Chapter 8

European Integration

For use with International Business

by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Learning Objectives

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
OPENING CASE: A Day in European
Business

What are the daily

challenges faced by
business people
travelling through
Europe to meet their
clients or suppliers?

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Types of Regional Economic
Integration

Figure 8.1:The EU has been a driving force of regional integration

in Europe, and it has gone through several stages of integration.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Starting Point: Treaty of Rome
• EEC Treaty 1957 stated in its Article 2:
– ‘It shall be the aim of the Community, by establishing a
Common Market and progressively approximating the
economic policies of Member States, to promote
throughout the Community a harmonious development of
economic activities, a continuous and balanced
expansion, an increased stability, an accelerated raising of
the standard of living and closer relations between its
Member States.’
• Initially, the focus was on establishing a customs union with a
common external tariff, and common policies for agriculture,
transport, trade and the support of developing countries.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Common Agricultural Policy (CAP)

Probably the most controversial EU policy is the common agricultural

policy (CAP).
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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Membership
• Belgium, France Germany, Luxemburg, Netherlands, Italy were
founding members (1958)
• In the 1960’s UK, Ireland, Norway and Denmark applied for
membership.
• Norwegian voters,however, rejected membership in a referendum in
1972 (and again in 1994).
• In the 1980s, Spain, Portugal and Greece joined.
• In 1990, former East Germany joined the EU by joining the Federal
Republic of Germany (West Germany). Finland, Sweden and Austria
joined in 1995.
• The process of accepting new members has been formalized in 1993
with the establishment of the Copenhagen Criteria.
– New members should have a stable democracy and market
economy. They must demonstrate a good record on human
rights, the ability to cope with the competitive pressures of the
common markets and the ability take on obligations of
membership.

For use with International Business

by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
New Members?

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Treaties and Agreements
• Single European Act (SEA) (1986)
– The agreement that established the basis for the single European
market.
• Maastricht Treaty (1993)
– Deepening integration in Europe.
• European Constitution (2002)
– Project to create a new legal foundation for the EU, which failed.
• Lisbon Agreement (2007)
– Integrating earlier treaties of the EU, and changing the
institutional structures of the EU and opening up membership

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Economic Transition
• Central and Eastern Europe (CEE) have experienced a different form
of ‘integration’
– While Western Europe established market economies, CEE
developed a system of central planning under the Soviet Union.
• Processes included:
– Economic transition
• Changing from central plan to a market economy.
– Liberalisation
• Removal of regulatory restrictions on business.
– Stabilisation
• Policies to combat macroeconomic imbalances.
– Privatization
• Change of ownership from state to the private.
• These “transition” economies have now “ascended to become, mostly,
part of the European Union.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 The Single Market
• The single market is about free movements of goods, capital, people
and services within the union.
– It complements the customs union, which secures application of a
common external tariff on all imported goods.
• The Principles of Harmonization
– Mutual recognition
• Products recognized as legal in one country may be sold
throughout the EU.
– Harmonized sector
• Sectors for which the EU has created common rules.
– Subsidiarity
• The EU takes action only if it is more effective than actions
taken at lower levels.
• The single market for services is not yet a single harmonized market
• Political compromises and protected interests are still being
accommodated.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 The Euro

• The Maastricht Criteria established that countries had to accept the

monetary union. Countries were required to have:
– annual budget deficits not exceeding 3 per cent of GDP
– public debt under 60 per cent of the GDP
– inflation rates within 1.5 per cent of the three lowest rates in the EU
– long-term interest rates within 2 per cent of the three EU countries
with the lowest rate, and
– exchange rate stability

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
The Euro Zone

Optimal
currency area.
A theory
establishing
criteria
for the optimal
size of an
area sharing a
common
currency.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 EU Formal Structures
• European Council
– The assembly of heads of governments setting overall policy.
• President of the European Council
– The person chairing the meetings of the European Council.
• Council of the European Union
– The decision-making body consisting of ministers from the national
governments; it decides by qualified majority voting.
• European Commission
– The executive arm of the EU, similar to a national government.
• Directorate General (DG)
– A department of the commission, similar to a government ministry.
• President of the Commission
• The head of the EU’s executive, similar to a national prime minister.
• European Parliament
• The directly elected representation of European citizens.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 European Parliament

Why is the European Parliament important for business?

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Implications for Practice

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 CLOSING CASE: Nokia Goes to
Brussels

What is the best route to navigate through Brussels politics?

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Chapter Summary
1. Explain the origins and the evolution of the EU:
• European Integration started with the Treaties of Rome aiming to overcome the
historical divisions of Europe.
• The EU has continuously been enlarged, starting with the UK, Denmark and
Ireland in 1973.
• The integration in the EU has continuously been deepened through a series of
intergovernmental treaties often known by the cities where they were signed. Most
important are the Single European Act (1986), the Maastricht Treaty (1992) and
the Lisbon Treaty (2007).
2. Explain the evolution of the institutional environment in transition economies:
• Before 1990, CEE countries had an economic system organized around a central
plan.
• The processes of transition in the 1990 focused on liberalization, stabilization,
privatization and, crucially, the creation of a new institutional framework.
• Having met the Copenhagen Criteria of the EU, ten CEE countries
became members of the EU in 2005 and 2007.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Chapter Summary continued
3. Explain how and why the institutional framework created by the EU is pivotal for
business:
• Single market based on freedoms of movement of goods, capital, people and
services.
• Implemented though harmonization of regulation in some sectors, and mutual
recognition of national regulation in others.
• The EU aims to facilitate free movement of people within the union, notable to
enable people to take up a job in another country.
• The euro has become a common currency in 16 countries that have transferred
their monetary policy to the European Central Bank..
• EU competition policy aims to ensure that a competitive environment is
maintained in cases of mergers and acquisitions, cartels and collusion and state
aid.
4. Outline the political institutions of the EU:
• Formal political structures of the EU resemble a government, yet
national governments wield power through the Council.
• The decision-making processes in the EU are based on democratic
principles, yet they often are far removed from the individual citizens
in member countries
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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Chapter Summary continued
5. Participate in debates over the future of the EU:
• Enlargement creates not only benefits but also costs for existing
EU members, who thus may be less enthusiastic to admit further
members.
• The UK has an ambiguous relationship with the EU grounded in
its history and its political culture.
6. Draw Implications for Action:
• With major institutional changes being decided at European level,
businesses need to be informed about current rules and expected
future change, and they may direct their lobbying to Brussels and
Strasbourg.

For use with International Business

by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Critical Discussion Questions

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Recommended Readings

For use with International Business

by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning