EUROPEAN INTEGRATION

Course

Guillaume VALLET

Distance Learning
Department

Undergraduate - 2nd year

Semester 4
2019-2020

© EAD –FACULTE D’ECONOMIE-UGA-

2019-2020-Tous droits réservés
European Economy
Guillaume Vallet

guillaume.vallet@univ-grenoble-alpes.fr

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Course objective Evaluation

This course focuses on the European

Integration.
• The first objective is to develop and  1 Final Exam (2 hours)
expand knowledge and
understanding about the basic drives
behind European Integration.

• The second objective is to acquire

an understanding of the challenges
of the European Integration

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 Academic references

Baldwin, R. & Wyplosz, C. (2015, fifth edition), The

Economics of European integration, Mc Graw-Hill
Publishing.

Stiglitz, J. (2017), The Euro: how a common currency

threatens the future of Europe, Norton & Company.

Vallet, G. (2016), Economie. Les grandes notions

(chapter 8), Ellipses (in French).
 Websites
 Union européenne http://europa.eu

 Euractiv http://www.euractiv.com/

 Financial Times http://blogs.ft.com/brusselsblog

 The Economist Blogs http://www.economist.com/blogs/charlemagne

Others
 Glossary http://europa.eu/legislation_summaries/glossary

 Treaties http://europa.eu/abc/treaties/index_en.htm

 History http://www.cvce.eu/home

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 Introduction

What is the European Union?

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1. Is EU a State?

2. Is EU like any International Organization?

3. Is EU like any Intergovernmental Organization?

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1. Is EU a State?

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 What is a State ?
A State is a legal entity which has four key quality

1. It operates within a fixed territory marked by borders and controls the movement of
people, money, goods and services across those borders

2. It has sovereignty over that territory and over the people and resources within its borders
and has the sole right to impose domestic laws and taxes

3. It is legally and politically independent and both creates and operates the system of
government under which its residents live

4. It has legitimacy, meaning that it is recognized both by its people and by other states as
having jurisdiction and authority within a territory

None of these qualities is absolute and many challenge the viability of the state system

 Weaken public loyalty to the State (nation versus State)

 Weakness of state control/sovereignty due to integration processes and globalization

 Weakness of ability of state to meet the demand of its own citizen

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Federal State and Confederal State?

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 Federation
A federation : elected general government with sole power over monetary, foreign and security policy +
separately elected local government with powers over education and policing.

Constitution spelling out relative powers of the different levels of government + Court arbitrating
disputes between them + two major sets of law, taxation, government,

Cumulative interests of the local units help define the interests of the general government, which deals
mainly with those matters better addressed at the state rather than the local level.
e.g. USA since 1788

Is the EU a Federal United States of Europe ?

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 Confederation
A confederation : two or more organizational units keep their separate identities but give limited
and specified powers to a central authority for reasons of convenience, mutual security or
efficiency (union of states whereas a federation is a union of people living in a single state)

Balance of powers towards member states (central authorities are subordinate) e.g. USA
between 1781 – 1788 “league of friendship” rule of unanimity / Germany 1815 Vienna Congress
until 1871, Bosnia Herzegovina

Is EU a confederation ?

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2. Is EU like any International
Organization?

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 What is an International Organization (I.0.) ?
An I.O. is a body that promote voluntary cooperation and coordination between or among their
members but have neither autonomous powers nor the authority to impose their rulings on
members.

 Some IOs have national governments as members including intergovernmental

organizations IGOs such as the UN, WTO, NATO

 Some IOs are non governmental organizations (NGOs) including multinational organization
(International Chamber of Commerce hosting the International court of arbitration) or
private organization with specific interests (Amnesty International, Doctors without
Borders..)

Is the EU an IGO ?
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3. Is EU like any Intergovernmental
Organization (IGO) ?

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 What is an IGO ?
An I.G.O is a forum within which government representatives can meet, share views, negotiate
and work to reach an agreement.

 Membership is voluntary, management is communal, decision are the result of the joint will of
their members

 IGO depend for revenue on contribution from their members

 Do not have independent powers, decision making is intergovernmental

 Some IGOSs may decide to take collective action and develop common rules and policies on
shared interests and turn into Regional integration association (IRAs = transfer , sharing or
pooling of sovereignty and creation of regional institutions to oversee the making of new rules
and regulations.

EU is a benchmark case of an RIA but may also be considered through its supranationalism rules as a
sui generis international body
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 European Integration

Part I: Evolution, law and institutions of the EC/EU

Part II: The stages of the multinational integration process

Part III: EU horizontal and sectoral policies

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 Part 1 : Evolution, law and institutions of the EC/EU

Chapter 1 - The Evolution of the European Integration

Chapter 2 – Law and finances

Chapter 3 – European Institutions

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 Chapter 1

The Evolution of the European

Integration

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 Introduction
Europe's history = wars for the domination of some nations over the others

In 1945 end of Second World War

most devastating war of world history,
economic downfall of all European nations
world supremacy of a non-European power

Winston Churchill Europe as "a rubble heap, a charnel house, a breeding ground
for pestilence and hate".

19 September 1946, Zurich speech, Churchill proposed as a remedy "to recreate

the European Family ... and to provide it with a structure under which it can dwell
in peace, in safety and in freedom ... a kind of United States of Europe".

Sixty years later the European Community/Union (EC/EU)

customs union,
single market
economic and monetary union

 political union (see Westerwelle Report September 17th 2012) ?

 Key dates in the history of the European Union (1/3)

1950 9 May - Robert Schuman’s Declaration putting forward proposals based on the ideas of Jean Monnet. France and
the Federal Republic of Germany pool their coal and steel resources in a new organization which other European
countries can join. Regarded as the date of birth of the European Union, 9 May = Europe Day.
1951 18 April In Paris, six countries — Belgium, the Federal Republic of Germany, France, Italy, Luxembourg and the
Netherlands European Coal and Steel Community (ECSC). It comes into force on 23 July 1952, for a period of 50 years.
1955 1–2 June At a meeting in Messina, the foreign ministers of the six countries decide to extend European integration
to the economy as a whole.
1957 25 March In Rome, the six countries sign the treaties establishing the European Economic Community (EEC) and
the European Atomic Energy Community (Euratom). They come into force on 1 January 1958.
1960 4 January At the instigation of the United Kingdom, the Stockholm Convention establishes the European Free
Trade Association (EFTA), comprising a number of European countries that are not part of the EEC.
1965 8 April A treaty is signed merging the executive bodies of the three Communities (the ECSC, EEC and Euratom)
and creating a single Council and a single Commission. It comes into force on 1 July 1967.
1966 29 January The ‘Luxembourg compromise’. Following a political crisis, France agrees to take part in Council
meetings once again, in return for an agreement that the unanimity rule be maintained when ‘vital national interests’
are at stake.
1968 1 July Customs duties between the member states on industrial goods are completely abolished, 18 months
ahead of schedule, and a common external tariff is introduced.
1973 1 January Denmark, Ireland and the United Kingdom join the European Communities, bringing their
membership to nine. Norway stays out, following a referendum in which a majority of people voted against
membership.
1975 28 February In Lomé, a convention (Lomé I) is signed between the EEC and 46 African, Caribbean and Pacific
(ACP) countries.
1979 7–10 June The first direct elections to the 410-seat European Parliament.
1981 1 January Greece joins the European Communities, bringing the number of members to 10.
1985 14 June The Schengen Agreement is signed with the aim of abolishing checks at the borders between member
countries of the European Communities.
1986 1 January Spain and Portugal join the European Communities, bringing their membership to 12.
17 and 28 February The Single European Act is signed in Luxembourg and The Hague. It comes into force on 1 July
1987.
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 Key dates in the history of the European Union (2/3)
1989 9 November The fall of the Berlin Wall.
1990 3 October German unification.
1991 9–10 December The Maastricht European Council adopts a Treaty on European Union, laying the foundation
for a common foreign and security policy, closer cooperation on justice and home affairs and the creation of an
economic and monetary union, including a single currency.
1992 7 February The Treaty on European Union is signed at Maastricht. It comes into force on 1 November 1993.
1993 1 January The single market is created.
1995 1 January Austria, Finland and Sweden join the EU, bringing its membership to 15. Norway stays out again
following a referendum in which a majority of people voted against membership.
1997 2 October The Amsterdam Treaty is signed. It comes into force on 1 May 1999.
1999 1 January Start of the third stage of EMU: 11 EU countries adopt the euro, which is launched on the financial
markets, replacing their currencies for non-cash transactions. The European Central Bank takes on responsibility
for monetary policy. The 11 countries are joined by Greece in 2001.
2000 23–24 March The Lisbon European Council draws up a new strategy for boosting employment in the EU,
modernizing the economy and strengthening social cohesion in a knowledge-based Europe.
2001 26 February Signing of the Treaty of Nice. It comes into force on 1 February 2003.
2002 1 January Euro notes and coins are introduced in the 12 euro-area countries.
2004 1 May Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia
join the European Union.
29 October The European Constitution is adopted in Rome (subject to ratification by member states).
2005 29 May and 1 June Voters in France reject the Constitution in a referendum, followed three days later by
voters in the Netherlands.
3 October Accession negotiations begin with Turkey and Croatia.
2007 1 January Bulgaria and Romania join the European Union. Slovenia adopts the euro.
2008 1 January Cyprus and Malta adopt the euro 12 December Switzerland joins the Schengen area
2009 1 January Slovakia adopts the euro
2011 1 January Estonia adopts the euro
Mid 2013 Croatia joins the UE
 Key dates in the history of the European Union (3/3)

• 2012: Treaty on Stability, Coordination and Governance (strengthening economic governance and macroeconomic
surveillance and strengthening fiscal discipline)
• 2014: Adoption of the euro in Lavia
• 2015: Adoption of the euro in Lituania
• 2016 June 13 : Referendum on british membership: Leave victory (art.50 of the Treaty has been triggered on 29
March 2017: opening of a two-year period to discuss the framework of the new relationship between Britain and
the EU)
 1. The Evolution of the European Integration

1.1. Theoretical Framework of European integration

1.2. Major Trends of European integration

1.3. Outlook of European integration

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 1.1. The Theoretical Framework of European integration
1.1.1. Integration Theories

 Federalists

Coudenhove-Kalergi (1926) European nations, which had just devastated one another in a
nonsensical fratricide war, were a natural entity that could become a significant global force, if only
they could succeed in having a federal constitution.

Altiero Spinelli (1972), national states could no longer guarantee the political and economic safety
of their citizens and should give way to a federation, "the European Union".

 Functionalists e.g. Mitrany (1966)

International organizations are not an end in themselves, but rather the means of addressing the
priorities dictated by human needs and have, therefore, to be flexible and modify their tasks
(functions) according to the needs of the moment

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 Neofunctionalist theory - Ernst Haas (1968) inspired by Jean Monnet method of "common

action which is the core of the European Community",

Robert Schuman’s Declaration of 9 May 1950 "Europe ... will be built through concrete achievements

which first create a de facto solidarity".

Integration = process where the constructive functions of the main actors, the common

institutions, would induce positive reactions of the political and economic elites, influence the

behavior of other societal groups and bring together the citizens of the different nations.

Neofunctionalist logic is built on the "spillover" effect: economic integration would gradually build

solidarity among the participating nations and would in turn create the need for further

supranational institutionalization.

Leon Lindberg (1963) defined the "spillover effect" as: "a situation in which a given action, related

to a specific goal, creates a situation in which the original goal can be assured only by taking further

actions, which in turn create a further condition and a need for more action and so forth".
 Intergovernmentalism

Stanley Hoffmann's (1964)

States would not compromise their sovereignty by moving their integration from the
areas of "low politics" (read economics) to the sphere of "high politics", i.e. foreign and
security policy.

Liberal intergovernmentalist
Andrew Moravcsik (1993)
National interests, voiced by national governments in international negotiations delay
European integration.

Gary Marks et al. (1996)

There is a theoretical trap of imagining either the withering away of the state or its
stubborn resilience by highlighting the multi-level governance (European, national,
regional, etc) of the EC/EU and the interaction of political actors across those levels
 Transactionalist theory of Karl Deutsch (1968)

International integration is the attainment, within a territory, of a "sense of community" and of

institutions and practices strong enough to assure dependable expectations of "peaceful

change" among its population.

First comes the formal institutional framework and on it are built the informal transactions

and hence the community spirit, necessary for an effective multinational integration

 Neoinstitutionalists, March and Olsen (1984)

Importance of institutions (not just formally established supranational organs, but also
informal interactions, open method of coordination, soft law) in providing contexts where
actors can conduct a great number of positive sum bargains.
COUDENHOVE-KALERGI Richard N., Pan-Europe, Knopf, New York, 1926.

SPINELLI Altiero, "The Growth of the European Movement since the Second World War", in M. Hodges (ed.),
European Integration, Penguin, Harmondsworth, 1972.

MITRANY David, A Working Peace System, Quadrangle Books, Chicago, 1966.

DEUTSCH Karl W., The Analysis of International Relations, Prentice Hall, Englewood Cliffs NJ, 1968.

MONNET Jean. "A Ferment of Change", Journal of Common Market Studies, n. 1, 1962, p. 203-211.

HAAS Ernst B. The Uniting of Europe: Political, Social and Economic Forces 1950-1957, 2nd edn. Stanford: Stanford
University Press, 1968.

LINDBERG Leon, The political Dynamics of European Economic Integration, Stanford CA, Stanford University Press.

BALASSA Bela, The Theory of Economic Integration, Allen and Unwin, London, 1962.

HOFFMANN Stanley, "The European Process at Atlantic Crosspurposes", Journal of Common Market Studies, No 3,
1964.

MORAVCSIK Andrew, "Preferences and Power in the European Community: A Liberal Intergovernmentalist
Approach, Journal of Common Market Studies, No 31 (4).

MARKS G., SCHARPF F., SCHMITTER P.C. and STREECK W., Governance in the European Union, London, Sage.

MARCH J.G. and OLSEN J.P., "The New Institutionalism: Organizational Factors in Political Life", American Political
Science Review, No 78.
1.1.2. An empirical Approach to European integration

The multinational integration process may de defined as the voluntary establishment by treaty,
concluded between independent states, of common institutions and the gradual development by
them of common policies pursuing common goals and serving common interests.

Jean Monnet, "union between individuals or communities is not natural; it can only be the result
of an intellectual process... having as a starting point the observation of the need for change. Its
driving force must be common interests between individuals or communities"

The primary goal of multinational integration is the achievement of peace and security among the
member states as well as between them and the rest of the world.

A multinational integration scheme is built gradually by means of a large number of common

policies, cementing common interests and creating a real solidarity among the member states.

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The fundamental decision of a number of states to establish a multinational integration

process, outlined in a treaty, signed and ratified by willing governments, is the catalyst, which

precipitates a sequence of secondary decisions formulating various common policies.

A common policy is a set of decisions, measures, rules and codes of conduct adopted by the

common institutions set up by a group of states and implemented by the common institutions

and the member states.

A "real" common policy (to be distinguished from a so-called one) has to be implemented by

all the participants and, therefore, needs to be monitored by supranational executive and

judiciary authorities.
In the integration process, all economic policies and a growing number of non-economic

ones are made up partly of common policy measures and partly of intergovernmental

cooperation measures (first have mandatory effects whereas the latter do not).

Intergovernmental cooperation measures serve the learning process and usually pave the

way for common policies formulated and managed by the legislative procedure.

If the implementation of initial common policies gave satisfactory but not optimal

economic results, it would reveal the necessity for more common policies and would thus

have a multiplicative effect on the process. There is no predictable end to this process, as it

depends on all sorts of internal and external factors.

Intergovernmental cooperation and the integration process are complementary, but that

the latter tends to replace the former in a growing number of areas as the integration of the

participating states marches forward..

Conclusion

By adopting a common policy, the participants agree to transfer some of their

sovereign powers to common supranational institutions. Common policies, thus,

distinguish multinational integration from intergovernmental cooperation

 This transfer of sovereign rights in the framework of common policies is the main

drawback but also the fundamental characteristic of multinational integration. It

explains why common policies are difficult to adopt, but also why, once adopted, they

are the binding (or integrating) elements of the whole multinational structure.
 1.2. Major Trends in European Integration

1.2.1. Increasing number of the participants and continuous raising of their goals

ECSC Treaty 1951, as a customs union concerning only the coal and steel sectors of six

countries.

EEC Treaty 1958, same countries extended the operation of the customs union and of the

common market to all the sectors of their economies

1973, First Enlargement with countries which had originally preferred intergovernmental

cooperation inside a free trade area.

1992, the builders of the common market had become twelve, had completed the work on that

stage of their integration on the basis of the Single European Act (1986) and had signed the Treaty

of Maastricht leading them to the next stage of their integration.

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1995, the builders of the union were joined by three more states, which had originally

believed in the benefits of the free trade area and, in 1997, the fifteen had decided to

perfect their area of freedom, security and justice, on the basis of the Treaty of

Amsterdam.

2007, the fifteen had opened the door of their enterprise to twelve more states, most

of which less than twenty years before were considered to be their antagonists

(economically, politically), were perfecting their economic and monetary union and were

progressing in their political union on the basis of the Treaty of Lisbon (signed in 2007,

entered into force on December 1st 2009)

2013: Croatia joined the EU. No perspective of enlargement in the short term. On the

contrary, Britain is going to leave the EU, most probably in 2019, after a two-year period

of negociation
1.2.2. Constant increase of their activities by the development of common policies

 Five main horizontal common policies

Two horizontal policies - regional and social - pursue the objective of economic and social
cohesion which is linked to the objective of economic and monetary union.

Common regional policy operating capital transfers from the richer to the poorer
regions of the EU. Standard of living in the Union's poor regions increased considerably
and they recovered a great part of their disadvantages (e.g. Monetary Union, implying
abandonment of the use of exchange rate adjustment as a means of balance of
national economies)

Lack of a true common social policy: the process of social integration is pursued
through common employment, vocational training and social protection policies but it is
still mostly intergovernmental.

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Three other horizontal common policies - on taxation, competition and environment protection
ensure a common ground for European businesses.

Harmonization of indirect taxes brought about by the common taxation policy is

instrumental for leveling the competition conditions inside the single market of
products and services.

Common competition policy is not only a necessary instrument for the smooth
functioning of the internal market, preventing new compartmentalization by the
agreements of large companies and protectionism by national administrations through
national aids, but is also a complement to common sectoral policies - industrial,
agricultural, energy, transport - aimed at improving production structures and achieving
international competitiveness.

Common environment policy for the sustainable development of the European and
world economy.
 Four sectoral common policies

Large sectors of the European economy - industry, energy, transports and agriculture- are
organized gradually at European level by the legislation of the single market and by specific
legislation adopted in the context of sectoral common policies.

Necessary for the smooth functioning of the customs union, the common market and the
economic and monetary union.

Both horizontal and sectoral policies, including research and development, strive to boost
the international competitiveness of European businesses, while cementing the economic
integration of the States of the Union.

All economic parameters change:

 trade increases strongly within the large internal market,
 both supply and demand conditions are modified dramatically,
 state intervention is curbed
 new dynamics: trade and investment opportunities, mergers and joint ventures.
Remarks

 The internal market and the single currency have placed more than 60% of European
agricultural, industrial and commercial transactions outside this wild competition; BUT for
transactions with the rest of the world, Europe must find common answers to the common
problem of preserving high social standards, while competing with countries with lower or no
such standards at all.

 Multinational integration has not solved all the economic and social problems of the
Member States. It cannot do so by itself. Integration is only an instrument for building an
internal market by consensual methods between formerly antagonistic nations.
 1.3. Outlook of European Integration

1.3.1. Democratic deficit or Information deficit on European Integration ?

 European integration is often criticized for its lack of transparency (Treaty of Lisbon two years

after referendum in France and Netherlands, Polls, political leaders and frustration of national
parliaments)

 If European citizens were led to believe that the disadvantages of European integration were
greater than its benefits, they might be led to press their political leaders to disengage their
country or countries from the integration process or, worse, to halt this process altogether and
return to the ante-integration status;

The information deficit endangers the integration process.

 Need for a common information and communication policy implemented by a European Press
Agency in close cooperation with the governments of the Member States combined with the civic
education of young Europeans at school.

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1.3.2. Need of a common foreign and security policy and of a European political
union in the world

 Intergovernmental relations still rule FCP (rule of unanimity)

 No strong European voice in the world

 One voice trade policy at WTO

 G20 weak Europe v. India, China, Brazil and USA

1.3.2. Need of a “solidarity “ mechanisms (debt mutualisation) and deeper political

integration

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 Chapter 2

Law and finances

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 2. Law and finances

2.1. The Legal System of the European Union

2.2. The Finances of the European Union

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 2.1. The Legal System of the European Union
2.1.1. The treaties

Multinational integration process treaty =

objectives that States wish to attain /

common policies that they wish to implement in order to achieve their goals

structure and functions of the common institutions that will enact and monitor the common
legislation formulated in the framework of the common policies

fields reserved for the cooperation of their governments.

Since common policies need to develop and multiply in order to serve better the ever changing
needs and interests of the participating states, the treaty, which outlines them, needs also to be
modified, so as to allow these states to attain the higher goals that they set.

Treaty of Lisbon in 2007 replaced the treaty establishing the European Community (TEC) by the
treaty on the functioning of the European Union (TFEU)

45
European Community (EC) does not exist anymore. It is taken over by the European Union (EU).
Treaty of Lisbon, signed by the heads of State or government of the 27 Member States, on 13

December 2007, maintained all the important elements of the stillborn constitutional Treaty,

The Charter of Fundamental Rights is not incorporated into the Treaty of Lisbon as it was in the

Constitution, but its provisions are given a binding legal force, except for the UK and Poland.

Treaty of Lisbon is only a ring in the chain of treaties that move forward European economic

and political integration.

Treaty Establishing the European Stability Mechanism February 2nd 2012 + Treaty March 2nd

2012 Treaty on Stability, Coordination and Governance in the Economic and Monetary Union

both signed in Brussels

The integration process is evolutionary and the Treaties are the means of progress.

Treaties = primary source of European law + legal basis of common policies

give the common institutions the legal means to implement common policies and to enforce

their decisions on all the parties concerned and on their citizens.

The national laws of the member states are harmonized in a great number of fields in the
context of common policies.

Acquis communautaire is a set of laws that is superimposed and takes precedence over
national law, even the constitutional law, of the Member States, whether national
legislation predates or postdates European legislation.

Article 288 of the Treaty on the functioning of the EU (ex Article 249TEC) = five forms of
legal instruments, each with a different effect on the Member States' legal systems
Regulations
Directives
Decision
Recommendation
Opinion
Resolution
2.1.2. Binding legislation

Regulation has a general scope, is binding in all its elements and is directly applicable in each
Member State. Just like a national law, it gives rise to rights and obligations directly applicable to
the citizens of the European Union.

Regulations enter into force on a date which they lay down or, where they do not set a date, on the
twentieth day following their publication in the Official Journal of the European Union (OJ).

Regulation substitutes European law for national law and is therefore the most effective legal
instrument provided for by the Treaty and must be complied .

As "European laws", regulations must be complied with fully by those to whom they are addressed
(individuals, Member States, European institutions).

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Directive binds any Member State to which it is addressed with regard to the result to be
achieved, while allowing the national authorities competency as to the form and methods
used.

Sort of European framework law and lends itself particularly well to the harmonization of
national laws

Member States have some discretion, in transposing them into national law, in taking into
account of special national circumstances.

Member States must, however, "ensure fulfillment of the obligations arising out of the Treaty
or resulting from action taken by the institutions of the Union" (Article 4 TEU

Member States are obliged to adopt the national measures necessary for implementation of
the Directive within time-limits set by it, failing which they are infringing European legislation.
Decision is binding on the addressees it indicates, who may be one, several, or even all the
Member States or one or more natural or legal persons.

This variety of potential addressees is coupled with a variety in the scope of its contents,
which may extend from a quasi regulation or a quasi directive to a specific administrative
decision.

It takes effect on its communication to the addressees rather than on its publication in the
Official Journal.

In any case, according to the Court of Justice, a decision can produce direct effects creating
for the individuals rights that national jurisdictions must safeguard
 Conclusion

 Primacy of European law [see Case 6/64 Costa v. Enel July 15th 1964],
According to the Court of Justice, Member States have definitively transferred sovereign rights
to the Union they created, and they cannot subsequently go back on that transfer through
unilateral measures unless they decide to break away from the EU.

 Direct effect of European law [see Case 26/62 Van Gend en Loos February 23rd 1963].

Treaties and the legislation derived from them engender rights and obligations not only for the
Member States but also for their nationals. Citizens may thus invoke the European law before
national courts and, if necessary, before the Court of Justice of the European Union.

By virtue of the "Francovich" jurisdiction of the Court, in certain circumstances European

(Community) law requires the Member States to compensate for damage sustained by
individuals by reason of their failure to transpose a directive into national law where its
purpose is to confer rights on them Case C-6/90.
2.1.3. Non Binding legislation

These instruments enable the European institutions to suggest guidelines for coordination of
national legislations or administrative practices in a non-binding manner, i.e. without any legal
obligations for the addressees - Member States and/or citizens.

Recommendations suggest a certain line of conduct or outlining the goals of a common policy

Opinions assess a current situation or certain facts in the Union or the Member States.

Resolutions suggest a political desire to act in a given area.

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 2.2. The Finances of European Union
Resources

Since 2001, the system of the European Union' own resources is based on the following elements
[Decision 2007/436]:

•· the maximum ceiling on own resources is fixed at 1.27 % of gross national income (GNI) of
the EC/EU (+/- 70% of the resources);

•· traditional own resources - essentially customs and agricultural duties - minus 25% retained
by the Member States as collection costs (+/- 15% of the resources);

•· 0.5% of the maximum call-in rate from VAT resources, aiming at correcting the regressive
aspects of the system for the least prosperous Member States (+/- 15% of the resources);

•· technical adjustments aiming at the correction of budgetary imbalances in favor of the

United Kingdom and originating in the famous battle cry of Margaret Thatcher of 30 November
1979: "I want my money back".

53
Expenditures
Expenditures

Little more than one percent of the cumulative Gross Internal Product of the 27 Member States.
Serve to finance the objectives of the various common policies (redistributive function of the
Union budget).

Thus, out of a total € 140 billion in commitment appropriations of the 2015 budget, the most
important commitments were:

sustainable growth, including competitiveness, research, energy and transport networks,

education and training;

cohesion, regional growth and employment;

 natural resources, including agriculture, rural development and the environment;

1.5% for citizenship, freedom, security and justice. 5.8% were allotted to EU actions outside the
Member States, including pre-accession aid for candidate and potential candidate countries, the
neighborhood policy and aid to development and humanitarian efforts around the world.

The administrative costs of EU institutions amounted 5.9% of the total commitments

55
Part 2 : The Stages of the Multinational Integration Process

Chapter 1: A Timeline of European Economic Integration

Chapter 1 - The Rationale For a Multinational Integration
Process
Chapter 3 – The Five Stages of Multinational Integration
Process
Chapter 4 – Monetary Integration in the EU

56
 Chapter 1: A Timeline of
European Economic Integration
 Main stages of European economic
integration
• 1951: European Coal and Steel Community
• 1954: Failure of the European Defense
Community
• 1958: Treaties of Rome
– EEC: a single market
– Euratom: cooperation in the field of nuclear energy

– Six founding countries: (Germany, Italy, France,

Belgium, the Netherlands, Luxemburg)
 1958-1970: the set up of a customs
union

• Customs union = single market protected from

outsiders
• Why setting up a single market?
• Historical background:
– Political unity out of reach
– Yet common management of the Economic
Recovery Plan (Organisation for European
Economic Cooperation)
– After WWII: consensus over free trade
• Between 1958 and 1968: first steps towards a
single market among EC 6 original member
states
– Gradual removal of tariffs and quota
– Common external tariff
• Customs union completed by mid-1968
• First crisis: between 1965 and January 1966
the French government did not take part in
the EC decision-making process
• Time of optimism: according to the Werner
Report (1969) monetary union should be
completed by 1981
 1970-1985: Euroskepticism
• First enlargement in 1973
• Economic crisis burst out at the beginning of the
1970s
• No strong response from the EC except:
– Subsidies to declining sectors
– Trade barriers against third countries (common
commercial policy since 1973)
– Unsucessful exchange rates arrangements
between some EC countries until the set up of the
European Monetary System in 1979
 What went wrong
within the EC?
• New forms of protectionism developed within
the EC (non tariff barriers)
• Strong disputes over the EC budget
• Shortcomings of the CAP
 1985-1992: A new start

• The French Government decided not to get out of

the European Monetary System (1983)
• EC budget: the UK was granted a rebate (1984)
• CAP: reform in 1992 (from minimum guaranteed
prices to farmers’ income subisidies)
• Non-tariff barriers were removed thanks to the
1987 Single European Act
 A new Treaty: the Single Act
• It aimed at completing the single market by
removing NTBs
• The Single Act was based on the White Book
published in 1985 by the European
Commission under the auspices of Jacques
Delors
• White Book: « The costs of non-Europe »
• How to remove NTBs?
• The Single Act elaborates on the mutual
recognition principle
• This legal principle was derived from a
decision taken by the European Court of
Justice in 1979
• It guarantees free movement of goods and
services without the need to harmonise Member
States' national legislation.
• It means that goods which are lawfully produced
in one Member State cannot be banned from sale
on the territory of another Member State, even if
they are produced to technical or quality
specifications different from those applied to its
own products.
• The only exception allowed is overriding general
interest such as health, consumer or environment
protection.
 Other provisions
of the Single Act
• Economic and Social Cohesion (regional policy
was reshaped in 1988 together with a strong
budgetary effort)
• Scientific and technological cooperation
• Environment policy
• Opened the way to monetary union
• Opened the way to political union
 1992-2007: Deepening and
enlargement
• According to the provisions of the Single Act, two
inter-governmental conferences were held in order
to negociate the deepening of European integration
• It led to the Maastricht Treaty (1992) which set up
the EU
– Economic and Social Cohesion became an EU
policy
– The Maastricht Treaty paved the way to EMU
 1) Deepening
• Economic and Social Cohesion: policy was
given a renewed strong financial support
• On the way to EMU:
– Deadline : 1999
– Convergence criteria
• Low inflation
• Healthy public finances
• Stable exchange rates within the EMS
• Low long-term interest rates
• German reunification in 1990 : booming German
economy versus sluggish economic growth in other
EC countries
• Diverging European economies led to an exchange-
rate crisis in 1992/1993
• The EMS crisis showed that there was only one way
to exchange rate stability: no exchange rates at all
• EU countries committed themselves to painful
austerity policies to be in line with the convergence
criteria
 Mundell’s
triangle of incompatibilities
• No way to achieve at the same time:
– Monetary policy autonomy (monetary policy, i.e. interest rates, devoted to
domestic concerns)
– And exchange rate stability

• In the context of free capital flows across

European countries
– Capital flows may trigger exchange rate movements that can only be
prevented by rising or decreasing interest rates
– Potential contradiction between the needs of the domestic economy and the
need to stabilize exchange rates
• So if European countries want to keep
monetary policy autonomy they have to:

– either set up a monetary union (no more

exchange rates and a single monetary policy)
– or give up exchange rate stability (at the expense
of trade development within the Single Market)
 2) Enlargement to CEECs
• Transition to Western-type democracies and to
market-based economies at the beginning of the
1990s
• Enlargement did not happen at once
• Enlargement was prepared all along the 1990s
– Subject to respect for economic, legal and political
criteria (so-called Copenhaguen criteria)
– Bilateral free-trade agreements
– Pre-accession financial support
 Threats posed by enlargement

• Rising disparities = need for a strengthened

Cohesion Policy
• Strain on the CAP
• Fear of unfair competition from CEECs
(offshoring in low cost economies)
• Fear of immigration waves from CEECs
 3) Unsolved problems
• EU countries were hit hard by globalization
• 2000: Lisbon Strategy (making the EU economy the
most competitive economy in the world)
– Total failure: weak governance
• EU countries did not commit themselves to the Lisbon Agenda
• Support only by the European Commission which is no longer the
powerful institution it used to be
• Europe 2020 follows more or less the same
objectives and economic governance has been
reformed
2007-2018: the aftermath of the world
financial crisis
• As a consequence of the crisis, economic
governance of the €-area and financial
regulation were reshaped
• The 2007/08 crisis weakened public finances
in many countries
– Recession means less tax revenues and more
governement spending
– As banks incurred heavy losses, tax payers’ money
was needed to restore solvency or to avoid
bankruptcy
• In the €-area, there was a fear of sovereign default
(in PIIGS, as British press denominated fragile €-area
countries)
• For fear of contagion, some €-area countries needed
to be bailed out and had to adopt austerity
measures as a counterpart
• €-area government had to set up new solidarity
schemes (the European Stability Mechanism = a
permanent rescue funding programme)
• Economic governance was reshaped :
– Oversight of domestic budgets by EU institutions
– A new Treaty: implementation of the golden rule
 TREATY ON STABILITY, COORDINATION
AND GOVERNANCE (TSCG)

• Entails many provisions of the 6-pack (fiscal arm)

and of the European Semester
• Sets up a fiscal golden rule : a lower limit to
structural deficit of 0.5% of GDP
• The golden rule should be made binding
(constitutional-like provision)
• European Court of Justice may impose financial
sanctions (0.1% of GDP)
TREATY ON STABILITY, COORDINATION AND
GOVERNANCE (TSCG)

• What is the golden rule?

• The only deficit which is allowed arises automatically from

poor economic conditions
• In times of recession, tax revenues are lower than expected
and public expenses are higher than expected
– Governments should not try to prevent this kind of deficit
– What is prohibited is so-called « structural deficit »: deliberate
deficit independent of economic conditions
 TREATY ON STABILITY, COORDINATION AND
GOVERNANCE (TSCG)
4

0
2006 2008 2010 2012 2014 2016 General government balance (USA)
Solde budgétaire conjoncturel
-2 USA
Solde budgétaire
General governmentconjoncturel
balance (Eurozone)
-4 EZ
Solde budgétaire
General conjoncturel
government underlying balance
-6
(USA)
primaire USA
-8 Solde budgétaire
General conjoncturel
government underlying balance
primaire EZ
(Eurozone)
-10

-12

-14
 What is the resulting policy mix?
• Austerity in the field of fiscal policies especially in
weakened countries (Greece, Spain, Portugal,
Ireland)

• Huge support to domestic economies from

monetary policy (ECB)
– Very low interest rates
– Abundant liquidity available for €-area banks
– Beginning in March 2015, the ECB has launched a 3-
year program of purchasing financial assets in order to
keep long term interest rates at very low levels
 The (incomplete) banking union

- Single Supervisory Mechanism (SSM)

- Single Resolution Mechanism (SRM) 3 pillars

- Protection of depositors
 A banking union to deal with banking
crises
• ESM: cutting the link between the sovereign
and banks
• Simultanously, financial reforms were
enforced in several countries
• One aspect of the replumbing of the financial
system is how to deal with the consequences
of banking crisis
• Preventive arm: reducing the probability of
banking crisis (single supervision of European
banks)

• Corrective arm: orderly dismantling of

troubled banks (single deposit guarantee
scheme and single resolution mechanism)
• €-area countries made a great sacrifice of
sovereignty when joining the monetary union
• But few are ready to face up with the
consequences
– Politics work mainly through crisis management
– €-area countries don’t really trust each other :
solidarity mechanisms are always subject to a
process of deal making and are not really effective
– It results in a great resentment of European
peoples against the EU and the €-zone
2016 Coping with the Brexit
 An ambiguous relation
• Britain was not a founding member of the EC
• Britain refused the set up of a customs union
• Britain tried to build up an alternative
(European Free Trade Area – EFTA) with other
small European countries
• As soon as 1963, Britain applied for
membership
• The French government opposed to British
member in 1963 and again in 1967
• At the beginning of the 1970s, the new French
government did not veto any more British
membership and Britain joined the EU in 1973
• But in 1974 a new Labour government went to
office and asked for a renegociation of the
British contribution to the EC budget
• A referendum was held in 1975
• Between 1979 and 1984, the newly elected
Conservative government fought hard to obtain a
rebate to the EC budget
• Then Mrs Thatcher strongly supported the Single
Act (completion of the single market)
• But she opposed other provisions of the Single
Act : the preparation of the Single Currency
• Mrs Thatcher delivered a famous speech in
Bruges in 1988 in which she reasserted the
priority that in her views should be given to
national states rather than to integration
• In the 1990s, Britain obtained an opting-out
clause in the Maastricht Treaty: Britain was
not committed to take part into monetary
integration
• With the financial crisis, Britain became even
more self centered and a new party arouse
recently (UKIP) which opposed to British
membership alongside with a growing part of
Conservative MPs
• During the 2015 general elections campaign,
PM D.Cameron promised to organise a
referendum on British membership
• He thought he could easily won as he had
obtained from EU partners a lot of
concessions about British involvement into
the deepening of EU integration
A sensitive issue: the financial issue

Source: The CityUk

The City: A global player
 FTSE 100 STOXX 50 Dow NIKKEI SMI
Jones 225

FTSE 100 0,69 0,74 0,72 0,86

Source : Author, from Swiss National Bank, 2018.

Coefficients of correlation between several financial market index and
London’s Stock exchange market (1999-2017)
 Share of United Kingdom in the European financial activities
(in per cent)

Savings managed by hedge funds 85

Currencies trade 78
Derivatives exchange on interest rates 74
Insurance for overseas shipping 65
Management of investment fund 50
Capitalization market 30
Banking loans 26
Source: The CityUK, 2018
 How to leave the EU
• The Leave victory was an unexpected outcome of
the referendum
• It left the British government unprepared
• The new British cabinet must prepare
negociations with the EU Commission
• On 29 March 2017, the British government
resorted to Art. 50 of the Treaty which is opening
a two-year period to discuss the framework of
the new relationship between Britain and the EU
What kind of relationship with EU?
• British membership of the European Economic
Area

• Bilateral Agreement : Swiss model, Turkish

model, Canadian model

• WTO rules may govern Britain-EU

relationships
 British membership of the European
Economic Area
• EEA : EU + EFTA
• European Free Trade Area = Norway + Iceland +
Liechtenstein
• Britain should first join the EFTA
• EEA : non-EU member states are given an extensive
access to the Single Market for goods (no tarriffs
except some food products) and services (including the
European passport for financial services + freedom of
movement for workers and capital (but the referendum
campaign showed a strong opposition immigration)
 European passport
• a system which allows financial services
operators legally established in one Member
State to establish/provide their services in the
other Member States without further
authorisation requirements
• The EEA is not a customs unions (no single
tarriffs for third countries, border controls,
EFTA countries are no part of EU trade
agreement with third countries)
• Non-EU countries contribute to the EU budget
• Non-EU countries have to implement EU
regulations which deal with the Single Market
(without influencing the decision-making
process)
 Bilateral agreement
• Swiss model: extensive network of bilateral
agreements: reciprocical access to domestic
markets (except in agriculture and services: no
European passport) but EU trade agreement with
third countries do not involve Swtitzerland
• Freedom of movement for workers
• Switzerland is part of the Schengen agreement
• EU regulations must be adopted in the field of
each bilateral agreement
• Switzeland contributes to the EU budget
 Bilateral agreement
• Turkish model: customs union since 1995
• EU external tarriffs hold for Turkey and EU
trade agreement with third countries must
also be implemented in Turkey
• No Turkish contribution to the EU budget
 Bilateral agreement
• Canadian model: free trade agreement
(except in agriculture and some service
activities) signed in 2016
• Time-consuming process
 WTO-like trade agreement
• Trade between Britain and the EU should be
submitted to tarriffs
• Britain would benefit of the most-favored
nation treatment : grant a partner a special
favour (such as a lower customs duty rate for
one of their products) and you have to do the
same for all other WTO members
 Dilemmas
• Dilemma between free access to the Single
Market and the limitation of immigration
• Dilemma between free access to the Single
Market and the adoption of EU regulations
• Dilemma between EU bargaining power and
the ability to conclude bilateral agreement
(with partners chosen by Britain, without
having concessions to make to other member
states)
 Economic consequences of Brexit
• EU membership as a factor of the
development of trade relationships
• EU membership fosters FDI
• Trade openness has a positive influence on
productivity of production factors
(technological and know-how spill-overs,
higher R&D spendings, dissemination of
managerial best pratices)
• Loss of trade flows: international divisions of
supply chains imply that spare parts travel
through many borders, a process which may
be costly (border controls and perhaps tarriffs)
• Loss of the European passport in the trade of
financial services (7% of UK GDP)
• Less immigration would be harmful to some
sectors (agriculture, construction) and its
effects on wages are far from certain
 Chapter 2

A Multinational Integration Process

112
1. The Rationale of a multinational integration process

In the isolationist period, usually following a devastating war, like the Second World War, states
erect high protection barriers against foreign trade and therefore against international
competition.
customs barriers (tariffs, quotas and measures having equivalent effect),
fiscal barriers (higher levels of taxation for goods largely manufactured outside the country),
administrative barriers (complicated bureaucratic procedures for imports)
technical barriers (concerning, for example, environment or human health protection)
serving in one way or another to discourage or even prohibit imports;

Great dissatisfaction
 on the part of consumers, whose choice is very restricted,
 on the part of the most dynamic and/or less protected businessmen, who find their field
of activity limited by the barriers.

Totalitarian regimes apart, such a protectionist system cannot last for long.
Dissatisfied citizens, as consumers and voters, and progressive businessmen, as influential
interest groups, press the political elite to reduce external protection.

Political elite under those pressures would normally start discussing the possibilities of trade
liberalization with like-minded elite in neighboring countries.

Indeed, by its very nature, trade liberalization cannot be decided unilaterally but can only be
envisaged in a multinational context.

If the economic and political elite of several states were to agree on the desirability of mutual
trade liberalization, they would still have the option between :
 a framework of bilateral or multilateral intergovernmental cooperation, which does not
necessitate loss of national sovereignty, or
 a framework of a multinational integration process requiring a great number of common
policies and, therefore, the transfer of segments of national sovereignty to common institutions;
Although the multinational integration process is continuous, four large stages may be
distinguished:
free trade area,
customs union,
common market,
economic and monetary union
….political union.

The passage from one stage to the other necessitates a fundamental decision of the
participating member states to transfer new parcels of sovereignty from national to
supranational level, sanctioned by treaty agreed by their governments and parliaments.

The EC/EU is clearly following this evolutionary pattern.

The EU is according to the form of contractual connection among member states an economic
integration.

Economic integration became established as a concept in economics and international business as

late as 1950s with theoretical contributions of Jacob Viner* and later Bela Balassa*.

Viner, J. 1950, The Customs Union Issue, New York, Carnegie Endowment for International Peace

Balassa, B. 1961:The Theory of Economic Integration, Irwin

116
Economic integration is a term used to describe how different aspects between economies
are integrated.

There are several definitions but

generally it is defined as an agreement among countries to reduce and ultimately remove

the various economic and political restraints of trade and other economic flows (flow of
goods, services and factors of production ) among each others.

It can also refer to any type of arrangement in which countries agree to coordinate their
trade, fiscal, and/or monetary policies.
Along with several definitions there are several terms used for economic integrations
that express their specific characteristics:

Regional trade agreements (RTA): WTO

Preferential trade agreements

Others terms that express different forms of economic integrations (free trade area,

customs union, etc.)

 The Five Stages of Economic Integration - Balassa

Characteristics

common currency
Free movement of
Common external
Free trade among

Common econ. &

common policies)
monetary policy,

(common instit.,
of econ. policies
factors of prod.

Harmonisation
tariff
MS
Stages

Free trade area - FTA X

Customs union X X
Common (internal) X X X
market
Economic union X X X X
Economic, monetary (and X X X X X
political union)
2. The different stages of economic integration

A free trade area is based on intergovernmental cooperation.

In such an area, member countries abolish import duties and other customs barriers to
the free movement of goods manufactured in the territory of their partners BUT
each country retains its own external tariff
its customs policy vis-à-vis third countries
retains entirely its national sovereignty

Compared to isolationism, trade liberalization is a common policy of a group of states, but,

since without concessions of sovereignty, there can be no spillover from this unique common
policy to other policy areas,
A customs union is the real first stage of the evolutionary multinational integration
process, free movement concerns not only products manufactured in the territory of
the partners, but all products, irrespective of origin, situated in the territory of the
member countries.
Furthermore, the latter lose their customs autonomy and apply a common external
customs tariff to third countries.
In order to manage the common customs tariff, the members of a customs union must
have a common commercial policy.
 In addition, trade liberalization has in this case spillover or multiplicative effects on
other common policies, notably, agricultural, taxation and competition.

There is therefore, already at this stage - completed by the original six countries of the
EEC in July 1968 - some concession of segments of national sovereignty to the common
institutions that run the customs union.
If the implementation of these initial common policies linked with the customs union
gave satisfactory but not optimal results, it would reveal the necessity for more common

policies inside a common market and would consequently have a multiplier effect on
the process.
In fact, if the members would like to turn a customs union into a real internal market,
they would need to ensure not only the free movement of goods and services, but
also the free movement of production factors, namely labor and capital.

In order to obtain these fundamental freedoms of a common market, the member states
had to develop a great number of common policies in pre-established and in new
fields, such as social, environment and consumer protection, calling for further
sharing of national sovereignties.

Several amendments of the original Treaties, through the Single European Act (1986),
were needed to bring about this evolution.
• The Single Act (1987): market integration must be deepened to foster growth
• Growth has remained sluggish in the EU since then
– the potential of the Single Market has been overestimated
– Adverse macroeconomic developments
• The designing of common solutions has proved difficult
– Coordination processes set up at the end of the 1990s
– Not binding enough to drive national reforms towards common goals
• A more comprehensive action plan launched in 2000: the Lisbon Strategy
However, even if all the freedoms of a common market were achieved, the single
market would still not resemble a genuine internal market, if currency fluctuations and
the exchange risk could create new barriers to trade, restrict the interpenetration of
the financial markets and impede the establishment of businesses in places where the
factors of production would appear to be most propitious for their activities.

In order to optimize the conditions of trade, investment and production, the

member states of a common market would need, therefore, to move forward to the
next stage of economic integration, economic and monetary union (EMU).

This would imply

single monetary policy, necessary for the management of a single currency,
 convergence of national economic policies, with a view to achieving economic
and social cohesion.

A new Treaty, the Treaty of Maastricht (1992), was needed to place the foundations of
this new stage of European integration.
 3. The Single Market
• The Single Market as an instrument to
improve productive structures
• Disappointing results: the Single Market is still
not yet completed (so says the Commission)
 3.1. Gains from the Single Market
• Single Market: free trade area + mobility of
production factors + common external tarriff
• How can the Single Market promote economic
efficiency?
– More competition= selection process among firms
– economies of scale (also beneficial for consumers)
– Stimulation of innovation
– Financial integration
• Economies of scale mean bigger firms
• The Single Market is accompanied by a
concentration process among firms
• It is necessary to set up a competition regime
– Anti-collusion rules
– Prohibition of abuse of a dominant position
– Merger control
– Control over state subsidies
• The Single market should promote intra-EU
trade and a genuine EU-wide industry
• Protection against third countries is supposed
to have similar effects
• According to the theory of customs union
(Jacob Viner, 1951), welfare is improved when
trade creation due to a customs union is
higher than trade diversion
• Trade creation: the welfare change due to the
replacement of higher-cost domestic
production by lower-cost imports
• Trade diversion: the welfare change due to the
replacement of imports from a low cost
source by imports from a high-cost source
• The theory of customs union has lost its
relevance as trade barriers have been
removed thanks to the GATT/WTO
 3.2. Unfulfilled promises
• Why has the Single Market not delivered in
the 1990s and 2000s?
– Macroeconomic adverse conditions
– European firms were hit by growing competitive
pressure on world markets
– The Single Market failed to boost European
industry
– Innovation was slowed down by a comparatively
low investments in R&D
– The Single Market is far from being completed
• EU15 growth rate (1997-2006) : +2.3% per year
• US growth rate (1997-2006) : +3.1% per year

• R&D spendings
– Euro-area=1.96% of domestic GDP
– Japan: 3.44% of domestic GDP
– USA: 2.77% of domestic GDP

• Share of world exports of high tech products

– US= 20% EU15 = 13%
• Share of world exports of goods with intermediate technology
– US=23% EU15 = 40%
 4. An Agenda of Global Reforms
• How to tackle the shortcomings of market
integration?
– The Lisbon Strategy (2000)
– Europe 2020 (launched in 2010)
– As a consequence of the euro area crisis: a wide
set of new rules to improve EU economic
governance
 4.1. From the Lisbon Strategy to
Europe 2020
• Goals of the Lisbon Strategy
– Investing into the knowledge economy
(intellectual capital)
– Combining economic competitiveness and social
and environmental concerns

Method : Open Method of Coordination (common

objectives that should drive domestic economic
policies)
• Disappointing results:
– most objectives were not achieved
– too ambitious (117 objectives initially and then 14
after 2005)
• No binding objectives:
– the OMC is a weak coordination process
• No EU leadership
• Member states pursued common objectives only
if they were in line with their own domestic
priorities
4.2 An assessment of Europe 2020
• Europe 2020 has adopted more or less the
same objectives than the Lisbon Strategy
(competitivenness, employment,
environment) : growth enhancing reforms
• The method is not really different:
– common objectives
– the EU as a catalyst
• What is new is a reinforced economic
governance
 Strengthened economic governance
1. Macroeconomic surveillance: avoiding diverging
domestic economies beyond mere fiscal discipline
1. Competitiveness (labor costs, external balance)
2. Position in the business cycle (domestic demand)
2. Fiscal discipline (stability and growth pact) should be
more severe
1. Reinforcing the preventive arm of the SGP (The European
Commission and the EU Council present
recommendations on domestic fiscal (and
macroeconomic) policies: the European Semester)
2. Reinforcing the corrective arm of the SGP: semi-
automaticity of sanctions
• The main idea is to closely monitor fiscal policies
(Stability and Convergence Programmes) and
macroeconomic and structural reforms (National
Reform Programmes)
• EU monitoring is a consequence of economic
interdependance within the EU
• Since Europe 2020 was launched, new instruments
have been set up in order to draw the conclusions from
the €-area crisis
– Tighter fiscal discipline (TSCG)
– Set up of a rescue fund (ESM)
– A banking union to avoid the too-big-to-fail trap
The 5 targets for the EU in 2020
1. Employment
75% of the 20-64 year-olds to be employed
2. R&D
3% of the EU's GDP to be invested in R&D
3. Climate change and energy sustainability
greenhouse gas emissions 20% (or even 30%, if the conditions are
right) lower than 1990
20% of energy from renewables
20% increase in energy efficiency
4. Education
Reducing the rates of early school leaving below 10%
at least 40% of 30-34–year-olds completing third level education
5. Fighting poverty and social exclusion
at least 20 million fewer people in or at risk of poverty and social
exclusion
 Chapter 4
Monetary integration in the EU
 1. Chronology
• The European Monetary System (EMS) was the
first successful attempt to stabilize exchange rates
between EC countries (1979)
• The Single Act (1987) paved the way to the EMU
• The Maastricht Treaty (1991) provided with
– candidates had to fulfill convergence criteria
– two possible deadlines : 1997 or 1999
• EMU was set up in 1999 (with 11 member states)
 2. Rationale (1)
• Fixed exchange rates are supposed to foster
trade:
– exchange rates movements are often unrelated to
relative competitiveness of domestic economies
– and consequently impair the functioning of the
Single Market
• EMU = super-fixed exchange rates
 Rationale (2)
• Fixed exchange rate regimes are unsustainable when capital movements
are unrestricted (as is the case within the EMS after 1990 and the
liberalization of capital movements within the EU)
• Capital flows can be massive and sudden and trigger exchange rate
movements
• In order to stabilize exchange rates, monetary policy (i.e. domestic interest
rates) must be devoted to stabilize domestic exchange rate. Interest rates
needed to stabilize exchange rates are not necessarily in line with the
needs of the domestic economy (high interest rates may be necessary to
attract capital flows but can hurt a slow-growing domestic economy)
• Capital flows depend on (expected) interest rate differentials , expected
de-(re)valuation (if it is expected that the FRF is going to be devalued
against the DEM then it is rational to sell assets denominated in FRF at the
present exchange rate and to buy back such assets after a devaluation of
the FRF at a lower price (in DEM)
 3. Expected benefits
• Reduction of transaction costs
• Price stability (the ECB is committed to price
stability)
• Low interest rates
• The euro can be used to settle transactions in
international trade
 4. Short-term economic policy
• Monetary policy is devoted to a single Central
Bank (ECB)
• Fiscal policy remains an attribute of member
states (the EU budget is low- 1% of EU GDP-
and mainly devoted to sectoral policies (CAP
and Cohesion policy)
 4.1 Monetary policy
• The ECB is in charge of the Eurozone’s monetary
policy (i.e. the setting of short term interest rates)
• The ECB is an independent Central Bank
• The ECB is independent from member states and
EU institutions: the ECB can choose how to
implement monetary policy (how to reach the
objective of price stability)
• The ECB is not independent in the sense that it
cannot choose the objective of monetary policy:
the objective of price stability has been given by
the Treaty of Maastricht (1992)
• Independence of Central Banks is supposed to
enhance their credibility
• Credibility is needed to convince economic agents
of the Central Bank’s commitment to price
stability
• In the tradeoff between inflation and
unemployment, governements may be inclined to
choose to fight unemployment at the expense of
inflation (which in the long term is supposed to
be harmful to economic growth)
 4.2 Fiscal policy
• Fiscal policy remains in the hands of domestic
governments
• Monetary policy determines the level of short
term interest rates according to the average
situation (inflation rate) in the Eurozone
• If Italy’s inflation is higher than Eurozone average,
then interest rates are too low with respect to the
needs of the Italian economy
• If Germany’s inflation is lower than Eurozone
average, then interest rates are too high with
respect to the needs of the German economy
• So if interest rates may be not in line with the
situation of the domestic economy, it is useful
that domestic governments can resort to fiscal
policy
• Expansionary (tight) fiscal policy in countries
where interest rates are too high (low) in
order to manage global demand
Coordination of domestic fiscal policies
• If fiscal policies remain in the hands of
domestic governements, there is a need of
coordination
• Protracted fiscal deficits can result in serious
trouble (investors became unwilling to lend
more money to Greece, Ireland, Portugal
during the Eurozone cris (2010-2012) and, at
the height of the crisis, Spain or Italy had to
pay very high interest rates)
• A « big » country which would run
(protracted) fiscal surpluses would reduce
dmestic global demand but also the local
demand for imports from Eurozone’s trade
partners
• Domestic fiscal surpluses have a negative
impact on global demand even in other
countries (depending on the degree of
openness of Eurozone’s economies)
Fiscal policy: coordination schemes
• Stability and Growth Pact (SGP): prevents fiscal deficits
higher than 3% of domestic GDP
• The SGP never bit hard and after the Eurozone crisis,
economic governance has been reshaped
– Coordination of fiscal policies through the European
semester (2010)
– Commitment to fiscal discipline through the Treaty on
Stability, Coordination and Governance (2012): domestic
structural fiscal deficit should not be higher than 0.5% of
domestic GDP
• The European Stability Mechanism is an emergency
fund to rescue distressed member states
 4.3 Macroeconomic monitoring
• The Eurozone crisis revealed major imbalances
within and between member states (labor
costs, trade imbalances, credit growth…)
• Such imbalances made the crisis deeper and
more difficult to solve (ex: rapidly rising labor
costs reduce competitiveness and this cannot
be corrected by a devaluation of the domestic
currency. So restoring comptetiveness implies
painful measures and a rise in unemployment)
1,6 1,6
Germany
France
1,5 1,5
Ireland
Portugal
1,4 Spain 1,4

Greece
1,3 Italy 1,3

1,2 1,2

1,1 1,1

1 1

0,9 0,9
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
 Current account balance: Total, % of GDP, 2002 – 2012
Source: OECD

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Spain -3.74 -3.88 -5.58 -7.49 -8.98 -9.63 -9.25 -4.28 -3.92 -3.18 -0.22

Portugal -8.49 -7.16 -8.32 -9.88 -10.68 -9.72 -12.12 -10.42 -10.15 -5.98 -1.78

Italy -0.26 -0.61 -0.34 -0.90 -1.50 -1.38 -2.83 -1.89 -3.41 -3.01 -0.36

Ireland 0.25 0.49 -0.10 -3.54 -5.35 -6.50 -6.51 -4.91 -1.54 -2.01 -2.62

Germany 1.88 1.41 4.47 4.60 5.67 6.74 5.59 5.74 5.63 6.10 7.02

France 1.18 0.87 0.44 -0.02 0.04 -0.29 -0.96 -0.83 -0.84 -0.99 -1.22
• Since 2011, a new Macroeconomic imblance
procedure has been introduced (early warning
system monitored by the EU Commission
which can draw up recommandations if
needed)
 5. European Banking Union
• It is the last part of the reform of the economic
governance in the EU
• The banking crisis which began in 2008 put a
huge burden on national budgets (taxpayers’
money was used to rescue ailing banks) and
contributed to the Eurozone crisis
• Common supervision of the banking sector and
new instruments to restructure failing banks
without resorting only to taxpayers’ money
 6. The Theory of Optimum
Currency Areas
• Eurozone member states have long refused to
draw the implications of EMU membership
• They have become more interdepent and they
cannot be too different from one another
• So they have to implement policies which take
into account spill-over effects and which
reinforce structural convergence
• Convergence can be measured through the
prism of the optimum currency area theory
 OCA theory

It predicts that fixed exchange rates are most appropriate for areas closely integrated through

international trade and factor movements.

What Is an Optimum Currency Area?

It is a region where it is best (optimal) to have a single currency.

Optimality depends on degree of economic integration:
 Trade in goods and services
 Factor mobility

A fixed exchange rate area will best serve the economic interests of each of its members if
the degree of output and factor trade among them is high.
 Six Optimal Currency Criteria

(see Baldwin Wyplosz for further details)

Three classic (economic) criteria

Mundell (labour mobility – labour market flexibility)
Kenen ( production diversification)
McKinnon (trade openness)

Three political criteria

Fiscal transfers
Homogeneous preferences
Commonality of destiny

163
 Criterion 1 (Mundell): Labour Mobility

In an OCA labour moves easily across national borders

Caveats:

labour mobility is easy within national borders (culture, language, legislation, welfare,
etc.) not across borders
capital mobility: difference between financial and physical capital in presence of
country specialisation, skills also matter.

Labour mobility should in fact be interpreted as “labour market flexibility” encompassing

not only geographical labour mobility, but a host of other elements (see next slide)

164
Labour Market Flexibility
 Criterion 2 (Kenen): Production Diversification

Countries whose production and exports are widely diversified and of similar
structure form an OCA.

Produce similar goods (so shocks are symmetric), but a wide range of goods (so
shock are less likely to occur)

Indeed, in that case, there are few asymmetric shocks and each of them is likely
to be of small concern.

166
 Criterion 3 (McKinnon): Openness

Countries which are very open to trade and trade heavily with each other form an OCA.

Openness: share of economic activity devoted to international trade; exports/GDP and

import/GDP

If all goods are traded, domestic good prices must be flexible and the exchange rate
does not matter for competitiveness.

167
 Criterion 4: Fiscal Transfers

Countries that agree to compensate each other for adverse shock form an OCA.

Transfers can act as an insurance that mitigates the costs of an asymmetric shock.

Transfers exist within national borders:

 implicitly through the welfare system

 explicitly in federal states.

European Financial Stability Facility (EFSF), June 2010

Stability European Mechanism, July 2012

168
 Criterion 5: Homogeneous Preferences

Countries that share a wide consensus on the way to deal with shocks form an OCA.

Matters primarily for symmetric shocks:

prevalent when the Kenen criterion is satisfied.

May also help for asymmetric shocks:

better understanding of partners’ actions
encourages transfers.

Pb.
Inflation or employment?
Exporters or consumers? 169
 Criterion 6: Commonality of Destiny

Countries that view themselves as sharing a common destiny better accept the costs
of operating an OCA.

A common currency will always face occasional asymmetric shocks that result in
temporary conflicts of interests:

this calls for accepting such economic costs in the name of a higher purpose.

170
 Is Europe An OCA? (Asymmetric shocks)

OCA index:

Based on past experience, how much would European countries have adjusted their
exchange rates vis-à-vis the German Deutschmark to deal with asymmetric shocks?

Incorporates three classic economic OCA principles of Mundell, Kenen and

McKinnon
 Inside the OCA Index: Labour Mobility

Low internal EU labour mobility

EU must factor in many migration costs:

moving costs
risk of becoming unemployed
longer run career opportunities
family prospects
eligibility to welfare
taxation
cultural/linguistic differences
national attachment.

172
 Inside the OCA Index: Transfers

The EU does not satisfy the transfer criterion.

The overall EU budget:

is low, slightly over 1% of EU GDP

entirely used for administration, CAP, regional and structural funds.

BUT changes in 2018 ???

173
 Inside the OCA Index: Solidarity vs Nationalism

Little is known about this criterion.

Tendency of new member states to support joint decision-making more than

Nordic countries

Nationalism does not overall exert powerful influence..

...yet

174
 The OCA glass is half full, or half empty

But ..living in a monetary union may help fulfill the OCA criteria over time.
 European Integration

Part I: Evolution, law and institutions of the EC/EU

Part II: The stages of the multinational integration process

Part III: EU horizontal and sectoral policies

176
Europe will not be made all at once, or according to a single
plan.
It will be built through concrete achievements which first create a
de facto solidarity.

Declaration of the French Minister of Foreign Affairs,

Mr Robert Schuman, 9 May 1950
Part III EU horizontal policies
EU regional development policy
EU social progress policies
EU taxation policy
EU competition policy
EU environmental policy
and …EU Sectoral Policies
EU industrial and enterprise policies
EU research and technology policies
EU energy policy
EU transport policy
EU agricultural policy
EU fisheries policy

In Part III, we deal only with the two main EU horizontal and
sectoral policies: the EU Cohesion policy and the Common
agricultural policy (CAP): they account for 80% of the EU budget
Part III : EU Main Horizontal and Sectoral Policies

Chapter 1 – Cohesion Policy

Chapter 2 - Common Agricultural Policy (CAP)

179
 Chapter 1

Cohesion Policy

180
• The main objective of the common Cohesion policy is the reduction of existing
regional disparities and the prevention of further regional imbalances in the EU by
transferring European resources to problem regions using the financial instruments
of the European Union known as the Structural Funds. The common regional policy
of the EU does not seek to supersede national regional policies.

• In accordance with the principle of subsidiarity, the Member States, through their
own regional policies, are the first ones who must solve the problems in their
regions by promoting infrastructures and financially supporting job-creation
investments.
 In short:
• The Cohesion Policy deals with economic
backwardness of EU regions
• It deals with the development of the poorest
areas and their catching up
• It is money which is granted to investment
projects at the regional (or sub-) regional level
or to projects or initiatives which to improve
human capital (education, vocational training)
Need for a EU Regional policy

Globalisation and European integration:

 Global challenges: Economic globalisation, demographic change, migration flows, climate

change, energy.

 Localisation: Single territories are directly faced with challenges and have access to
opportunities of a larger magnitude and which requires pooling of resources.

Multi-level governance and subsidiarity:

 National policies have less of an influence on economic and regional development.

 More responsibilities for Regional and Local Authorities in the European Union policies.

 Institutional changes in the Member States: devolution, decentralisation and reform of

federalism.
183
 1. A priority in the EU budget
• The Cohesion Policy has been an EU policy
since the Single Act (1987)
• When the EC was launched, there was no
need of a regional development policy
• The European Regional Development Fund
(ERDF) was set up in 1975
• Since 1988, the EU budget is defined under a
pluri-annual financial framework
• So-called « Financial Perspectives » are a
program of revenues and expenditures over 6
or 7 years
• Between 1988 and 1993, Cohesion
expenditures increased twofold
• Between 1994 and 1999, Cohesion
expenditures increased again twofold
• In 2000, Cohesion expenditures represented
35% of the EU Budget
• No evolution since 2000 : 35% of the EU
budget in the financial perspectives 2007-
2013
• In the present period of programmation
(2014-2017), Cohesion expenditures have
fallen to 32.5% of EU budget
 2. Structural Funds and Priorities
• Today, Cohesion expenditures are made
through 3 so-called structural funds (parts of
the EU budget devoted to Cohesion Policy)
– The European Regional Development Fund (ERDF)
– The European Social Fund (ESF)
– The Cohesion Fund (money granted to less
developped countries and not on a regional basis)
• Since 2014, the EU Cohesion Policy has been
given new targets which are in line with
Europe 2020 objectives
• as, between 2007 and 2013, the Lisbon
Strategy gave the main directions
(infrastructures, employment, environment,
transport networks, administrative
capabilities)
 3. Beneficiaries
• Resource allocation depends on the regional
level of development (regional GDP)
– Less developped regions
GDP < 75% of EU average
– Transition regions
75% of EU average < GDP < 90% of EU average
– More developped regions
GDP > 75% of EU average
 Allocation principles
• Each member state must sign a Partnership Agreement
with the EU commission which describes operational
programmes to meet EU Cohesion policy objectives

• Additionnality: co-financing is the rule (the level of co-

financing depends on the degree of development in the
region
• EU share: 85% - 60% - 50%

• Concentration on less developped regions

• Programmation (pluri-annual financing)
• Partnership (involvement and commitment of local actors)
 Resource Allocation by Fund

2007-2013 2014-2020

ERDF 57.29% 54.55%

European Social Fund 21.9% 25%

Cohesion Fund 20.05% 20.44%

 4. Results
• 4.1. Measurement
• 4.2 Weak results?
4. Results
Dispersion of regional GDPs D9/D1
In 2000 In 2007

• UE 15 : 2.6 (2.8 in 1990) • UE 15 : 2.6

• UE 25: 4.4
• UE 25: 3.7
• UE 27 : 6
• UE 27 : 4.5
• Catching up of member states
• Catching up of regions (especially in CEECs)
• But as a consequence of the 2008 economic
crisis, European regions are no longer
converging (map)
• And even before 2008, economic growth to be
polarized within each country (map)
 4.2 Weak results?
• How can we explain somewhat disappointing results of
the EU Cohesion policy?
• If we observe spatial arrangement and distribution of
economic activities, we can see a tendency to
agglomeration.
• For instance, we can see that in many EU countries (see
chart below)
– the capital region is almost always the most dynamic
region (green dot) and is often by far the richest region
(length of the stick)
– most of the regions’ GDP (blue dots) are lower than the
average regional GDP (blue line)
 4.2.1 Theoretical explanations
• The theories of economic geography try to
account for this situation
• The main explanations relate to:
• Polarized growth (economies of scale)
• The so called home market effect (size of the
regional market)
• The core-periphery structure (agglomeration of
production/consumption capabilities)
• Input-output linkages (suppliers tend to locate
close to their customers)
 Polarized growth
• When it is cheaper for an industry to operate
in a single country because of returns to scale,
an industry will base itself in the country
where most of its products are consumed in
order to minimize transportation costs
 Home market effect
• when one region is larger in terms of
population and/or purchasing power, this
region attracts a more than proportional share
of firms

• an initial size advantage is magnified by trade

liberalization
 The Core-periphery Structure

• when workers move to a new place, they bring

with them both their production and
consumption capabilities
• there is circular causation : “manufactures
production will tend to concentrate where
there is a large market, but the market will be
large where manufactures production is
concentrated” (Krugman)
 Input-output Linkages

• the agglomeration of the final sector in a

particular region occurs because of the
concentration of the intermediate industry in
the same region, and conversely
 4.2.2 Pragmatic explanations
• Most of EU cohesion funds are not spent (no
eligible projects, lack of administrative
capabilities)
• For many years, money was poured into
infrastructures programmes with no
evaluation of their actual economic impact
• Regional catching up is closely related to
member states’ macroeconomic situation
Chapter 2

Common Agricultural Policy

 Why do we need an agricultural policy?

• Strategic sector
• Weather and climate dependent activity
• Economic constraints: huge price variations
– Stable demand vs erratic supply (King’s law)
– When demand is rising, there may be a gap in the
supply response
 Western European Goals of the CAP
Agriculture in 1955 • Food security
• The EC was not self
sufficient
• 25% of the working • Improving productivity
population was
employed in farming in
France or in Italy
• Market stabilisation and
• Farmers’ income was income support
low
 1. The original CAP : objectives and
instruments
1) Income support and market stabilisation
• The EC set up intervention prices (guaranteed
prices)
• The internal market was protected from outside
competition
• EC farmers were granted export subsidies
 Internal market protection: the agro-levy
system (ALS)
• If the world price of a commodity is lower than the
EC price, then:
– Variable import levies strike import prices so that import
prices rise up to internal prices
– Export subsidies make export price lower

• Variable import duties were fiercely opposed by

trade partners and were replaced in 1995 by fixed
import duties (Marrakech GATT Agreement in 1993)
 2) Food security and productivity rise
• A floor price is guaranteed:
– if supply exeeds demand, the market price falls
– whenever there is excess supply, intervention
purchases take place at a floor price
• A floor price is a strong incentive to rise supply
– in order to rise supply, productivity must be
improved
– rising supply allows farmers’ income to rise
 The original CAP: results
• Self-sufficiency was rapidly achieved
• Farmers’ standard of living improved
• But many problems arose:
– Excess supply became the rule
– The CAP became very costly (through market support:
intervention, export subsidies and storage)
– Large efficient farmers benefited disproportionately from
CAP subsidies
– Trading partners fought the ALS
– Rising productivity was achieved at the cost of environmental
degradation
 2. A flow of CAP reforms
• A. Market-oriented reforms
– Since 1992, intervention prices have been cut and
intervention purchases have been progressively
replaced by direct payments
– Direct payments were decoupled from production
(2003)
– Export subsidies have been lowered
– Variable import levies replaced by ad valorem
custom duties (1995-2000)
• Market-oriented reforms in order to:

1. Put an end to overproduction

2. Comply with WTO rules
3. Stabilize CAP expenditure
 A flow of reforms
• B. Focus on rural development
• Since 2000, the CAP is divided into two pillars
• First Pillar: Market support (direct payments,
intervention purchases, storage, export
subsidies)
• Second Pillar: Rural Development
 What is rural development?
• Rural development deals with the economic
structures of farming and economic
development of rural areas (beyond
agriculture)
• Rural development is also concerned with the
preservation of environment and of the
countryside
• Improving farms’ economic structures
– Investment and modernization subsidies
– Subsidies granted to newcomers
• Revitalizing rural areas
– Promoting multi-functionality in agriculture (agro-tourism)
– Promoting an integrated development of rural areas
• Preserving the environment
– Preserving bio-diversity
– Preserving water supply
– Promoting environment-friendly production
• The rural development policy is built on positive
externalities of farming:
– from a social perspective: avoiding desertification
– from an environmental perspective: occupying and
preserving the countryside

• The rural policy aims at preserving farming all over

Europe.
– beside big farms, smaller farms need specific support
– and rural policy goes beyond the field of agriculture
• 1st pillar: market support : 80% of CAP
expenditure
• 2nd pillar: rural development : 20% of CAP
expenditure (co-financed by member states)
• A growing share of market support subsidies
will be channelled into the 2nd pillar
 3. Market support reforms
A. Why lowering intervention prices?
– Closing the gap between internal and world prices
so that producers respond to market signals
– Improving the competitivenness of European
agriculture
– Improving the compatibility of the CAP with WTO
rules
– Stabilizing CAP expenditure
B. Production depends more than in the past on the
evolution of prices: what are the drawbacks of
relying on market prices?
– But in farming, there is a time gap between the evolution of
prices and supply responses
– Price dicreases do not necessarily mean lower consumer
prices (high market power of wholesale food distributors and
retailers in the supply chain)
– EU farmers are exposed to world market fluctuations
(declining income between 1995 and 2007)
C. Why decoupling direct payments from
production?
• Decoupled payments are not trade distortive
– Subsidies are independent of the volume of production and
of what is produced
– But they are not without drawbacks
• Risks of land abandonment (especially if market prices are low)
• If some subsidies remain coupled to production, the whole
system becomes very complex
• Other methods of income support have strong
distortive effects
 Distortive effects of income support
• (High) intervention prices
– overproduction, high production costs, high
consumer prices
• Export subsidies:
– unfair competition on foreign markets
• Production quotas:
– if not transferable, they prevent efficient
producers from entering the market
– If transferable, they turn into a rent
 4. The CAP and the WTO
• After the Marrakech Agreement in 1993, the
EU agreed to:
• Transform variable duties into fixed duties and
to lower them by 36% (1995-2000)
• Reduce overall support of agriculture
(intervention prices were cut by 25% on
average between 1995 and 2000 and export
subsidies have been divided threefold since
1995)
• Income support methods were put into boxes
– The amber box contains the most distortive
methods of support (should not represent more
than 5% of domestic farm production in advanced
economies)
– The green box contains non trade distortive
supports
• Decoupled payments come into the green box
• Unacceptable to trade partners: most of EU farm
supports would fall out of the bargaining process
• Up to now, WTO talks (Doah round) are frozen:
developping countries and the group of Cairns (group
of agricultural exporting nations) want the EU and
the US to actually open their domestic markets
 Conclusion
 The European integration process: a long and
uncertain way

 However, some positive outcomes

 The EU is now at a turning point

 Ageing
 Migration
 Environmental issues