. Lithuania's privatization efforts have combined spontaneous privatizations of small-scale enterprises with the sale of company shares for vouchers and the sale of (larger) assets for cash. small-scale cash privatization and sale by tender. among several moves. a (partial) flotation of leading refinery and petroleum company Polski Koncern Naftowy. has been slower than that of Hungary and the Czech Republic where almost 90% of state-owned enterprises have been privatized (Schoenberg. The Russian scheme gave particular preference to incumbent managers and employees. Most of these companies have remained in poor financial shape (Ziljstra. the dominance of voucher privatization can be easily demonstrated. vouchers could be used to buy shares at auction in individual enterprises or could be entrusted to investment funds. large-scale privatization has proceeded slowly. This meant that a form of 'insider control' was created in newly privatized firms in Russia. it should be registered that such heterodoxy also characterizes privatization processes in and between other countries in the region. mass voucher-based programmes have had a natural attraction and. In most cases. A number of shares in these enterprises were retained by the state or allocated to incumbent managers. The government now plans to sell stakes and to undertake partial flotations in key companies drawn from many sectors including oil and energy.000 medium to large-scale enterprises auctioned a proportion of their shares for vouchers distributed to all adult citizens. 1999). to date. 1999). while encouraging. over 500 state enterprises have been allocated to NIFs with each receiving a lead shareholding in a small number of enterprises and a minority holding in an additional number managed by other NIFs. the Polish government seemed to be acting on this promise with. chemicals. What is clear. Hungary. In this scheme. These shares have been secured through the conversion of special bonds issued by state authorities in exchange for much-needed loans and financing. The country's 'mass' privatization programme . with these units converted into shares in the fifteen different NIFs.has accelerated the pace of privatization but. pharmaceuticals. transport and shipbuilding. In tiny Moldova. Potts.00.Poland In Poland. they could be sold to speculators set on investing in specific enterprises or in investment funds (Potts. 1999). there are still nearly 3. Privatization units (vouchers) have been made available to all Poles at just over £10. this has had only limited coverage. while the analyst is struck by the variety of different methods in use. political and economic instability of post-Soviet Russia and that there is much domestic opposition to forms of privatization that surrender to the control of insidersReflections These histories demonstrate that the need to privatize huge numbers of firms in quite difficult conditions has led to a variety (and creativity) in privatization methods. 1998). A total of 25 million Poles have involved themselves in this process. 1999). the Czech Republic). The government is now also proceeding with the sale of a strategic stake in Tele-komunikacja Polska (TPSA) to France Telecom. In late 1999.000 enterprises which are either state owned or in which the Treasury is the sole or majority owner. During the final weeks of 1999.the National Investment Fund (NIP) Programme . insurance and banking. This stock market flotation was reported to have raised $515 million.g. In fact. is that the privatization process has been bedeviled by the financial. These 'stakeholders' would be able to buy up controlling shares in their own enterprises (at reduced price) before public auction of the remaining shares. privatization has taken place through mass privatization. a small but powerful group of bankers have secured lucrative shares in selected natural resource companies at 'knock-down' prices (see Bush. The overall rate of privatization. Under this scheme. 1999). Poland and Russia have been discussed and have highlighted such variation as the weight of sales to strategic investors (outsiders) in Hungary and the dominance of insider privatization to employees and managers in Russia.

1997. Much can be learned from the development of small businesses in Europe and particularly from the work of local authority development agencies in countries such as the UK and Italy. (Carlin and Landesmann. Croatia. western interest has been limited. 9% of Hungarian industrial enterprises representing 24% of industrial output and 35% of total exports had been registered as being in bankruptcy or liquidation within twelve months. has been that limited western interest and domestic savings. Lithuania. effectiveness and scope of such privatization at full price'. Small business development The privatization of the large industrial units and their restructuring may be less sig nificant in the long run than the development of small and medium-sized businesses. the growth of the private sector has been fuelled by the vast number of start-up companies and the economy now virtually relies on its small companies. the elimination of subsidies and reductions in 'soft finance' play an important part in bring ing about changes in the structure of enterprises. of the promotion of the private sector. who write: The role played by a credibly hard budget constraint. however. Privatization efforts in Hungary (especially). Having already discussed the limited achievements of successive Russian governments. Carlin and Landesmann. 1997). in Hungary) such pressures have led to multiple closures or to operational restructuring. Support for liberal trade regimes has also been quite high and increased competitive pressure from foreign (as well as from domestic firms) has been central to the encouragement of enterprise restructuring (see Heinrich. A significant small business sector not only carries an immense potential for making an economy prosperous but also distributes that prosperity to a larger seg ment of a country's population. small business tends to be less environmentally damaging. the Czech Republic. This point is made emphatically by Cariin and Landesmann. reduce the possible speed.3 million such enterprises were already registered in the CECCs by the end of 1995. Repeatedly. Again there is an apparent contradiction between the creation of a market economy and the need for government (particularly local gov- 145 . progress has really been quite unimpressive. In Poland. Slovakia and Slovenia have also transferred a large number of enterprises to private ownership. after a wave of foreign buy-outs of potentially profitable firms. While this rate of growth is not yet matched in the NIS. The Czech case. A shake-out of inefficient and bankrupt enterprises has continued since this time despite some relaxation of the law. of bank reform. In Poland.to be an attractive basis for sale and substantial capital resources. The problem.. Enterprise restructuring Successful enterprise restructuring depends not only on privatization but also on competition in the product market and the imposition of financial constraints. the introduction of privatization laws has been accompanied by the introduction of anti-monopoly laws and by the promotion of the private sector. and of competition in the product market to the separation of good from bad managers and to eliciting restructuring effort from good managers is clear. international bodies such as the IMF and the EBRD have associated enhanced market competition with the stimulation of enterprise reform. These firms two-thirds of which are one-man or one-woman businesses . Outside of these countries. Looking at the progress with privatization (both small scale and large scale). of privatization prospects. p. Privatization by such methods has only been possible for a limited number of SOEs and. Effective bankruptcy regimes are an important component of transition and play a key role in identifying firms with no future in a market environment and in increasing financial discipline. Changes in the law since 1992 have also induced banks to renegotiate non-performing loans and to change their lending behaviour so as to weaken support of unprofitable enterprises. where a largely unreconstituted enterprise sector has faced rather soft-budgetary constraints. 1995. Moreover. it is also the case that privatization programmes in Romania and Bulgaria have been extremely limited and that privatization processes have barely begun in the Ukraine. Belarus and the wider CIS. According to the EBRD. 23) In Central Europe at least. enterprise restructuring is accelerated. bears no comparison with Russia.contribute significantly to an estimated total of 4-5 million small and medium-sized private sector enterprises in the CECCs. In Russia. 1997). Poland and Estonia are really quite advanced. it is clear that some CEECs have fared better than others. as noted by Potts (1999).privatization per se is not a substitute for the other elements of the policy package. Where cuts have been made in such financial support. Latvia. Arguably this is one of the key failings of the Czech transition model where large-scale closures (at least in early transition) were prevented by delayed introduction of a bankruptcy code and through the writing-off of much enterprise debt. only a small number of large and very large enterprises are as yet subsidy-free (see Alfandari etal. large numbers of small private firms are emerging despite many obstacles to market entry. combined with problems of valuation and the need to create an effective stock market. cited in Carlin and Landesmann. hard budget constraints on companies have forced many to sell off assets and/or to engage in considerable labour-shedding. Eurostat estimates that 3. With respect to financial constraints (as imposed on enterprises). Where strict bankruptcy laws have also applied (e. where transition has taken place at a rapid pace. for example. The lack of significant social benefits in Central and Eastern European countries is already driving people into enterprising ways of generating incomes and an abundance of new small businesses is to be found in any large town.g.. 1996. as a result of the introduction of bankruptcy legislation in 1991.

In the EU local governments have been successful in creating and supporting business parks. In many cases projects have built on local resources and skills and where appropriate have been linked to such things as local tourism or the particular ethnic mix of a region. 1998. These types of developments are being considered by governments in Central and Eastern Europe and. Today. it was given the registration number 00000001. so new financial and banking systems (and capital markets) have had to be introduced so as to underpin and to operationalize the new market systems. the average 2-5% that SMEs pay above what larger enterprises pay for loan finance in the OECD economies is tiny compared with that extra premium paid by SMEs in the CEECs.ernment) support and planning. grants and lowinterest loans. for a significant development of new business to take place. the average 2-5% that SMEs pay above what larger enterprises pay for loan finance in the OECD economies is tiny compared with that extra premium paid by SMEs in the CEECs. According to Pissarides (1998) this can be attributed to underdeveloped capital markets in the CEH region in which access to credit is still easier for state and other large enterprises and in which SMEs continue to face higher levels of nominal interest rates. These types of developments are being considered by governments in Central and Eastern Europe and. However. Therefore. managed workspaces. he received a string of architectural contracts from others wanting to develop sites. in some regions. 4-5). he runs a business "" group that includes property development. Equity and bond markets must also be developed so that the financing needs of SMEs can be served more efficiently (see Pissarides. small business advisers. friends and relatives. Indeed. in some regions. 1998. While banks in alt societies generally consider the credit risks to SMEs to be higher than those applying to larger enterprises. 4-5). aged forty-nine. the Romanian dictator. While banks in all societies generally consider the credit risks to SMEs to be higher than those applying to larger enterprises.called Alpha. to provide links between savers and investors. In many cases projects have built on local resources and skills and where appropriate have been linked to such things as local tourism or the particular ethnic mix of a region. enterprise restructuring and small business development. for a significant development of new business to take place. In the EU local governments have been successful in creating and supporting business parks. small business advisers. Eurostat estimates that 3. Financial sector reform and development The development of an infrastructure for the market economy also necessitates a transformation of financial institutions (and legislation) and the development of new capital markets. Mr Patriciu was also among the first to grasp the value of property.3 million such enterprises were already registered in the CECCs by the end of 1995. In this context. just as new legal systems have had to be introduced to transform patterns of ownership and to create new property rights. Equity and bond markets must also be developed so that the financing needs of SMEs can be served more efficiently (see Pissarides. This is suggested in the preceding observations on privatization. Just before Bucharest land prices took off amid the high inflation of the early 1990s.But the fees were paid. and Mr Patriciu was on his way to financial success. Simultaneously. In short. With 146 . are in their early stages of development. one of the wealthiest men in Romania. pp. he sold a car and a video recorder and put the money into property. An architect by profession. After the fall of Nicolae Ceausescu. one of Romania's largest oil companies with its own refinery. co-operative support networks. Much can be learned from the development of small businesses in Europe and particularly from the work of local authority development agencies in countries such as the UK and Italy. local banking sectors must be strengthened (and further commercialized) and incentives must be created for banks to lend to SMEs. According to Pissarides (1998) this can be attributed to underdeveloped capital markets in the CEE region in which access to credit is still easier for state and other large enterprises and in which SMEs continue to face higher levels of nominal interest rates. large numbers of small private firms are emerging despite many obstacles to market entry. Therefore. However. notably with a loss-making which are one-man or one-woman businesses contribute significantly to an estimated total of 4-5 million small and medium-sized private sector enterprises in the CECCs. friends and relatives. co-operative support networks. doing business in the 1990s has been about getting in first. asset management and Rompetrol. to lend to creditworthy customers and to provide an efficient clearing and settlement system. grants and lowinterest loans. Entrepreneurs find ways to profit for Dinu Patriciu. Again there is an apparent contradiction between the creation of a market economy and the need for government (particularly local government) support and planning. He has his problems. there is limited availability of finance and venture capital for SMEs throughout Central and Eastern Europe and most enterprise creation takes place with equity provided from savings. there is limited availability of finance and venture capital for SMEs throughout Central and Eastern Europe and most enterprise creation takes place with equity provided from savings. market-driven institutions need to be established to attract savings. pp. Mr Patriciu was the first person to register a private company in the country . CER banks and other financial institutions have to be modeled on Western equivalents (specifically EU forms) and must execute the role of these institutions. are in their early stages of development. managed workspaces. The boom later fizzled out and some of Mr Patriciu's projects were never built. local banking sectors must be strengthened (and further commercialized) and incentives must be created for banks to lend to SMEs. While this rate of growth is not yet matched in the NIS.

In addition. Prior to 1988 EC trade flows with Central and Eastern Europe were relatively insignificant. p. For those countries dominating this trade . 1995. Despite the privatization of some commercial banks. 20). Banking and financing systems are still under development in the CEECs and the structural impediments to banking sector reform and development are immense. Individual EU members were not supposed to enter into agreements without prior consultation with the European Commission and state traders such as the Soviet Union. that financial reforms and healthy. 15).3. the World Bank and the International Monetary Fund. while 14. regional exports to Western Europe increased by an annual average of 12% (Faini and Fortes. Earnings arising from these exports helped to generate hard currency inflows at a difficult time in the reform process.6).respect to their practices. Eastern bloc exports to the EC markets were also frustrated by quality problems. Although bilateral trading links between individual countries did exist. Even where commercialization and privatization have proceeded at greatest pace. The quality and design of many products made in Central and Eastern Europe were so inferior that these products were virtually unsaleable on Western markets. however. Lithuania and Russia. 8. there was neither mutual recognition nor contractual relations between the European Community and the Council for Mutual Economic Assistance. the state monopoly of foreign trade. 1995). Aside from the construction of new relations with the European Union (EU) and with other European institutions. as the region has made its painful transition to a market economy. 59. Such weakness and the under-development of financial sectors throughout the region are a genuine brake on growth in the CEECs. Political leaders have had to learn the hard way. Trade re-orientation and entry into the international economic community Central and Eastern European governments have also turned their attention to integrating themselves more fully into the global financial and production systems. these factors have already led to severe sectoral crises in Latvia. This in turn has contributed to the pressures for trade liberalization and to significant changes to the commodity structure of exports with major changes required to the nature and type of products being sold. Bank reform struggles for pace few countries in central and east Europe have been spared banking crises. Other serious obstacles included the inconvertibility of Eastern bloc currencies. most countries evidence a deep resistance to majority foreign control of domestic banking sectors and to downscaling of banking sectors. Estonia and Poland lessons were taken on board early. this has encompassed membership of the World Trade Organization (WTO) and significant efforts to gain access to international capital from such institutions as the EBRD. This geographical restructuring of trade has continued in subsequent years despite the revitalization of intra-regional trade by the formation of CEFTA. enjoyed no group trading preferences with the European Community. Even fast-reforming countries (notably the Czech Republic) have seen 'substantial disturbances in the form of failures of medium-sized or large local banks' (see EBRD Transitions Report.Hungary. banks must also enforce repayments and impose hard budget constraints on enterprises (EBRD Transition'. ii particular through the sale of large stakes to foreign strategic investors. Of the major CMEA economies. providing means for the importation of Western energy and technology and for the servicing of sovereign debts. Another feature of transition in Central and Eastern Europe has been the establishment of new trading links with Western nations and the re-orientation of foreign trade. only Romania received special trading concessions because it was categorized as a developing country. It has been no coincidence that a fast pace of sustainable growth has been accompanied in most cases by determined efforts to restructure the banking sector and to privatize state-owned banks. Banks continue to play only a modest role as providers of invest ment finance and capital markets continue to lack maturity. red-tape and political-bureaucratic interference (see Lavigne. East Germany and Czechoslovakia. 84). 1998. Combined with poor credit practices and inadequacies in banking supervision. Indeed. and as discussed with regard to the restructuring of enterprises. In fast-track reform countries such as Hungary. Governments have often been wary about surrendering control of state-owned banks and have been reluctant to give up the powers of patronage and influence conferred on them by their seats on the bank boards. financial institutions lie at the heart of the transition process and are the foundation stones of a strong economy. Poland and 147 . Many of these banks are also debt ridden and are plagued by non-performing loan problems. Report. Geographic restructuring and the 'new' commercial relations In Central Europe. the current spate of bank privatization deals across central and east Europe from Croatia to Bulgaria and from Romania to the Czech Republic shows that a decade after the start of transition ever the worst laggards are seeking to catch up with this pace set by the front-runners.0% of CEC exports go to other countries in the region. p. banks continue to lack experience in private sector lending and other skills and methods of work are as yet poorly developed.1% of all CEC exports are now destined for the EU market (see Table 7. Indeed. there was a significant switch in trade patterns towards the EU and EFTA markets during the early stages of transition. p. 1998. However. several large commercial banks remain in state hands. between 1989 and 1993. The collapse of institutional trading relationships between the former members of the CMEA (a primary cause of the collapse of industrial output in CEECs following 1989-90) has necessitated a substantial reorientation of trade towards Western Europe and the re-integration of the CEECs into the international trading order.

these agreements also involve the guarantee of free EU market access for industrial exports by 1999. the terms of the EAs now commit the candidate countries themselves to demanding liberalization timetables and to opening up their own markets to EU goods and services by 2004. metal products and mechanical engineering. The relative efficiency of a number of other sectors is forecast to improve in the years ahead. the use of trade data to reveal comparative advantage suggests that the Central European Candidate Countries are relatively efficient in the production of natural-resource-based and labourintensive products (see Brenton and Gros. now also covering Romania. Latvia. Reference to Figure 7. Agreements range from basic trade and economic co-operation agreements (as existing with Albania) to so-called Partnership and Co-operation Agreements (PCAs) as concluded with the European NIS (Russia. the asymmetric liberalization of the Europe Agreements establishes that the EU's trade concessions to Central Europe are now largely in place. It is also to be noted that the PCAs extend MFN terms for the cross border supply of a limited range of services (an innovation here) and provide conditions for freedom of establishment of companies and of capital movements. the EU has stopped short of establishing preferential trading terms with these countries and has yet to advance the idea of association. Estonia and Slovenia. In this regard. Since 1992.the EU is an even more significant trading partner accounting for nearly 70% of total export trade. which together represent almost 70% of EU trade with the group. While these terms have granted NIS products better treatment and access to the European market. The Balkan economies and European NIS have also experienced a strong re-orientation of trade towards Western markets. Although these restrictions have now been lifted.known as Europe Agreements (EAs) . these agreements have been occasionally revised so as to improve terms of trade and in order to address Central European concerns over trade impediments and liberalization timetables.the Czech Republic . and an improvement in export opportunities in areas such as textiles and steel still to be regulated by quota. chemicals and other sensitive sectors so as to restrain import flows to 'acceptable levels' prior to this date. Anti-dumping rules now apply in accordance with GATT provisions and a consultation clause is granted. while the EU has stuck to its basic commitment. textiles. access to EU markets has been regulated by the trade provisions of multi-issue association agreements with the EU. This will establish new competitive pressures for indigenous firms in Central Europe and create further export and investment opportunities for Western businesses.61 billion with the EU enjoying a significant surplus in machinery and transport equipment. Lithuania. coal. 1997). Hungary. they clearly fall well short of those agreements concluded with the Central European countries and are essentially 148 . Faini and Fortes. shielding sensitive industries from competition and creating negative spillover effects for other CECC exporters. Instead. the Ukraine. Brussels has taken a number of such actions against its associates. they do not establish a timetable for full liberalization or commit the EU to that result. electrical machines and appliances. In fact. 1993. Already. However. the commercial provisions of these agreements . for example. and short of final EU membership. the balance of trade has tilted decidedly in the EU's favour with heavy demand for Western products in transition markets. Contributing to the strengthening of trade links post-1989 (and to this broad re-orientation of foreign trade) has been the progress of the Central European countries up the EU's hierarchy of trading preferences Following the conclusion of 'first-generation' trade and co-operation agreements between 1988 and 1990. These conditions. discounting its more favourable treatment of candidate countries Bulgaria and Romania. Articles 17 and 18 of the EU-Russia PCA). been the focus of controversial definitive anti-dumping duties. Imports of ammonium nitrate from Lithuania and Bulgaria. is the principle of reciprocal tree trade in nonagricultural products by the year 2004. The basis of EAs. have ensured tariff and/or quota restrictions in some of these sectors as late as 1998. Trade flows are dominated on the EU side by Germany and Italy. though these means of contingent protection are provided for (e. Belarus and Moldova). agreements consist of the limited extension of tariff concessions (most favoured nation treatment on goods). 1995). Slovakia and the Czech Republic. These include paper. PCAs raise the possibility of an FTA between a signatory country and the EU (through future negotiation). although Russia can still apply restrictions on capital outflows. Indeed. Based around the principle of asymmetric liberalization.have been in place since March 1992. of hematite pig iron from Poland and of steel tube fittings from Slovakia have all. The fear is now that the EU may compensate for their absence by subjecting its associates to antidumping actions and other contingent forms of protectionism. The agreements also reduce substantially the scope of certain EU commercial instruments such as anti-dumping procedures and safeguard actions.1 highlights a trade deficit with the EU (in 1997) of some €21. as established in a series of special annexes and protocols to each of the Europe Agreements. Despite this. the elimination of several quantitative restrictions (these were in place on over 300 commodities exported by Russia as of October 1995).g. The main EU trade deficits with the region are apparent in products that are not very capital intensive including clothing and textiles where EU imports marginally outstrip exports to candidate countries. Bulgaria. This has meant that East European states have been relatively disadvantaged in commercial terms (at least compared with the Central European countries) and have had less success in overcoming many of the trade barriers encountered when attempting to enter EU markets. For Poland. they have previously stymied exports in exactly those sectors where the transition economies have enjoyed a comparative advantage (see Dyker. road vehicles. As at the Copenghagen Summit in June 1993. the member states have made full use of special conditions applying to steel. chemicals.

taking more than €26 billion worth of imports from the NIS in 1996 (or more than 33% of the NIS' total exports). Among this second set we find a varied mix of regional economies oscillating between progressive and revanchist measures. while there has been no universal agreement as to the best strategy for transition towards market capitalism in the CEE region.3). most have taken a slower path to reform. divisions are now evident between the likes of Bulgaria (see Case Study 7. Trade between the European Union. These include market deregulation.g. Russia and the other NIS has been growing strongly since 1989 and the NIS as a group are now running a big trade surplus with the European Union. these agreements are an important part of the process of commercial re-orientation in the former Soviet states and in encouraging increased trade flows between these countries and EU markets. Inclusions such as nuclear products and space launches suggest the EU's continuing ability to control Russian imports in strategic areas. As seen in Figure 9. Here. throughout the CEECs there are outstanding tasks. Transition: progress and challenges The preceding analysis has highlighted a number of key points.2 the EBRD's transition indicators (averaged out across countries) highlight restructuring requirements in eight major categories. Indeed. the Czech Republic.'non-preferential'. it is now possible to distinguish between those economies well down the road to successful market economies (e. and economies such as that of the Ukraine marked by a continued paralysis in economic decision-making. 1998 8. Significant trade concessions depend on further negotiation and the number of sensitive sectors identified by the EU (and therefore subject to significant import restrictions). Second. intensifying reform efforts after years of crisis. Third. Poland.1 EU trade with the candidate countries in 1997 (in ECU million) Source: European Commission. banking and financial sector reforms. 149 . Hungary. By and large. privatization and enterprise restructuring. price liberalization. energy and raw materials. a number of essential elements can be recognized as being central to the transition process. those economies that have adopted more rapid programmes of change have seen an improvement in their economic fortunes and have succeeded in attracting the larger slice of international capital investment (a point to be given more serious examination in the later stages of this chapter). Exports of timber. macroeconomic stabilization. In fact. while a number of CEECs have opted for rapid transformation (or for 'shock therapy). Figure 8. and progressive integration into international financial and commercial systems. Slovenia and Estonia) and those whose reform efforts have progressed at a slower pace. First. chemicals and metals are on the rise and Russia (in the face of continuing restrictions) is beginning to actively seek new export possibilities in relation to military aerospace production and nuclear materials.4. Figures for the full set of newly independent states (but dominated by Russia and Ukraine) show that the European Union is now the NIS' most important Western trading partner. Nonetheless. the PCAs do little more than confirm that the European NIS will be treated by the EU as if they were members of the WTO (a possible future objective for these states). with respect to trade and commercial relations. The major part of Russian-NIS exports to the EU is fuel.

much remains to be done vis-a-vis financial sector reforms. The private sector now accounts for about 67 per cent of gross domestic product (GDP). The finance ministry currently estimates that GDP grew by 4.9% of GDP last year.1% in 1996 in the final year of the previous socialist 150 . The progress is real but still fragile. 'We can forecast far more. financial indiscipline. During the worst times you could plan for a couple of weeks only.5% last year. the center-right government.000 old leva). and (II) environmental conditions and improvements. scores of 4 or 4+).8% of GDP for 1999 taking account of various steps to cushion the blow of the tough structural reform measures that should be implemented this year. the programme is open and transparent. towering losses in state-owned enterprises. These challenges sit alongside those tied to the control of inflation and government spending. the economy began to show some modest growth last year. up from 42% two years ago. Inflation as shown in the consumer price index had dropped to only 1% in December year-on-year from 578. led by Prime Minister Ivan Kostov. hyperinflation. in both Bulgarian and English. The government is forecasting a budget deficit of 2. efforts still have to be made in all societies to create a secure basis for long-term competitiveness and to reduce state aids. mounting budget deficits.Figure 8. Of course such ratings mask the variations in national performance. Certainly.000 leva to 1DM and provides full foreign currency backing for domestic money in circulation). Foreign exchange reserves have been rebuilt with international support from a low of $400 million in January 1997 to more than $2. corporate governance issues and deep-level enterprise restructuring. When government ministers are asked about their commitment to the reform process.9% in 1997 and by 10. The target is to achieve a broadly balanced budget in the medium term. After the ravages of recent years. has brought much-needed stability to the Bulgarian economy. Bulgaria has provided the economic success story the International Monetary Fund has so lacked in other parts of the world. 1994-1998 (average across the CEECs) Source: EBRD Transition Report 1998 With a score of 1 representing little change from old regimes. Backed by the restrictive terms of the IMF agreement the government budget achieved a surplus equivalent to 0. it is clear that much progress is to be made in areas such as enterprise restructuring and banking reform before scores are reached that signal Western standards (e. as emerging markets have lurched from one crisis to another. (From 1 July in a further reform. and it is publicly available on the government Internet site. For the past two years. Helped crucially by the introduction of a currency board in the summer of 1997 (which fixed the exchange rate of the Bulgarian lev to the D-Mark at 1. The currency board system has brought stability to economic decision-making'.5 billion. albeit from a shrunken base. But even in the betterperforming states.2 Movements in EBRD Transition Indicators. which was marked by severe banking and foreign exchange crises. the lev will be redenominated to one new lev for 1. Gross domestic product declined by 6.g. Now people can plan years ahead. the reply is invariably that the targets have to be met because they are stated in the agreement with the IMF. It is to these two subjects (I) unemployment and labour market conditions.5% a year earlier. finally. stalled privatization and. and to the tackling of unemployment and environmental despoilment. says Martin Zaimov. the economic policies of the past two years have represented a clear break from Bulgaria's recent chaotic past. deputy governor of the Bulgarian National Bank. In addition. The progress has been remarkable. that analysis now turns.

Against the background of the slowdown in the world economy. While increased wage levels are helping to improve the welfare of many workers and their families. ten years after the start of the transition from a com mand to a market economy. The banks. Eurostat estimates that. in most countries. the daunting challenge still facing the government is to put Bulgaria on a path of sustain-able growth at a time when the economy still faces tight external limitations. and it is crucial that the government makes progress on infrastructure projects in areas such as power generation and distribution. as financial constraints have been tightened on enterprises and as businesses have been liquidated. the right to work was guaranteed and every worker had some rights to choose his/her job. Under the three-year. The decline in male industrial employment especially reflects the scale of industrial restructuring in the region and the high over-employment before transition. $864 million IMF programme agreed last September. and new lending has been negligible. private sector shares of employment are now in excess of 50%. On reform. warned on a recent visit to Sofia that the government still had to take many 'courageous and painful economic decisions'. especially in those labour-intensive industries currently dominating exports. Acceptance of the bonds by international investors would provide a crucial vote of" confidence in the current government's economic policies. the private sector share of employment in the CEECs has been expanding rapidly. Despite the stabilization successes of the past two years. US assistant secretary of state. Under the centrally planned system. Privatization had been slow. Equally. Average wages continue to lag well behind Western levels but. Throughout the region. one point of concern here (and one factor militating against larger declines in regional inflation) is the evidence that the growth of real wages is continuing to outstrip increases in labour productivity. A key test of foreign investors' appetite for Bulgarian risk should come later this year with both the Republic of Bulgaria and the capital city of Sofia planning to make their debut on the international bond market. They hold much of their assets as low-yielding deposits in. large numbers of male jobs in both industry and agriculture have also been lost and totals for long-term male and youth unemployment have escalated. such as metals and chemicals. Efforts to reform the state apparatus and to root out corruption and red tape had to be intensified. are showing a steady increase. accepts that that is unlikely to be achieved in 1999. bureaucratic and had lacked transparency. Subsequently it was women who were made redundant. 151 .7%. Structurally. but Dimitar Radev. The consequent increases in unit labour costs are a potential threat to CEEC competitiveness. remain very cautious lenders. the finance ministry is currently forecasting growth of 3. burned by their experiences in the recent years. the transition years have been characterized by the growth of service sector employment.4% in 1998 owing to the fall in world prices for key exports. there was a migration from the poorer East European countries to the more wealthy. energetic reform' was critical.government. the Neftochim oil refinery and Petrol (the state-owned service stations). 'Sustained. with the government seeking strategic foreign investors for assets such as the telecom utility. while agriculture continues to account for a substantial portion of total employment in all countries except the Czech Republic. and municipal services. In countries such as former East Germany it was common to find Poles and. The economy slowed sharply in the second half of last year. between 1990 and 1997. the government is targeting growth of 4-5% a year. the leading state-owned banks. such rights to work were lost and female participation rates fell dramatically. deputy minister of finance. in Hungary. Bulgartabak (the tobacco industry). GDP in Bulgaria last year was still only 66% of the 1989 level. Privatization revenues should help to finance the current account deficit during the next two years. the private sector's share reached almost 70% in Poland. Employment fall-out in industrial sectors is further expected as slow-track reformers advance processes of privatization and industrial restructuring. where foreign capital is also supposed to play a big role. Green-field site foreign investment will be urgently needed as the receipts from privatization diminish. Increasingly. In countries such as former East Germany 75% of women's jobs were traditionally reserved for them. From a level of less than 10% of total employment in 1990. Stuart Eizenstat. however. Exports fell by 12% in value last year. Services now account for the largest share (and for growing shares) of total employment in most Central European countries. German banks and in government securities. In other words. The latter part of this was subject to European countries had been Vietnamese. These people too have often been sent back to their countries of origin. Industrial sales fell by 9. employment in industrial sectors fell by more than 6 million people or by almost a third. Latvia and Lithuania in 1998. According to figures from the European Bank for Reconstruction and Development. Cubans and Angolans. 'in a few years we may be describing Bulgaria as the Balkan Tiger. he said. Activity is seriously constrained by the lack of capital. Bulgarians had often found jobs. but if it took place.

int/enlargement 3. The impact on the EU and Central Europe. Alan. European Business. 6. Longman. The Czech Republic. 1997. Political. p. 7.europeaninternet. 8. 125-176 Simon Mercado. 2001. 2000 Mayhew. 2.eu. 258-285 Inotai. enlarging the European Union. Cambridge University Press. 403 Maresceau. economic and social arguments for and against EU Enlargement. 5. Institute for World Economics. The costs and benefits of Eastern enlargement. 1998. p. p. London.europarl. Andra. Hungary. Relations between the EU and Central and Eastern Europe. p. Winners and losers of EU Integration: Policy Issues for Central and Eastern Europe. Economic Policy. 1997 Balwin. recreating Europe: the European Union’s Policy Towards Central and Eastern Europe. http://www. Budapest.20 4. 152 . Marc. World Bank.com/centraleurope/ http://www. Poland. the Slovak Republic and Slovenia. Inottai Andras.___________________________________________________________________________ Bibliography on Transition Economies: Central and Eastern Europe and suggested readings ___________________________________________________________________________ 1. Richard. 1999.

2 The EU's pre-accession strategy 9. At the Helsinki Summit in December 1999. Slovenia has also made progress since 1997 but must speed up its privatization efforts and further facilitate the restructuring of enterprises. Hungary and Poland appear to have made greatest progress to date and are thus likely to be among the first wave of CEE entrants. Few involved in the process expect a first wave of entries before this date and it is clear that the finishing line. Estonia and Bulgaria (in 1995).2 The EU's pre-accession strategy Discussion of the debate surrounding EU enlargement raises the various strands of 284 CEE development and integration with the European Union EU assistance for Central and Eastern Europe already established. Romania and Slovakia . the EU took the important step of confirming that present and future signatories to agreements of association ('Europe Agreements') were eligible for EU membership. The EU also established an 'entry test' at Copenhagen. The association agreements ('Europe Agreements') 153 . the EU member states finally agreed to open formal negotiations with these remaining countries -Bulgaria. a multidimensional programme of financial aid and technical assistance.costs and benefits 9. Lithuania. keeps moving backwards. the capacity to cope with competitive pressure and market forces within the Union.1 CEE development and integration with the European Union 9. Areas such as state aid. financial services regulation and consumer protection.1 CEE development and integration with the European Union As is clear from the preceding analysis. In March 1998. this placed the remaining candidates into a second stream characterized by the absence of formal entry negotiations and a more distant promise of future EU membership. Estonia. In each of these areas the applicant countries are subject to progress reports issued by the European Commission. 2. it has only been since the Copenhagen Summit of 1993 that the EU has been formally committed to eastward enlargement. optimistically set at 2000 by former German Chancellor Helmut Kohl. social and legal adjustments with the target of future EU membership.Hungary and Poland (in 1994). Poland and Slovenia (along with another candidate country.also adding Malta and Turkey to their list. Romania. these showed that all the candidates still face a heavy workload in preparing for accession. it becomes clear that there are wide-ranging efforts directed at aligning domestic legislation with EU legislation in a variety of fields. Moreover. formal association (or 'Europe') agreements. Aspirant members must also demonstrate a good record on human rights (including the protection of minorities and respect for the rule of law). political and judicial systems. environmental law and farm reform are also subject to some criticism. bilateral accession partnerships. Slovakia. Hungary. much of the transformation in CEE environments is marked by attempts to adopt or to emulate West European practices and principles.9. If the issues are examined in greater detail. All three of these front-line applicants attract some criticism for the state of their administrative.000 pages of EU legislation) and the timetables attaching to ratification procedures. A number of CEECs have made applications to join the EU .4 The financial consequences of enlargement 9. differences between the applicant states as regards compliance with the eligibility criteria are such that it is possible to identify those moving at greatest speed towards the full satisfaction of EU entry requirements. which now integrates: 1. and 3. These efforts reflect the determination of many CEE governments to enter their countries into the EU and the EU's requirements for entry. These include the essential requirements of a stable democracy and a fully functioning market economy. While the prospect of future EU membership for Central and Eastern European countries was raised by the very fall of Communism. and the Czech Republic and Slovenia (in 1996). Latvia. EUROPEAN UNION ENLARGEMENT 9. 9. At this summit. However. the EU opened formal entry talks with the Czech Republic. since referred to as the Copenhagen Criteria. While the environment is an important area. harmonization with EU laws and standards is also being pursued in such areas as competition law. the EU has indicated that it will only open new 'chapters' or tracks of negotiations with an individual candidate (there are thirty-one in total) where it is convinced that progress can be made. Cyprus). and the ability to take on the obligations of membership (the acquis communautaire). Latvia. The EU has operated a coherent pre-accession strategy since 1994. The i existing member states have remained vague about when the negotiations with the most advanced countries might conclude but the European Commission has signalled that accession is unlikely before 2004 given both the expected length of future negotiations (covering 80.3 EU enlargement . When progress reports were presented in October 1999. For nearly two years. pol itical. Thus ten CEECs (among a total of thirteen candidate countries) are now engaged in EU entry talks and are continuing to make far-reaching economic.

In October 1991, Jacques Delors called on the EU to prepare for an EU of twenty-four, or even thirty,
members. His answer to the collapse of the economic system in Eastern Europe and the growing demand from
EFTA countries for EU membership was to devise a system of so-called concentric circles. This would see the
present EU membership at the centre, the EFTA countries in a second ring, and Central and Eastern Europe in an
outer ring. Circles were to be linked by their own internal agreements and would be built around the EU through
the device of external agreements. These ranged from agreement on the EEA between the EU and the EFTA
countries (see Chapter 3) to a bundle of fairly uniform association agreements with applicant countries from
Central and Eastern Europe.
Association agreements were initially negotiated between the EU and Poland, the former
Czechoslovakia and Hungary in 1991. These agreements built on bilateral trade and economic co-operation
agreements struck in the later 1980s. Succeeding agreements were later extended to Bulgaria and Romania (in
1993) and to Estonia, Latvia, Lithuania and Slovenia (in 1995). Replacement agreements for the Czech Republic
and Slovakia were also concluded in 1993 following the partition of Czechoslovakia. In all cases, these
agreements conferred the status of 'associate members' on the CEE signatories, set national paths for progressive
legislative convergence with the EU, and provided for far-reaching economic, political and financial cooperation. The EU's decision at Copenhagen (June 1993) to confirm the status of CEE associates as future EU
members brought an even higher status to these agreements and corrected what was for some, a glaring omission
in the original deals. Looking at the content of these agreements, apart from providing for free trade in industrial
goods and for the preferential treatment for exports of agricultural products (see previously), the EAs also
committed the new associates to introducing similar legislation to that of the Union in the areas of competition
rules, state aids, and intellectual, commercial and industrial property. The agreements also provided for national
treatment for establishment and operation of enterprises and for improved rights of movement for workers,
although not for free mobility between EU and CEE states. In the political sphere, a key feature of the
association agreements was the formalization of bilateral political dialogues between the EU institutions and the
applicant governments. These dialogues have been conducted primarily through so-called Association Councils
and have involved regular and systematic meetings at ministerial levels on most areas of Union policy. The EAs
also raised the possibility of the early participation of the transition economies: Central and Eastern Europe
associate countries in various Community programmes on cultural, technological and environmental questions,
the accession partnerships (APs) bilateral accession partnerships have been in place since early 1998 and are
central to what the European Commission now calls its enhanced pre-accession strategy. These partnerships
(established with all ten applicant countries) are aimed at guiding the applicants towards European Union
membership by supporting their preparations for membership. This builds on the EU's launch of the Agenda
2000 programme in 1997 which established a profile of all the internal and external measures needed to achieve
eastward enlargement. Under the APs, support is provided for the applicants' membership efforts by setting out
both the priority areas for further work and the financial assistance from the EU available to help tackle these
problems. Thus, unlike the earlier Europe Agreements, APs focus specifically on preparing the applicant CEECs
to meet specific membership criteria set by the Copenhagen European Council.
EU assistance to Central and Eastern Europe
Since the reforms in the Eastern bloc took place, the EU and its member states have increased the
amount of aid going to Central and Eastern Europe. In particular, specific EU programmes such as PHARE and
TACIS (which provides grant finance for the NIS) have been established to help with the transition process and
to channel large amounts of capital into specific development projects throughout the region. Public money from
the EU member states along with that from other OECD group economies has also been channelled into Central
and Eastern Europe through the European Bank for Reconstruction and Development. The EBRD is not actually
part of the EU but is jointly owned by fifty-eight governments, the European Union and European Investment
Bank. It is based in a member capital (London) and derives a majority of its capital from the EU and EIB. From
1991 to 1997, the EBRD had made available nearly €14 billion worth of financing. The bulk of approved EBRD
projects have been in the Czech Republic, Hungary, Poland and Russia. In capital terms, the largest recipient of
EBRD loans and investment since the launch of the bank in 1991 has been Russia, Financial institutions account
for the largest slice of the EBRD's disbursements (over 35%) but emphasis has fallen increasingly on transport
and energy projects and on manufacturing and environmental clean-up operations.
The EU's dedicated aid programme for the CEECs, PHARE, was set up in 1989. For ten years, it has
functioned as the world's largest grant assistance effort for Central and Eastern Europe, committing some €11.1
billion to programmes promoting private sector development, transport and telecommunications infrastructures, /
nuclear safety and environmental improvements. Between 1999 and 2006, the EU's pre-accession aid package
(worth €24 billion) will be administered under a relaunched PHARE programme - dubbed PHARE2 - and two
parallel instruments, ISPA and SAPARD. ISPA will finance projects in transport and the environment and
SAPARD will finance agricultural sector improvements. The future job of PHARE, which means 'beacon' in
French, is to focus solely on preparing the ten candidate countries for EU membership. Thus, between 1999 and
2006, around 30% of PHARE assistance will be channelled towards institution building, which includes the
strengthening of democratic institutions and public administrations. This is to ensure that public services are

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ready to apply the acquis. The remaining 70% of PHARE financing will go towards more traditional investment
support, although with reduced emphasis on transport, agriculture and the environment (now covered by ISPA
and SAPARD).
The EU has resolved to only fund projects that tackle priorities set out in the Accession Partnership and
to ensure that more money is spent on development rather than on supervision and/or consultancy services. It has
also made clear that candidates are expected to show that proposals are cost-effective and that the necessary
technical and institutional arrangements are ready to deliver those projects. These insistences are welcome, along
with the broad re-organization of EU aid efforts, given some of the significant problems with EU aid
programmes prior to 1999. While these programmes have helped beneficiary countries bring about economic,
legislative and social progress, several problems have been noted. First, as highlighted by Echikson (1997),
nearly two-thirds of the aid money previously spent has gone to 'highly-paid Western consultants, including
wealthy multinational consulting and accounting groups'. Second, money approved by the EU's political leaders
under PHARE has often never been spent. The same problem has applied to the TACIS programme where, in
one notorious case, the EU Court of Auditors noted that only a third of $180 million allocated to improve
Ukrainian nuclear safety had been disbursed. Third, months have often been needed to get EU programmes up
and running and many projects have been outdated before tenders have been made and accepted. Fourth, failing
projects have been rarely terminated even where performance has been poor or where interim objectives have
been barely satisfied. Fifth, project proposals have often been poorly conceived or have simply not been ready
for implementation. Concerns have also been raised over the lack of transparency in programme administration
and the misappropriation of funds. The present re-orientation of PHARE should go some way to dealing with
some of these past difficulties but the EU must strengthen its oversight of pre-accession aid spending and
concentrate on fewer, strategically important projects.
Box 9.1
The EBRD
Since its creation in 1991, the EBRD has provided direct financing for private sector activities, restructuring and
privatization in transition economies and has provided funding for the infrastructure that supports these
activities. While its present reputation is good, this has not always been the case. In 1993 it emerged that the
EBRD had spent twice as much on its running costs and offices as on loans and investments to the east. Its then
President Jacques Attali was forced to resign. Since 1993, the EBRD has reestablished its reputation by emerging
as an effective 'pump primer' for economic and enterprise development in Central and Eastern Europe. The main
forms of its financing have been loans, equity investments (shares) and credit guarantees tied to sizeable
projects. It is only really through providing guarantees to other lenders, such as commercial banks, that the
EBRD involves itself in providing finance to smaller-scale projects and entrepreneurial schemes. In this respect
the EBRD-EU regional finance facility for the ten EU accession countries is an important step, providing term
loans and equity finance to financial intermediaries so as to facilitate the expansion of lending to small and
medium-sized enterprises (SMEs). By and large, the EBRD has exercised a conservative lending strategy and
has stuck largely to safe ventures with governments, blue-chip firms, banks and public agencies. For example,
the EBRD's ECU 102 million contribution to Volkswagen's ECU 3,490 million investment in Czech car
company, Skoda, was hardly risky or innovative and could easily have been served by a traditional commercial
bank- However, as private banking has developed in Central Europe and as privatization programmes have
edged towards completion, the EBRD has taken greater risk with larger investments in countries such as the
Ukraine, Bulgaria and Russia. Although concentration has continued to rest with larger (often complex) projects,
levels of risk have increased and substantial losses are being incurred as a consequence of the economic
instability in Russia. Despite this the Bank remains committed to Russia and the NIS. Many of its projects such
as the innovative Kamchatka energy project in Russia (for which it has provided a $100 million loan) are longterm projects at early stages of development and are set to have a substantial transition impact.
9.3 EU enlargement - costs and benefits
Of course the existence of a pre-accession strategy reflects the prospect of future EU enlargement to
Central and Eastern Europe, and some comment has already been made on the progress and scheduling of entry
talks. The admission of Central and Eastern European countries to the EU has a good number of supporters.
These supporters are able to point to both political and economic benefits. Politically, the re-integration of the
Central and Eastern European countries (or at least a number of CEECs) with the rest of Europe will promote
democracy and stability throughout the continent, cementing processes of democratisation and marketization
east of Berlin. A wider EU might also be assumed to carry greater weight and influence in international fora,
maximizing and harmonizing the 'European voice' in world affairs. Economically, (eastward) enlargement should
see the EU population rise by up to 30% with the possible integration of 100 million more consumers into the
Single Market. Enlargement should also provide a further stimulus to pan-European trade and investment and
accelerate the economic development of transition states. Deeper market integration holds a clear potential for
welfare gains on the part of all parties, arising in the form of traditional efficiency gains, increased exploitation

155

of economies of scale and a medium-long-run growth bonus. With specific regard to investment effects, there
would be manifold benefits for foreign investors extending from the further strengthening of the institutional,
commercial and legal linkages between the CEECs and the EU. Investors not only would have greater
confidence in the long-term security of the CEE region, but might also benefit from the ending of residual
restrictions on the transfer of employees, goods, services and capital.
However, the idea of extending EU membership into Central and Eastern Europe runs up against a number of
obstacles and cautions. For the applicant states, concerns surround the full exposure of indigenous industry to
Single Market freedoms (and competition). Fears are raised that SEM integration will lead to a 'wipe out' of
home-country firms in vulnerable sectors such as heavy engineering, steel and agriculture. Equally, although
applicant countries have maintained their bids for membership, the introduction of EU standards in various areas
has demanded much adaptation of national law (and much expenditure). Harmonization with EU laws and
standards in such areas as social and environmental protection may also pose a threat to the present competitive
advantage extending from present national standards. From the perspective of incumbent EU states, a number of
concerns are evident:
1. Fears that eastward enlargement of the EU could make the EU too cumbersome to function efficiently and
lead to an increase in conflict management difficulties.
2. Fears that eastward enlargement could lead to a weaker, multispeed EU marked by greater internal disparities
(between members) and the wider use of opt-outs.
3. Difficulties in 'funding' enlargement given the relative economic underdevelopment of applicant states and the
financial underpinnings of EU policies on agriculture and the regions (see below).
4. The belief that the EU should concentrate on deepening its integration rather than on admitting new members
(widening).
5. Worries about a flood of cheap imports as a direct consequence of eastward enlargement. With Eastern Europe
strong in labour-intensive industries, enlargement is feared as likely to aggravate the slump in labour-intensive
industries in current member states.
6. Fears over a flood of economic migrants as the citizens of CEEC states secure the right to move freely across
the EU territories. This right is a notable omission from those provided under the Europe Agreements.
These fears have not prevented the establishment of a pre-accession strategy nor have they dissuaded the Council
of the European Union from backing the goal of eastward enlargement. What is clear, however, is that the
concerns listed above have contributed to the EU's internal arguments over enlargement and to the fragmentation
of pre-accession efforts. The condition of entry talks (which in most cases are little advanced) and the continued
absence of target entry dates also reflect the worries of incumbent EU members. Many of these concerns are now
being used to support calls for transitional arrangements at point of entry (e.g. initial restrictions on the
movement of CEE workers throughout the EU) and for full compliance with the Copenhagen criteria.
While a full evaluation of these arguments is beyond the scope of the present study, it is beneficial to provide
some further explanation of the specific concerns relating to the financial consequences of enlargement. These
concerns are central to the debate about the timing and format of EU extension and to the EU's internal review of
its own fiscal, policy and institutional arrangements.
9.4 The financial consequences of enlargement
On the EU's side, it is clear that enlargement will inevitably have consequences for certain common
policies and for the Community expenditure associated with them. This has also been the case with past
enlargements but, given the economic characteristics of the present applicants (relative underdevelopment and
large agricultural sectors), unparalleled concerns are raised over the future funding and operation of the EU's
agricultural and regional policies. Available estimates of combined fiscal costs range from 0.1% to 0.2% of EU15 GNP. Thus, as remarked on by Keuschnigg and Kohler (1999), 'given that the Union's own resources amount
to no more than 1.27% of national GNPs, approximately 10% of the Union budget is at stake'. At the policy
level, allowing for progressive cuts in farm spending and subsidies in the years ahead, conservative estimate
suggests that the costs to the CAP of CEEC membership may be around €10 billion. As eastern farm products
switch from the external protection regime of the CAP to its internal price and income support structures, CAP
expenditure will be inflated and tariff revenues will be lost. On the structural policies, eastward enlargement
could cost a similar sum at around €13 billion (Baldwin et al., 1997). While some calculations have virtually
doubled this cost, it should be recalled that, under current rules, EU structural funding has to be matched by
equal funding from state government. In this context, the European Commission has estimated that new
members would be unable to absorb more than 4% of their own GDP with absorption capacities varying from
case to case.
Whatever the precise costs, the budgetary consequences of eastward enlargement are clearly huge and
member states have been locked in repeated internal debate over their meaning and management. Specific states
such as Spain and Portugal, which receive significant monetary transfers under the EU's structural policies, have
been determined to secure assurances over future financial allocations and have argued for the EU to strengthen
its overall funding. Others, such as Holland and Finland, have been determined to hold EU spending to
acceptable levels and to look to policy reform so as to make enlargement achievable. The scope for such tensions

156

This policy is again designed to improve the competitiveness of EU agriculture and to avoid future surpluses. According to Schoenberg (1998).extending from the 1992 MacSharry Plan and the 1994 WTO Agreement on Agriculture . The priorities for the European Commission were to ensure that European agriculture would become more competitive (on both the EU and global markets) and to facilitate satisfaction of international and tightening environmental requirements. Meanwhile. for example. On agriculture. These involve progressive reductions in interventionist price supports for commodities such as cereals.g. the WTO Agreement demanding a tariffication of variable levies and charges. the financial allocations received by some existing member states would inevitably be reduced as a consequence of EU expansion.27% of EU GNP. which buy up supplies when at their highest so as to stabilize market prices. Several actions have now been made the basis of Council agreement. Interventionist price supports for commodities such as cereals. CAP reform in the 1990s . external barriers and market interventions are used to control agricultural production and to stabilize markets in general terms. the challenge is to find a structure that allows any new members to receive manageable levels of aid and without creating uproar among the EU's present poorer members. including further reductions in price supports. Specific agencies exist for key Community products such as cereals. and providing for duty and export subsidy reductions. Although common prices. This policy framework has undergone a number of significant changes in recent years inspired by internal financial constraints. The reform issues surrounding these policies are complex but the EU's challenge is to preserve the coherence and effectiveness of these policies (if not to improve them) while introducing new member states. The Commission argues that lower prices will benefit consumers and leave more room for price differentiation in favour of quality products. • Progressive implementation of measures to limit the use of factors of production such as the set-aside of arable land.is considerable. These priorities have been fully upheld in the latest package of measures forming a part of the Commission's Agenda 2000 proposals. In the UK. the EU experiences the free movement of agricultural products across and between the member economies on the basis of common prices. levies and customs duties. common rules on competition and central administration by the EU. oilseeds and beef. • Reduced duties and export subsidies. While some are modest in scale and do not raise particular financial concerns (e. On regional policy. milk powder.2). This had to be achieved without prejudice to CAP principles and with sensitivity to the need to protect farmers' livelihoods. compensatory payments and income supports. Greater market orientation will importantly prepare the way for the integration of new member states. beef and veal. persistent agricultural surpluses and external demands for EU agri-market liberalization. as well as duty and export subsidy reductions agreed with WTO partners under the Uruguay Round. the average farm size in Poland is approximately 8 hectares. 157 . Since internal EU prices are higher than those on world markets.has helped to reduce internal budgetary and supply pressures and to expose EU producers to greater competition. Additionally there will be increased emphasis in the new CAP on food safety and on environmental concerns. • Full and on-going compensation for that reduction through compensatory payments (made on a hectarage or headage basis). others are large and encompass hundreds of thousands of relatively inefficient smallholdings. and a considerable simplification of policy rules. this pattern to agri-sector activity in Poland (which alone has 4 million farmers) would equate with the eligibility of thousands of Polish farmers for a range of CAP subsidies. The principle of Community Preference gives priority to the sale of EU produce via extensive regulation of imports. increases in (compensatory) direct payments. the EU has been looking to adopt: • A pricing policy geared more to the market. protection through levies and customs duties is combined with the formal maintenance of EU prices above certain minimum levels. In the former cases. Were the EU to stick to its present plan to hold spending to 1. Eighty-five of the eighty-nine CECC regions (at NUTS II level) are at present eligible for objective 1 funding as their per capita incomes are less than 75% of the EU average. therefore. Within this there is considerable variation. Box 9. external protection and intervention cover about two-thirds of agricultural production in the EU and external protection without intervention covers about onethird. price subsidization and other forms of domestic market support. the Czech agricultural sector). the Commission has proposed to continue the broad direction of reforms initiated under the MacSharry Plan of 1992 (see Box 7. oilseeds and beef are being drastically cut.2 The Common Agricultural Policy For forty years. CEE farm sectors will have to undergo dramatic restructuring before membership can even be considered. holdings under 10 hectares represent only a quarter of all farms. the CAP must protect domestic producers and the internal market against cheap imports and fluctuations by the use of such means. Under current CAP rules. Specifically. As a consequence of its operation. the Community's Common Agricultural Policy (CAP) has sought to increase agri cultural productivity in Europe and to stabilize agricultural markets and farming incomes.

158 . the majority of firms still under foreign control were expropriated and assigned to German companies. The benefits of a border with the EU have been very clear. the preference of foreign firms to pay somewhat higher rents and wages in order to operate in the most developed and favourably situated locations is. or the establishment of new overseas facilities. The experience to date is that. in some instances. Indeed. This belief is based on the expectation that inward capital inflows will augment low domestic capital supplies and bring with them new technology and management methods. establishing both ownership and control over a company (or other foreign assets). where control was still held by the state. 1995.g. A further bonus of foreign investment is that it can help to create greater market competition and to break down old state monopolies. trade concessions from Central European governments such as quotas and tariffs on competitors' imports. For instance. Eventually. This occurs when a firm invests overseas to produce and/or to market a product in a foreign country. Thus FDI may take the form of an acquisition of an existing company in the local market. that foreign investment brings with it the capability for export growth and import substitution. This can happen when transnationals close off entry to markets. foreign investors have also tended to target big urban areas with good infrastructure and easy access to office space and production facilities (e. Foreign owner assets were an extensive part of the manufacturing sector and over half of mining production. in itself. Against this is the possibility that. cross-border acquisitions can sometimes hamper trade. because Western companies were still reluctant to invest in countries which they perceived to be politically unstable. For example. This is especially the case where investment is tied to privatization processes. Russia and the Czech Republic. where they secure exclusive supply rights. The countries of Central and Eastern Europe are also banking on foreign investment in helping them to access new markets (to strengthen their export potential) and to improve their balance of payments problems. Prior to and during the Second World War. On the other hand. during the nationalization programme between 1944 and 1950. the benefits brought by foreign investment should not obscure the fact that there are often less welcome facets to this sort of activity. It is central. In other cases. some form of equity investment with local partners (involving part ownership and control of overseas facilities). located on the wrong side of the former Yugoslavia and at distance from the core EU market. A study by the UN's Economic Commission for Europe (RCE) found that big multinationals such as foreign automakers often lobby for. In this sense. 9). and get. This reality gives foreign firms some very strong bargaining power with which to play off different countries looking for new investment. FPI does not generally involve an investor taking a significant equity stake in a single foreign business entity. Slaskie and Wielkopolskie Voivodships in Poland). control was placed in the hands of the Communist governments. and suck up or kill off local companies to acquire local monopolies. foreign investment can actually reduce competition. p.Foreign investment in Central and Eastern Europe Up until the First World War. To date. if legislation is too liberal and/or too many concessions are made. investors have been able to secure tax concessions and favourable terms for profit repatriation. Hungary has benefited significantly from its border with Austria and Poland and the Czech Republic from their borders with Germany. Most of the inward investment centred around co-production activities. Bulgaria. The technology transferred (although not always the most up to date) has been more modern than those hitherto employed. Even this move did not bring with it significant new investment. contributing to Central and Eastern Europe's own core and periphery problem. The governments of all countries confront a key dilemma: if legislation is too restrictive and/or if investors' demands are not treated sympathetically. During the First and Second World Wars. Within these countries. Hungary. Towards the end of the 1970s it became clear that these types of arrangements had not brought with them the hoped for technology transfer and associated benefits. the liberal regime that had allowed this to happen was tightened and much foreign-owned property was placed under state control. Foreign direct investment into Central and Eastern Europe is likely to speed up the process of industrial development and modernization. has found it relatively difficult to attract investors. in virtually all cases. Praha in the Czech Republic and the Mazowieckie. We also see that foreign investment is concentrated in specific locations. These concessions are often an effective precondition for investment (Papp. foreign investment was a very important feature of the economies of the countries in Central and Eastern Europe. and regulations were loosened still further. Thus an important distinction is raised between FDI and FPI (foreign portfolio investment) which concerns passive investment in foreign firms (or investment funds) and which requires no management effort by the investor. therefore. the overwhelming proportion of inward FDI into Central and Eastern Europe has been located in Poland. In the 1960s the state control of production remained binding but some Communist governments began to see that there might be certain advantages in foreign investment and it began to be accepted that limited investment could help with some of the problems of relative underdevelopment. the better organization introduced in factories belonging to foreign firms has led to rapid increases in labour productivity. revenue streams will be reduced and large slices of profit removed abroad. foreign capital will go elsewhere. There can be little doubt now that all countries in Central and Eastern Europe are in favour of attracting foreign direct investment.

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