European Business

Copyright © 2015. Taylor & Francis Group. All rights reserved.
Johnson, Debra, and Colin Turner. European Business, Taylor & Francis Group, 2015. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/londonww/detail.action?docID=4014327.
Created from londonww on 2022-10-24 11:08:42.
European
Business
The third edition of European Business is published at a time of turbulence in Europe. This uncertainty puts
Europe’s unique business environment at risk.
Key features of the new edition include:
■■ assessments of how individual member states affect the integration process and bring diversity to
European business;
■■ new material on the links between Europe and the world’s other main regions, including emerging
economies;
■■ new case studies on topics such as the rise of the BRICs, the energy crisis, enlargement and the Euro.
The book retains popular pedagogical features to help students make sense of a confusing and complex en-
vironment. A unique and accessible text, the book is ideal reading for students of European and International
Business and important additional reading for those interested in European politics and economics.
Debra Johnson is Senior Lecturer in European and International Business at Hull University Business School,
University of Hull, UK.
Colin Turner is Associate Professor of International Management at the School of Management and Lan-
guages at Heriot-Watt University, UK.
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European
Business
Third edition
Debra Johnson and

Colin Turner
Contents in brief
List of illustrations xiii

List of contributors xix
Abbreviationsxxi
Prefacexxv
Part I A portrait of Europe: squaring the circle of

continuing diversity and greater integration? 1
1 A portrait of Europe 3
2 European business: structure and performance 23
3 The evolution of European integration 41

4 Europe’s institutional framework 66
Part II The business environment and market integration 83
5 The Single European Market: towards a new phase

of market integration 85
6 European competition policy: the guardian of integrated markets 105
Contents in brief
7 Promoting structural change: EU industrial and enterprise policy 131
8 Economic and monetary union: a step too far

for European integration? 151
9 The European citizen and consumer 174
Part III Inputs and factors of production 195
10 Transport: towards efficient and effective mobility 197
11 Energy policy: the quest for competitive, clean

and secure energy supplies 225
12 EU Environment policy: a green light for competitiveness? 256
13 A Digital Agenda for Europe: creating the

inclusive information economy 283
14 European labour markets and the search for flexibility 303
Part IV Europe and the rest of the world 329
15 Europe in a global context 331
16 Engaging with the European space: enlargement

and neighbourhood policy 359
17 European business in a global context: the developed world 378
18 Europe and the BRICs: opportunity or threat? 397
19 Europe and the least developed countries: trade,

aid and the ACP states 427
Index440
vi
Part I
A portrait of Europe
Squaring the circle of continuing
diversity and greater integration?
Why European business? What is different about European business or business in Europe from
American business or Asian business or business in any other part of the world? Clearly, businesses
have much in common whatever their origin. They are all trying to find the best way to compete
in a world which is becoming increasingly open and competitive. However, although their overall
objective may be similar, business strategies are shaped and influenced by the culture, traditions,
economies, political and institutional frameworks and general context of their home base. These
contexts vary tremendously from country to country and from region to region. European business
is no different and the first part of this volume establishes the context in which European business
operates and which provides it with the platform from which it engages with the rest of the world.
Part I also provides a context for the more detailed chapters that follow in Parts II to IV.
Chapter 1 opens with a broad-brush portrait of Europe which sketches the scope and main
characteristics of the European economy and markets. In the process, some of the main similari-
ties and differences among European countries are highlighted, particularly, but not only, in terms
of the major social and economic models that co-exist in Europe. The chapter then discusses the
nature of competitiveness in general and what measures various authors claim are necessary for
nations to be competitive. The chapter concludes by discussing the European Union’s latest long-
term initiative, Europe 2020, to boost Europe’s competitiveness and to enhance its place in the
world economy.
Chapter 2’s focus is on European business in general terms, providing a profile of its structure,
composition and measures of its competitiveness and the ease of doing business on its territory.
What really makes European business unique, however, is the depth, level and ambition of the
regional integration which shapes its operating environment. Indeed, in international business liter-
ature, regional integration is an important factor in business location: the example and experiences
(both good and bad) of European integration can help other regions that are not so far down the
integration road or even individual countries that are struggling to overcome market fragmentation.
A Portrait of Europe
Chapters 3 and 4 outline how Europe has reached its current stage of integration. Chapter 3 dis-
cusses the theoretical and historical background to European integration while Chapter 4 sets out
the institutional and decision-making process in which European integration takes place. Although
it is not essential for those studying European business to know the ins-and-outs of the history of
the EU and its decision-making process, it is extremely useful to have an overarching knowledge of
these matters to help them understand the context in which European integration is taking place
and to understand where and how the important decisions that affect European business are taken.
Chapter 1
A portrait of Europe
I think he bought his doublet in Italy, his round hose in France, his bonnet in Germany, and his
behaviour everywhere.
William Shakespeare, Merchant of Venice,
(Act 1, Scene 2, line 78)
This chapter will help you to understand:
■■ key features of modern Europe;

■■ different European social models;
■■ conditions that can foster competitiveness;
■■ Europe’s priorities going forward.
Much of the focus of regional interest in the field provoked represent a serious strategic challenge
of international business is on the rapidly grow- for the 28 relatively small states of the European
ing emerging economies, particularly of India and Union (EU) which occupy a comparatively small
China. For business practitioners, academics and area of land at the far end of the Eurasian plate.
students, these markets have attracted consider- A cursory examination of the business press
able attention, primarily because of their tremen- highlights the essence of the challenges facing
dous trade and investment potential; because they Europe. It is not uncommon for Europe to be
encompass two-fifths of humanity and because portrayed as the ‘old continent’, refusing to face
they are behind the shifting power within the up to the reality of relative decline, bereft of ideas
global economy. Thus, the emergence of these and unwilling to make the necessary reforms to
states and the intensified economic rivalry this has enable it to compete. Whatever the truth in these
allegations, Europe remains a pivotal player in the outside this framework. The 2004 EU enlarge-
global economic system as a market, a produc- ment absorbed eight Central and Eastern coun-
er, an exporter and an investor – and is likely to tries plus the two island states of Cyprus and
remain so. Malta and two more – Bulgaria and Romania in
In historical terms, one cannot overstate the 2007, followed by Croatia in 2013. The situation
significance of the ‘old continent’. For centuries, is more complex in South-east Europe where sev-
Europe has been the source of ideas that have eral Balkan states are at varying stages of applying
shaped the world and its business practices. The and negotiating to join the EU (see Chapter 16).
spread of Europeans throughout the globe has Further eastwards, Turkey has been in accession
been pivotal in shaping the contemporary envi- negotiations with the EU for a number of years.
ronment to which Europe must now respond. The EU in 2015 is composed of 28 nation
The challenge for Europe is that it must be and states with a combined population of over 500
remain a good place to do business. To this end, million people (see Table 1.1). Europe’s main
Europe has to undergo a process of adjustment. traditional economic rivals – the United States
This means a transformation of how it creates and and Japan – have populations of 316 million and
sustains employment; the types of jobs it creates; 127 million respectively whereas the two largest
how it innovates; how it enables its businesses to emerging economies – China and India – have
expand and develop and how it engages with the populations of 1.4 and 1.3 billion respectively and
rest of the world. great potential as markets and labour forces.
Within the context of the rest of this text, this A major thrust of Europe’s integration pro-
chapter addresses a number of objectives. The cess has been to create a Single European Market
first is to offer a portrait of contemporary Europe (SEM) (see Chapters 3 and 5) within which Euro-
and to examine its economic structures. The sec- pean businesses can compete with each other on
ond is to elaborate upon the various European equal terms and which creates a strong domestic
social models – models which are both contro- market for European business to use as a platform
versial and important in terms of setting the con- from which they can compete with businesses in
text within which businesses operate. The chapter the rest of the world.
then examines the core competitive challenges Figures 1.1 and 1.2 go some way to explain
for Europe before moving on to outline how the why a key thrust of European integration is to end
EU seeks to address these challenges through its the fragmentation of the European market place.
Europe 2020 strategy. Europe’s economies range widely in terms of their
size. The big four are Germany, France, the UK
and Italy.Their economic dominance helps explain

Contemporary Europe their centrality in many EU policy debates: Ger-
many’s GDP, for example, is bigger than the com-
The bulk of contemporary Europe’s business bined GDP of the 21 smallest EU economies. This
environment is organised within the framework dominance by a few states also explains why small-
of European integration in the form of the EU, er states are so anxious for their concerns to be
an arrangement which is the main focus of this heard. However, in an international context, the
text. In 2015, in Western Europe, only Switzer- US economy is over 4.5 times bigger than that of
land and Norway plus a few smaller independent Europe’s biggest economy – Germany. It is, there-
nations such as Andorra and Liechtenstein stand fore, only through acting as an integrated unit that
4
Table 1.1 Portrait of the EU, 2013 (unless stated otherwise)
Population Population GDP per Social protection Labour productivity

in millions density – head – PPSa expenditure as a per person
inhabitants (EU-28 % of GDP employed (EU-28
per km2 = 100) – 2012 = 100) – 2012
Austria 8.5 103 128 30.2 110
Belgium 11.2 340 119 30.8 129
Bulgaria 7.3 370 45 17.4 45
Croatia 4.3 76 61 21.2 81
Cyprus 0.9 124 89 23.1 74
Czech Rep. 10.5 136 82 20.8 73
Denmark 5.6 132 124 34.6 112
Estonia 1.3 31 73 15.4 70
Finland 5.4 18 113 31.2 109
France 65.6 121 107 34.2 116
Germany 87.0 231 122 29.5 107
Greece 11.1 86 73 31.2 92
Hungary 9.9 109 66 21.8 71
Ireland 4.6 67 130 32.5 142
Italy 59.7 203 99 30.3 109
Latvia 2.0 32 64 14.0 66
Lithuania 3.0 47 73 16.5 76
Luxembourg 0.5 210 257 23.3 162
Malta 0.4 1323 86 19.4 92
Netherlands 16.6 498 131 33.3 108
Poland 38.5 126 67 18.1 76
Portugal 10.5 114 79 26.9 76
Romania 20.0 87 65 15.6
Slovakia 5.4 113 75 18.4 82
Slovenia 2.1 102 82 25.4 81
Spain 46.7 94 94 25.9 110

Sweden 9.6 24 127 30.5 114
UK 63.9 265 109 28.8 100
Eurozone 334.6 107 30.4 109

EU-28 507.2 117.5 100 29.5 100
Notes
a PPS = Purchasing Power Standards – a form of measurement that is expressed in a common currency and corrects
for differences in price levels.
Source: Eurostat.
5
Germany
France
UK
Italy
Spain
Netherlands
Sweden
Poland
Austria
Belgium
Denmark
Finland
Greece
Portugal
Ireland
Czech Rep.
Romania
Hungary
Slovakia
Luxembourg
Croatia
Bulgaria
Lithuania
Slovenia
Latvia
Estonia
Cyprus
Malta
0 500 1000 1500 2000 2500 3000
€ bn
Figure 1.1 GDP of EU economies, 2013

Source: Eurostat.
14
12
10
8
€ trillion
0
EU-28 US Eurozone China Japan India
Figure 1.2 Relative size of EU GDP compared to other major economies, 2013
Source: Eurostat.
Europe begins to match the US (see Figure 1.2) in Greece, Spain and Portugal gave way to con-
in terms of market size, influence, potential for vergence with Western European norms and,
economies of scale and the other benefits claimed indeed, EU membership in the 1980s for all
for a unified single market. three countries. By 1989–90, it had become
In order to understand European business clear that the era of Soviet domination, both
and its environment, it is important to acknowl- economically and politically, over Central and
edge the different units which make up this trad- Eastern Europe was rapidly drawing to a close.
ing bloc – the individual nation states – which, The former Soviet satellites, without excep-
although having much in common, also exhibit tion, chose the model of democracy and market
factors which give Europe significant diversity in economics to guide their social, economic and
terms of culture, organisation, tradition, history, political transformation. Moreover, the goal of
economic structures and interests, etc. These can EU accession required them to adopt the insti-
lead to major differences at EU level in relation tutions of a market economy and all existing
to the determination of policy and the future EU rules and regulations (the acquis communau-
direction of Europe. Moreover, diversity within taire) which essentially gave them a detailed
Europe also continues to exercise an influence roadmap to help them achieve their transition
over the business environment. Thus an abiding goals. In short, by the turn of the century, after
theme in the creation of modern Europe is the over 50 years of division, Europe’s nations had
constant tension between convergence and diver- converged on a broad common economic and
gence among EU member states. political framework. However, many differenc-
In terms of convergence, Europe shares much es remained among Europe’s nations in relation
in terms of a broad common history and intellec- to the details of this framework.
tual traditions going back several centuries. More All European states are currently examples of
recently, there has been a convergence of politi- mixed economies. Most have privatised some of
cal and economic ideology and of commercial their state-owned enterprises (SOE), although
structures. After the Second World War, economic many still retain full or partial control of some
policy in Western Europe was based on Keynesian SOEs, especially in the utility and transport sec-
economics in which there was a clear role for the tors (see Chapter 2).
state in managing economic demand. The domi- The size and role of the welfare state also varies
nance of Keynesianism started to diminish in the considerably within Europe (see Table 1.1 and the
1970s when the simultaneous existence of high section below on European economic and social
levels of inflation and unemployment began to models). This reflects differences not only in the
undermine its key assumptions. Neo-liberalism – ability of states to support such spending, but also
that is, an economic ideology that limits the role different priorities in terms of the implicit bar-
of the state to more or less creating an environ- gain between the state and its citizens. For exam-
ment in which market forces determine resource ple, as Table 1.1 shows, those countries with a
allocation – began to replace the demand manage- tradition of flexicurity (see Case Study 14.1) and
ment approach, albeit with more enthusiasm in of following a version of the Nordic model tend,
some member states than others, and provided the unsurprisingly, to have some of the largest shares
underpinning economic philosophy of the SEM. of social protection spending (that is, expenditure
Similarly in the 1970s, the twin systems of on pensions, unemployment, disability payments,
political dictatorship and economic isolationism etc.) in the EU. These countries also have some
7
of the highest GDPs per head. Countries fall- Table 1.2 S

hare of Gross Value Added by sector,
ing into the category of the Continental model, 2012 (%)
such as Belgium and Germany, also spend a large Agriculture Industry Services
proportion of their income on social welfare.
EU-28 1.7 25.0 73.3
Although not spending such a large share of their
national income on social protection, member
Austria 1.6 28.6 69.8
states that have been badly affected by the euro-
Belgium 0.7 21.8 77.5
zone crisis have seen their share of social spending
rise. This is particularly noticeable in the case of Bulgaria 6.4 30.4 60.3
Greece where, despite austerity and falling GDP Croatia 5.0 26.2 68.8
growth, social spending is up almost five per- Cyprus 2.5 14.9 82.6
centage points since the beginning of the crisis – Czech Rep. 2.4 37.3 60.3
a function of the rapid rise in unemployment Denmark 1.4 21.8 76.8
and poverty in Greece. At the other end of the Estonia 4.1 29.0 66.9
spectrum, the share of social spending in GDP in Finland 2.8 25.9 71.3
the Baltic states and Romania is about half that of France 2.0 18.8 79.2
spending in the Nordic states and some of those in Germany 0.8 30.5 68.7
Northern Europe. In the case of the Baltic states, Greece 3.4 16.2 80.4
at least, this stems from the adoption of a devel- Hungary 4.7 30.6 64.7
opment approach based predominantly on reli- Ireland 1.6 27.9 70.5
ance on the market as the main source of income Italy 2.0 24.3 73.7
allocation. Latvia 5.0 25.7 69.3
Trends in terms of economic structure (see
Lithuania 4.0 31.1 64.9
Table 1.2) are broadly similar in Europe. When
Luxembourg 0.3 12.9 86.8
the Treaty of Rome establishing the European
Malta 1.8 17.3 80.9
Economic Community (EEC) was signed in 1957,
Netherlands 1.7 24.3 74.0
agriculture’s share of gross value added (GVA)
(GVA measures the difference between output Poland 3.9 32.4 63.7
and intermediate consumption – that is, it assigns Portugal 2.3 23.6 74.1
a value to the goods and services produced minus Romania 6.0 42.3 51.7
the cost of all inputs and raw materials and, as Slovakia 3.1 35.2 61.7
such, quantifies the value of goods and services Slovenia 2.7 31.1 66.2
produced in a particular region, industry or com- Spain 2.5 26.0 71.5

pany) and employment was much bigger than at Sweden 1.6 25.2 73.2
present. Agriculture has subsequently declined UK 0.2 20.7 78.6
in relative importance throughout Europe, com-
Source: Eurostat.
prising only 1.7 per cent of GVA in the EU-28
in 2013. Agriculture’s current share ranges from
less than 1 per cent of GVA in Belgium, Ger- Southern Europe and of those states that acceded
many, Luxembourg and the UK to 6.4 per cent to the EU in 2004 and beyond.
in Romania. In general, agriculture makes a big- Industry has also declined in relative impor-
ger relative contribution to the economies of tance throughout the Union, accounting for
8
25 per cent of EU GVA in 2013 and ranging from funding in the coming years. EU members are also
14.9 per cent in Cyprus to over 30 per cent in subject to the same environmental imperatives and
several Central and Eastern European states are vulnerable to energy supply insecurity (see
and Germany. The former are still in transi- Chapter 11). They are also facing increased com-
tion to a post-Soviet economy and shifting to a petition from the emerging economies of Asia (see
more service-based economy whereas Germany, Chapters 18 and 19) and are subject to international
uniquely among developed countries, has seen its economic cycles, increased economic mobility and
share of industrial GVA increase (see Box 2.1). need to find a positive response to increasing eco-
Services dominate contemporary European nomic interdependence or globalisation.
economies and – for the majority of member Despite the convergence in economic ideol-
states – contribute two-thirds or more of GVA. As ogy, economic structure and the challenges fac-
Chapter 15 shows, Europe is also the world leader ing European countries, significant differences
in trade in commercial services – a dominance remain which influence their response to these
which is becoming less emphatic as a result of the challenges and lead to different business and
growth of services in many emerging markets. policy concerns. This diversity emerges from the
Services themselves include a range of activities, interaction of economics, politics, history, social
including distributive trades; transport and com- preferences and culture. Different organisational
munication; accommodation and food services; structures persist in European countries, whether
information and communication technology (ICT); of government (the Belgian and German states
financial and insurance services; real estate; pro- are organised along federal lines, for example,
fessional, scientific, technical and administrative whereas the French state is highly centralised) or
support services; public administration, defence, of legal and financial structures.
education, health and social service; and arts,
entertainment and recreational services. Within
services, individual member states have their own European social models
strengths: financial and insurance services are par-
ticularly important to Luxembourg and the UK, The development of competing European social
for example, whereas Malta and Cyprus (which models is a useful device to highlight similarities and
also has had a relatively large banking sector) rely differences among European countries. However,
heavily on tourism and related activities and Ireland care needs to be taken in interpreting these mod-
has the largest ICT sector in relative terms. els. First, the term ‘social model’ is misleading as
Member states are also subject to – and have the implications of the models stretch far beyond
to respond to – the same domestic and interna- the social and into production, productivity and
tional challenges. They are, for example, all subject employment: that is, into areas which can have pro-
to the problems arising from an ageing popula- found effects on growth, competitiveness and the
tion (see Chapter 14). The problem is more acute ability to prosper within a more interdependent
in some countries: the 2004 accession states, for global economy. Second, the models themselves are
example, currently have a less marked problem in stylised: in reality, individual countries will fit more
this regard than the states of Western and South- or less with a particular model but on some criteria,
ern Europe but their position is forecast to decline they may show more elements of a different model.
fairly quickly. Consequently, all member states will Social models can be developed in a number of
have to re-examine their welfare systems and their ways but one influential version, and one which
9
has much in common with other models, has been made in education. This emphasis is demon-
developed by André Sapir. Sapir’s analysis was first strated by Figure 1.4, according to which Fin-
presented to the Union’s Finance Ministers at an land, Sweden and Denmark are the leading EU
informal meeting in September 2005. It is used here member states in terms of R&D expenditure
as an example of how European countries can be as a share of GDP.
classified according to key dimensions. One draw- 2 The Anglo-Saxon model (the United Kingdom
back of Sapir’s approach, as is the case with others, and Ireland): this is the most market-oriented
is that it is concerned with the EU-15 and does not model of the four with little employment protec-
incorporate the 2004 and later accession states. tion afforded to the workforce. Social transfers
Figure 1.3 provides an overall representation tend to be smaller and more targeted than in oth-
of the four social models identified by Sapir. The er models and unions are generally weak. There
main characteristics of each model are: tends to be a bigger pool of low paid workers
than in other models and there is a wide spread
1 The Nordic model (Denmark, Finland, Swe- of wages. In general, there is a preference for
den and the Netherlands): these countries competition and deregulation. In many respects,
have the highest levels of social protection and the Baltic states have the most in common with
welfare in the EU. The protection offered to this grouping, having adopted a clear market
employment by legislation is rather muted approach with a lesser emphasis on welfare.
but much emphasis is placed on active labour 3 The Continental model (Austria, Belgium,
market policies to keep people in work and France, Germany and Luxembourg): often
to ensure that those out of work can gain categorised as ‘social market’ economies in
the necessary training and skills to get them which the market is used as the major source
back into work (see Case Study 14.1). Trade of resource allocation but is regulated to attain
unions are strong and the range of incomes is socially acceptable outcomes. This model has
relatively compressed. Political and economic come under scrutiny because its emphasis
decisions rely greatly on consensus and rela- on equity has, according to some, derailed its
tions between the social partners are based on quest for efficiency. This model relies heavily
a high level of trust. High technology and the on insurance-based benefits, non-employment
associated skills are regarded as key to future benefits and pensions. Although declining, the
economic success with large investments being influence of unions remains strong and the
social partners play an important role in indus-
EFFICIENCY trial relations. However, in the German case, the
Low High
model has proved to be adaptable with the social
partners demonstrating a flexible approach so
High Continental Nordic
that the German economy can continue to grow
EQUITY
and the state can sustain the major part of the
social bargain (see Box 2.1).
Low Mediterranean Anglo-Saxon 4 The Mediterranean model (Greece, Italy,
Portugal and Spain): social spending is tra-
ditionally relatively low with extensive fam-
Figure 1.3 European social models ily networks sharing the burden and much of
Source: Sapir, 2005. the expenditure is directed towards pensions.
10
Collective bargaining determines wages and the Nordic model. Whether reform takes place in
the wage structure is highly compressed. this model is a political matter.
Employment protection tends to be strong The Nordic model appeared to be in serious
in this model and early retirement has been trouble in the 1980s and early 1990s with seri-
used extensively to keep employment down. ous doubts emerging about the long-term afford-
Table 1.4 shows the yawning gap between ability of their generous welfare states. However,
employment levels of 20–64 year olds and the Nordic model countries embraced elements
the achievement of their Europe 2020 targets of the Anglo-Saxon model to boost their growth
which has to cast doubt on the sustainability rates: product markets have become as deregu-
of the model unless some way is found of get- lated as those in Anglo-Saxon countries and labour
ting more of the population into work – an markets are less heavily regulated than those in
urgent but challenging priority in view of the France and Germany. Increased labour market flex-
economic stagnation of these states that are at ibility has been matched by an emphasis on active
the heart of the eurozone crisis. labour market policies which help with re-skilling
and strict fiscal prudence. Trust and consensus are
Figure 1.3 places the four models in an equity/ important watchwords in the Nordic models. The
efficiency matrix. The ideal position to be in is that Nordic countries have also emphasised technol-
of the Nordic model – one of high equity and high ogy, R&D, education and growth – factors which
efficiency. The worst position is that of the Mediter- align the Nordic countries fully with the targets and
ranean model which is neither equitable nor effi- objectives of Europe 2020. This combination has, for
cient. The Continental model is regarded as high example, facilitated the emergence of leading global
on equity but low on efficiency – although recent telecommunications companies from within their
German performance appears to belie this. If they midst. Although it is unlikely that other member
can increase their efficiency levels, the Continental states will be able to follow the example of the Nor-
model countries could well find themselves in the dic countries in all aspects because of different social
position where they can continue to fulfil their equity bargains and different economic starting points, les-
goals and perhaps even improve their performance sons can be learned from the Nordic experience in
in this area. Without improved efficiency, however, terms of securing a future which combines equity
it is clear that the sustainability of their high levels of and efficiency. It is upon this basis that Europe can
equity will be undermined.The Anglo-Saxon model begin to address its competitiveness problems while
provides an efficient but inequitable system. not undermining its desire for social cohesion.
The Continental and Mediterranean models
have become inefficient and reliance on strict

employment protection laws has rendered their Europe’s competitiveness
systems resistant to change, rigid and bad for over- problem
all employment levels. Activity rates tend to be
higher in the Nordic and Anglo-Saxon countries. The assumptions surrounding the concept of
Pressures from globalisation, ageing populations competitiveness can be misleading, especially
and low activity rates make these models unsus- when they extend the basic principles of competi-
tainable in the medium to long term and in serious tive advantage to the level of the state. The impli-
need of reform. The Anglo-Saxon model is more cation is that the same analytical principles can be
sustainable but is demonstrably less equitable than applied to both the state and the firm. However,
11
it would be misleading to extend the analogy of are performing (see Chapter 2 for a more applied
the ‘state/region as a firm’ too far. The notion of view of competitiveness). Thus being competitive
‘EU plc’ is misleading as it makes certain assump- is based on the ability of the firm to preserve and
tions which can lead to misunderstandings about enhance its presence within the globalising market
the different pressures on states and firms. Krug- place. This means that competitiveness is not pri-
man (1994) disputes the notion that states – like marily about states or government, although gov-
firms – are in competition with each other for the ernment actions can clearly help or hinder firms.
following reasons. As a consequence, firms must be the focus of policy
and, in the context of the EU, the notion of com-
■■ Firms are not like states: the firm is motivated petitiveness is based upon the ability of all firms
by profit whereas the latter is motivated by a located within the region (both EU and non-EU
broader range of economic, social and political owned) to thrive and prosper within the frame-
issues, which can and do interact to influence work of a favourable business environment. Again,
the performance of business but which have the single market was essentially about removing
other dimensions as well. Moreover, firms can barriers to business activity (that is, to improving
go out of business whereas states can perform the supply-side of the economy) rather than direct
badly or even fail: in these cases, the political government intervention in production.
and economic systems and even boundaries Porter (1990), while not taking an extreme
can change but the territory remains. view on the ‘states as firms’ perspective, none-
■■ Trade is not a zero sum game. The metaphor of theless believes that states do compete with each
the state as a firm is based on the premise that other. In this context, Porter argues that the
the state will only prosper by winning market competitiveness of nations is based on the char-
share from other states. However, trade lib- acteristics of the domestic environment. It is the
eralisation is expected to work to the benefit combination of a series of conditions (and their
of all states. Thus, if the EU prospers in global mutual reinforcement) within states that have a
markets, it may not necessarily be at another large influence upon the performance of busi-
state’s expense. ness on both domestic and foreign stages. Never-
theless, these conditions are a necessary but not
Nevertheless, the spectre of competitiveness is sufficient condition for good firm performance:
raised time and time again. Indeed, it was confirms must still respond to these conditions and
cerns about Europe’s competitiveness in relation take advantage of them – it is, however, easier to
to the US and Japan that led to the single market perform well if the appropriate conditions are in
initiative (see Chapter 5) and much of the ongoing place. Porter’s conditions are:
debate about globalisation and Europe’s response
to the rise of the BRICs and other emerging mar- ■■ Factor conditions: all states have a combination
kets (see Chapters 18 and 19) is expressed in of given and created factors of production. The
terms of competitiveness – so what exactly is the former include energy, raw materials where-
‘competitiveness’ problem faced by the EU? as the latter include infrastructure, skills,
In part, the answer lies not at the macro level but labour, technology, etc. and can be shaped to
at the micro level. The barometer of competitive- varying degrees by public policy. Historically,
ness is not how well the economy per se does but Europe’s competitive strength was derived
how well those firms located within that economy from its natural factor endowments in terms
12
of energy supply, raw materials, etc. It was no software firms that drove the emergence of
coincidence, for example, that the first indus- the US as a ‘new economy’ power are absent.
trialising countries, for example, were the UK This is despite the development and sourcing
and Germany which both had large reserves by Europeans of many of the core technologies
of coal that enabled them to power the first within the new economy.
factories and early railroads and steam ships. ■■ Firm strategy, structure and rivalry: how firms
In the modern world, however, created factors compete and are managed is influenced by the
are generally regarded as more important than home environment. The education system,
given factors and these are firmly embedded commercial cultures and competitive struc-
in the key themes and targets of Europe 2020. tures are just three factors that can influence
■■ Demand conditions: demand is important in the form and the nature of firm behaviour
understanding user needs and requirements, within internationalising market places.
especially within the home market. The higher However, Porter places the greatest empha-
and more sophisticated the level of demand, sis on the intensity of competition as a driver
the greater the scope for economies of scope of change. Under pure market conditions,
and scale as well as assorted marketing skills the intensity of rivalry creates a distinction
that could be valuable in overseas markets. It between those firms that have successful strat-
was to end the fragmentation of the European egies and those that do not. In these conditions,
market and to create a bigger domestic mar- economies are subject to dynamic change
ket, thereby reaping these economies of scale which leads to a process of renewal both with-
and scope, as a platform for exporting to the in firms and across whole industries. These
rest of the world that lay behind the single pressures should breed excellence in products,
market programme (see Chapter 5). services and innovation. However, within the
■■ Related and supporting industries: these indus- EU, the intensity of competition has been lim-
tries (if they are internationally competitive) ited by the ongoing and incomplete process
when working closely with firms are able to of building the single market (see Chapter 5)
spur innovation and change. One potential and by the actions of states driven by a suspi-
impact of the SEM was expected to be greater cion of market forces that has caused them to
specialisation resulting in greater clustering of resist the full forces of competition. The result
related and supporting industries in locations is that firms are restricted in using the benefits
around Europe. In essence one of the key prob- derived from intense competition in national
lems facing Europe is the continuing absence markets to deliver competitive advantage at
of world-class supporting industries to aid the the international level. In short, how can firms
competitiveness of firms elsewhere in the EU be expected to compete internationally when
economy.The dearth of such supporting indus- they are not allowed to compete domestically?
tries has been driven by the relative absence
of entrepreneurialism, a limited advanced In addition to the four primary determinants
scientific research base and the scarcity of discussed above, Porter’s framework for explain-
venture capital. The most evident example of ing national competitiveness is supported by two
this is the weakness of an indigenous ICT sec- other factors of secondary importance – chance
tor within the EU. Across this industry value (the potential for a random innovation or histori-
chain, the interlinkages between hardware and cal accident to create change) and government
13
(the ability of government policy to influence out- from the form and nature of institutional con-
comes via the primary determinants). Despite its straints and freedoms created. These can be for-
relative downplaying by Porter, government has mal institutions such as laws, regulations etc., and
an important facilitating role through its action informal institutions such as culture and ethics.
and inaction to remove or create impediments to Clearly there is scope for overlap between these
competitiveness. In the European context, the EU different views.
and national governments together have played
a major role in shaping the factors determining
Europe’s business environment. A long-term growth strategy
Porter’s framework for national competitive- for Europe: Europe 2020
ness, often referred to as ‘Porter’s diamond’, has
become increasingly popular. In prescriptions for In 2010, Europe 2020 was launched, a ten year
aiding the development of competitiveness, this growth strategy which was the successor to the
framework has been widely accepted. While it can Lisbon Strategy and its predecessor the 1993
be criticised for its simplicity and for the low prior- White Paper Growth, Competitiveness, Employment.
ity given to policy makers and MNCs, the frame- This initiative provides an overview of what the
work is a useful benchmark for addressing and European policy elite consider the overarching
examining issues of national and regional competi- long-term priorities for the EU and its member
tiveness.Taking each of the determinants in turn, it states.
can be argued that the competitiveness problem is The ambitious Lisbon Strategy aimed to make
created by the interaction and mutual dependence the EU the world’s most competitive economy
between the primary factors identified by Porter by 2010. This was to be achieved by a wide range
and between these factors and government policy. of interdependent market-driven reforms to
Porter’s perspective on competitiveness merely stimulate more intense competition from inter-
reflects a belief that it is the external environment nal and external sources and to facilitate the
that shapes a firm’s competitive position and there- development of the knowledge economy. The
fore enables an economy to prosper. The message Lisbon Strategy was important as a long-term
is get the environment right then competitiveness vision into which several governments, previ-
will result. However this only represents one view ously sceptical about market-driven liberalisa-
of what enables firms to develop competitive advan- tion, bought. However, the initiative was rapidly
tage. Others suggest that competitiveness is based on undermined – in part by its over-optimism but
the internal environment (see Fahy, 2001) and comes also by events. Enthusiasm for reform started
from the interaction between firm (finance, skills, to wane: this was exemplified by the intense
etc.) and country (education systems, infrastructure, debates about the ultimately watered down Ser-
etc.) specific resources. The policy implications are vices Directive and the conclusion in the 2010
that government should seek to ensure that country report on the single market by former EU Com-
specific resources are as valuable as possible to max- missioner Mario Monti (2010) that the EU was
imise the yield from firm specific resources. suffering from ‘integration fatigue’. However, it
Other theories suggest that competitiveness was the financial and economic crisis that hit just
is based upon the institutional framework (Peng, halfway through the lifetime of the Lisbon Strat-
2000). This perspective argues that the ability of egy that finally put paid to its chances of even
firms to develop competitive advantage is derived minor success.
14
The starting point of Europe 2020 was acknowl- 2 Sustainable growth: that is, growth that
edgement of the damage done by the financial and leads to a more resource-efficient, greener
economic crisis which it was claimed had: and competitive economy. This links into
the smart growth theme, for example, by
wiped out years of economic and social progress requiring innovation in greener technologies
and exposed structural weaknesses in Europe’s which, in turn, have the potential to create
economy. In the meantime, the world is moving new jobs, especially if Europe can develop a
fast and long-term challenges – globalisation, leading position in some of these technolo-
pressure on resources, ageing – intensify. gies (see Chapter 12).
(European Commission, 2010a) 3 Inclusive growth: that is growth that results in
high levels of employment, reduces poverty
The aim of Europe 2020 was to identify, develop and creates social and territorial cohesion. In
and pursue a strategy that would enable Europe to the knowledge-based economy envisaged by
put the crisis behind it and to emerge from it as Europe 2020, this requires investment in skills,
a reinvigorated, highly competitive economy. In education, and training and connects with both
order to achieve this, the following three, mutu- the above priorities. Inclusive growth also
ally reinforcing priorities were identified: implies that the benefits of economic growth
should reach all parts of the EU, including its
1 Smart growth: that is, growth based on knowl- peripheral regions.
edge and innovation arising from improved
quality in education; strengthening of Europe’s In order to move these priorities from being
research performance; promoting innovation purely aspirational into something real, five
and knowledge transfer; maximising the use of headline targets have been set to measure pro-
information and communication technologies gress towards achieving these priorities (see
and facilitating the transformation of innova- Table 1.3). These targets are for the EU as a
tive ideas into products and services that cre- whole: each member state has its own individual
ate jobs and address some of the key global target which reflects its starting position and
challenges. circumstances.
Table 1.3 Europe 2020’s five priority targets

Employment 75% of 20–64 year olds to be employed

Research and development (R&D) 3% of GDP to be invested in R&D
Climate change and energy sustainability 20:20:20 strategy (see Chapter 11):
■ greenhouse gas emissions to be at least 20% below 1990 levels
■ 20% of energy to come from renewables
■ 20% increase in energy efficiency
Education Early school leavers rate to fall below 10%
At least 40% of 30–34 years old to have a tertiary education
Fighting poverty and social exclusion 20 million fewer people to be in or at risk of poverty and social
exclusion
15
Underpinning these targets are seven, more young professionals and the launch of a youth
detailed flagship initiatives designed to underpin employment framework, along with mem-
the targets and push forward the main themes. ber states and social partners, aimed at easing
Each plan identifies strategies to be followed at the entry of young people into the workplace
EU and at member state level. Themes contained through apprenticeships and work experience.
in some of these initiatives are raised in subsequent Member states are responsible for financing all
chapters of this text. The flagship initiatives are: levels of education and training and improving
educational outcomes.
1 ‘Innovation Union’: the overarching aim of 3 ‘A Digital Agenda for Europe’: the aim of
this initiative is to refocus R&D and innovation this flagship initiative is to contribute to the
policy on the main challenges facing Europe, creation of ultra-fast internet for all. The
namely climate change, energy and resource Commission will work to provide the legal
efficiency, health and demographic change. framework to stimulate investments in an
The Commission’s role is to create the Euro- open and fast internet structure and related
pean Research Area with a strategy to meet the services and to create a single market for
above challenges; to improve the framework online content. These issues are discussed
conditions for business innovation, including more fully in Chapters 13 and, to a certain
creation of a single EU patent and a special- extent, in Chapter 9.
ised Patent Court; to upgrade trademark and 4 ‘Resource-efficient Europe’: the overarch-
copyright regulations; and making it easier for ing aims of this initiative, aspects of which are
SMEs to benefit from intellectual property touched upon in Chapters 10 to 12, are to create
protection; to strengthen EU instruments that a resource-efficient, low-carbon economy and to
support innovation (i.e. the Structural Funds, de-couple economic growth from resource and
R&D framework programmes, rural devel- energy use. The Commission’s plans to achieve
opment funds etc.); and to strengthen links this include developing the use of market-based
between education and business. Member instruments such as emissions trading; revi-
states will need to develop their own innova- sion of energy taxation, etc. (see Chapter 12);
tion schemes with a focus on encouraging the presentation of proposals to modernise and
cooperation between universities and business, decarbonise the transport sector (see Chapter
on prioritising R&D expenditure and on ensur- 10); to complete the internal energy market and
ing an ample supply of good quality maths, sci- promote the use of renewables (see Chapter 11)
ence and engineering graduates. and to upgrade energy infrastructure. Member
2 ‘Youth on the move’: in order to tackle the states are to phase out environmentally harmful
problem of youth unemployment (see Chapter subsidies; to use market-based instruments to
14) and to foster the creation of a knowledge- promote the aims of this initiative and to devel-
based economy, the aim of this initiative is to op their infrastructure accordingly.
improve the performance and attractiveness 5 ‘An industrial policy for the globalisation era’:
of Europe’s higher education institutions. EU a range of measures are to be brought forward
measures will include enhancement of mobil- to promote competitiveness and facilitate
ity schemes for students and researchers; entrepreneurship across all sectors of Europe’s
exploration of methods of promoting entre- economy and all elements of the increasingly
preneurship through mobility programmes for international value chain (see Chapter 7). This
16
will include measures to improve the busi- European partners, partly, but not only, on the
ness environment, especially for SMEs – work grounds of the precedent it would set for other
which will be supported by member states. fiscally imprudent eurozone members. Moreover,
6 ‘An agenda for new skills and jobs’: the inten- European citizens generally are less enthusiastic
tion of this flagship initiative is to modernise and optimistic about the European project (see
the workforce through developing the flexicu- Figures 3.1–3.3) than previously and in the UK,
rity agenda (see Case Study 14.1); to promote a referendum on whether the UK should remain
intra-EU labour mobility; to introduce legisla- a member of the European Union will take place
tion to support evolving work patterns and to by the end of 2017.
promote training, especially lifelong learning. Europe 2020 is not helped by the above trends
Some of these issues are discussed more fully but the five targets it has set itself (see Table 1.3)
in Chapter 14. provide a basis on which to begin assessment of
7 ‘European platform against poverty’: the how near or how far away the EU is from achiev-
overall aim is to reduce poverty and combat ing its targets. The energy 20:20:20 targets are
social exclusion. More specific EU initiatives covered in Chapter 11 but the R&D and social
include training for vulnerable groups; anti- targets (employment, education and fighting pov-
discrimination measures and assistance for the erty and social exclusion) are discussed below.
integration of migrants.
In order to further Europe 2020 goals, the Research and Development

intention is also to utilise the full range of EU
policies and instruments, including the SEM (see The Lisbon strategy aimed for 3 per cent of EU
Chapter 5); the budget and external trade policy GDP to be invested in R&D by 2010. The fact
(see Part IV). that the target remains the same for 2020 tells its
own story. Although the overall EU target is 3 per
cent, each member state has its own individual
Progress to date and target (see Figure 1.4).
prospects for 2020 According to Figure 1.4, Finland, Denmark,
Germany, Malta and Cyprus appeared in 2013
Attainment of the goals of the Lisbon Agenda was not to be too far from achieving their target. The
patchy to say the least. Indeed, in many respects first three in this group already had relatively high
the Lisbon Strategy was a failure.Will Europe 2020 R&D intensity and the target appears to be within
be any different? Certainly Lisbon was damaged their grasp whereas the opposite was the case in
by the economic and financial crisis, the effects Malta and Cyprus. However, it could be argued
of which Europe continues to experience half- that the targets set by Denmark and Germany are
way through the Europe 2020 programme. After not terribly ambitious given their relatively high
a relatively quiet period in the eurozone, early starting point which, already more or less met
2015 finds Europe wrestling with the fall-out the 2020 targets at the onset of the initiative. At
from the eurozone crisis following the election of the other extreme are Bulgaria, Latvia, Lithuania,
an anti-austerity Greek government that would Luxembourg, Poland, Portugal, Romania and
ideally like to achieve cancellation of a significant Slovakia who have ambitious targets which will
part of its debt. This is strongly opposed by its require acceleration of their R&D expenditure
17
4.5
3.5
3
% GDP
2.5
1.5
0.5
0
Finland
Sweden
Austria
Denmark
Germany
Slovenia
Estonia
France
Belgium
EU-28
Portugal
Netherlands
Luxembourg
Spain
Romania
Ireland
Lithuania
Hungary
Poland
Italy
Bulgaria
Latvia
Croatia
Greece
Slovakia
Malta
Cyprus
2013 actual 2020 target
Figure 1.4 Europe 2020 R&D targets compared to actual 2013 levels
Note: UK and the Czech Republic are not presented as they are not strictly comparable.
Source: Eurostat – Europe 2020 indicators.
growth and above average growth compared to and maintain a status as a leading, high technol-
the rest of the Union. ogy provider in both manufacturing and services
Each member state has its own set of specific (and is to achieve its R&D objectives), it needs a
contextual factors affecting its R&D performance highly educated and skilled workforce. The Lisbon
but there are some causes of poor performance Agenda’s social objectives were more explicitly
that are common across some or most states, aimed at raising employment in response to the
These include inadequate public funding of the ageing population, setting explicit targets for over-
science base and higher education which, in the all employment as well as for older workers and
long run, can lead to home-grown scientific talent the percentage of women in the workforce. Europe
moving abroad; an inadequate pool of science and 2020 certainly acknowledges the importance of
engineering graduates to serve the needs of busi- increasing the share of the population in the work-
ness and limited opportunities for fruitful coop- force, aiming for at least 75 per cent employment
eration between universities and business. rates for the adult population aged 20–64 by 2020
– an achievement which would help, among other
things, the 2020 target of poverty alleviation (which
Social targets will also be helped in the longer run by attainment
of the education targets). However, this overarch-
The social targets in Europe 2020 link directly into ing employment target, which essentially relates
the strategy’s main themes. If Europe is to become to the quantity of the workforce, is augmented by
18
educational targets which are intended to boost targets may be experiencing a mix of cyclical and
the quality of the workforce and to help the EU structural factors. In 2013, in Italy, for exam-
achieve its broader economic objectives. ple, almost 60 per cent of 20–64 year olds were
Table 1.4 sets out Europe 2020’s social targets for employed but only 49.9 per cent of females were
the EU as a whole and for individual member states employed compared to 62.6 per cent of this age
and sets them against actual figures for 2013. In the group and 74.9 per cent of Italian males. In short,
process, this gives some idea of how much progress in this case cultural differences relating to gender
member states need to make to achieve their targets. roles have a big impact on employment rates.
The EU’s employment target is ambitious: in Employment figures may not have shown much
2004, 67.4 per cent of the EU population aged change in recent years for a number of reasons
20–64 were in employment. By 2013, this had ris- but there have been tremendous changes in Europe
en only slightly to 68.4 per cent, requiring a 6.6 per 2020’s educational indicators. As Table 1.4 shows,
cent increase in employment levels if the EU is to ten member states had already achieved their target
meet its 2020 targets, which represents an increase of reducing the percentage of early school leavers
in employment not seen in Europe for some time. by 2013 with several others also near to achieving
There are two types of changes that will enable their target ahead of 2020. What the table does not
Europe to achieve its 75 per cent employment goal show is the tremendous fall in this indicator since
for 20–64 year olds – cyclical and structural changes. 2004 in member states that remained a long way
Cyclical changes depend on what is happening to the from achieving their 2020 target in 2013. Portu-
economy generally – economic growth promotes gal, for example, has a target of 10 per cent but, as
employment and poor economic performance has recently as 2004, 39.3 per cent of its young peo-
the reverse effect. Since 2010, when the European ple left school at the earliest available opportunity
economy has struggled to pick up after the 2007–8 which makes the fall by 2013 to a figure of 18.9
crisis, many EU members have experienced stagnant per cent remarkable. The trend has been similar in
or limited growth. The impact of restricted growth Spain and Malta to varying degrees.
and cyclical factors has been demonstrated most Trends in tertiary education show a similar
notably in Greece, which famously has endured the pattern: by 2013, 12 member states had met their
worst economic situation of all European economies: individual targets for the percentage of 30–34
in 2010, 63.8 per cent of the Greek adult population years olds with tertiary education (see Table 1.4).
in the 20–64 age group were employed but by 2013, However, this does not tell the whole story. Since
this had fallen to 52.9 per cent. 2004, the percentage of 30–34 year olds across
However, several member states exceeded the the EU with a tertiary education has risen from
75 per cent target in 2013, although not neces- 26.9 to 36.9 per cent – an impressive rise in such
sarily their own national targets which are high- a relatively short period of time.
er than 75 per cent in some cases. These higher Figure 1.5 shows how large the increase in the
performing countries tended to be in North- percentage of graduates in the 30–34 age group
ern European states and fall into one of two has been for many countries between 2004 and
categories – the Nordic and Continental models 2013. This growth has been particularly pro-
– as described above. These countries also tend to nounced in the Baltic states and other member
have the characteristics of flexicurity as outlined states that have joined the EU since 2004, ena-
in Case Study 14.1. Member states that are the bling several of them to reach their targets ahead
furthest from achieving the EU and their national of 2020.
19
Table 1.4 Europe 2020 social targets compared to actual performance in 2013
Employment Education Poverty and social exclusion
75% of 20–64 Early school 40% of 30–40 years At least 20mn fewer
year olds to be leavers olds to have tertiary people to be in or at
employed below 10% education+ risk of poverty
Actuals National Actuals National Actuals National Actuals 2013 National

2013 target 2013 target 2013 target % of pop. target % of
under 60 pop. under 60
Austria 75.5 77 7.3 9.5 27.3 38 18.8 18.9
Belgium 67.2 73 11 9.5 42.7 47 21.6 20.8
Bulgaria 63.5 76 12.5 11 29.4 36 49.3 48
Croatia 57.2 63 4.5 4 25.6 35 32.6 29.9
Cyprus 67.2 75 9.1 10 47.8 46 27.1 27.8
Czech Rep. 72.5 75 5.4 5.5 26.7 32 15.4 14.6
Denmark 75.6 80 8 10 43.4 40 19 18.9
Estonia 73.3 76 9.7 9.5 43.7 40 23.4 23.5
Finland 73.3 78 9.3 8 45.1 42 17.2 16
France 69.6 75 9.7 9.5 44.1 50 19.1 18.1
Germany 77.3 77 9.9 10 33.1 42 19.5 19.3
Greece 52.9 70 10.1 9.7 34.9 32 34.6 35.7
Hungary 63.2 75 11.8 10 31.9 30 32.4 33.5
Ireland 65.5 69 8.4 8 52.6 60 30 29.5
Italy 59.8 67 17.9 16 22.4 26 29.9 28.4
Latvia 69.7 73 9.8 13.4 40.7 34 36.2 35.1
Lithuania 69.9 73 6.3 9 51.3 49 32.5 30.8
Luxembourg 71.3 73 6.1 10 52.5 66 18.4 19
Malta 64.8 70 20.8 10 26 33 23.1 24
Netherlands 75.5 80 9.2 8 43.1 40 15 15.9
Poland 64.9 71 5.6 4.5 40.5 45 26.7 25.8
Portugal 65.4 75 18.9 10 30 40 25.3 27.5

Romania 63.9 70 17.3 11.3 32.8 27 41.7 40.4
Slovakia 65 72 6.4 6 26.9 40 20.5 19.8
Slovenia 67.2 75 3.9 5 40.1 40 19.6 20.4
Spain 58.6 74 23.6 15 42.3 44 27.3 27.3
Sweden 79.8 80 7.1 10 48.3 40 15.6 16.4
UK 74.8 – 12.4 – 47.6 – 24.1 24.8
EU-28 68.4 75 12 10 35.9 40 24.7 24.5
Source: Eurostat – Europe 2020 Indicators.
20
60
50
40
% 30
20
10
0
Ireland
Luxembourg
Lithuania
Sweden
Cyprus
Finland
France
Estonia
Denmark
Netherlands
Belgium
Spain
Latvia
Poland
Slovenia
EU-28
Greece
Germany
Hungary
Portugal
Bulgaria
Austria
Slovakia
Malta
Croatia
Romania
Italy
2004 actual 2013 actual
Figure 1.5 Percentage of 30–34 year olds with tertiary education, 2004 and 2013
Source: Eurostat – Europe 2020 indicators.
Key points
■■ Europe shares much in terms of a common history and aspects of culture but the differences
among European countries continue to manifest themselves in a variety of ways.
■■ Competitiveness is a complex issue which is open to various interpretations.
■■ The European Union through its Europe 2020 initiative, which follows on from the Lisbon
Agenda, is seeking to put Europe back on track after the economic and financial crisis and to
help it thrive in the hyper-competitive world economy.
■■ The main themes of Europe 2020 are Smart Growth, Sustainable Growth and Inclusive Growth.
These themes are reinforced by five measureable targets and seven flagship initiatives. Progress
towards achieving these targets is far from even.
Activities
1 Research the Nordic model further. To what extent are the Nordic countries equipped to meet the twin
challenges of globalisation and an ageing population? What can other member states learn from the Nor-
dic model and to what extent can or should the Nordic experience be transferred to the rest of Europe?
21
2 Choose a European country and analyse it in the context of each of Porter’s determinants of competi-
tiveness. What conclusions do you draw from this analysis about the prospects for your chosen economy?
3 Choose one of the three overarching themes of Europe 2020 and research how the flagship initiatives
are intended to contribute to your chosen theme.
4 How do the various themes, flagship initiatives and targets of Europe 2020 overlap and reinforce each
other?
Questions for discussion
1 To what extent do the objectives of Europe 2020 align themselves with the Nordic state model? What
challenges do you envisage in transferring this model, even partially, to other EU member states?
2 What makes a nation competitive?
3 Assess the targets of Europe 2020. Would you have included any others?
4 Relative to the rest of the world, European states have much in common among themselves. Do you
agree? Are the common factors sufficient to enable Europe to continue to search for a common future
or is Europe too divergent for this to work?
Bibliography
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Dicken, P. (2015) Global shift: Mapping the Contours of the Monti, M. (2010) A New Strategy for the Single Market: At
World Economy, 7th edn, London: Sage. the Service of Europe’s Economy and Society. Report to
Dølvik, J. and Martin, A. (eds) (2014) European Social the President of the European Commission, José Manuel
Models From Crisis to Crisis, Oxford: Oxford University Barroso, available at http://ec.europa.eu/internal_mar-
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22
Chapter 2
European business
Structure and performance
A competitive world offers two possibilities.You can lose. Or, if you want to win, you can change.
Lester Thurow (1938–), US economist
This chapter will help you to:
■■ identify the main challenges facing Europe in developing and enhancing its competitiveness;
■■ understand the main forces for competitiveness within the European economy;
■■ identify the main European multinational companies;
■■ understand the demography of the European business environment;
■■ comprehend the role of SMEs and LSEs within Europe;
■■ appreciate the importance of state-owned business to the European economy.
So far, the early years of the twenty-first century First, following on from the more theoretical dis-
have proved difficult for the European economy. cussion of competitiveness in Chapter 1, it exam-
Slow growth and a perception of diminishing ines the relative competitiveness of the European
competitiveness have driven restructuring of economy as a prelude to understanding the broad
the European commercial base – main motivat- process of change within it. Building on this,
ing factors behind the construction of the Single and reflecting that European competitiveness is
European Market (SEM) – back to the forefront ultimately driven by European businesses, the
of European policy. The theme of positioning chapter then moves on to examine the structure
European economies within the context of the of European business. Initially, it analyses those
global economy recurs throughout this text. This large European multinational businesses that
chapter seeks to do this in a number of ways. have established a global presence. Thereafter, it
23
moves on to present a broad demographic profile markets. Competitiveness involves a whole gamut
of European business. This focuses on the impor- of issues such as productivity, cost, and innovation
tance of state-owned enterprises to the European which reflect its dynamic nature as both states
economy and on the emergence of high growth and firms adapt to shifting markets. For Europe,
business (notably SMEs) as a potential source of this approach is reflected in the Porterian dic-
future competitiveness. tum (Porter, 1990) that there is nothing better
for competitiveness than competition itself. This
stance reflects the neo-liberal consensus embed-
The performance of Europe: ded within conceptual notions of the competi-
competitiveness and growth tion state, which focus on micro adaptation by
the state to global markets and their demands
The issue of European competitiveness has vexed (Fougner, 2006).
Europe’s political and economic leaders for dec- Over the past decade, the lists of competitive-
ades. These competitive pressures were an under- ness indicators created by the World Economic
current of the single market programme (see Forum (WEF) have gained increasing currency.
Chapter 5) and gained urgency during the reces- These criteria for the measurement and determina-
sion of the early to mid-1990s, leading to the flag- tion of a nation’s competitiveness are aligned with
ship Growth, Competitiveness, Employment White Paper the WEF’s definition of the concept as being ‘the set
of 1993. From the resumption of growth in the late of institutions, policies and factors that determine
1990s to the 2007–8 financial crisis, the issue was the level of productivity of a state’ (Schwab and
placed on the backburner as Europe focused on Sala-i-Martin, 2013, p. 4). This focus on productiv-
making monetary union a political and economic ity reflects the belief that it is the primary driver
reality and, hopefully, a success. The financial crisis of a state’s prosperity. This productivity is based
(and its aftermath) highlighted the failure of Euro- on what the WEF terms ‘12 pillars’ located within
pean states to be competitive within the macro three categories that are reflected in Figure 2.1.
framework provided by the euro (see Chapter 8). Within a text of this nature, a full examina-
As later chapters reflect, the failure of the euro to tion of each pillar is impossible but many of these
compensate for the loss of external price flexibility themes recur throughout the text, and Case
with internal price flexibility led to many higher Study 2.1 offers a fuller examination of one of
cost states losing competitiveness within both these themes – infrastructure – as a means of
Europe and the global economy as a whole. These enabling a fuller comprehension of such indices.
themes were reflected in the Lisbon Agenda and its While such a framework is not beyond criticism
successor, Europe 2020 (see Chapter 1). (see Fougner, 2008), it does reflect a sustained
What competitiveness is and how it can best be neo-liberal consensus within policy-making net-
measured and attained is a moot point. Striving works, building on themes in Porter’s much cited
to achieve the lowest cost or highest productivity Diamond Framework (see Chapter 1) and it does
is useful but too simplistic to attain overall com- provide a useful benchmarking device through
petitiveness. In truth, competitiveness is about a which the relative state of the competitiveness of
state of being competitive in a context of global European economies can be gauged.
markets and thus reflects the capability of the For advanced economies such as those within
state (and of the economic agents within it) to the EU, the focus is on becoming innovation-
gain and sustain market share within their chosen driven. Progress in this direction is far from even:
24
European business: structure and performance
Basic Efficiency Innovation and sophistication

requirements enhancers factors
1 Institutions 5 Higher education and 11 Business
2 Infrastructure training sophistication
3 Macro-economic 6 Good market efficiency 12 Innovation
environment 7 Labour market
4 Health and primary efficiency
education 8 Financial market
development
9 Technological
readiness
10 Market size
Key for factor Key for efficiency Key for innovation

driven economies driven economies driven economies
Figure 2.1 The WEF’s Global Competitiveness Index

Source: Schwab and Sala-i-Martin, 2013.
member states that have recently undergone eco- global leaders in innovation, they tend to do less
nomic transition (that is, those of Central and well in some of the basic indicators such as infra-
Eastern Europe) fall more into the efficiency- structure.The lagging states – unsurprisingly – are
driven category. It is only the more advanced trailing not just in innovation but also in basic cri-
economies of Western Europe that can, as yet, teria such as infrastructure and economic reform.
be classified as innovation-driven. This under- For many, the ultimate cause of the euro crisis
lines a core feature of the European economy – (see Chapter 8) lies in Europe’s lack of competi-
its sheer diversity in terms of economic struc- tiveness, or to put it more precisely, the variance
ture and development. This issue became evident in competitive performance between the states
during the euro crisis (see Chapter 8). Table 2.1 who participate in the eurozone economy. This
reflects the rankings of individual European states reflects the lack of uniformity in competitiveness
in terms of international competitiveness out of a across states and highlights the sustained absence
total of 148 states in relation to the criteria of the of economic convergence. For Schwab and Sala-i-
WEF’s ‘12 pillars’. Martin (2013), this variance arises from national
Looking across the whole of Europe, including differences in productivity across these states
non-EU states, it is clear that parts of Europe are which are driven by lower levels of innovation,
very competitive within international markets. higher education and training and labour market
However it is also possible to argue that there efficiency. These concerns have proved especially
are several European economies that are suspect, acute for Southern European economies. This
notably Greece and some of the ex-transition highlights the north–south split in performance
states. Further analysis of the rankings reveals that, that makes economic integration in Europe dif-
although the best performing European states are ficult. These gaps are especially large, not only in
25
Case Study 2.1

Infrastructure and growth
Even in times of austerity, there has been consensus among states and international finance on the
need to sustain or even increase investment in infrastructure (both economic infrastructure – roads,
rail, pipelines, etc. – and social infrastructure – housing, schools, hospitals) as a means of laying the
foundations for the growth and competitiveness of the EU economy. In part, such debates are a reflec-
tion of the state and financial markets differentiating between what is ‘good’ and what is ‘bad’ public
spending. Such debates are not merely an extension of the conventional demand management logic of
the state seeking to spend its way out of its difficulties: the political economy of austerity contradicts
such measures in any case. The current debates on promoting infrastructure investment in European
states is about the emergence of infrastructure as an asset class – within the context of competition
for investment funds – and about seeking to establish the means through which global finance invests
in these core assets.
The link between a state’s infrastructure system and a state’s competitiveness and long-term growth
lies mainly in the supply-side of the economy. The effects of infrastructure on growth are felt through a
number of channels, all of which can cause the productive potential of the economy to increase. First,
enhanced infrastructure can stimulate improvements to logistical systems, thereby aiding efficient
movement around and between economies through offering sufficient capacity to match internal and
external flows. Second, infrastructure can aid growth through external effects by enhancing knowledge,
by reducing the cost of trade and by enhancing the economy’s attractiveness as a location for inward
investment. Third, infrastructure can aid the process of growth through dispersing activity throughout
a territory and alleviating bottlenecks and congestion within it. This is a non-exhaustive list of the posi-
tive impact of infrastructure and is in addition to the short-term employment effects generated during
the construction phase.
In the WEF’s Global Competitiveness Index, infrastructure is one of the 12 pillars of competitive-
ness. Its inclusion in the Index not only reflects how infrastructure is a factor driving inward investment
but also how it drives the processes of time-space and cost-space compression. The WEF rankings of
infrastructure quality reflect a range of variables: namely, road quality; railroad, port and airport in-
frastructure; electricity supply and gas pipelines; and the availability of mobile telephony and fixed tel-
ephone lines. According to these criteria, the states with the best infrastructure are Switzerland, Hong
Kong, Finland, the United Arab Emirates and Singapore. Twelve European states are in the world’s top
20 but newer EU members rank poorly with Romania in 88th and Bulgaria in 94th position (out of a
total of 148).
However, this consensus on the positive impact of infrastructure on growth is undermined in cer-
tain incidences. The first is in cases such as China where there has been a widely acknowledged over-
investment in national infrastructure. In these cases, the economic benefits of a project are outweighed
by the economic and opportunity costs of the project. However, investment in a national infrastructure
system is not solely driven by the needs of the competition state but also by the needs of the state
26
to develop a system that integrates, secures and enables control of its territory. Second, the political
economy of infrastructure formation can also hinder the realisation of benefits where planning controls,
local stakeholders and local politics can all work with other factors to both inflate costs and erode the
benefits of any given piece of infrastructure.
Case question
Chose an infrastructure project with which you are familiar and consider its impact on local,
regional and national economies. Does the project have any cross-border implications?
innovation but also in institutional systems such as agenda – to identify four groups of EU members
liberalisation, etc. with divergent economic performance:
Europe 2020 (see Chapter 1) has been devel-
oped in part to address the competitiveness issue. 1 Nordic Europe: Sweden, Finland and
The WEF (2012) has used some of the themes Denmark;
within Europe 2020 – innovation, digitisation, 2 Western Europe (and Estonia): Netherlands,
labour market efficiency, and product market and Austria, Germany, United Kingdom, Luxem-
resource efficiency set against a socially inclusive bourg, Belgium, France, Estonia and Ireland;
3 Southern and Eastern Europe: Slovenia, Portugal,
Spain, the Czech Republic, Cyprus, Malta, Latvia,
Lithuania, Italy, Slovakia, Poland and Hungary;
Table 2.1 T
he ranking of Europe’s economies by
competitiveness 4 South-east Europe: Greece, Romania and
Bulgaria.
1. Switzerland (1) 17. Malta (31)
2. Finland (3) 18. Poland (42)
The ranking of these groups (from high to
3. Germany (4) 19. Czech Rep. (46)
4. Sweden (6) 20. Lithuania (48) low) reflect a diminishing level of competitive-
5. Netherlands (8) 21. Italy (49) ness, with the Nordic states having proved espe-
6. UK (10) 22. Portugal (51) cially strong through investment in innovation
7. Norway (11) 23. Latvia (52) and education against a background of promoting
8. Denmark (15) 24. Bulgaria (57) labour and product market efficiency (see section
9. Austria (16) 25. Cyprus (58)

10. Belgium (17) 26. Slovenia (62)
on social models in Chapter 1). At the other end
11. Luxembourg (22) 27. Hungary (63) of the spectrum, the South and East European
12. France (23) 28. Croatia (75) states have a high degree of sclerosis within fac-
13. Ireland (28) 29. Romania (76) tor and product markets. Such divergence in the
14. Iceland (31) 30. Slovakia (78) performance and development of the EU states
15. Estonia (32) 31. Greece (91)
highlights the difficulties in developing uniform
16. Spain (35)
solutions for a continent that remains so diverse.
Notes: Figures in brackets denote international ranking out Industrial strategies launched by the EU tend to
of 148 states be very aspirational, paying lip service to notions
Source: WEF, 2013. of knowledge-driven economies and reform.
27
Case Study 2.2
The competitive performance of Switzerland
Switzerland has long been a consistent presence at the top of the international league of competitive
states. In seeking to account for this sustained performance against a background of economic turmoil
in its neighbours, it is helpful to examine key features of the Swiss economy. The first is the high level of
stability of its macro-economic environment, a key facet of which has been the introduction of the self-
imposed ‘debt brake’ which limits potential for the state’s indebtedness. Moreover, the much vaunted
isolationism of Switzerland is illusory as it is very integrated into the Single European Market through
a series of bilateral agreements. Indeed, exports to the EU represent 50 per cent of all Swiss exports
and, as such, the country has not been able to isolate itself from events in the eurozone. The WEF has
also highlighted three further factors driving Switzerland’s performance:
1 Institutions: Switzerland has highly effective and transparent institutions with a unique governance
structure which fosters cohesiveness and inclusiveness across the federal system of cantons. This
enables the development of a long-term agenda. Key to this is collaboration among stakeholders to
find solutions to the country’s problems. This creates an open, consensual system of governance.
2 Market dynamism: Switzerland has well-functioning labour and finance markets with its
companies offering highly sophisticated goods and services across a diverse range of product
groupings. This diversity has allowed the state to weather the turmoil in the eurozone, notably
the rising value of the Swiss franc – an unintended side-effect of this turmoil. Thus, despite its
aloofness from formal integration, Switzerland has an open economy which utilises advanced
manufacturing and management practices. The unemployment rate remains low and labour is both
flexible and efficient and supported by an excellent education system.
3 Innovation: these well-functioning markets are key to Switzerland’s strong record in innovation,
making it a most attractive place for creative and highly qualified labour. These markets also provide
the basis for innovation through intensive collaboration between government, business, research
institutes and universities. These links are supported by strong intellectual property protection.
These features of Swiss competitiveness have been supported by the actions of the Swiss National
Bank to maintain a relatively fixed exchange rate vis-à-vis the euro – the currency of its major trading
partners. The strategy aimed to prevent Switzerland becoming a refuge for funds seeking to flee the
crisis in the euro which would push up the value of the Swiss franc and undermine the country’s com-
petitiveness. However this policy was ditched in late 2014 and caused a sharp revaluation of the Swiss
currency, forcing its business to adjust accordingly. At the time of writing, the impact of the unilateral
abandonment of the euro-Swiss franc link is difficult to discern but many believe that the successful
positioning of many Swiss businesses should see them cope without too much difficulty.
Case questions
1 Why does Switzerland choose to remain outside the EU?
2 What lessons can other states learn from the Swiss experience?
3 Given its strengths, what are the dangers for the Swiss economy?
Such broad-brush aspirations tend to ignore the Table 2.2 E

uropean rankings in World Bank’s Ease
relative state of preparedness of individual states. of Doing Business Index
This divergence in the performance of Euro- 5. Denmark 33. Slovenia
pean states is also borne out by the World Bank’s 9. Norway 36. Belgium
Ease of Doing Business Index. This index is a reflec- 10. UK 38. France
tion of the extent to which any given economy 12. Finland 39. Cyprus
operates a business friendly environment in terms 13. Iceland 45. Poland
14. Sweden 49. Slovakia
of the degree of regulation (and consequent 15. Ireland 52. Spain
unnecessary costs involved) and the protection 17. Lithuania 54. Hungary
of property rights. There is convincing evidence 21. Germany 58. Bulgaria
to suggest that there is a strong positive correla- 22. Estonia 60. Luxembourg
tion between these two variables and economic 24. Latvia 65. Italy
28. Netherlands 72. Greece
growth.The core criteria upon which the business
29. Switzerland 73. Romania
friendliness of an economy is measured according 30. Austria 75. Czech Rep.
to the World Bank Index are: 31. Portugal 89. Croatia
Note: out of 189 countries

■■ the ease of starting a business;
Source: World Bank, 2014.
■■ the ease of obtaining construction permits;
■■ access to electricity supplies;
■■ the rules for registering property; Southern and Eastern European states with the
■■ the availability of and access to credit; Northern European states (especially the Nordic
■■ the regulations for registering a business; states) offering a considerably friendlier business
■■ the level and range of taxes levied on business environment than several of the former Com-
and the administrative burden of paying the munist states of Central and Eastern Europe,
taxes; with the exception of the three Baltic states.
■■ the ease of foreign trade; The results also reinforce the need for reform in
■■ the rules of contract enforcement; Southern Europe. There are also some surpris-
■■ insolvency rules, a composite relating to the ing results, notably the relatively lowly placing of
time, cost and outcome of insolvency proceed- Germany and Luxembourg in the rankings. The
ings, including the outcome for creditors. World Bank’s research also indicates those states
in Europe who are making the fastest strides
The focus of the dataset is on the barriers to towards improving the ease of doing business
entrepreneurial activity within a state. How- (namely, Poland and the Czech Republic), further
ever, these indicators can also be a key driver in underlining how little progress many of the crisis
the hostility or otherwise of the state to foreign states of the eurozone have made in terms of eco-
direct investment (FDI) and business activity gen- nomic reform.
erally. The rankings for European states are shown Despite such divergences, the recurrent theme
in Table 2.2. Singapore and Hong Kong top the in the EU’s industrial strategy is the adaptation of
global rankings with New Zealand and the US European business to the challenge of globalisa-
third and fourth respectively. The highest placed tion. Over the past two decades, the competitive
European state is Denmark in fifth place. Again, landscape has changed notably with the emer-
there appears to be split between Northern and gence of low cost locations in the Far East (see
29
Chapters 18 and 19) that initially challenged the Table 2.3 S

ize distribution of enterprises across the
core industries of Southern Europe but which EU-27, 2011
have – over time – moved on to directly com- Number of Number of Percentage
pete with the more service-based economies of employees enterprises of total
Western and Northern Europe. Understanding 0–9 20,154,303 93
the form and nature of the challenge requires a
10–19 888,500 4
clear comprehension of what exactly European
20–49 466,500 2
business is and what it looks like. As such, there is
50–249 222,000 1
no better place to start an examination of the size
distribution of European businesses 249< 42,421 >1
Total = 21,773,724
Source: European Commission.

The size distribution of
European business
the European economy. LSEs on the other hand,
The size distribution of firms is an important produce more than 80 per cent of Europe’s
indicator of the degree of concentration within a value-added, especially within high technology
given economy. Indeed, applying the conclusions manufacturing.
of Porterian analysis (namely, that there is noth-
ing better for competitiveness than competition),
a highly plural structure is seen as a good barom- Europe’s MNCs in the
eter of the pressures stimulating innovation and global economy
change within industrial structures.
European industry can be split into three broad Despite the aforementioned weaknesses in the
categories for the purposes of analysis. The first European economy, Europe’s firms remain sig-
is large-scale enterprises (LSEs including MNCs) nificant players within the global economy. As
which are those businesses with more than 250 Table 2.4 demonstrates, many of the MNCs that
employees. The second is state-owned business, populate the international business environment
which are those businesses owned and/or con- are European based and/or owned. However,
trolled by the state. The third group is small and only two of the top ten MNCs globally are Euro-
medium-sized enterprises which are businesses pean (Royal Dutch Shell and BP) – a reflection of
employing less than 250 people. A subset of this the rise of state-owned enterprises and the domi-
latter category is micro-enterprises which have nance of extractive/energy firms during the last
less than ten employees. decade. The ten largest European MNCs ranked
Table 2.3 shows that SMEs are central to the by turnover are highlighted in Table 2.4.
success of Europe’s economy: they comprise 99 European companies comprise 159 of the
per cent of all businesses and provide around 65 world’s 500 largest MNCs, of which the UK and
million jobs. These businesses are also the source France have the highest European representation
of much of Europe’s growth with around two on the Fortune Global 500 list with 37 and 31
million SMEs created annually. Such firms tend companies respectively. Germany (29 companies)
to be less capital intensive than larger firms and and the Netherlands (22) are next on the list, fol-
are increasingly focused on the service sector of lowed by Switzerland with 14 companies and Italy
30
Table 2.4 Top European MNCs, 2013
European rank Firm Industry Turnover

(global rank) (state) ($mn)
1 (1) Royal Dutch Shell (UK/Netherlands) Petroleum 484,489
2 (4) BP (UK) Petroleum 386,463
3 (11) Total (France) Petroleum 231,580
4 (12) Volkswagen (Germany) Automobiles 221,550
5 (14) Glencore International (Switzerland) Extraction 186,152
6 (15) Gazprom (Russia) Energy 157,830
7 (16) E.On (Germany) Energy 157,057
8 (17) ENI (Italy) Energy 153,676
9 (18) ING Group (Netherlands) Finance 150,571
10 (21) Daimler (Germany) Automobiles 148,139
Source: Forbes Global Fortune 500 (2013).
and Spain with eight each. The list is dominated include not only indigenously owned firms but
by the US (with 162 companies), China (with 69) also non-domiciled SOEs from resource-rich
and Japan (with 62). Moreover Paris and London states and China. Some European SOEs, mainly
rank fourth and sixth globally for the location of from Eastern Europe, do feature on the Forbes
MNC headquarters with 19 and 17 respectively. list but they tend to have a strong domestic
However, both cities remain a long way behind focus. However, within Europe, Russian SOEs
Beijing (48 HQs) and Tokyo (46). make the highest contribution to their domes-
Energy companies in various guises are the larg- tic economy, representing over 80 per cent
est, albeit not the most numerous European com- of value created. Elsewhere in Europe, Nor-
panies on the list. They include not only the huge way (with 48 per cent), France (17 per cent),
oil conglomerates mentioned above but also large Greece (15 per cent), Finland (13 per cent)
Russian energy companies and state-controlled and Germany (11 per cent) have the highest
assets in Norway. Energy utilities also loom large level of dominance by SOEs. In some cases,
on the Global 500 list. The most numerous group- this reflects the aftermath of the financial crisis
ing representing Europe on the lists are financial and the necessity of state ownership to sustain
companies which make up almost 30 per cent of key critical resources (such as banks). Kowal-
the 159 European firms on the list. ski et al. (2013), although not breaking down
the role of SOEs by geography, point out that
SOEs also remain important within extractive
The sustained importance of industries. This is especially notable in econo-
state-owned enterprises mies such as Russia and Norway that rely heav-
ily on resources for their exports and wealth
Despite the mass privatisations throughout generation.
Europe from the 1980s onwards, SOEs remain One of the most notable trends affecting EU
prominent in Europe. SOEs active in Europe SOEs is their increasingly cross-border effects.
31
This is not only about intra-European interac- Table 2.5 E

urope’s largest SOEs – key indicators
tion but is also about global MNCs and Sovereign of performance (as percentage of Gross
National Income)
Wealth Funds becoming more involved within the
European theatre. In some instances, however, the State Sales Profits Assets Market
state ownership of aspects of European econo- value
mies, notably the emergency bailout of the banks Austria 1.1 0.1 3.8 3.1
in 2008–9 resulted in a reduction in the interna- Belgium 2.6 0.9 31.4 2.9
tional presence of some SOEs as they sought to Czech Rep. 5.6 1.3 15.4 13.1
restore their balance sheets. Nevertheless, the Finland 3.3 0.7 11.5 10.6
SOE remains important because of its connec-
France 7.9 0.4 23.0 7.1
tion to the competition state (see Case Study 2.3)
Germany 0.1 0.0 0.3 0.2
and – as such – is a primary catalyst for success in
Greece 5.8 0.4 23.2 3.8
international markets.
Ireland 6.5 -1.9 133.2 0.3
Across Europe, SOEs remain important in
those sectors where they have had an historical Italy 0.4 0.0 0.8 0.2
presence, notably within the network sectors in Norway 25 2.1 32.7 25.9
which – in some cases – natural monopoly argu- Poland 12.4 1.3 27.2 14.8
ments still hold sway to some extent. In other Sweden 3.4 0.7 7.6 8.1
instances – and for reasons arising from the Switzerland 3.1 0.6 27.8 7.1
recent financial crisis – SOEs are also present UK 2.8 -0.1 96.8 3.2
in the banking and finance industry. Moreover,
Source: Forbes, 2013.
it is a legitimate concern of the state to retain
some degree of ownership of parts of its critical
infrastructure system – that is, those parts of the largest SOEs as identified within the Forbes Glob-
economic system whose failure would directly al 2000 list (Forbes, 2013).
impinge not only on the welfare of its citizens The largest European SOE is Gazprom. The
but could also potentially undermine the state’s French utility groups EDF and GDF Suez are
governability. also sizeable. In global terms, only six Europe-
The relative importance of SOEs to a state’s an SOEs figure in the top 25 SOEs: in addition
national income varies markedly across Europe- to Gazprom, EDF and GDF Suez, these are the
an states. Surprisingly, many of the more liberal Russian bank, Sberbank; the Norwegian energy
states (that is, those who have led both the liber- company, Statoil, and the Russian oil company,
alisation and the privatisation of utilities) possess Rosneft. Of these, only the two French utili-
the highest ratio of SOE assets to national income ties are EU companies. The largest SOEs in the
notably the UK and Ireland. Again, figures for world are, unsurprisingly, from China with 11
these states have been boosted by the bank res- SOEs in the top 25. It is clear, however, that the
cue packages of 2008–9. However, this support is recent financial crisis has generated a change
intended to be temporary with these assets even- of attitude towards SOEs within Europe where
tually to be transferred back to the private sec- states have, to a degree, reversed their long held
tor. Tables 2.5 and 2.6 offer an indicative list for hostility to state involvement in the economy
leading EU states with regards to the role of SOEs in order to secure key assets threatened by the
within their respective economies. These are the financial crisis.
32
Table 2.6 European SOEs and the Forbes 2000 list, 2012
Country Number of companies Number of SOEs SOEs as percentage of total

in Forbes 2000 in Forbes 2000 number of companies
in Forbes 2000
Austria 10 1 10
Belgium 15 2 13
Czech Republic 1 1 100
Denmark 10 0 0
Estonia 0 0 0
Finland 12 1 8
France 63 5 8
Germany 52 1 2
Greece 12 3 25
Hungary 2 0 0
Iceland 0 0 0
Ireland 15 1 7
Italy 35 1 3
Luxembourg 9 0 0
Netherlands 28 0 0
Norway 10 2 20
Poland 6 6 100
Portugal 8 0 0
Slovakia 0 0 0
Slovenia 0 0 0
Spain 29 0 0
Sweden 27 1 4
Switzerland 43 6 14
UK 93 1 1
Source: Forbes, 2013.

The salience of the SME undermined economic efficiency This view arose
from the theory that the more fragmented a coun-
As Table 2.3 shows, SMEs form the backbone of try’s economic base, the more growth was retard-
the EU economy but the continent has histori- ed. Thus, in the post-war era, economic success
cally had an ambivalent attitude to SMEs which was linked to scale and this was reflected in policy
paid lower wages and were regarded as ineffi- measures such as public ownership, competition
cient and offering lower innovative potential than policy and regulation. This obsession with scale
large-scale enterprises. To many policy makers, lasted well into the 1980s. However, this empha-
SMEs were marginal businesses, luxuries that sis changed with the emergence of globalisation
33
which shifted comparative advantage towards within the wholesale trade is the percentage of
knowledge-based economic activity (Audretsch, turnover represented by exports of SMEs com-
2002) and which incentivised individuals to estab- parable to the levels of LSEs. This lack of desire
lish their own businesses. or ability to export has been a major reason for
SMEs have thus become important agents of the growth of SMEs to lag behind that of LSEs. As
change within the knowledge economy. There is export growth has tended to increase generally
evidence from the European Commission regard- faster than domestic sales, so LSEs have been able
ing the increasingly important commercial role to increase their rate of growth. A further reason
played by SMEs within the European economy. for this difference in growth is that SMEs have
This is based on SMEs: tended to raise prices faster than LSEs. Indeed,
it is this rather than exports that explains a large
■■ acting as vehicles for knowledge spillover proportion of the differences in growth between
which can be accessed by LSEs; LSEs and SMEs. The reason for this difference in
■■ creating an increased degree of competition pricing behaviour is due to costs relative to pro-
in the input market which, in turn, promotes ductivity growth. One possible explanation for
innovation and the spread of new ideas; this is that, as wages grow faster in LSEs than
■■ increasing the degree of diversity within the SMEs, the former have a greater incentive (and
market place. ability) to replace labour with capital.
Although, SMEs play a prominent role in the
These phenomena demonstrate that the EU’s prosperity, developing common conclusions
impact of SMEs upon the European economy is as to their impact and importance can be diffi-
not restricted to the SME sector. Their effects are cult due to the sheer heterogeneity of the firms
felt throughout the economy, including on larger involved. Clearly not all firms are motivated
businesses. by the desire to become big. Evidence from the
The impact of SMEs is not uniform across all European Commission suggests that only one-
of Europe’s business sectors. Enterprise size var- third of firms are striving for growth. Over 40
ies markedly across sectors, mainly as a result per cent are merely struggling to survive or are
of the production processes within a particular seeking to consolidate the business. This is espe-
industry. The greater the benefit from economies cially true for micro-enterprises. Thus in focusing
of scale and scope, the larger firms will be within upon how SMEs aid competitiveness, there is a
a sector. For example, there is a tendency towards need to focus on creating and encouraging entre-
larger firms within the extractive industries. This preneurship to enable businesses to become high
is also true for the transportation and commu- growth businesses (see Chapter 7).
nication sectors, although there is a need to dif-
ferentiate between large-scale broad activities on
the one hand and niche service provision on the The structure of European
other. In the latter case, there is scope for small business by sector
firms to exist and thrive. Smaller firms tend to be
more common in construction, trade, hotels and Taken together, market (banking, retailing, etc.)
personal services. and non-market services (such as those provided
SMEs have also been characterised as having by government and other not for profit bodies)
a lower propensity to export than LSEs. Only comprised around 75 per cent and manufacturing
34
Case Study 2.3

The EU as a set of competition states
The basis of our understanding of the strategies deployed by the states within the European economic
arena is best encapsulated by the concept of the competition state. Initially developed by Cerny (1997)
but with clear antecedence in the work of Strange (1996), the idea of the competition state is based
on the understanding that the primary role of the state is to secure the enhanced welfare of its citizens
through the securing of economic growth within its borders. Jessop (2002) extends this notion by sug-
gesting that the process of growth extends beyond the borders of the state through actions designed to
ensure that all businesses operating within the borders of the state (irrespective of where they operate)
are able to flourish. The ultimate aim of the competition state is to enable those businesses operating
within its borders to operate successfully internationally thereby further enhancing the welfare of all
citizens within its borders. Consequently, the primary focus of competition states is to deliver competi-
tiveness by creating the conditions (both economic and non-economic) that are vital to secure competi-
tive position both within domestic and international markets for products and factors of production.
The concept of the competition state was developed by Cerny as a means of understanding how
states were adapting to the pressure of the global economy where often a ‘zero sum’ mentality prevailed.
These processes are reflected in the change of focus within government policy which now exhibits the
following characteristics:
■■ a shift from macro- to micro-economic interventionism;

■■ a shift in focus towards developing flexible responses to changing economic conditions and away
from selective interventionism within strategic industries;
■■ a focus on the maintenance of price stability and anti-inflationary policies shaped by neo-liberal
ideology to drive non-inflationary growth;
■■ a shift towards the promotion of enterprise, innovation and commercial sustainability of all economic
agents (both public and private) and away from formal redistributive policies of welfarism.
The end point is that the state acts more like a market player that seeks to enhance the impact of
global forces on the national economy. The result, as suggested, is a growth-focused state stressing
supply-side measures where the differences between national and international policies become increas-
ingly blurred. Palan et al. (1996) identify a range of strategies states can deploy as competition states:
■■ join together in regional blocs;

■■ adopt the developmental state model based on high state intervention;
■■ embrace the social democratic model of selective global integration;
■■ employ hegemonic strategies either regionally or globally;
■■ exploit cheap and abundant labour resources;
■■ establish a parasitical niche such as becoming a tax haven;
■■ structurally impede interaction with the global economy.
35
These strategies suggest that, despite expectations to the contrary, states still have a role to play in
the global economy. In some cases, this has had its most salient expression in the increased prominence
of state capitalism deployed by states such as China. In many cases, states are vital to making global
forces work by developing the right institutional structure. However the sustenance of the competition
state as a model for EU states is subject first to sustained confidence in the neo-liberal model and,
second, that the decision made by states in relation to markets are always welfare enhancing for its
citizens. Clearly, the financial crisis of 2007–8 brought these issues into sharp focus.
Case question
How do the core benchmarks of competitiveness as identified by the World Economic Forum link to
the concept of the competition state?
15 per cent of EU GVA in 2012. Market services within the EU, notably the ageing population. The
contributed three times as much to EU GVA as top ten sectors in terms of their contribution to
non-market services whereas construction and EU GDP are set out in Table 2.7.
mining and quarrying account for 6 per cent and 1
per cent respectively of EU GVA. In terms of the
service/manufacturing split, it is fair to generalise EU productivity
that services are more concentrated in Western
Europe while Eastern Europe has retained a high- One of the main forces contributing to the under-
er percentage of manufacturing in its GVA. The performance of the EU over recent decades has
prominence of the service sector within Europe
reflects a long-term shift away from manufactur- Table 2.7 T
he top ten most important sectors in
the EU
ing, although some states have maintained a larger
share of manufacturing due to inward flows of FDI. Sectors Percentage
Germany is the EU’s manufacturing power- of EU GDP
house contributing around one-quarter of the 1. Warehousing and retailing 11.5
GVA in the EU. Poland has emerged as a more 2. Real estate activities 10
prominent manufacturing force in recent years
3. Public administration 7.5

whereas the UK has continued its long-term 4. Human health activities 7
decline and is now the fourth largest EU manufac- 5. Construction 6
turing state, trailing Germany, Italy and France. 6. Professional, scientific and 5.5
Overall, the share of manufacturing in EU eco- technical activities
nomic activity has fallen by 3.3 per cent between 7. Transportation and storage 5.5
2000 and 2012. Services grew on average 1.7 per 8. Education 5
cent per annum during the same period. Phar- 9. Financial and insurance activities 5
maceuticals was the only manufacturing sector
10. Information and communication 4.5
to increase its share of output between 2000 and
2012, due in no small part to demographic change Source: European Commission, 2013.
36
been its poor productivity. Prior to the onset of Perhaps the more effective barometer of cost
the financial crisis, productivity was rising across competitiveness is unit labour cost (which reflects
the EU. The only sector not demonstrating any real the cost of labour per unit of output). As such,
productivity improvements was non-market ser- the surge in productivity of the information and
vices. Since 2008, however, only the information communication sectors without a corresponding
and communication technology sector has shown a increase in costs generated a big improvement in
sustained (albeit slower than previously) productiv- the cost competitiveness of this sector in the EU.
ity increase, growing by an average 3 per cent per Conversely, rising wages without a correspond-
annum over the period 2001–12. Conversely, the ing increase in productivity led to a declining cost
construction sector has suffered a sharp fall in pro- competitive position for the EU’s business ser-
ductivity since 2008. Overall, however, productiv- vices. The onset of the financial crisis saw a sharp
ity and output figures suggest that the EU remains decline in labour productivity in manufacturing –
most competitive in knowledge-intensive sectors without a consequent fall in wages: a factor that
and high tech manufacturing. This is offset by the helped accentuate the economic crisis within the
sustained decline of low tech manufacturing (such eurozone economies.
as textiles) and mining which have been in long- A main source of European growth and com-
term decline and whose output between 2001 and petitiveness lies in its human capital. Europe has
2012 fell by an average 5 per cent per annum. an advantage in this sector due to its relatively
Germany’s economic model
Box 2.1
Throughout the euro crisis, Germany has been held up as an exemplar to which ailing states should as-
pire and strive to emulate. Germany has remained relatively immune from the effects of the crisis and
has re-emerged as the economic powerhouse of not only the eurozone but also of the EU as a whole. The
basis of Germany’s sustained economic performance has been its export-led economic model. Although
there was a mild economic downturn in Germany when the euro crisis subdued demand in key export
markets, the negative effects on employment were negligible. In fact, just 1 per cent growth has been
sufficient to create jobs in Germany.
However, this approach has not attracted universal admiration: Germany is intensely unpopular in
those parts of Europe where it is perceived to have enforced its austerity agenda. Many also question
whether this export dependent model is both sustainable and transferable to other states and the suit-
ability of the German model as a template for the rest of Europe comes with some strict caveats as it
is apparent that the culture that generated the German model has distinct and often provincial roots.
Nevertheless, there is widespread admiration for the German model in terms of its vocational training
for example and of the Mittelstand – the small and medium-sized businesses that are at the heart of
Germany’s economic success.
This more recent performance is in sharp contrast to the early 1990s when Germany was strug-
gling with the aftermath of reunification and was undergoing its most severe economic downturn since
1945, resulting in around half a million lost jobs. An overvalued currency, the rise of Asian competi-
tors and the high costs of reunification combined with rigid market structures to undermine Germany’s
37
c ompetitiveness. The response to this crisis was not to dismantle the consensual German system but
to make it more flexible. As firms began to outsource to lower cost states, so German workers became
more flexible in the face of the competitive threat. The result was that German manufacturing rose
as a share of GDP at a time when manufacturing’s share was declining elsewhere in Europe. Perhaps
the most crucial action taken by Gerhard Schröder – the then German Chancellor – was to reform the
labour markets by reducing unemployment benefits and by liberalising temporary work. This reform
has continued under the current Chancellor Angela Merkel who has also amended the Constitution to
require all tiers of government to reduce their budget deficits to almost zero.
The German model dates back to the prolonged recession of the 1870s and drew on new ideas on
economic management which relied on capital and labour to cooperate and coordinate rather than
confront and which prized trust between the social partners. These characteristics are reinforced by
a culture that dislikes debt. This can come at the cost of not maximising short-term profit but this is
not a core objective: companies prefer to invest in the next generation of resources as typified by the
dual system of training provided by a mix of state and employers in which formal education is offered
alongside work-based apprenticeships. However, there is increasing evidence that young Germans are
turning away from this system.
German industry is confident it can adapt to new trends in the competitive environment, especially
in areas like environmental technology which offer new markets for the Mittelstand. New markets are
also appearing in emerging economies (see Chapters 18 and 19) which are acquiring German capital
equipment as a means of underpinning their own process of development. This adaptability reflects the
operation of many of the Mittelstand as oligopolists within narrowly defined niches which are increas-
ingly defended by services.
Despite its success to date, there is some concern that this platform spans a narrow range of prod-
ucts such as vehicles, machines, electronic devices and chemicals. These products account for over 50
per cent of exports which, in turn, contributed nearly all of Germany’s growth in the five years to 2012.
While some believe this model is sustainable, others feel that the relatively poor state of the German
services sector is an obvious cause for concern. Moreover, many feel that more needs to be done to raise
domestic demand, notably in areas such as domestic infrastructure investment. Indeed, as the global
economy slows, especially in its core European markets, Germany will have to rely more on domestic
demand to drive its growth.
educated workforce and Europe 2020, through technology of a sector and the level of human
its education targets and the associated innova- capital within it. Inevitably human capital con-
tion initiatives, recognises this and is seeking to cerns feed directly into the state of innovation
develop these factors further (see Chapter 1). within the EU and again these tend to be high-
The education, information and communica- est within the high knowledge/high technology
tion and finance and insurance sectors are the sectors of the economy most notably within high
most labour-intensive sectors. Generally, there technology manufacturing sectors (most notably
is a direct correlation between the level of pharmaceuticals).
38
Conclusion to many of the world’s largest businesses and

is also a significant player in global manufac-
This chapter offers a brief overview of Euro- turing and services. Nonetheless despite these
pean business. It aims to set the context for fol- positions of economic power there is a grow-
lowing chapters by identifying the main features ing perception that the EU is fading relatively,
of and trends affecting European business. What particularly as a result of the rise of Asian states
is immediately apparent is the sheer diversity of (see Chapters 18 and 19). Adapting to the new
the continent and its constituent parts. It is also competitive situation and restoring Europe’s
noticeable that, despite the much publicised growth and competitiveness lies at the heart of
difficulties faced by Europe, it remains a sig- understanding the challenges facing European
nificant player in the global economy. It is home business.
Key points
■■ The European economy is a core player in the evolving global economy.
■■ Many European states face key problems with competitiveness.
■■ There is much diversity among European states in their relative competitiveness.
■■ Europe has a diverse economic structure: large MNCs and SOEs are important but SMEs are
underdeveloped.
■■ European firms are central to the global services industry but are declining in importance in
manufacturing.
Activities
1 Choose a major European MNC and analyse how it operates internationally.
2 Using the example of one state, analyse how and to what extent it has adapted to the logic of the
competition state.
3 Using the WEF’s Competitiveness Framework, assess an individual state’s competitive position.
1 In what ways does the quality of an education system aid competitiveness?
2 Why do you think Northern European states outperform Southern European states?
39
3 What are the major barriers to doing business in Europe?
4 How do you account for the relatively high number of Swiss MNCs?
5 How do you account for Europe’s declining manufacturing performance?
Bibliography
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Literature, a report prepared for the European Com- bridge: Polity.
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Cerny, P. (1997) ‘Paradoxes of the competition state: the (2013) ‘State-owned enterprises: trade effects and policy
dynamics of political globalization’, Government and implications’, OECD Trade Policy Papers, No. 147.
Opposition, 32 (2), pp. 251–74. Palan, R., Abbott, J. and Deans, P. (1996) State Strategies
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40
Chapter 3
The evolution of European

integration
Someday, following the example of the United States of America, there will be a United States
of Europe.
George Washington (1732–99), first President of the United States, in a letter to Marquis
de La Fayette, French aristocrat and general in the American War of Independence
■■ the background and context to the contemporary European business environment, which is
very much shaped by the European Union – the world’s most ambitious and developed regional
integration initiative;
■■ why and how European integration has evolved;
■■ some of the challenges and obstacles facing the future of Europe.
The extent to which the countries of Europe have but nowhere has the integrative thrust been as
striven to integrate their markets and to remove ambitious, as far reaching or as successful as in
barriers to trade among themselves makes Europe. European integration, notwithstand-
the European business environment unique. ing all its complexities and problems, is worthy
Indeed, European businesses and enterprises from of study in its own right for its transformative
non-European countries with European market impact on business and acts as a benchmark and a
aspirations have become increasingly affected by learning opportunity for other regions.
policies and programmes devised at the EU level. This chapter explores the nature of European
In other regions of the world, countries have also integration. It begins by providing an introduc-
attempted to integrate and unite their markets tion to the theoretical aspects of integration,
41
thereby setting the context for the second part of across borders. Positive integration involves the
the chapter which outlines how European inte- modification of existing instruments and institu-
gration has developed in practice. This provides a tions, often by developing common policies and
context and facilitates understanding of how key institutions, to enable transnational markets to
policy measures such as the Single European Mar- function more effectively. Negative integration is
ket (SEM) and Economic and Monetary Union generally easier to achieve than positive integra-
(EMU) have come about. tion, but has fewer far reaching effects. European
integration has been a mixture of both types of
integration.
What is economic integration? European integration emerged as a conse-
quence of processes within and, increasingly,
The literal meaning of ‘integration’ is the act external to the European economy. The initial
of combining parts to make them into a whole. themes and concerns of integration arose from
Economic integration is based upon the removal the after effects of the two world wars that devas-
of barriers which inhibit the flow of goods, ser- tated the European economy and highlighted the
vices, labour, capital and communication between need to contain conflict. These initial objectives
states or regions. In the context of the European have increasingly been overtaken by a rationale
Union, this involves the removal of impediments in which consolidation as opposed to fragmen-
to trade and mobility between member states so tation is regarded as the most effective way of
that the area, as interaction and interdependency enabling Europe to sustain and enhance its eco-
increases, begins to transform itself into a single nomic and commercial standing in international
economic unit or market. In Europe, this process markets. This became especially important for
has evolved in response, in part, to the require- smaller European states that needed to re-define
ments of enterprises and other commercial and their commercial position within an increasingly
policy actors concerned about Europe’s competi- internationalised economy. In short, at one level,
tive position, initially vis-à-vis the US and Japan the continuing push for an integrated European
and, latterly, in relation to emerging markets. The economy has become a response to the impera-
first stage of Europe’s integration was the crea- tives of globalisation (see Chapter 15).
tion of a customs union, completed by 1968. This Table 3.1 outlines the key stages of economic
was followed by the creation of the SEM, a pro- integration. There is no hard and fast rule that
cess begun in the late-1980s and then, for some integration starts with a free trade area or cus-
member states, by the establishment of EMU, toms union and inevitably concludes with EMU.
the implications of which continue to unfold as The speed and depth of integration is determined
the crisis in the eurozone continues to play itself by many factors such as the requirements of
out (see Chapter 8). enterprises, levels of interaction across borders
Tinbergen (1954), in his classic work Interna- and the political willingness of elites to commit
tional Economic Integration, identified two dimen- themselves to deeper forms of integration. Inte-
sions to economic integration – negative and gration is therefore a pragmatic affair determined
positive integration. Negative integration refers by the particularities of a specific area. Each stage
to the removal of discriminatory restrictions on implies a differing degree of commitment by
movement: that is, the elimination of measures states to the integration process and acceptance
used by states to inhibit the free flow of resources of the consequences for their freedom of action.
42
The evolution of European integration
Table 3.1 Forms of economic integration
Forms of integration Characteristics

Free trade area (FTA) Tariff and quota-free trade between member states
Little ceding of sovereignty
No positive integration
Persistence of non-tariff barriers between member states
Retention of national tariffs with the rest of the world
Problems of trade deflection (whereby commodities from third countries
enter via the member state with the lowest tariff) overcome by rules of
origin
Customs union Free trade in goods and services with a common external tariff to overcome
problems of trade deflection
Some positive integration
Some common policies, especially in relation to trade with third countries
Single market Customs union enhanced by freer mobility of factors of production – notably,
goods, services, capital and labour
More positive integration
Fuller development of other common policies, such as competition and
regional policy
Economic and monetary Measures to secure economic unification strengthened via enhanced
union (EMU) coordination and inter-state transfers
More intense positive integration
Policy harmonisation to remove the remaining impediments to commodity
and factor mobility
Severe limits on the independent actions of states
Monetary stability as an accompaniment to economic unification achieved
via stabilised/fixed exchange rates or a single currency
More fulsome development of centralised supranational power, possibly
within a federal context
Free trade areas generally require little con- area. However, this may alter as states reconsider
straint upon national policy actions whereas EMU their economic interests in the light of continuing
implies a considerable loss of policy discretion. globalisation.
Other forms of economic integration lie some- Economic integration has been traditionally
where in between. examined within the bounds of static analysis in

In the EU, integration started with a customs which the relative benefits and costs of integra-
union rather than a free trade area. Geographical tion are assessed in terms of trade creation and
proximity, shared historical experiences, cultural trade diversion. Briefly, the former refers to
affinities, converging levels of economic develop- benefits from accessing cheaper resources and
ment and rising levels of intra-industry trade have commodities from partner countries as opposed
all combined to stimulate and enhance the inte- to their provision from more expensive indig-
gration process in Europe. Other regional blocs enous production. The latter relates to increasing
have seemingly little desire to move beyond the costs resulting from the replacement of imports
most diluted form of integration – the free trade of resources/commodities from third countries
43
(which are now subject to a common external will only occur if the interactions between opera-
tariff) by relatively more expensive production tors are of sufficient intensity to warrant its devel-
from within the newly formed trading bloc. Such opment. This underscores a vital rationale for
analysis offers an examination of theoretical wel- policy development: that is, it should be pragmat-
fare gains from integration but is often divorced ic and respond to the changing needs and require-
from the process via which gains are realised. ments of those operators/actors directly affected
An element of dynamism often operates with- by it. Policy is a phenomenon that can kick-start
in the integration process, resulting in the spill- such processes but the outcome is very much a
over of shallower integration into ever deeper micro-phenomenon arising from the individual
integration. This dynamism is frequently born of strategies and actions of each operator. For exam-
commercial need: that is, as enterprises exploit ple, the SEM brought freedom of movement for
opportunities arising from one form of integra- factors of production but its effects were only as
tion, the need for further integration emerges. great as the willingness and ability of the individ-
This thinking lay behind the development of ual actors to exploit the opportunities it created.
the theory of neo-functionalism which outlined Thus policy events as formal expressions of eco-
how many early commentators believed Euro- nomic integration are born of the ongoing pro-
pean integration would evolve. For example, in cesses which stimulated their initial development.
exploiting the opportunities of a customs union, The process of integration can be formalised
firms may find they need greater resource mobil- into the following three stages. The three inter-
ity to fully realise commercial gains, thereby related phases identified exhibit the following fea-
creating pressure to introduce elements of a sin- tures and characteristics.
gle market. Once the SEM started to take shape
and public barriers to trade were progressively 1 Stage one: interactions: interlinkages and inter-
removed, competition policy, for example, had relationships across borders grow to a degree
to be strengthened (see Chapter 6) to ensure that of intensity where the interests of each state
public barriers to trade were not replaced with become mutually defined, both formally and
private barriers by firms seeking to make access informally. In terms of the integration process,
to specific markets more difficult for their com- these links result from the operations of indig-
petitors. Within weaker forms of economic inte- enous enterprises in the economies of partner
gration, states can overcome problems derived states. Thus the prosperity of the domestic
from concerns over trade deflection by use of economy starts to exhibit increasing reliance
rules of origin, thereby removing the motive for upon events and processes in other economies.
a common external tariff and the need to develop Consequently the intensity of interactions will
a customs union. However, if closer trading links be determined by phenomena such as intra-
raise a demand for closer coordination of other union FDI, resource movements between
internal policies, this process may be hard to member states and trade links.
resist. 2 Stage two: interdependence: the mutuality of
Examining integration as a consecutive series interest between actors (stimulated by the
of policy events underplays the deeper processes intensity of interactions) creates a degree of
at work. There is no inevitability that the develop- reliance in which the commercial interests of
ment of one policy will necessitate the develop- each party become mutually dependent. The
ment of further policy measures. Policy spillover result of such interdependence is a non-zero
44
sum game for the states involved. Economic and as wealth creation becomes more evidently
prosperity is mutually dependent to the extent tied into technology and intellectual investment.
that any independent action to secure advan- Within the context of the network economy,
tages for domestic enterprises over foreign Wallace (1990) offered a distinction between for-
firms is likely to result in a commercial loss for mal and informal integration which broadly mir-
all parties concerned. For example, levels of rors the above analysis and which seeks to provide
FDI between states can grow to such an extent a formal statement of how, in practice, integration
that independent action to protect indigenous within the EU is likely to evolve. Informal inte-
industry can be mutually damaging to all econ- gration arises from the interaction among market
omies concerned. dynamics, technology and communications net-
3 Stage three: integration: the result of this pro- works. In short, the emergence of informal inte-
cess are policy events whereby the mutuality gration is due to the practicalities of economics
of interests reflected in the process is formal- and commerce and not to any conscious political
ised. Integration need not be fully expressed as decisions. Generally formal integration acts as a
a policy event: it may be represented in eco- catalyst and facilitates the actions of commercial
nomic terms by a series of formalised indus- operators and public administrations and parallels
trial or sectional re-organisations which reflect the ‘policy and event’ analysis offered above. The
the preferences of economic operators oper- tendency to policy (formal) integration is driven
ating within the larger economic space. Such by processes derived from market behaviour.
integration reflects a response to the increased Such a stance perceives economics and enterprise
interactions and interdependence across space functioning as the primary drivers behind the
and may need to be supported by policy meas- integration process to which politicians respond
ures or regulatory decisions. via series of policy measures. Thus political inte-
gration is a derivative of broader socio-economic
In this context, the integration process reflects integrative forces.
decisions made by enterprises and/or public sec- As economic integration has deepened, there has
tors in response to interactions and interdepend- been pressure to complement it via closer political
encies. Commercial operators exploiting changes ties. Increasingly bigger political units are advocated
in their operating environment are a powerful to support the development of big business and as a
factor driving the process of economic integra- complement to the coalescence of economic units.
tion. Operators working across borders may find This is true of sectors where economies of scale are
limits upon their preferred level of interaction needed for the establishment of a global presence in
and require policies which further stimulate the specified sectors. Laffan (1992) distinguishes four
integration process. aspects of political integration:
The emergence of the network economy is an
example of the above process in action and pro- 1 institutional: based upon collective decision
motes integration via the gradual expansion of making;
networking relationships. Networks are tools of 2 policy: based upon the transfer of policy devel-
transnational corporate strategy, enterprise value- opments to a higher level;
added, market access and organisational efficien- 3 attitudinal: sources of support for the process
cy. Such networks become ever more important among assorted communities;
for enterprise success on an international level 4 security: non-violent inter-state relations.
45
Such political centralisation is frequently asso- economic and political reconstruction, the need
ciated with dirigiste economic policies. In part, to break the cycle of recurrent military conflict
the desire to develop European champions as a and assessment of the security threat from the
replacement for national champions in the glo- Communist bloc.
balising economy offers a commercial rationale to In 1951, the first tentative steps in modern
some states for deeper political integration. Busi- European integration were taken when Belgium,
ness, as a matter of routine, requires a policy (and France, Italy, Luxembourg, the Netherlands and
therefore political) arena that best complements West Germany signed the Treaty of Paris estab-
the needs and requirements of the environment lishing the ECSC (Table 3.2). On one level, the
within which they operate. ECSC was a technocratic organisation, intended
Policy initiatives that have shaped the develop- to rationalise and unify crucial coal and steel mar-
ment of the European business environment arose kets. On another level, it was much more than
out of this process.The Treaties of Paris and Rome that. To some, it symbolised the first step in the
which established the European Coal and Steel construction of a European Community that
Community (ECSC) and the EEC were modest in would gradually extend common policies to other
what they prescribed in terms of necessary policy activities. Coal and steel were merely the starting
measures to complement their objectives. How- point: both products were central to industrial
ever as these foundations have been built upon, production and their surrender to supranational
the range and potency of transnational or supra- control made disintegration into military con-
national level policies have expanded. This is a flict much more difficult. The ECSC therefore
response to policy spillovers in terms of resources provided a framework for the re-integration of
and the effects of their consumption (for example, Germany into the European mainstream and, in
pollution), the need to address interdependencies particular, for Franco-German reconciliation.
in stabilisation policies (for example, the ability The ECSC was dirigiste in nature and was
of competitive devaluations to distort intra-EU run by a strong supranational executive body,
competition) and the need to compensate for the the High Authority. These characteristics reflect-
potentially negative side-effects of existing policy ed the backgrounds and aspirations of its archi-
to complement further integration (for example, tects, Jean Monnet and Robert Schumann, who
cohesion and convergence policies). It is through sought a united Europe based on economic unity
these processes that policy starts to have an and strong, centralised supranational institutions.
increasingly influential impact upon business. These ambitions were not wholly shared by par-
ticipants in the 1955 Messina Conference, which
led to the negotiation of the Treaty of Rome estab-

Emergence of the EEC lishing the EEC and the Euratom Treaty which set
up the European Atomic Energy Community.
The idea of European unity pre-dates the estab- Political unity, however, did not figure highly on
lishment of the EEC by decades if not by centuries. the agenda: problems within the ECSC and failure
However, it took the devastation of the Second to agree terms of a European Defence Commu-
World War before the first modest steps were nity stymied more ambitious plans for European
taken to make this idea a reality. In the immediate integration. Rather, the Treaty of Rome stressed
post-war era, which coincided with the beginning economic integration and reflected the strong
of the Cold War, Europe was preoccupied with liberal philosophy of Germany and the Benelux
46
Table 3.2 Milestones in European integration
1951 Treaty of Paris, signed by Belgium, France, Italy, Luxembourg, the Netherlands and West Ger-
many, establishes the ECSC which starts work under the leadership of Jean Monnet in 1952
1955 Messina Conference (Belgium, France, Italy, Luxembourg, the Netherlands and West
Germany – ‘the Six’) agree to start negotiations that lead to the foundation of the European
Economic Community (EEC) and the European Atomic Energy Community (Euratom)
1957 The Treaty of Rome establishing the EEC and the Euratom Treaty are signed by the Six
1958 Treaty of Rome comes into effect
1960 Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the UK establish EFTA
1961 Denmark, Ireland and the UK apply to join the EEC – Norway follows suit in 1962
1963 President de Gaulle of France vetoes British membership and all accession negotiations cease
1965–66 Empty chair crisis – Luxembourg compromise and retention of national veto
1967 Denmark, Ireland, Norway and the UK make their second membership applications
1968 Completion of the customs union
1969 Hague Summit of EC leaders agrees to open membership negotiations with Denmark,
Ireland, Norway and the UK and to phase in EMU by 1980
1970 Council agreement to allocate ‘own resources’ to the EC
1972 Introduction of currency ‘snake’
1972 Norway rejects EC membership in a referendum
1973 EC-6 becomes EC-9 with accession of Denmark, Ireland and the UK
1974 Heads of state or government agree to meet regularly as the European Council
1979 European Monetary System established
1979 First direct elections to the European Parliament
1981 Greece becomes tenth EC member
1985 Commission presents White Paper on the single market and the European Council agrees to
complete the single market by 1992
1986 Spain and Portugal become EC members
1987 Single European Act in force
1987 Turkey applies to join the EC
1989 Presentation of the Delors Report on the creation of EMU
1989 Fall of the Berlin Wall

1990 IGCs on political union and EMU run in parallel from December
1990 Stage one of EMU begins
1990 Cyprus and Malta apply to join EC
1990 German reunification – five eastern Länder become part of EC
1990 UK joins the ERM
1991 Sweden applies to join EC
1992 Portugal joins ERM and the UK and Italy leave it
1992 50.7% of Danes vote against ratification of the TEU and 51% of French vote in favour
(Continued)
47
Table 3.2 Milestones in European integration (Continued)
1992 Single market deadline – majority of programme completed
1993 Second Danish referendum returns 56.8% majority in favour of TEU
1993 Currency crisis leads to widening of ERM bands from 2.25 to 15%
1993 Maastricht Treaty (Treaty on European Union) enters into force
1994 Stage two of EMU begins
1994 European Economic Area Treaty between EFTA – minus Switzerland – and the EU in force
1994 First membership applications from Central and Eastern Europe (Hungary and Poland) –
other CEE applications follow in 1995–6
1995 EU-12 becomes EU-15 with the accession of Austria, Finland and Sweden. Norway again
rejected membership in a 1994 referendum
1996 Intergovernmental conference on review of Maastricht Treaty opens
1997 Amsterdam Council reaches agreement on ‘Amsterdam Treaty’
1998 Enlargement negotiations begin with Poland, Hungary, Czech Republic, Estonia, Slovenia
and Cyprus
1999 Stage three of EMU begins on 1 January – the single currency is born
1999 May – Amsterdam Treaty, signed in 1997, in force
1999 European Commission resigns following report on fraud, mismanagement and nepotism
2000 Launch of Lisbon Agenda
2002 January 1 – euro notes and coins in circulation
2002 December – agreement that ten candidate countries will join the EU on 1 May 2004. Bul-
garia and Romania scheduled for 2007. Turkey recognised as candidate country
2002–3 The Convention on the Future of Europe under the Chairmanship of former French President
Valery Giscard d’Estaing completes its work
2003 February – Nice Treaty (text agreed in 2000) in force
2003–4 IGC draws up the draft constitutional treaty which is signed by member states in October 2004
2004 EU-15 becomes EU-25 with the accession of Cyprus, the Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia
2005 May–June referenda in France and the Netherlands reject the constitutional treaty, sending
the ratification process into disarray
2005 October – accession negotiations begin with Turkey and Croatia
2007 Bulgaria and Romania become 26th and 27th members of the EU
2009 1 December – Lisbon Treaty, signed December 2007, in force. Follows a ‘no’ vote in an Irish
referendum in 2008 and an Irish ‘yes’ in 2009
2010 Adoption of Europe 2020 strategy for sustainable growth
2012 Treaty on Stability, Coordination and Governance agreed by all member states bar the Czech
Republic and the UK
2013 1 July – Croatia becomes 28th member of the EU
48
countries who sought the development of a com- Denmark, Austria, Portugal, Iceland and Switzer-
mon market. land. EFTA dismantled tariffs barriers among
The Treaty of Rome made a commitment to member countries but left the tariffs of individu-
an ‘ever closer union’, to economic and social al members vis-à-vis the rest of the world intact.
progress ‘by common action to eliminate the bar- Nevertheless, concerned about possible growing
riers which divide Europe’ and to ‘the constant economic and political isolation, the UK re-evalu-
improvement of the living and working condi- ated its position and applied for EEC membership
tions of their people’. The predominantly eco- in 1961. This was followed shortly afterwards by
nomic nature of the EEC was brought out by applications from Ireland, Denmark and Norway
Article 2 which stated: who sought to extend the range of their markets.
This initiative rapidly came to nought following
The Community shall have as its task, by veto of the British application by French President
establishing a common market and progres- Charles de Gaulle in 1963, and again in 1967.
sively approximating the economic policies of President de Gaulle was at the centre of
Member States, to promote throughout the another controversy which had a more long last-
Community, a harmonious development of ing effect on the integration process. In 1965
economic activities, a continuous and balanced the European Commission attempted to make
expansion, an increase in stability, an acceler- the EEC self-financing. This was too much for
ated rise in the standard of living and closer de Gaulle who was very protective of national
relations between the States belonging to it. sovereignty, wary of supranationalism and who,
accordingly, strongly resisted what he saw as the
Apart from the Common Agricultural Policy aggrandisement of supranational institutions,
(CAP), the prevailing philosophy of the Treaty namely the Commission and the European Parlia-
of Rome was laissez-faire rather than inter- ment (EP) which would receive increased budget-
ventionist, relying on benefits to materialise ary powers under the proposals. Failing to secure
through the mechanisms of competition and the support of other member states against the
interdependence – an approach which exactly Commission, de Gaulle withdrew France from all
matched the growing popularity of neo-liberal involvement in EEC affairs – the so-called ‘empty
economics in Europe from the 1980s onwards. chair crisis’. In order to return business to nor-
mal, the other member states agreed to a num-
ber of concessions in what became known as ‘the
The Treaty of Rome to the Luxembourg Compromise’. This was an informal
first enlargement agreement that when matters of national inter-

est were under discussion, every effort should
The trading credentials of the EEC were initially be made to reach a consensus. Failing this, each
insufficient to attract the UK into the EEC. The member state retained the right to veto policy if
UK, always somewhat aloof from Europe and valu- it adjudged its vital interests were at stake. As a
ing its links with the Commonwealth and the US, result, unanimity in the Council became the norm
preferred an arrangement which involved minimal and qualified majority voting (QMV) uncommon,
surrender of national sovereignty. In 1960, this thereby slowing down decision making, reducing
resulted in the creation of the European Free Trade ambitions and giving rise to a tendency for lowest
Area (EFTA) comprising the UK, Norway, Sweden, common denominator policy formulation.
49
Although the first decade of the EEC had In the early 1980s, European integration
its successes (the customs union was achieved appeared becalmed and there was a fear that
ahead of schedule, for example), the 1969 European competitiveness was falling behind
Hague Summit relaunched the integration pro- that of the US and Japan, resulting in ‘Eurosclerosis’ –
cess, giving it an ambitious new agenda which a period of lagging growth rates and rising
proposed: unemployment. From 1979–84, the European
Community was dominated by the efforts of the
■■ the opening of accession negotiations with British Prime Minister Mrs Thatcher to achieve
the UK, Ireland, Denmark and Norway – the a permanent solution to what she viewed as the
first three became members in 1973. Norway inequitable budgetary system. The only other
rejected membership in a referendum; policy measure which received any attention
■■ a re-examination of the system of financing the was the CAP, widely perceived to be badly in
EEC, which resulted in a shift from member- need of reform. The looming southern enlarge-
ship contributions to a system of Community ment to include Greece (which took place in
‘own resources’; 1981) and Spain and Portugal (both 1986) also
■■ the creation of a system of foreign policy raised alarm bells about the need for political
cooperation known as ‘European Political and institutional reform to offset the danger that
Cooperation’ (EPC); the increased diversity resulting from the acces-
■■ the introduction of economic and monetary sion of these three states would paralyse deci-
union to augment the common market by 1980 sion making at European level.
as set out in the 1970 Werner Report (see
Chapter 8). In practice, EMU only occurred
20 years after the Hague deadline and only Renewed vitality: from the
then in an incomplete and partial form. Single European Act to the
Treaty on European Union
Political stagnation and By the mid-1980s, several factors had come

economic sclerosis together to boost the integration process. The
1984 Fontainebleau Council reached a settle-
Despite the Hague Summit’s attempts to give ment on the budget issue and introduced meas-
integration greater momentum, the balance of ures to limit the growth of agricultural surpluses,
success and failure was mixed by the late 1970s thereby opening the way for enlargement. In
and early 1980s. On the positive side, the customs the economic sphere, the old consensus around
union was well established and accompanied by a Keynesian economics was dead and a new one
common commercial policy. However, there was was emerging around supply-side economics –
scant movement onto the next stage of integra- that is, the introduction of a range of policies
tion – the creation of a common market – and designed to enable competition to flourish and
many barriers to trade in goods, services, capital to remove barriers to trade. This approach had
and labour remained firmly in place. The institu- its most vocal adherents in the UK, but elements
tional structure of the Community, and the prin- of supply-side economics were creeping into
ciple of unanimity in particular, were hampering contemporary Community policy documents
further development. and gaining influence in a number of member
50
states. At the same time, large European firms 1 the 1985 White Paper Completing the Internal
were adopting an increasingly supranational Market which identified almost 300 obstacles
perspective and, particularly through the Euro- which needed to be removed to end Europe’s
pean Roundtable of Industrialists (a lobby of market fragmentation; and
the most influential entrepreneurs in Europe), 2 the Single European Act (SEA) which intro-
added another powerful voice to the pressure for duced institutional changes to facilitate the
change. implementation of the single market.
In 1985, Jacques Delors became President of
the European Commission. He pulled togeth- In the wave of Euro-enthusiasm which followed, the
er and capitalised upon the above factors and, Community also adopted the Social Charter; pushed
together with the Internal Market Commission- through the Merger Control Regulation (MCR) – a
er, Lord Cockfield, developed the campaign to particularly timely achievement given the wave of
end the fragmentation of European markets – a cross-border mergers and acquisitions that accom-
major factor in Europe’s continuing relatively panied the single market programme; extended the
poor economic performance. This revitalisation reach of the SEM to previously excluded sectors
of European integration had two elements: such as energy and revived the drive towards EMU.
Key features of the SEA
Box 3.1
The SEA, the first comprehensive revision of the EC treaties, was a response to the need to overhaul
decision making in the light of the ambitious single market programme and the Iberian enlargement.
Its key features were:
1. More qualified majority voting (QMV)

Article 100A enabled the Council of Ministers to adopt most single market legislation by QMV and thus
was a powerful weapon in the implementation of the SEM programme. Tax measures, workers’ rights
and the free movement of people remained subject to unanimity.
2. Increased role for the EP

The SEA introduced the cooperation procedure which enabled an absolute majority in the EP to reject
a common position adopted by QMV in the Council of Ministers. In turn, the Council could only over-
rule the EP by acting unanimously. The cooperation procedure, which applied to most single market
legislation, has subsequently been almost entirely replaced by the co-decision procedure (subsequenly
renamed the ‘Ordinary Legislative Procedure’).
3. Enhanced policy competence

The SEA formalised and clarified the EC’s policy competence in environmental policy, research and tech-
nology and economic and social cohesion and codified the Community’s role in foreign policy coordination.
4. Creation of a new court

The SEA created the Court of First Instance (CFI) to relieve some of the heavy burden on the Euro-
pean Court of Justice (ECJ).
51
The Internal Market White Paper and the SEA conference (IGC) which resulted in the Treaty on
represent a second, more successful relaunch of European Union (TEU), commonly known as the
European integration. Within a short period, the ‘Maastricht Treaty’.
apparent integration paralysis had been overcome The TEU, the most radical revision of the trea-
and institutional obstacles to successful adop- ties to date, set the stage for EMU and extended
tion of Community level legislation had been the competencies of the Community into new
removed, giving renewed momentum to integra- areas. It defined itself as marking ‘a new stage
tion. During this period, both within the SEM in the process of creating an ever closer union
framework and through flanking policies (such among the peoples of Europe’ and set a number
as competition and social policy), EC activity of objectives, including:
spread into new areas: a doubling of the Struc-
tural Funds, intended in part to offset potential ■■ the promotion of balanced and sustainable eco-
negative regional effects of the SEM, and a signifi- nomic and social progress through the creation
cant increase in budgetary resources signalled the of an area without frontiers, greater social and
willingness of member states to support greater economic cohesion and EMU;
integration. ■■ the assertion of identity in the international
Against this background, it is not surprising arena, particularly by the implementation of a
that EMU reappeared on the agenda. The 1988 common foreign and security policy (CFSP),
Hanover Council established a committee under including common defence;
the chairmanship of President Delors to iden- ■■ greater protection of individual rights through
tify the actions needed to introduce EMU. This the introduction of Union citizenship;
initiative led directly to the intergovernmental ■■ closer cooperation in justice and home affairs.
Key features of the Maastricht Treaty

Box 3.2
The TEU is frequently compared to a temple supported by three pillars:
Pillar 1 The European Community

The first pillar represents the traditional ‘acquis communautaire’ (the customs union, the single market,
the CAP, structural policy, etc.) and new elements such as EMU and trans-European networks (TENs).
Policies under the first pillar are governed by Community institutions.
Pillars two and three are essentially intergovernmental in nature and are dealt with within the
Council of Ministers as common policies agreed among independent states and not within the normal
framework of Community institutions.
Pillar 2 Common foreign and security policy (CFSP)

Pillar 2 specifies that that the Union and its member states ‘shall define and implement a common
foreign and security policy… [which] shall include all questions related to the security of the Union,
including the eventual framing of a common defence policy’ [Articles J1 and J4].
Pillar 3 Cooperation in justice and home affairs

The third pillar requires member states to regard some justice and home affairs policies as matters
of common interest. These include asylum policy, controls on external borders, immigration policy and
52
residence rights of third country nationals, measures to combat drug addiction and international fraud,
and customs and police cooperation.
1. Institutional changes
European Parliament (EP):
■■ The TEU introduced a new legislative procedure – the co-decision procedure. Under the
cooperation procedure, established by the SEA, the Council of Ministers can ignore the EP’s
wishes provided it acts unanimously. However, the co-decision procedure gives the EP a veto over
legislative proposals and cannot be over-ruled. The TEU brought many measures designated as
cooperation procedure measures under the co-decision procedures.
■■ The EP gained the right to subject an incoming Commission to a vote of approval before its formal
appointment.
■■ The EP to appoint an Ombudsman to receive complaints from citizens about maladministration by
Community institutions.
Council of Ministers:
■■Some extension of QMV.
European Court of Justice:

■■ECJ given power to impose fines on member states which fail to comply with its judgments or
implement Community law.
Committee of Regions:
■■the Committee of Regions established to provide the Council and Commission with advice on
matters of significance for the regions.
2. Policy competence
Community competence was extended in some areas and the Community was awarded new competen-
cies in others:
■■ EMU: the TEU sets out the timetable, criteria and institutions required for the creation of EMU.
■■ new policies and policies which previously did not have an explicit treaty base were brought within
the scope of the treaties, including consumer protection, development cooperation, public health,
TENs, education and culture.

■■ the strengthening of policy areas first brought into the treaties by the SEA, including
environmental policy, research and technological development and social and economic cohesion.
■■ the incorporation of the Social Charter into the legal framework of the Community in the form of
the Social Agreement and the Social Protocol (see Chapter 14).
Negotiation of the Treaty was no easy matter. among the dissenters was the UK government.
Notwithstanding the Euro-enthusiasm of the late Under the leadership of Mrs Thatcher, the UK
1980s, radically divergent views on the future of had been highly supportive of the SEM which
the Community were becoming apparent. Chief both reinforced its own supply-side agenda and
53
represented the ideal type of Community from apply in practice and, despite the development
the British point of view – an organisation based of guidelines to facilitate operationalisation of
upon optimising market conditions but which did the subsidiarity principle, can give rise to argu-
not require significant transfers of power from the ment about its implementation. In view of these
national to the supranational level. Mrs Thatcher’s problems, a Protocol on subsidiarity was attached
resignation in 1990 did not lead to a significant to the Amsterdam Treaty, stating more precisely
change in the approach of the British govern- what it is and how it should be applied.
ment and John Major, her successor, negotiated
opt-outs for the UK from the final stages of EMU
and from the Social Agreement and Protocol. The The JOURNEY FROM
UK was not alone in its reservations about further Amsterdam TO LISBON
integration: Denmark also shared its preference
for intergovernmentalism over supranational- Given the above reservations, ratification of the
ism and enthusiasm appeared to be waning more Maastricht Treaty was not a foregone conclusion.
generally for further integration even before the In July 1992, the Danish population voted against
Maastricht negotiations were complete. the Treaty in a referendum, technically sinking it
The radical step forward in integration which forever. However, other member states continued
the TEU represented raised fears of loss of with ratification in the expectation that some com-
national sovereignty and identity and the rise of promise would be reached to enable Denmark to
a European super-state. In order to prevent the change its mind. Ratification troubles rumbled on
Community acquiring too much power and influ- and the Treaty was even challenged, albeit unsuc-
ence at the expense of member states, the TEU cessfully, in the German Constitutional Court.
formally introduced the notion of subsidiarity, Although not required under French law, Presi-
which stated that: dent Mitterrand decided to hold a referendum
on Maastricht, believing that an overwhelming
In areas which do not fall within its exclusive ‘yes’ vote would put integration back on track.
competence, the Community shall take action, However, the referendum campaign became a
in accordance with the principle of subsidiarity, popularity vote on his government and coincided
only if and in so far as the objectives of the pro- with a second European currency crisis in a year.
posed action cannot be sufficiently achieved by Thus, the outcome was an extremely narrow pro-
the Member states and can therefore, by the Maastricht vote. Ratification was able to proceed,
reason of the scale or effects of the proposed however, following minor concessions to Den-
action, be better achieved by the Community. mark which finally voted in favour of the Treaty,
Any action by the Community shall not go enabling it to come into force on 1 November
beyond what is necessary to achieve the objec- 1993, one year later than planned.
tives of this Treaty. Other factors also combined to take the
(Article 3B of the Treaty on European Union) momentum out of European integration,
including:
The subsidiarity principle was introduced to
ensure action was taken at Community level only ■■ the ambitious nature of the Maastricht Treaty:
when it was clear that it was the most appropri- Europe’s leaders were pushing ahead with
ate and effective level. The principle is difficult to integration too quickly for many European
54
citizens, resulting in a lack of popular enthu- despite the apparent improbability at one stage of
siasm for, and even distrust of, the European any member states apart from Luxembourg satis-
project; fying the convergence criteria, the EMU project
■■ the highly complex, technocratic and incom- became unstoppable and was launched with the
prehensible nature of the Treaty; participation of 11 out of 15 member states in
■■ the end of Soviet hegemony over Central and January 1999 – Greece was subsequently accept-
Eastern Europe which necessitated a rethink ed for EMU membership in 2001.
of fundamental assumptions about Europe’s Article N of the TEU required a review of
political geography; the Treaty in 1996. As 1996 approached, enthu-
■■ German reunification; siasm for the IGC was muted. The outcome was
■■ the timing of the Maastricht negotiations and the low key Treaty of Amsterdam which came
ratification with economic recession: sup- into force on 1 May 1999. This treaty’s ratifica-
port for European integration has always been tion occurred almost unnoticed and without the
strongest when the economy is buoyant (early controversy which surrounded the ratification
1960s and late 1980s) and weakest when eco- of Maastricht. This was more a symptom of the
nomic performance is sluggish (late 1970s and relatively modest and incremental achievements
early 1980s); of the Amsterdam Treaty and the postpone-
■■ the currency crises of 1992 and 1993; ment of difficult decisions than of any renewed
■■ the inability of member states to develop a Euro-enthusiasm. The most significant changes
common approach to the Yugoslav crisis. brought about by Amsterdam were some exten-
sion of the European Parliament’s powers,
In view of these setbacks and reservations, inclusion of an Employment Chapter and some
the European Commission, which took office strengthening of labour market provisions (see
under Jacques Santer in 1995, continued the Chapter 14, especially Box 14.4) and changes to
lower visibility, less proactive approach to Euro- the third pillar (see Box 3.2). However, the IGC
pean integration begun during the final years of failed to undertake reform of the EU’s institu-
the Delors presidency. Nevertheless, there were tions and decision-making processes in prepara-
some significant achievements during this period. tion for the eastern enlargement as had been the
Although not complete by the 1992 deadline and original intention.
with implementation and enforcement issues Amsterdam’s relative failure left the way open
outstanding, the SEM had still made significant almost immediately for another IGC and treaty
progress. In addition, the most radical reform of revision. The resulting Nice Treaty was signed
the CAP to date and a significant overhaul of the in 2001 and came into force in 2003. The driv-
Structural Funds took place in 1992. The acces- ing force behind Nice was again the imperative
sion of Austria, Finland and Sweden in 1995 went to ensure that the creaking EU institutions could
ahead smoothly, only one full year after the Euro- cope with the looming enlargement – the big-
pean Economic Area (EEA) agreement, which gest ever. Once more, the Treaty negotiations
had given EFTA states access to the SEM, came soon became bogged down in controversy. This
into force. Moreover, the Community grasped time, there was a significant gulf between the
the mettle of reassessing its links with Central large and small states. The former had agreed to
and Eastern European (CEE) countries and lat- abandon their right to appoint a second Commis-
er of preparing them for accession. Moreover, sioner and the latter were concerned to ensure
55
Innovations of the Amsterdam Treaty

Box 3.3
The Amsterdam Treaty largely fell short of expectations but did contain the following important and
innovatory elements:
■■ Anti-discrimination became a key Community objective, potentially opening the way for equal
opportunity cases on the basis of gender, racial or ethnic origin, religion or belief, disability, age or
sexual orientation.
■■ Further enhancement of the European Parliament’s role, including significant and considerable
extension of co-decision and the virtual disappearance of the cooperation procedure, except for
some aspects of EMU.
■■ Council of Ministers: QMV to apply to all new Treaty provisions but only extended to research
framework programme among existing provisions. Unanimity retained for all tax measures, for
example.
■■ European Commission: the Commission President gained rights to object to appointment of
Commissioners and to allocate and reshuffle portfolios.
■■ Flexible integration: Article K.15 allows those member states who wish to do so to push ahead
with deeper integration provided the principles of the treaties are respected; a majority of member
states are involved; the acquis communautaire is not affected; participation is open to all member
states and that this provision is used only as a last resort.
that all qualified majorities would have to include intellectual property, measures to facilitate the
a majority of states. The main features of the Nice free movement of people, etc.;
Treaty were: ■■ flexibility: further refinement of the concept
of ‘flexible integration’ introduced at Amster-
■■ a limit on the number of Commissioners to dam. Eight countries or more are necessary
one per country to be introduced when the for closer cooperation that does not include all
number of Commissioners reached 27 – the member states. Previously, a majority of mem-
maximum number to be fixed by the Coun- ber states had been required. Thus, given the
cil (it must be less than 27). Their nationality increase in the number of member states fol-
to be determined by a rotation system to be lowing enlargement, the conditions surround-

agreed; ing flexibility have eased considerably.
■■ double majority voting: a qualified majority
requiring 72.3 per cent of weighted votes, a Despite an initial rejection of the Nice Treaty in
majority of member states plus the support a referendum in Ireland, a decision which was
of countries representing 62 per cent of the overturned in a second referendum, ratification
Union’s population; proceeded in a relatively straightforward man-
■■ limited extension of QMV to industrial policy, ner. However, questions continued to be asked on
the conclusion of international agreements on whether treaty reform had gone far enough. In
trade in services and commercial aspects of December 2001, the Laeken Council concluded
56
that it had not and launched the Convention on Opponents of the Treaty claimed it sought to
the Future of Europe which called for ‘a deeper build a ‘European super-state’ which gave more
and wider debate about the future of the Euro- powers to the EU at the expense of member states.
pean Union’. The Convention was chaired by for- This claim is also difficult to substantiate if one
mer French President, Valery Giscard d’Estaing, looks at what the draft treaty actually contained.
assisted by former Italian and Belgian prime For example, the Treaty confirmed the principle
ministers, and comprised representatives of the of subsidiarity and, through the principles of con-
governments of the EU-15 and of the candi- ferral and proportionality, limited the EU to act
date countries; representatives from the EP and within the limits of the competences conferred
national parliaments of current and future mem- upon it by member states and restrained the EU
bers and from the European Commission. from taking action which went beyond the objec-
The Convention marked a new departure in tives of the Constitution. In particular, the Con-
EU reform. First, it started with a clean slate and stitution explicitly set out the areas in which the
all issues were potentially up for discussion. Sec- EU had exclusive competence; in which it shared
ond, the Laeken Declaration also set up a Forum competence with member states, and where its
for Civil Society to transmit ideas about Europe’s competence was limited to supporting, coordi-
future to the Convention from all areas of Euro- nating or complementary action. These compe-
pean society. Third, although the document that tences survived and were expanded on slightly in
emerged from the Convention was not binding on the subsequent Lisbon Treaty (see Table 3.3). In
the European Council, it did provide a draft text addition, for the first time, the Treaty gave nation-
of a constitutional treaty which became the basis al parliaments a role in the EU decision-making
for the work of the subsequent IGC that sat from process and contained a clause outlining the pro-
2003–4. Many aspects of the Convention’s work cedures to be followed if a member state wishes
survived into the final text. In other words, the to withdraw from the EU. In reality, the Treaty
Convention represented a new, more transparent involved rather more than that implied by Tony
and inclusive way of agreeing treaty revisions. Blair’s tidying up statement but much less than
The IGC completed its work in 2004 and that implied by the ‘super-statists’.
the draft treaty was signed by member states in In order for any EU Treaty to come into force,
October 2004 with a view to ratification in 2006. it must be ratified by all member states. The rati-
However, the draft constitutional treaty marked fication process varies from state to state and
a return to the controversy that had dogged the depends on national practices and laws. In some
Maastricht Treaty. Supporters and opponents countries, a referendum is necessary whereas in
of the Treaty could not agree about what the others approval by Parliament is sufficient. Some
Treaty meant. British Prime Minister, Tony Blair countries chose to hold a referendum when there
described the draft constitutional treaty as a ‘tidy- was no legal requirement for them to do so. This
ing up exercise’. In other words, he sought to was the case in France and in the UK: the May
minimise the changes brought about by the Treaty, 2005 referendum in France registered a resound-
claiming it merely simplified the texts of the trea- ing rejection of the constitutional treaty and, as
ties and brought them together into one docu- a result of the French vote and an even bigger
ment to make them more readable and accessible rejection in the Netherlands shortly afterwards,
to the European citizen. In many senses, he was the UK and other member states cancelled their
correct but the Treaty did other things as well. plans to hold referenda.
57
Table 3.3 Clarification of competences in the Lisbon Treaty
Exclusive EU competence Shared competence with member Supporting, coordinating or

states complementary action
Customs union Internal market Protection and improvement
of human health
Competition (in relation to the SEM) Social policy for aspects defined in Industry
the treaties
Monetary policy for eurozone Economic, social and territorial Culture
countries cohesion
Conservation of marine biological Agriculture and fisheries (excluding Tourism
resources – in the Common Fisheries the conservation of marine biological
Policy resources)
Common commercial policy Environment Education, youth, sport and
vocational training
Conclusion of certain international Consumer protection Civil protection
agreements
Transport Administrative cooperation
Trans-European Networks
Energy
Areas of freedom, security and justice
Aspects of public health
Research, technology and space
Development cooperation and humani-
tarian aid
Coordination of economic, employment
and social policies
Common foreign security and defence
policies
In effect, the Dutch and French failures to rat- meet the needs of the reluctant country. This was
ify the treaty caused the draft constitution to fall. unlikely to work in this case. First, the margin of
The referenda ‘nos’ in France and the Netherlands defeat was more substantial than in previous cases
thrust the EU into disarray: some member states and involved two member states traditionally at
wished to push ahead with ratification to confirm the heart of Europe. Second, referenda defeats
support for the EU whereas others, particularly were also probable in other member states. Third,
those where ratification would be problematic, the defeats were indicative of widespread, albeit
were pleased to suspend the process. The tradi- non-specific, concerns about the direction in
tional way of dealing with referenda defeats (for which Europe was moving and a reaction to the
example, Denmark on the Maastricht Treaty and poor economic performance of the eurozone.
Ireland in relation to Nice) has been to hold a sec- The official position of the European Council
ond referendum following further negotiations to was that there should be a period of reflection
58
to enable further debate to take place on issues over the constitutional treaty, member states
raised by the Constitution and its ratification to be pressed ahead, leading to an IGC in 2007 and the
followed by a return to the issue in the first half negotiation of the Lisbon Treaty. Many aspects
of 2006 to decide how to proceed. Surprisingly, of the failed constitutional treaty re-emerged in
despite the controversy generated by the debate the Lisbon Treaty but the latter was no longer
Main Features of the Lisbon Treaty
Box 3.4
Further details are given, where appropriate, in Chapter 4.
1 Institutions
The European Council and Council of Ministers:
a. European Council formally separated from the Council of Ministers.
b. Introduction of new ‘double majority’ qualified voting system.
c. A President of the European Council to be appointed for 2.5 years (renewable once). First
incumbent is former Belgian Prime Minister Herman van Rompuy.
d. A new post, the High Representative for Foreign Affairs and Security Policy, created, combining
the roles of the High Representative for the Common Foreign and Security Policy and the
Commissioner for External Relations. First incumbent was the UK’s Catherine Ashton.
Parliaments – European and national:

■■ Powers of EP to be extended via application of co-decision procedure to more policies, especially
in areas of justice, security and immigration.
■■ The number of MEPs to be reduced to 750.
■■ Greater engagement of national parliaments by granting them more time to scrutinise legislation
and enabling them to jointly compel the Commission to review or withdraw legislation.
European Commission
■■ From 2014, the size of the European Commission to be reduced to increase efficiency. A
subsequent concession to Ireland resulted in the dropping of this provision.
2 Citizens’ Rights
a. The EU’s Charter of Fundamental Rights is made legally binding – the UK, Poland and the Czech
Republic have been granted exemptions.

b. Citizens’ initiative – if signed by a million EU citizens, such an initiative can require the European
Commission to submit proposals in specific policy areas.
3 Policies
a. New policies – e.g. a common energy policy and a strategy on global warming.
b. A ‘solidarity clause’ if a member state is subject to terrorist attack or the victim of a man-made or
natural disaster.
4 Exit Clause
■■A member state is able to leave the union on terms to be negotiated with partners.
59
portrayed as a constitution for the EU. This made officially renamed the Treaty on the Functioning
it easier for some countries to sidestep the need of the European Union (TFEU). Lisbon also gave
for a referendum. The only member state to hold the Charter for Fundamental Rights legal force
a referendum was Ireland, which returned a ‘no’ and European citizens were given the right to
vote, later overturned in a second referendum, petition the Commission for action. National
and legal challenges in Germany and the Czech parliaments were given the formal power to
Republic were headed off. These events delayed challenge legislative proposals and the powers
but did not prevent the coming into force of the of the EP were extended. The European Coun-
Lisbon Treaty which occurred in December 2009. cil gained a permanent chair and role of the
Although not attracting the same level of rotating presidency was confined to individual
controversy as the constitutional treaty (per- subject councils where voting was simplified.
haps because the treaty was no longer portrayed For fuller details of the institutional changes
as a constitution for the EU with all the negative introduced by the Lisbon Treaty see Box 3.4 and
connotations for national sovereignty), the Lis- Chapter 4.
bon Treaty retained many features of its failed Despite the major problems caused by the
predecessor. Lisbon also ended the pillar system eurozone crisis, European integration has shown
introduce at Maastricht, bringing the second remarkable resilience. The response of member
and third pillars into the first pillar which was states to the crisis has been to recognise the
60
50
40
% of respondents
30
20
10
0
Spring 2006
Autumn 2006
Spring 2007
Autumn 2007
Spring 2008
Autumn 2008
Spring 2009
Autumn 2009
Spring 2010
Autumn 2010
Spring 2011
Autumn 2011
Spring 2012
Autumn 2012
Spring 2013
Positive Neutral Negative
Figure 3.1 Does the EU conjure up a negative, positive or neutral image?

Source: Eurobarometer.
60
incomplete nature of the eurozone’s integra- parts of the European population about the direc-
tion, leading to agreement on the Fiscal Com- tion of Europe has not dissipated but rather has
pact in 2012 (see Chapter 8). Initial proposals grown over the course of the financial and eco-
required new legislation and possible further nomic crisis. These graphs draw on the findings of
treaty changes but, in the face of British oppo- Eurobarometer, a regular opinion poll carried out
sition, the final version of the Fiscal Compact on behalf of the European Commission by inde-
used the European institutions but sat outside pendent polling organisations. They reveal pro-
the framework of the Union itself. Other indica- nounced changes in views among the general EU
tors of the continuing relevance of the EU were population about the EU and its future. In 2006,
the accession of Croatia in 2013, the adoption shortly before the start of the financial crisis, about
of the euro by Latvia in 2014, and the ongoing half the population held positive views about the
aspirations of several countries to join the EU EU whereas only 15 per cent held negative views,
(see Chapter 16). with the rest remaining neutral. By 2013, follow-
The commitment to deeper EU integration ing prolonged economic insecurity, only 30 per
is strongest among Europe’s political leaders. As cent of the EU population had a positive image of
Figures 3.1 and 3.2 show, the disquiet felt by large the EU, roughly the same as those with a negative
80
70
60
% of respondents
50
40
30
20
10
0
Spring 2007
Autumn 2007
Spring 2008
Autumn 2008
Spring 2009
Autumn 2009
Spring 2010
Autumn 2010
Spring 2011
Autumn 2011
Spring 2012
Autumn 2012
Spring 2013
Optimistic Pessimistic Don't know
Figure 3.2 Are you optimistic or pessimistic about the future of the EU?
61
image, with the remaining approximately 40 per Figure 3.3 takes the aggregate measure of
cent being neutral. Similar worrying trends are Figure 3.2 a stage further and presents the feel-
discernible in Figure 3.2: in 2007, less than one- ings of optimism and pessimism about the EU
quarter of the population were pessimistic about within individual member states, demonstrating
the future of the EU whereas 70 per cent were a wide range of views in the process. Not sur-
optimistic and the remainder unable to express a prisingly, the UK, with its longstanding tenden-
view. Within six years, the gap between optimists cy towards Euroscepticism, and those countries
and pessimists had almost dissipated. most adversely affected by the eurozone crisis,
Cro
Port
Cyp
Gr
Sp
UK
Cz
It
Fr
Hung
Aust
EU-27
Slov
Sk
Swe
Fin
Ger
Ire
Lux
Lat
Bul
Bel
Nl
Rom
Pol
Mt
Lith
Est
Dk
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% of respondents
Optimistic Pessimistic Don’t know
Figure 3.3 Are you optimistic or pessimistic about the future of the EU? By member state, Spring 2013
62
namely Greece, Spain, Portugal, Cyprus and Italy, unenthusiastic countries such as the UK but also
demonstrate below average levels of optimism in those countries in which the population has tra-
about the future of Europe as does the Czech ditionally been more supportive of greater inte-
Republic where some of its leaders have long gration. This has been exacerbated by the financial
been critical of the EU. Particularly worrying is and economic crisis that began in 2007–8 and the
the below average level of optimism in France, later crisis in the eurozone, which have under-
long regarded as one of the main drivers of EU mined economic progress in large parts of the
integration but a country which is suffering more Union. Historically, integration progress is slower
severe economic problems than other longstand- when member states are preoccupied with eco-
ing members of the EU. nomic downturns but the growing divergence
between the elites and the general population
could reflect more than integration fatigue among
Conclusion the general population. It is therefore incumbent
upon Europe’s leaders, if they wish to continue
In short, the greater enthusiasm of Europe’s on their preferred integration path, to bring their
political elites for accelerated European integra- populations with them or, if they cannot do so,
tion (noted earlier in this chapter in relation to to listen to their citizens and respond to their
the Maastricht Treaty) remains and is dangerous concerns. To do otherwise could ultimately undo
for the whole European project as scepticism what has occurred to date and undermine the
appears to be growing not only in traditionally Union’s positive achievements.
Key points
■■ The evolution of European integration since the Treaty of Rome in 1957 has proceeded rapidly
at times and slowly at others but overall its achievements have been remarkable. However,
continued integration and ‘ever closer union’ are far from guaranteed.
■■ Policy makers have recognised the need to reform the treaties to meet the challenges, among
others, of enlargement. However, particularly in later years, treaty revisions have not kept pace
with these aspirations.
■■ The objectives of integration have changed. It is a complex process which is increasingly driven
by the imperatives of globalisation and the needs of business. Policy responses at national and
EU level can slow down or accelerate the process, depending on the willingness and ability of
politicians to act.
63
Activity
1 Within the context of the classroom situation, take a vote on the questions referred to in Figures 3.1 and
3.2 – that is, whether students have a positive or negative attitude towards the EU and whether they are
positive or negative about the EU. Ask students to explain why they have reached their conclusions.
1 What were the main reasons behind the establishment of the European Community? To what extent
are they still relevant today? Are there any new developments that reinforce the rationale for Euro-
pean integration? If so, what are they?
2 Assess the performance of the European Union to date. What are its successes and failures? Justify
your answer.
3 Assess the major challenges facing the European Union in the future.
4 Discuss the quotation by George Washington at the beginning of the chapter. To what extent do you
think he was right and to what extent is his claim desirable?
5 To what extent does the apparent fall in support for the European Union in many parts of Europe sug-
gest there should be a rethink of future developments in Europe? Consult the Eurobarometer website
(http://ec.europa.eu/public_opinion/index.en_htm) if you wish to trace the evolution of public opinion
further or to look at its evolution in more detail.
6 As the European Union becomes bigger and as views on the future of Europe diverge, is there a case
for the emergence of a two- or even a multi-tier Europe? That is, integration that allows for states
that wish to do so, to push ahead with integration while others move ahead more slowly, if at all. Do
we already have a two-speed Europe? What are the implications of a two- or multi-speed Europe for
member states and for business?
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Gilbert, M. (2011) European Integration: A Concise His- Rosamond, B. (2000) Theories of European Integration,
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65
Chapter 4
Europe’s institutional framework
A Parliament is nothing less than a big meeting of more or less idle people.
Walter Bagehot (1826–77), English journalist and essayist, in
The English Constitution (1867)
■■ understand the role of the European Council and the Council of Ministers;
■■ understand the role of the European Parliament;
■■ understand the role of the European Commission;
■■ understand the role of the European Court of Justice;
■■ explain why the activities of European institutions matter to European business.
Businesses have been among the strongest advo- alluded to throughout this volume, include the
cates of European integration, even if they differ potential for:

about the details and how deep the process should
go. Pressure from the European Roundtable of ■■ enhanced value-added from more diverse
Industrialists, for example, was an important sourcing opportunities;
factor in the launch of the single market, EMU ■■ greater intensity of competition within domes-
and TENs. Business tends to support integration tic markets;
because of the opportunities arising from the ■■ stimulus to product innovation;
creation of a large, obstacle-free market, albeit a ■■ greater opportunities within foreign markets;
market which also throws up major competitive ■■ re-organisation of production and distribution
challenges. These opportunities and challenges, systems on a transnational basis;
66
■■ pressure upon costs and prices; trade-offs between policies whereas the latter are
■■ operational efficiencies derived from econo- required to take a European rather than a national
mies of scale; perspective on policies and decisions. The EP is
■■ exploitation of the international division of organised on transnational lines and thus is for-
labour; mally, and usually in reality, a supranational insti-
■■ greater price transparency; tution. However, as MEPs are representatives of
■■ rationalisation of product lines; constituencies in their home state, the possibility
■■ development of networking relationships; of the promotion of national interests over Euro-
■■ possible harmonisation of labour conditions; pean interests is a possibility, particularly in a cli-
■■ financing opportunities through integrated mate of growing Euroscepticism.
capital markets.
In order to take advantage of these opportu- The European Council

nities, businesses require European politicians
and institutions to deliver a regulatory, econom- Whereas the Commission is charged with repre-
ic, legal and political environment that creates senting European interests, the European Council
consistency, certainty, clarity and transparency. and the Council of Ministers act as the inter-
Therefore, it is important that businesses develop governmental institutions in which the balance
an understanding of how European institutions of national interests among member states are
operate and of their role in decision making, and worked out and consequently where the big polit-
are aware of where political power and influence ical battles are fought and compromises forged.
lie within these bodies. This understanding will The European Council is composed of the
enable them to lobby decision makers, either heads of government of each member state, its
directly or through national and/or European President and the President of the European
trade associations. They can target policy mak- Commission. Its meetings are also usually attend-
ers at national or at European level, notably the ed by the High Representative of the Union for
Commission and Parliament. The Council is not Foreign Affairs and Security Policy. This body
amenable to direct lobbying but companies and normally meets four times a year but addition-
national interest groups do work to influence the al meetings can be called in response to urgent
position of their home governments in Council issues and emergencies.
negotiations. Once a directive has been passed, The Council’s main role is to determine the
lobbying of national governments will often overarching political direction, priorities and
continue in an attempt to influence the way it is strategy of the EU. As far as possible, decisions
implemented. are reached on the basis of consensus, usually
This chapter discusses the major features and as the result of intense bilateral and multilateral
roles of the main EU institutions. These institu- meetings. When a vote is taken, only the heads of
tions range from the intergovernmental Euro- government are entitled to vote. The Council has
pean Council and Council of Ministers and the no direct role in legislation but it can request the
supranational role of the European Commission Commission to bring forward policies to move its
and the European Court of Justice. The former strategy forward or take decisions on matters on
necessitates much balancing of national inter- which the Council of Ministers have been unable
ests involving compromises, concessions and to agree.
67
Prior to the coming into force of the Lis- membership is fluid as ministers attend the
bon Treaty in 2009, the European Council was Council according to the subject under discus-
chaired by the head of government of the member sion: Agriculture Ministers, for example, attend
state holding the rotating presidency of the Coun- the Agriculture Council whereas transport minis-
cil. Since 2009, the post has been a permanent ters will be present at Transport Councils. Mem-
position, held initially for a two and a half year ber states take it in turn to act as President of
term with the possibility of renewal for a further the Council for a six month period. The Council
term. The first incumbent was Herman van Rom- Presidency sets the agenda, within constraints,
puy, the former Prime Minister of Belgium, who for its period of office, coordinates the Union’s
served two terms from 2009–14. He was suc- business and, along with the Commission, acts as
ceeded by Donald Tusk, Prime Minister of Poland a broker to find agreement between states at odds
from 2007–14, on 1 December 2014. The Presi- with each other. Apart from the Foreign Affairs
dent oversees and coordinates the work of the Council, which is chaired by the High Represent-
Council and, together with the High Representa- ative, each Council meeting is chaired by the rel-
tive of the Union for Foreign Affairs and Security evant minister from the rotating presidency.
Policy, represents the Union to the outside world. A less public, but vital part of the Council
network is Coreper (the Committee of Per-
manent Representatives) which is composed of
The Council of the European national officials of ambassadorial rank, support-
Union (also known as the ed by lower ranking national officials. Coreper
Council of Ministers) carries out much of the preparation for Council
meetings and works out the more detailed and
Despite being increasingly required to share its technical aspects of legislation, thereby leaving
legislative powers with the EP through successive the elected representatives of member states in
reform of the treaties, the Council of Ministers the Council free to take the more strategic and
arguably remains the pre-eminent of the EU insti- political decisions.
tutions. It performs a mixture of executive and leg- The history of the Council of Ministers has
islative functions. In the case of the latter, it shares been dogged by controversies surrounding its vot-
the final decision-making powers on EU laws with ing procedures. Initially, the debate was over the
the EP and, although it has no power to initiate divide between unanimous and qualified major-
laws itself, it can request the European Commis- ity voting. Unanimity, and hence the possibility
sion to do so.The Council of Ministers also plays an of national vetoes, had been the order of the day
important role in coordinating the common goals, since the Luxembourg compromise in the mid-
albeit not the details, of the economic policies of 1960s. However, escalation of the legislative pro-
member states; signs international agreements on gramme following the launch of the SEM meant
behalf of the EU in a range of areas including the that continuing insistence on unanimity would
environment, transport, trade, and development; have rendered the SEM stillborn. The 1987 Sin-
approves, together with the EP, the EU’s budget gle European Act therefore introduced qualified
and acts as a forum for developing a common majority voting (QMV) on SEM matters. Over
approach to justice matters and the CFSP. time, QMV has been extended to more and more
The Council itself is composed of ministe- issues to avoid legislative deadlock. Consequently,
rial representatives from member states. Its it is only on certain key issues, such as taxation,
68
enlargement, security and foreign affairs that una- countries by preventing the larger countries con-
nimity is retained. stantly railroading smaller countries into policies
As a result of the Lisbon Treaty, the voting they do not want and by stopping small countries
procedures in the Council of Ministers were or small groups of countries from blocking deci-
amended further from November 2014. From sions taken by a reasonable majority. Moreover, in
this date, the Council adopted a system of double the past, despite fiercely fought battles over the
majority voting, according to which any decision weighting of the votes, in practice the Council
not requiring unanimity needs the support of at took decisions by consensus wherever possible –
least 55 per cent of the members of the Council a convention that is anticipated to continue in the
of Ministers (that is, 16 out of 28 member states) post-2014 system.
and 65 per cent of the EU’s population – that is
approximately 329 million of the total EU popu-
lation of 506 million. In order for a decision to be The European parliament
blocked, at least four member states represent-
ing more than 35 per cent of the EU population, Long disregarded by many commentators as a
must vote against it (see Table 4.1 for the popula- talking shop of little consequence, the European
tion figures to be used in the voting process). This Parliament (EP) has, particularly since its dem-
system is intended to simplify what had become ocratic legitimacy was established by the first
an increasingly complex system and to continue direct elections in 1979, gradually secured an
to provide a balance between large and small enhanced role in the EU’s policy-making process.
Table 4.1 Population figures used for voting in the Council from 2014
Country Population % of total Country Population % of total

(thousands) population (thousands) population
of the EU of the EU
Germany 80,523.7 15.93 Austria 8,451.9 1.67
France 65,633.2 12.98 Bulgaria 7,284.6 1.44
UK 63,730.1 12.61 Denmark 5,602.6 1.11
Italy 59,685.2 11.81 Finland 5,426.7 1.07
Spain 46,704.3 9.24 Slovakia 5,410.8 1.07
Poland 38,533.3 7.62 Ireland 4,591.1 0.91

Romania 20,057.5 3.97 Croatia 4,262.1 0.84
Netherlands 16,779.6 3.32 Lithuania 2,971.9 0.59
Belgium 11,161.6 2.21 Slovenia 2,058.8 0.41
Greece 11,062.5 2.19 Latvia 2,023.8 0.40
Czech Rep. 10,516.11 2.08 Estonia 1,324.8 0.26
Portugal 10,487.3 2.07 Cyprus 865.9 0.17
Hungary 9,908.8 1.96 Luxembourg 537.0 0.11
Sweden 9,555.9 1.89 Malta 421.4 0.08
Source: Eurostat, 2013.
69
This transformation has been slow and incremen- month, the EP’s committees sit and work in Brus-
tal and the EP is still a long way from fulfilling the sels. In order to expedite Parliament’s work, the
same functions as national parliaments. However, EP has 20 standing committees, each of which
the EP has been the major beneficiary of succes- specialises in a particular area. In addition, the EP
sive treaty reforms. sets up temporary committees to deal with par-
Nevertheless, reporting of its work and knowl- ticular problems or committees of inquiry. The
edge of its activities among EU citizens are limited Parliament’s administrative headquarters are in
and voter turn-out at European elections is low Luxembourg.
and declining. In 2014, for example, turn-out was The EP’s main functions are:
43 per cent, compared to 62 per cent in 1979,
and ranged from 13 per cent in Slovakia to 90 per ■■ Legislation: for many years the EP’s only leg-
cent in Belgium and Luxembourg. Turn-out fig- islative role was to be consulted on legisla-
ures have been falling in the majority of countries tion. Its legislative powers have been gradually
but have not been helped by the below average extended over the years and are now shared
turn-outs in the post-2004 accession states. Low equally with the Council through the ‘Ordi-
voter turn-out is a result of the perceived distance nary Legislative Procedure’ (known as the co-
of the European institutions from their citizens decision procedure prior to the Lisbon Treaty)
and the growing lack of enthusiasm for the EU which has become the EU’s main legislative
in particular and politics in general. Whatever the procedure. Under this procedure, Parliament
causes, the lack of engagement of the European can prevent the adoption of a proposal if it
population with an institution which encompasses believes the Council has failed to take sufficient
the most direct exercise of democracy in the EU account of its views. Moreover, the Council
is not encouraging. can no longer adopt a proposal that has been
The EP consists of 751 members (MEPs) elect- rejected by Parliament. If deadlock occurs, a
ed for a five year term. Seats are allocated roughly Conciliation Committee of representatives of
by population with Germany having the largest Parliament and the Council is set up to try to
number (96), followed by France (74), and the resolve differences before the third reading of
UK and Italy with 73 MEPs each. At the other end the legislation. Despite the dominance of the
of the scale are Malta, Cyprus, Luxembourg and Ordinary Legislative Procedure, the Assent
Estonia with six seats each. However, in terms of Procedure continues to operate, according to
seats per head of population, the smaller states which the EP must give assent for the acces-
are over-represented at the expense of the bigger sion of new member states, association agree-
states. The MEPs are organised into seven politi- ments, citizenship matters, the Structural and
cal groups along transnational rather than national Cohesion Funds and the tasks and powers of
lines plus a number of non-aligned MEPs. No sin- the European Central Bank (ECB). The Parlia-
gle group has enough seats to form a majority and ment can veto decisions under this procedure
the EP tends to operate via consensus, achieved but it cannot amend them.
by shifting alliances on different areas of policy. ■■ Scrutiny of the Executive: this is a key function
The Parliament meets once a month (except of democratic parliaments worldwide and in
during August) in plenary session in Strasbourg. many countries the executive is frequently
A further week is set aside for meetings of trans- drawn from the legislature itself. However,
national political groupings. Two weeks every this is not the case in the European Union and
70
the problems of executing this task are made invited to give evidence in front of parliamentary
even more complex by the unusual blurring committees.
of executive roles between the Commission
and the Council. Scrutiny of the Commis-
sion takes many forms, including approval The European Commission
of members of the Commission and, as seen
below, hostile questioning has resulted in Whenever an EU institution is subject to criti-
the withdrawal of Commissioners-designate cism, it is often the European Commission,
from the process. The EP’s ultimate supervi- sometimes accompanied by the European courts,
sory power is that of dismissing the Commis- which is the main target. Significantly, the Com-
sion: this power has never been used directly mission and the courts are the most supranational
but in 1999, following publication of a Court of the EU institutions, charged with acting in the
of Auditor’s report alleging mismanagement, Union’s interest and pushing forward the Euro-
corruption and nepotism by certain mem- pean agenda. In many ways, the Commission is
bers of the College of Commissioners, the the glue that holds the Union together. Those of a
Commission as a whole resigned rather than more Eurosceptic persuasion tend to portray the
face a vote of parliamentary censure which Commission as a huge monolith, full of faceless,
would have required a collective resignation. unelected, unaccountable bureaucrats circulat-
More mundanely, MEPs receive and examine ing endless pieces of paper designed to tie com-
regular reports from the Commission on its panies and citizens down in a mass of regulation.
activities, submit written or oral questions On occasion, criticism can be justified, but more
to the Commission and question Commis- frequently the nature of the Commission and its
sioners directly during committees and ple- activities are misunderstood, sometimes wilfully
nary sessions. and sometimes genuinely.
■■ Budget: together with the Council, the EP The European Commission is essentially the
reviews the annual draft budget prepared by bureaucratic/executive arm of the EU but, given
the Commission: it can ask for amendments or the supranational nature of the Commission, the
for appropriations in new areas and can ulti- reality is more complex than this statement sug-
mately reject it. gests and is without an exact parallel in member
states.The Commission acts as guardian of the trea-
As the EP grows in stature, so its importance ties and is involved in policy formulation at all stag-
to the business community increases. There are a es and levels: the nature of its involvement varies,
number of ways in which enterprises can realis- ranging from policy broker to legislator in certain
tically and legitimately engage with MEPs. As in fields of secondary legislation. More specifically,
national parliaments, a business can lobby its own the Commission performs the following tasks:
MEP. Membership of European pressure groups
and more informal networks bring business into ■■ Initiator of legislation: the Commission has the
contact with MEPs from multiple member states. sole right to propose legislation. This facilitates
MEPs on key standing committees can also be a the attainment of a coherent and consistent
useful channel of influence for business. Expert body of legislation and was developed so that
witnesses, including senior executives from European laws were consistent and reflected
major European companies, are also frequently European interests rather than those of the most
71
effective coalition of member state interests at by member states. Failure to implement EU

any particular time. The Commission’s task law properly can ultimately, if informal efforts
is to ensure that the principles of the treaties, fail, result in the Commission taking a mem-
which have been agreed by all member states, ber state to the European Court of Justice
are translated into law. Requests for legislation whose judgments are binding on European
can come from the Commissioners themselves, institutions and member states. The Commis-
Commission staff, the EP, the European Coun- sion has had recourse to the courts frequently
cil or the Council of Ministers and external in the environmental and energy fields and
bodies or can be necessitated by rulings of the in competition matters. Use of the courts is
European courts. The Lisbon Treaty introduced not the only option open to the Commission
a new source of legislation – the ‘Citizens’ Ini- when trying to ensure EU law is applied: ‘nam-
tiative’, according to which, the Commission ing and shaming’ has been used effectively on
can be invited to introduce legislative proposals occasion, notably in the case of the regular
upon receipt of a petition signed by at least one publication of the Single Market Scorecard
million EU citizens from a minimum of seven which was important in the early days of the
member states. Any such requests must lie with- SEM in encouraging member states, particu-
in the EU’s areas of competence as set out in the larly Italy, who were proving slow in transpos-
treaties (see Table 3.3). Legislative proposals are ing single market directives into national law.
drafted by the responsible Directorate-General ■■ Representative of the Community in international
(DG) in consultation with other interested DGs, forums and negotiator of trade agreements: the Trea-
national officials, experts, and interest groups. ty empowers the Commission to act for the EU
Often the discussion will be opened up to more in international economic relations. It is the
general public consultation. The proposals are Commission, not individual member states,
then sent to the College of Commissioners for who negotiates on behalf of EU members at
approval. If no amendments are required, the the World Trade Organisation on the basis of a
proposal is then forwarded to the EP and the negotiating mandate from the Council of Min-
Council of Ministers who, together, make the isters. Similarly, bilateral negotiations on trade
final decision on whether the legislation should and, since the Lisbon Treaty, investment, are
enter into force. conducted by the European Commission on
■■ Legislator: the Commission also has the power behalf of member states, again on the basis of
to legislate in its own right. The final decisions a mandate from the Council of Ministers. The
on legislation involving major political issues Commission’s role in trade policy is an inevita-
or points of principle are taken by the Council ble consequence of the setting up of a customs
of Ministers and the EP, but their work would union (see Chapter 3) and enables Europe to
become bogged down if they were responsi- speak with one voice in the international arena,
ble for all decisions. Commission legislation, thereby increasing its influence.
or secondary legislation, therefore relieves the ■■ Manager of the EU’s finances: the Commission
burden on these institutions by dealing with draws up the Community’s annual draft budg-
more detailed, technical legislation. et and plays a key role in management of its
■■ Ensuring the implementation of EU laws: as the finances.
‘guardian of the treaties’, the Commission ■■ Broker and mediator: in addition to bringing for-
monitors the application of Community law ward legislative proposals, the Commission
72
plays a central, albeit informal, role as mediator, to approve the appointment of the Commission
reconciling differing views of member states President-designate (chosen by the Council) and
about its proposals and reaching consensus on to scrutinise the suitability of the proposed new
policies within and between the European insti- Commissioners. The President, the dominant
tutions themselves. This calls for highly devel- and most public face of the Commission, ide-
oped diplomatic and political skills. Even within ally emerges through consensus, albeit not with-
the Commission itself, DGs will approach a spe- out behind-the-scenes wheeling and dealing. The
cific proposal from its own perspective – which appointment of Jean-Claude Juncker, the former
often varies from that of other DGs – and will Prime Minister of Luxembourg, as Commission
require mediation. For example, a proposal on President in 2014 did not conform to this pat-
energy taxes in the transport sector, controver- tern as the UK lobbied hard and publicly against
sial enough in itself, will involve at least the fol- his appointment. The UK government, fighting
lowing DGs – DG Climate Action, DG Energy, to maintain support against a climate of grow-
DG Environment, DG Taxation and Customs ing Eurosceptism at home, attempted to build a
Union and DG Mobility and Transport – before coalition against Juncker’s appointment, on the
a draft proposal is even presented to the College grounds that he was too federalist, but it became
of Commissioners. On such a policy, the Com- increasingly isolated and failed.
mission will also have to deal with representa- Member states, in discussion with the Commis-
tions from affected industrial sectors which will sion President-designate, nominate the new Com-
also be working to influence individual member missioners. Each Commissioner-designate must
states and other key pressure points in the Euro- attend a hearing at the EP at which they can be given
pean system. a rough ride by MEPs. Indeed, it is not unknown for
proposed Commissioners to withdraw as a result
The European Commission that took office in of this process: for example, the Bulgarian nomi-
November 2014 is composed of 28 Commission- nee, Rumiana Jelevic, resigned as Commissioner-
ers, one per member state. Many Commission- designate to the second Barroso Commission
ers have held high political office in their home (2009–14) and in 2014, Alenka Bratusek from Slo-
country (see Table 4.2). Since the Nice Treaty, and venia also withdrew as a result of the parliamentary
prompted by the 2004 enlargement, the bigger hearings on the Juncker Commission.
member states have lost their entitlement to two Once the appointment is formalised, each
Commissioners amid fears that a larger Com- Commissioner is allocated a portfolio of respon-
mission would become increasingly ineffective. sibilities, decided by the President, correspond-
According to the first draft of the Lisbon Treaty, ing to the Commission’s areas of competence.
the number of Commissioners was to be reduced They are supported in their work by the Com-
further. However, this was strongly resisted by the munity’s permanent civil service, sub-divided
smaller member states and the initial rejection of currently into over 30 Directorate Generals and
the Treaty in the 2008 Irish referendum resulted several supporting services such as the Legal Ser-
in the retention of the principle of one Commis- vices and the Publication Office. Once appointed,
sioner per EU member. the Treaty requires Commissioners to act totally
The Commission’s term of office is five independently: in other words, they must act in
years and begins in the autumn following elec- the Community interest and not as representa-
tions to the EP. This enables the new Parliament tives of their own state.
73
Table 4.2 Composition of Juncker Commission, 2014–19
Name State Portfolio Previous senior positions

Jean-Claude Luxembourg President Prime Minister
Juncker Minister for Finance
Minister for Work and Employment
Frans Netherlands First Vice-President (V.P.) – Better Foreign Minister
Timmermans Regulation; Inter-Institutional
Relations, Rule of Law and Charter
of Fundamental Rights
Federica Italy V.P. – Foreign Affairs and Minister for Foreign Affairs
Mogherini Security Policy
Kristalina Bulgaria V.P. – Budget and Human Member of Barroso Commission
Georgteva Resources World Bank economist
Maroš Sefčovič Slovakia V.P. – Energy Union Member of Barroso Commission
Ambassador
Jyrki Katainen Finland V.P. – Jobs, Growth, Investment Prime Minister
and Competitiveness Deputy Prime Minister
Minister of Finance
Valdis Dombrovski Latvia V.P. - Euro and Social Dialogue Prime Minister
Minister of Finance
Andrus Ansip Estonia V.P. – Digital Single Market Prime Minister
Minister of Economic Affairs
Vèra Jourová Czech Justice, Consumers and Gender Minister for Regional Development
Republic Equality
Günther Oettinger Germany Digital Economy and Society Member of Barroso Commission
Minister-President of
Baden-Württemberg
Pierre Moscovici France Economic and Financial Affairs, Minister of Finance
Taxation and Customs Minister for European Affairs
Marianne Thyssen Belgium Employment, Social Affairs, MEP
Skills and Labour Mobility
Corina Creţu Romania Regional Policy MEP
Johannes Hahn Austria European Neighbourhood Policy Member of Barroso Commission
and Enlargement Negotiations Minister of Science and Research

Dimitris Greece Migration, Home Affairs and Minister for National Defence
Avramopoulos Citizenship Minister for Foreign Affairs
Minister for Health and Social
Security
Minister for Tourism
Vytenis Andriukaitis Lithuania Health and Food Safety Minister of Health
Jonathan Hill UK Financial Stability, Financial Leader of the House of Lords
Services and Capital Markets Chancellor of the Duchy of
Union Lancaster
(Continued)
74
Table 4.2 Composition of Juncker Commission, 2014–19 (Continued)
Name State Portfolio Previous senior positions

.
Elzbieta Poland Internal Market, Industry, Deputy Prime Minister
Bieńkowska Entrepreneurship and SMEs Minister of Infrastructure and
Development
Minister of Regional Development
Miguel Arias Spain Climate Action and Energy Minister of Agriculture and
Cañete Fisheries
Minister of Agriculture, Food and
Environment
Neven Mimica Croatia International Cooperation and Member of Barroso Commission
Development Minister of European Integration
Magarethe Denmark Competition Deputy Prime Minister
Vestager Minister of the Economy and
Interior
Minister of Education
Violeta Bulc Slovenia Transport Entrepreneur
Minister without Portfolio
Cecilia Sweden Trade Member of Barroso Commission
Malmström Minister for European Affairs
Karmenu Vella Malta Environment, Maritime Affairs Minister for Public Works
and Fisheries Minister for Industry
Minister for Tourism
Tibor Navracsics Hungary Education, Culture, Youth and Minister of Foreign Affairs and Trade
Sport Minister of Public Administration
and Justice
Carlos Moedas Portugal Research, Science and Innovation Cabinet Minister
Phil Hogan Ireland Agriculture and Rural Minister for the Environment,
Development Community and Local Government
Christos Cyprus Humanitarian Aid and Crisis MEP
Stylianides Management
For the first time, President Juncker has pro- President Juncker and Senior Vice-President Tim-
posed a Commission that clusters certain mem- mermans oversee all the Commissioners. Each
bers around one or more key policy areas in team has a core membership with other Com-
‘project teams’. The project teams are a Connect- missioners being called in when required. Such
ed and Digital Single Market; Deeper and Fairer an arrangement should help the coordination and
Economic and Monetary Union; New Boost for consistency of policy but contains the danger of
Jobs, Growth and Employment; Resilient Energy over-complexity and slowing down the work of
Union with a Forward-looking Climate Change the Commission.
Policy and a Stronger Global Actor. Each team Given the Commission’s central role in the
is headed by one of the five Vice-Presidents and initiation and formulation of policy, businesses
75
are assiduous in lobbying Brussels. Although the The European Court of Justice
Commission could easily be overwhelmed by
the number of interests wishing to gain its ear, Often neglected in discussions of EU institu-
particularly given the proliferation of European tions, the European Court of Justice (ECJ) has
interest groups and public affairs offices in Brus- nevertheless played a major role in the develop-
sels by corporations, companies and local and ment of the European Union and its interpre-
regional authorities, it remains open to technical tation of EU regulations and directives. Given
policy inputs from specialised interests. Despite that it can only rule on matters that fall within
criticisms of its size and influence, the number the competence of the EU as set out in the trea-
of European civil servants engaged in the devel- ties, its rulings are largely concerned, not with
opment and monitoring of policy is less than criminal or family law, but with economic issues.
those employed in national ministries of medium As such, the ECJ has frequently had significant
importance or even within large regional authori- impact on business, delivering rulings on issues
ties. Indeed, shortages of in-house technical of competition policy, pension law, employment
expertise create heavy Commission reliance on law, etc.
specialised committees and working parties made The Court itself is based in Luxembourg and
up of member state officials and independent comprises 28 judges, one from each member
experts and special interest groups. This brings state, and nine advocates-general who deliver
needed technical expertise into the policy forma- preliminary opinions on cases brought before
tion process but also opens the Commission to the Court to assist the judges in their delibera-
criticism that it is working according to the nar- tions. Since 1989, the overburdened ECJ, whose
row agenda of specific interest groups rather than workload has escalated in line with the growing
in the broader interest. However, consultation size and scope of the EU, has been assisted in its
and involvement of interested parties can smooth tasks by the General Court, formerly known as
the way for the passage of legislation. the Court of First Instance.
Types of EU legislation
Box 4.1
Regulation: regulations have general application, are binding and take effect directly in all member
states. Regulations do not need to be passed into national law but national law will sometimes require
amendment to avoid conflict with a regulation. The Merger Control Regulation is a prominent example
of a regulation.
Directives: directives are binding in terms of the results and objectives to be achieved but rely upon
member states to transpose them into national law. This approach requires member states to meet
agreed objectives but enables them to decide exactly how they are to be achieved, thereby enabling them
to respect their own traditions and conditions.
Decisions: decisions are binding upon those to whom they are addressed, which can be individual
member states, companies, groups of individuals or even individuals. Decisions are used by the Commis-
sion when determining the outcome of merger cases, for example.
Recommendations and opinions: these instruments have no binding legal force.
76
The fundamental role of the ECJ is to ensure ■■ Proceedings for failure to act: the Court may
that the treaties and Community legislation are review the legality of a failure to act by a Com-
respected. More specifically, the Court has juris- munity institution. Such cases are unusual. The
diction in the following areas: most renowned example was the 1985 deci-
sion which upheld the action brought by the
■■ Preliminary rulings: these form the biggest share EP that the Council of Ministers had failed to
of the ECJ’s work, are binding and are intend- fulfil its obligations within the Treaty of Rome
ed to promote consistency of application and to develop the Common Transport Policy.
interpretation of Community law across mem- ■■ Actions for damages: the ECJ rules on the liabil-
ber states. National courts, when doubtful of ity of the Community for damage caused by its
the validity or interpretation of an item of institutions or employees in the performance
Community law may, and in some cases must, of their duties.
request a preliminary ruling on the relevant ■■ Appeals: the Court hears appeals on points of
questions from the ECJ. In addition, individu- law against judgments of the General Court.
als may seek clarification of Community law
which affects them. Over the years the Court has made a number
■■ Failure to fulfil an obligation: these actions enable of landmark decisions which have clarified the
the ECJ to determine whether a member state governance structure of the Community, espe-
has fulfilled its obligations under EU law. A cially on the relative balance of power between
famous case occurred in 1999 when the French Community institutions and member states, or
government refused to accept the Community have had a profound impact on policy within the
decision that British beef was safe to eat follow- Community (see Box 4.2).
ing the end of the BSE crisis. The Court found
in the UK’s favour but it took €10 million plus
fines on France and several years before all Other EU institutions
restrictions on trade in British beef were lifted.
■■ Proceedings for annulment: member states, the In addition to the five main European institutions –
Commission, the Council and, in certain cir- the European Commission, the European Council
cumstances, the EP, individuals and companies and the Council of Ministers, the EP and the Euro-
may apply to the ECJ for annulment of all or pean Court of Justice – the following other bodies
part of an item of Community legislation or play an important role in the work of the EU:
decision if it conflicts with the treaties. For
example, in 2000 the ECJ annulled the 1998

Tobacco Advertising Directive which was The European Economic and
designed to phase out all tobacco advertising, Social Committee (EESC)
including promotion and sponsorship by 2006.
The Court ruled against the Directive on the The EESC was established in 1957 to involve rep-
grounds that it had been introduced on spuri- resentatives of civil society in the creation of the
ous single market grounds under Article 100A common market. Its 353 members belong to one
when it was, for all intents and purposes, a of three categories – employers; workers; and
public health measure which went beyond the groups representing professional and community
Community’s competence. associations, youth organisations, women’s groups
77
Landmark ECJ decisions

Box 4.2
The cases discussed below established important principles which have had a fundamental effect on the
way in which the EU operates:
1. The supremacy of Community law (Costa v. ENEL)

In this 1962 judgement, the Court ruled that by virtue of joining the Community, member states had
voluntarily ‘limited their sovereign rights, albeit within limited fields [that is, those allowed within the
framework of the treaties]’ and effected a permanent transfer of power to Community institutions. In
other words, where there was a clash between Treaty obligations or legislation derived from the treaties
and national laws, Community law was supreme. In fact, the supremacy of Community law is essential
to make the Community workable as, without it, member states would be able to pick and choose
which pieces of Community legislation they applied, thereby rendering achievement of Treaty objectives
unattainable.
2. The principle of direct effect (van Gend en Loos)

The 1964 van Gend en Loos case established the principle that certain provisions of the Treaty have
direct legal effect, enabling individuals and companies to claim Treaty-based rights in national courts
when there was conflict with national rules. This ruling has been of great practical importance as
Treaty-based rights prevail over national law even if there is no Community legislation to operationalise
these rights. The Court has subsequently ruled on direct effect in relation to many Treaty articles
including Article 30 (free movement of goods), Article 48 (free movement of workers), Article 52
(right of establishment) and Articles 59–60 (free movement of services).
In one of the most famous ECJ rulings of recent years, professional footballer, Jean-Marc Bosman,
challenged the system of demanding transfer fees for players even after the expiry of their contract
which he claimed breached his right of freedom of movement as a worker within the EU. He won his
case and the 1995 Bosman ruling has transformed business practices within European football.
The treaties have enabled the Court to attack discrimination on the grounds of gender in the workplace.
Article 119 establishes the principle of ‘equal pay for equal work’. In the Defrenne. SABENA case, the
ECJ ruled that ‘the elimination of discrimination based on sex’ is a fundamental right based on general
principles of Community law which the Court had a duty to uphold. The Court therefore determined
that Article 119 was in part directly effective, enabling women to claim their right to equal pay in any
national court and that equal pay provisions were applicable to both public and private sector employees.
Article 6A of the Amsterdam Treaty (see Chapter 14) which provides for action against discrimination
on the grounds of gender, racial or ethnic origin, religion or belief, disability, age or sexual orientation,
has created the possibility of legal action in member states without laws prohibiting such discrimination.
3. Principle of mutual recognition (Cassis de Dijon)

In this 1979 case, the ECJ ruled that national standards could not be used to prevent the free circulation
of goods (in this case, blackcurrant liqueur) except on grounds of public health, fiscal supervision
and consumer protection. The judgment firmly established the principle of mutual recognition which
78
stated that if a product was lawfully sold and marketed in one member state, it must be allowed free
circulation throughout the Community. This principle greatly simplified the process of building the SEM
by reducing the need to harmonise technical standards and was utilised not only in the case of goods,
but also in service sectors and to help secure free movement of workers through the mutual recognition
of qualifications.
4. State liability for damage arising from failure to meet obligations under Community law
The 1991 Francovich judgment made member states liable to pay damages for failure to observe its
Treaty obligations. The decision arose when Italian workers were unable to claim back pay from a
guarantee fund for bankrupt enterprises because the Italian government had failed to establish such a
fund in line with a Community directive.
and other interest groups. Members are appointed health, education, youth, culture and economic
for five years by the Council, following nomination and social cohesion. It can also, on its own ini-
by member states (the number of members per tiative, give its opinion on other issues affecting
state is decided relative to population). Members regions such as agriculture and environmental
are not based permanently in Brussels: many of protection. There is no obligation on other insti-
them continue to work at their jobs in their home tutions to take heed of CoR opinions.
states, the idea being that this keeps them in touch
with the realities of life for European citizens.
The main function of the EESC is to act as a con- The European Central Bank (ECB)
duit between EU citizens and EU institutions which
it does by drawing up opinions on matters referred The ECB was established in Frankfurt in 1998 to
to it by the Commission and the Council of Minis- operate monetary policy in the euro area, particu-
ters. In some cases, consultation is mandatory, in larly in relation to maintaining price stability. The
others it is optional, and in others it is carried out ECB took a major role in addressing the eurozone
on the initiative of the EESC. Whatever the origin crisis of 2010 onwards (see Chapter 8).
of the opinion, the other EU institutions are under
no obligation to take heed of its findings.
The Court of Auditors
The Committee of the Regions (CoR) The Court of Auditors scrutinises the EU’s
accounts to ensure that spending takes place in
The Maastricht Treaty established CoR as an insti- line with the Union’s budgetary rules and for the
tution to be consulted on the impact of EU policy purposes for which it was intended. The Court has
at the local and regional level. It is composed of the power to carry out on-the-spot audits into EU
353 appointed members who are elected officials spending wherever it takes place, including pro-
at local and regional level in their own member grammes managed outside the Community. The
state. The CoR must be consulted on matters that Court publishes an annual general report on Com-
directly affect the regions including TENs, public munity finances and also reports back on individual
79
cases of errors, mismanagement, irregularities, In addition, the Bank lends outside the EU
potential fraud and flaws in systems and proce- in support of the Community’s cooperation
dures which allow irregularities to take place. It policies.
was a Court of Auditor’s report that ultimately led
to the Commission’s resignation in 1999.
The European Investment Fund (EIF)
The European Investment Bank (EIB) The EIF was set up as a cooperative joint venture
between the EIB, the EU and several dozen com-
The EIB provides long-term loans for capital mercial banks as part of the European Growth
investment to promote EU development and initiative. Venture capital and loan guarantees to
integration and works closely with other sources support the activities of European SMEs comprise
of Community finance such as the Structural and its two main activities.
Cohesion Funds. The Bank’s lending supports:
■■ economic progress in disadvantaged regions; The Ombudsman

■■ construction of TENs;
■■ the enhancement of industrial competitive- Since the coming into force of the Maastricht
ness, integration at a European level and sup- Treaty, all European citizens have had the right to
port for SMEs; apply to the European Ombudsman, if they are
■■ protection of the environment, quality of life the victim of maladministration by a Community
and Europe’s architectural heritage; institution or organisation.
■■ securing energy supplies.
Key points
■■ An understanding of the evolution of the EU and of its institutions helps business understand the
context of individual policies and how they can influence the decision-making process.
■■ Businesses can attempt to influence the formation of EU policy at both national and European
levels directly or through national and European trade associations.
■■ The European Council and the Council of Ministers are essentially intergovernmental
organisations whereas the European Commission is supranational in nature.
■■ The European Court of Justice has had a major, and under-rated, impact on forging the European
business environment.
■■ The EP has been the major beneficiary of successive treaty reforms.
■■ The European Commission initiates legislation but the Council of Ministers and the EP must
approve it.
80
Activities
1 Identify and research two decisions of the European Court of Justice that have had implications for
business. Be prepared to explain these implications in a presentation to your fellow students.
2 Chose an industrial or services sector and research how and where the industry trade association(s)
lobby to try to influence policy. Note: there is likely to be both a national and a European/international
dimension to this lobbying.
3 Assess the performance of the European Commission. This could take the form of a class debate, with
one group of students presenting the positive points and the other the negative points.
1 Why do businesses active in Europe need to understand the role of the EU and how it works?
2 What, if any, restraints should be placed on lobbying European institutions?
3 ‘The European Commission is a vast, unaccountable bureaucracy that is out of control’. Discuss.
4 Discuss the differences between the European institutions and those of member states.
5 The Bagehot quotation at the beginning of the chapter is 150 years old yet seems to reflect contempo-
rary views of politicians. Do you agree that politicians are held in such low esteem? If so, why? How
damaging is this and how do the reputations of politicians differ throughout Europe?
Bibliography
Ashiagbor, D., Countouris, N. and Lianos, I. (eds) (2012) McCormick, J. (2014) Understanding the European Union:
The European Union after the Treaty of Lisbon, Cam- A Concise Introduction, 6th edn, Basingstoke: Palgrave
bridge: Cambridge University Press. Macmillan.
Bache, I. (2014) Politics in the European Union, 4th edn, Pinder, J. and Usherwood, S. (2013) The European Union:
Oxford: Oxford University Press. A Very Short Introduction, Oxford: Oxford University
Press.
Bomberg, E., Peterson, J. and Corbett, R. (eds) (2012) The
European Union: How does it work?, 3rd edn, Oxford: Van Schendelen, R. (2011) More Machiavelli in Brussels:
Oxford University Press. The Art of Lobbying in the EU, Amsterdam: Amsterdam
University Press.
Greenwood, J. (2011) Interest Representation in the Euro-
pean Union, Basingstoke: Palgrave Macmillan. Wallace, H., Pollack, M. and Young, A. (eds) (2010) Policy-
Kassim, H. et al. (2013) The European Union and the making in the European Union, 6th edn, Oxford: Oxford
University Press, Chapters 2 and 4.
Twenty-First Century, Oxford: Oxford University Press.
81
Part II
The business environment

and market integration
From a business perspective, the most important dimensions of European integration are the vari-
ous initiatives that seek to end the fragmentation of the European market. Market integration is
designed to enable businesses within Europe to take advantage of the commercial opportunities
available to enable them to grow and in so doing generate sustainable employment by using the
integration process as a platform for international competitiveness. Chapters in Part II cover the
horizontal policies, such as the single market and economic and monetary union, which estab-
lish the broad integration framework which cuts across all sectors. Part II also includes those
policies – competition, consumer and industry/enterprise policy – which perform major roles in
supporting and enhancing the core integrating initiative: the single market. Competition policy
aims to ensure that the removal of public barriers to trade in the European Union does not result
in their replacement by the actions of private companies that wish to restrict market access for
others. Consumer policy seeks to ensure that the impact and benefits of the single market are felt
not only by commerce but also by consumers and that the new rights for business are supported by
the necessary obligations to consumers. Finally, industrial and enterprise policy seeks to ensure that
the commercial opportunities from the single market are spread across the population of business
of all sizes to benefit from the changes arising from European integration.
83
Chapter 5
The Single European Market

Towards a new phase of
market integration
What we need are strengths which we can only find together. […] We must have the full
benefit of a single large market.
Margaret Thatcher, British Prime Minister (1979–90), in
a December 1986 speech to the European Parliament
■■ the concept and major provisions of the Single European Market;

■■ the main micro- and macro-economic impacts of the Single European Market;
■■ how the single market is key to the European Union’s Growth Strategy;
■■ how the single market is to be developed and extended.
The initial Single European Market (SEM) pro- can be traded and moved are freely tradable and
gramme, covering the years 1985–92, was movable. This means that the creation of the SEM
limited (if not minimalist) in the efforts made would always need to be extended and updated
towards the realisation of its stated objective. beyond the priorities outlined in the initial pro-
Much of the programme was about catching up gramme. This was formalised in 2012, on the
with lapsed priorities espoused in the founding twentieth anniversary of the initial 1992 deadline,
Treaty of Rome. Indeed, the Commission mar- when the EU relaunched the single market pro-
keted its SEM initiative as merely the first phase gramme against the background of several years
of the creation of the SEM. A true SEM will only of financial and economic crisis.The initial section
exist when all goods, services and factors of proof this chapter explains the importance of and
duction (including information and data) that opportunities afforded to European business from
85
Business environment
the development of the SEM. After exploring the ■■ lower financial transaction costs;
aims and objectives of the initial programme, an ■■ lower barriers to entry.
assessment of its impact in micro- and macro-
economic terms is offered. Thereafter, the main In combination, these advantages allow EU-
themes within the relaunch of the single market based businesses a stronger platform from which
programme are examined. to compete in both international and domestic
markets. Over time, this enhanced position will
lead to greater levels of employment and invest-
European business and ment. These benefits will be accentuated by
the single market higher levels of product innovation and a greater
attention to non-price factors in the production
At its heart, the SEM is about improving the per- process (for example, through enhanced product
formance of European enterprises as a precursor quality and design).
to broader industrial success within international Many of the cost effects of the SEM are
markets. Such success is pivotal in securing the derived from alterations in the mode and manner
greater levels of employment and investment in which firms organise their logistics chain. For
which are increasingly the core focus of policy many enterprises, this means establishing a new
makers. Surveys prior to the initial SEM pro- network of suppliers and distributors across the
gramme suggested that, across a number of sec- continent, both as a means of entering new mar-
tors, the fragmentation of the European market kets and as a more direct cost reduction measure.
was inhibiting indigenous business success on the Benefits to the enterprise’s logistical chain are
global stage. For a market of a similar size, the derived from:
US had considerably more efficient and rational-
ised market structures with fewer firms in core ■■ suppliers: sourcing from new suppliers that
internationally traded sectors (for example, white offer lower prices and/or better quality inputs
goods and motor vehicles). to the enterprise;
Business opportunities arising from the SEM ■■ production systems: developing new locations to
come from a number of areas, not least from enter new markets with lower entry costs;
the possibilities of the re-organisation of produc- ■■ distribution systems: competition in services to
tion offered by producing a single product for a the firm (in areas such as transport, warehous-
single market instead of the multitude previously ing and retailing systems) can further increase
required by different national laws and regulations. efficiencies.
Most analysts believe the advantages to European

business from the SEM are derived from: These cost reduction measures can be comple-
mented by new or renewed marketing efforts and
■■ wider availability of economies of scale in the promotional systems at the end of the logistics
production process; chain (that is, the consumer).
■■ the effects of more intense competition; Naturally, the extent to which and how such
■■ direct cost reductions due to the abolition of efficiencies are realised comes down to the indi-
border formalities and national regulations; vidual enterprise, its requirements and strategy.
■■ simplification of cross-border mobility and the The response of many enterprises has been to
increase in labour force potential; develop more pronounced transnational networks
86
Barriers to be removed in the SEM
Box 5.1
The White Paper Completing the Internal Market argued that the fragmentation of the European
market was sustained by a number of barriers which inhibited factor movements and trade as well as
directly imposing costs upon business. Broadly these barriers, which varied in importance on a sector-
by-sector or even on a firm-by-firm basis, were categorised as follows:
■■ physical barriers: these include border stoppages, customs barriers and other time-delaying and
cost-increasing measures involved in mobility between states;
■■ technical barriers: these include the absence of common standards across the EU which requires
the development of different versions of the same product for each market; also included are
public procurement practices, technical regulations and differing business laws and practices (such
as a culture of state support);
■■ fiscal barriers: these include differentials in the levels of VAT and excise duties across states.
as a means of rationalising the production process This reinforced the underlying principle that
and of providing an entry point into other mar- there is nothing better for competitiveness than
kets. Porter (1990) disputes that the creation of competition itself. The ongoing development of
these pan-European systems are the most effec- the SEM is linked to other aspects of the com-
tive mechanism for realising the competitive gains petitiveness agenda and there is a perceived link
from the SEM as such devices could be used to between the SEM process and improvement of
limit the intensity of rivalry between companies the technological and innovative capabilities of
thereby limiting the competitive benefits of the Europe, the improved performance and promi-
SEM to the economy as whole. Given the need nence of SMEs, the emergence of knowledge
for rationalisation of production, some consoli- industries and higher levels of employment (see
dation is necessary. The issue is one of whether Chapter 1 and Europe 2020).
this emerges via a process of ‘natural selection’ (as The process of reform within Europe has been
Porter suggests) or through agreement/coopera- driven as much by business as by politicians. This
tion. Indeed, one feature of the SEM was the rise trend has been accelerated by the introduction
in the number of cross-border mergers and acqui- of the euro, privatisation, the rise of information
sitions within services and manufacturing across technology and the spread of the internet. As mar-
the EU as firms consolidated as part of their strat- kets open, businesses are developing and pushing
egy to enter new markets and to sustain competi- forward deals that open the market further and
tiveness within this integrating market. promote further market integration. This com-
The Lisbon Agenda (see Chapter 1) reinforced mercial drive has to be matched by political com-
the strategic importance of the completion of the mitment if the effects of legislation are to feed
SEM to the future commercial success of the EU. through into tangible benefits for the European
The product and factor market reform – which economy. In part, the inability to translate com-
is integral to the SEM process – was anticipated mitments into cast-iron policy reflects differences
to act as a platform for broader economic reform between Anglo-Saxon and the more rational form
across all aspects of the European market place. of Continental capitalism. The ongoing impact of
87
the introduction of the euro may stimulate many socio-economic structure in the 20 years after the
of the reforms needed to push the process of 1992 deadline, a fifth freedom can be added:
European competitiveness forward.
The seemingly endless list of growth initiatives 5 the free movement of information/data.
launched by the EU since the end of the initial
1992 deadline for the SEM have all continued a Initially the promotion of the SEM was the
commitment to building on the SEM as a platform Community’s response to the problems that were
for growth. As is seen later on in this chapter, this evident throughout the European economy in the
growth discourse was embedded within the for- late 1970s and early 1980s (that is, rising unem-
mal relaunch of the SEM in 2012. In terms of the ployment and slow growth – the so-called ‘Euro-
core strategic Europe 2020 programme, the SEM sclerosis’). The 1985 White Paper Completing the
is pivotal. Indeed, one of the three main themes of Internal Market proposed nearly 300 measures to
Europe 2020 – sustainable growth – recognises the push the development of the SEM.The programme
role that connected markets play in the process of was formalised in the Single European Act (SEA)
change and that the legal changes not only need which was ratified in 1987. Importantly, the SEA
to be deepened but also to be supported through set a deadline for the implementation of the initial
improved standardisation and the establishment measures – the end of 1992. It also reformed the
of the necessary supporting infrastructures. Con- decision-making procedure to speed up the imple-
sequently, the current discourse on enhancing the mentation of SEM-related legislation. The central
SEM is related less to the virtues of neo-liberalism theme of these measures was to remove the remain-
and more to the impact on growth, competitive- ing non-tariff barriers (NTBs) which fragmented
ness and, ultimately, employment. the EU market (see Box 5.1). At its most basic, the
SEM programme was an exercise in deregulation.
At its core, the SEM was the legislative pro-
The initial SEM programme: gramme and the implementation of the necessary
intentions and objectives supporting legal framework which consists of:
At the core of the SEM programme is the realisa- ■■ rules set out in the treaty;
tion of what have been widely termed ‘the four ■■ rulings of the European Court of Justice;
freedoms’.These are the core economic freedoms ■■ legislation, mainly directives, which had to be
that are necessary for the completion of the com- implemented into national law.
mon market and refer to:
This framework was underpinned by the core

1 the free movement of goods; underlying legal principle of the SEM – ‘mutual
2 the free movement of services; recognition’ – according to which a member state
3 the free movement of capital; could not exclude a product of another member
4 the free movement of labour. state from its market on the grounds that it did
not meet the host’s national standards. In short, if
These freedoms represent the free mobility a product was assumed safe and reliable and could
of factors of production and products to enable legally be sold in one EU state, then it was con-
the anticipated efficiency gains. Following the sidered saleable in any other. The establishment of
consequent progress of ICT throughout the EU’s this principle was important as it released the EU
88
Case Study 5.1

Infrastructure for the SEM
Infrastructure was initially an ancillary measure to the SEM. While the EU has been involved in infra-
structure development for decades, it was, at first, mainly for reasons of economic and social cohesion
rather than of market integration – though there are obvious links between the two. Through the Treaty
on European Union, the EU formally gained competence in the development of TENs – a process which
has seen limited success (see Case Study 10.1). With the relaunch of the SEM, infrastructure has once
again emerged as a priority as it is key to enabling market integration through the capability of national
physical infrastructure systems to interconnect and interoperate for the mutual benefit of all parties.
The challenge is not so much to demonstrate the need for such infrastructure but more – in an age of
austerity – of how to channel finance into these systems.
The 2010 Monti Report on the relaunch of the SEM identified that these infrastructures cut across
a number of important integration themes, not least of which is the creation of the Single Digital Mar-
ket (see Chapter 13) and the development of integrated energy markets (see Chapter 11). However
with the relaunch, Monti chose to focus on the key impediments to the formal integration of national
systems. Despite 20 years plus of the SEM and policies of system liberalisation, planning, finance and
management of infrastructure retains an overwhelmingly national focus and, therefore, is unresponsive
to the changing nature of pan-European production. In short, the main challenges to completing inter-
operable and connected networks depends as much on the soft infrastructure regulations (that is, the
rules and regulations governing the operation of and access to the infrastructure) as to the construction
of the physical infrastructure itself.
As the economic crisis took hold, so the political imperative for stimulating these systems grew: these
networks are major job creators in the short term (that is, in the construction stage) and key determi-
nants of competitiveness in the medium to longer term. The challenge is to facilitate the channelling of
private finance into these systems and to allow for the creation of public–private partnerships to militate
against the large risks involved in large infrastructure projects that can deter investment. Such support
can come through cohesion funds but there also needs to be an adjustment in the EU soft infrastructure
system (such as planning, finance rules, etc.) to allow viable infrastructure business models to emerge.
The emphasis in the Commission’s TENs proposals has been on energy and transport; sectors in
which market failures have been most evident. In these cases, the key actions were focused on soft
infrastructure (i.e. liberalisation and re-regulation). Such examples include renewed efforts to open
up the market for rail services and reform of the bureaucracy surrounding administrative and customs
duties at ports. The intention is that greater competition will generate increased flows across networks
and will stimulate increased investment in infrastructure as a result. Other more direct measures of
infrastructure integration include the creation of a ‘Single European Sky’ (see Chapter 10) through the
integration of national systems of airspace management to facilitate the free flow of air traffic and the
push for formal integration of energy networks to breed both more intense competition and to promote
energy security (see Chapter 11).
89
Case questions
1 Why have trans-European networks proved so difficult to build?
2 Is it fair to argue that there is no clear rationale for an EU level competence in the development
of infrastructure?
from the logjam created by decision making based The commercial effects of
on harmonisation of national standards. It meant the initial SEM programme
decisions could be made speedily and applied
promptly within the context of a readily under- The 1988 Cecchini Report estimated substantial
stood framework. Since 1992, the total body of gains from the creation of the SEM both within
directives linked to the completion of the SEM individual sectors and the economy as a whole.
has risen from 1291, in 1995, to over 3,000 direc- In terms of the sectoral effects (derived from
tives and regulations by April 2014. the removal of barriers to trade, economies of
The prioritising of the SEM by the EU has scale, competition and other barriers limiting
implications for other complementary, or ‘flank- production), Cecchini estimated that the SEM
ing’, policies, notably: would add 4.3–6.8 per cent to the Commu-
nity’s GDP. In terms of the broader economic
■■ the requirement for the EU’s competition pol- picture, it was estimated that the SEM would
icy to ensure a level playing field for the busi- create nearly two million extra jobs and have
ness community (see Chapter 6); positive effects on fiscal and external balances
■■ a more effective regional policy to counter as well as inflation. Overall, the impact of mar-
any regional imbalances that result from the ket integration is difficult to judge. Inevitably,
advent of the SEM; the impact of the SEM is directly related to the
■■ the development of an appropriate social extent to which the legislation has actually been
dimension to prevent any erosion of social implemented (see Table 5.1). After nearly two
rights that may arise from the development of decades, it is apparent that the impact of the
the SEM (see Chapter 14). SEM has been felt on both a micro- and macro-
economic level.
In addition, the regulatory framework for the Harrison et al. (1994) are more circumspect
SEM has to be consistent with economic reform about the effects of the SEM than the over-
and the delivery of a more competitive European whelmingly optimistic contribution of the Cec-
economy. Overall, it is important to recognise chini Report. These authors quantified the direct
that the SEM will not be realised by Community effect of the SEM at just 0.5 per cent of GDP
legislation alone. Some form of alignment needs with longer terms effects of around 1.2 per cent
to take place across national legal structures and of GDP. Moreover in estimating the benefits of
administrations, attitudes and behaviour of mar- full integration, they estimated that the biggest
ket participants and (as suggested above) the winners (around 6 per cent of GDP) were the
adjustment of complementary policies at both smaller member states with high EU trade inten-
Community and member state levels. sity such as the Benelux countries. The gains were
90
Table 5.1 The 12 levers of the new Single Act
Lever Key action

Access to finance for SMEs Legislation to make it easier for venture capitalists established in the EU to
invest freely in other member states
Mobility for citizens Legislation modernising the system for recognising professional qualifications
Intellectual Property Rights Legislation setting up a unitary patent protection and litigation system
Consumer empowerment Legislation on alternative dispute resolution
Services Revision of legislation on the European standardisation system
Networks Energy and transport: identification and roll-out of strategic projects of Euro-
pean interest to ensure interoperability and interconnection
Digital Single Market Legislation ensuring the mutual recognition of electronic identification and
authentication across the EU. Review of the directive on electronic signatures
Social entrepreneurship Legislation setting up a European framework facilitating the development of
social investment funds
Taxation Review of the Energy Tax directive
Social cohesion Legislation to improve, reinforce, transpose, implement, enforce and clarify
the exercise of freedom of establishment and the freedom to provide services
alongside fundamental social rights
Business environment Simplification of accounting directives
Public procurement A revised and modernised public procurement legislative framework
considerably more marginal (around 2 per cent Costs of the SEM

and lower) for other states.
The impact of the SEM varies across states There are also costs associated within the imple-
depending on: mentation and evolution of the SEM programme.
These can come through two channels – adminis-
■■ intra-EU trade intensity: logically the greater the trative and adjustment costs.
share of GDP contributed by intra-EU trade,
the greater the benefits of the SEM; 1 Administrative costs These can stem from over-
■■ size of the country: following on from the above, regulation, inefficient bureaucracy and inap-
the benefits of the SEM tend to be greatest for propriate allocation of tasks between different
smaller states; administrative levels, all of which can impose

■■ industrial competitiveness: the more competitive direct costs upon businesses. In theory, the
the export sectors of a state the more it will rise of the SEM should create administrative
benefit from the SEM; efficiencies by creating a one-stop shop for
■■ economic structure: those states with a speciali- standardised regulation. However, if standards
sation in industries with rising economies of are geared towards minimising adjustment for
scale will benefit more from the SEM; the majority of states rather than developing
■■ degree of liberalisation: those states that undergo the most efficient standards, then losses can
more radical liberalisation will benefit more undeniably emerge. Moreover, the principle of
from the process of market integration. subsidiarity suggests that decisions should be
91
made at the level of greatest efficiency. This is 2 Adjustment costs The costs of the SEM are greater
not always adhered to. It has been estimated for those locations whose companies are less
that total administrative costs for companies competitive than those of their foreign rivals.
are equivalent to 3.5 per cent of EU GDP. This These costs are often temporary as domes-
figure varies markedly across states: the more tic firms are forced to adjust to more efficient
efficient Northern EU states average admin- rivals from partner states. As a means of mitigat-
istrative costs of less than 2 per cent of GDP ing these adjustment costs, the EU established a
whereas in the Southern EU states, this figure Cohesion Policy but there is scant evidence that it
is above 4 per cent. has generated any significant stimulus to growth.
Concerns over the SEM

Box 5.2
When developing its new strategy for the SEM, the European Commission had to identify the main
problems with the existing programme and to determine how and why the programme had appeared to
lose some of its popular legitimacy. The Commission concluded that diminishing support for the SEM
was attributable to three non-exclusive factors.
1 Temporal concerns
Before the financial crisis erupted in 2007–8, there was already evidence of integration fatigue. The
sharp rise in labour mobility, the failure of the SEM to live up to expectations and the ambivalent
attitude of member states all contributed to this integration fatigue. The crisis brought many of the
principles of the SEM under duress and, although it survived, the crisis highlighted how vulnerable the
SEM is when it has not taken root in the mindset of EU governments and citizens. As a consequence
of this integration fatigue, there is likely to be less support for market integration in the longer term.
2 Interest group concerns

These concerns fall into six categories. First, incumbents have concerns over the impact on profits
of market opening. Incumbency advantage has led to companies lobbying to limit the impact of the
SEM through regulatory capture and effective non-market strategies. Second, consumers (see Chap-
ter 9) often feel neglected by the process which can seem to offer them few benefits and may actually
be seen as harmful to their interests. Third, citizens are often unable to enjoy fully the supposed rights
brought by the SEM, thereby potentially alienating them from the process. Fourth, social concerns
arise from fears of social dumping or that mobility may erode wages or rights for indigenous workers
(see Chapter 14). Fifth, there are environmental concerns arising from how the mobility facilitated by
the SEM impacts on climate change and sustainability. Finally, business, although generally a strong
supporter of the SEM has concerns about removal of remaining obstacles to the programme, the
burden of SEM legislation, and – in the case of larger business – the impact of the external dimen-
sion of the programme.
92
3 Concerns in member states

These concerns differ across types of member states. Social market economies tend to be less enthusi-
astic about the programme due to social concerns and have been suspicious of the neo-liberal agenda
embedded within the programme. Anglo-Saxon states have been a driving force in the SEM as it is
consistent with their variety of capitalism but have been reluctant to adopt the social elements of the
programme. New member states have also been strong advocates of the SEM, seeing it as a method of
catch up with Western economies but adoption of the programme and related principles has not been
painless. Finally, Nordic states have balanced strong social protection with the open markets of the
SEM and are seen as role models for other states (see Chapter 1).
The economic effects Growth

of the SEM
In its 20 year appraisal of the SEM, the European
The full effects of the SEM are difficult to gauge as Commission – unsurprisingly – lauds its major
many of the benefits are dynamic and occur over a impact upon the EU’s macro-economy. For exam-
protracted period of time as industry responds to ple, in terms of growth, the EU estimates that the
the new freedoms and the opportunities created EU’s GDP in 2008 was 2.13 per cent higher than
by the process. To date (2015), the main impacts it would have been without the SEM, amount-
have been as follows: ing to around €500 per capita. These gains were
driven not only by the SEM programme but also
by linked measures such as the liberalisation of
Moderate effects on GDP network industries and enlargement.
While there is a broad consensus on the positive

impact on GDP of the SEM, these effects have Price effects – mixed evidence
been less than the optimistic forecasts offered
within the Cecchini Report. Strahoof et al. The evidence that margins have been as squeezed
(2008) examined the period between 1959 and as anticipated is mixed. On average, manufactured
2005 and concluded that the SEM has boosted EU goods have seen margins squeezed as a direct result
GDP by 2 to 3 per cent. Again, these effects were of the SEM. Moreover, intense competition has led
greater for the smaller, more open states. Boltho to enhanced innovation and stronger productivity
and Eichengreen (2008) estimate that these ben- growth. However, evidence suggests that mark-ups
efits amount to around 5 per cent of GDP for in the service sector have actually risen.These trends
the whole EU and that the impact of the SEM has highlight the pivotal role of competition policy in
been relatively small. Ilzkovitz et al. (2007) sug- the process of an effective SEM (see Chapter 6).The
gest that the SEM contributed an additional 2.2 SEM has led to some convergence of price levels in
per cent to GDP between 1992 and 2006: once household goods. These effects are due not only to
the expansion to Central and Eastern Europe is competition effects but also to rising incomes; this
stripped out, the figure falls to 2 per cent. has been especially evident in those states with lower
93
per capita incomes. These effects were especially by 28 per cent with external agents investing
pronounced across the EU-27 in the mid-to-late 14 per cent more inside the SEM than in compara-
1990s with the accession of the Eastern European ble states. Intra-EU FDI has also increased markedly,
states which reflected – in part – a catching up pro- rising from €64 bn in 1992 to €260 bn in 2010 –
cess in Greece, Spain, Portugal and Ireland. however, it did peak at €730 bn immediately prior
to the economic crisis that began in 2007–8.
Large impact on trade

Employment effects
There is consensus on the positive impact that the
SEM has had on intra-EU trade. Between 1992 Ilzkovitiz et al. (2007) argue that the SEM has
and 2012, intra-EU trade intensity increased increased employment by about 1.35 per cent – a
from 12 to 22 per cent of EU GDP with exports figure that is in line with other research. The Euro-
to non-EU states growing faster than intra-EU pean Commission estimates that in 2007, 25 million
exports. This reflects the broader trend of the jobs (10.3 per cent of the total) were dependent
global opening of the international trading sys- upon exports to non-EU states and that nearly two-
tem. Straathof et al. (2008) estimate that trade thirds of these were in manufacturing. A total of
is around 8 per cent higher than it would have nine million jobs came from trade in inputs within
been had there been no integration. Again, these SEM-based value chains and which are processed
effects tend to be strongest for the smaller open into products that go into the SEM and beyond.
economies. Overall, it is estimated by the EU
that nearly 10 per cent of jobs (21 million) are
dependent upon EU exports with one-quarter Labour mobility evolves slowly
of these jobs located outside the main export
market with exporters drawing on a network of Actual labour mobility has been limited despite the
resources across the EU. Moreover exports to freedom of movement allowed (see Chapter 14).
non-EU states have also increased threefold over Indeed by 2004, only 2 per cent of EU citizens
the 20 years to 2011. These extra-EU exports were working in other EU states. This situation
now account for 12 per cent of GDP (up from changed markedly with the 2004 enlargement as
8 per cent in 1992). vast income disparities created strong incentives
for mobility. Due to fears of spikes in migration,
most pre-2004 member states only introduced
Foreign direct investment labour mobility gradually.Those that did allow full
migration saw a surge in migration from Central
At the beginning of the SEM initiative in 1985, and Eastern Europe. Indeed, 70 per cent of migra-
FDI within the EU was less than 1 per cent of tion from the 2004 accession states went to the
GDP. Currently, FDI stands at around 5 per cent UK and Ireland whereas 80 per cent of Romanian
of EU GDP, with the total stock of FDI rising and Bulgarian migrants went to Spain and Italy.
twentyfold since the onset of the SEM. This is Across the entire EU-28, the number of EU citi-
a global trend of which the SEM is but one fac- zens working in another EU state has doubled to
tor. Nonetheless, Straathof et al. (2008) estimate 3 per cent. Moreover, as a result of the economic
that EU membership boosts bilateral FDI stock crisis, there have been new flows of migrants with
94
Southern Europeans moving north and Irish citi- industries, there have been two major new policy
zens restarting their long history of emigration. initiatives. The first, in 1997, was the Single Mar-
These macro-economic impacts were measured ket Action Plan and, in 1999, the Financial Services
prior to the 2007–8 financial crisis which saw the Action Plan. However, it was felt that the focus of
EU’s GDP fall by €700 bn between 2008 and 2009 states – as the millennium approached – was else-
followed by a recovery of €500 bn in 2010. Moreo- where, market integration was incomplete and that
ver, the crisis resulted in five million people losing states were reluctant to submit fully to implications
their jobs between 2008 and 2010 and a fall in intra- of capital liberalisation. These would come back to
EU trade in goods by 15 per cent and in extra-EU haunt Europe when the euro crisis took hold.
exports by 12 per cent over the same period. Inward Despite the LisbonTreaty stimulating a renewed
FDI also fell by over €500 bn in 2009 and external emphasis on the SEM, member states were still
FDI outflows fell by €420 bn. In short, the crisis reluctant to complete the process, even though
seemed to wipe out many of the macro-economic the issue of competitiveness was at the heart of the
gains made by the initial impetus from the SEM. crisis itself and called for more market integration.
These short-term considerations aside, the This call for a renewed emphasis on the SEM was
SEM has overall failed to live up to expectations. further enhanced by the progressive enlargement
One possible reason for the divergence between of the EU. These internal factors were also com-
expectations and reality could be the declining pounded by more generic influences, namely:
importance of manufacturing to the EU economy
at a time when services have grown in significance. ■■ globalisation and the rise of the BRIC states;
The former has greater scope for both economies ■■ the technological revolution, notably the
of scale and trade than the latter. This reflects – in spread of the internet;
part – the unrealistic expectations that accompa- ■■ the growing importance of services;
nied the programme from the outset and a one- ■■ the rise in the political salience of
sided focus on its benefits by SEM enthusiasts. environmentalism.
Furthermore, many of the costs of the SEM have
eroded the benefits of the programme and there In addition to these generic challenges to the
were unrealistic assumptions about the degree SEM, the following factors more closely linked to
to which the SEM would promote price conver- events in or around Europe itself were also at play:
gence with much research ignoring the salience
of non-price competition between EU firms. ■■ enlargement;
Product differentiation, for example, can create the collapse of the Soviet bloc;
■■
market power for a firm that will be unaffected by ■■ greater economic diversity;
the competitive forces unleashed by the SEM. The ■■ the introduction of the single currency;
capability of the firm to develop regional pricing ■■ increasing migration;
strategies that reflect different customer prefer- ■■ the emergence of multi-speed Europe.
ences across Europe have also been neglected in
assessment of the potential impacts of the SEM.
After 1992, the SEM was developed and built Gaps in the SEM
upon. While there were many specific initiatives to
consolidate the initial programme and to extend After two decades, unresolved SEM issues
its principles to emergent activities in different remain, both within the initial programme and
95
in the form of others that have emerged during incompleteness of the mutual recognition of
the course of the project. It was always the case qualifications, especially for vocational skills.
that the SEM is a long-term project of which the The issue is further complicated by bilateral
Single European Act was an important but only tax rules and the retention of pension earned
a partial measure. The creation of a true single abroad in some cases. Access restrictions and
market takes time as labour mobility, consumer the variable regulation of occupations also rep-
behaviour and industrial restructuring evolve resent a barrier to labour mobility: profession-
only slowly. It is evident that –compared to the al services in particular are treated unevenly
US – borders still matter within the EU. For throughout the EU.
example, trade between US states accounts for ■■ The increasing importance of services The EU
40 per cent of GDP but only 20 per cent between is becoming an increasingly service-based
EU states. This reflects a continuing ‘home bias’ economy yet restrictions on trade in services
that has changed little over 20 years. Given the remain. Services generate 70 per cent of EU
cultural and linguistic divergence within the EU, value-added but their share in the increase
which has only been sharpened by enlargement, of EU trade is only 20 per cent. This may, in
this should come as little surprise. The following part, be due to the non-tradability of some
offer some scope to provide greater market inte- services, especially those that are produced
gration in Europe. and consumed locally. However, strategic
and commercial change means that many ser-
■■ The extending deregulation and harmonisation vices are now tradable and, despite the Ser-
While progress has been made in reducing vices Directive of 2006, significant barriers to
product regulation, big differences persist intra-EU trade remain given the resistance of
among EU states. Some, such as the UK and some member states to the full implementa-
the Netherlands, have a low intensity of regu- tion of this directive. Moreover, the long list
lation compared to others whereas it remains of exceptions to the legislation also water
high in France, Germany and Italy. In short, down its effectiveness. As a result, the leg-
best practice has still to spread throughout islation focuses mainly on business-related
the EU. services, real estate, wholesaling, retailing,
■■ Public procurement Despite being a key objec- construction, tourism and entertainment
tive of the initial SEM programme, liberali- which account for 40 per cent of EU GDP.
sation of public procurement has some way Key sectors such as finance, transport, post,
to go: between 2006 and 2010, only 3.4 per telecommunications and healthcare were
cent of all EU public contracts were awarded excluded from the process. Moreover, the
to non-domiciles. Generally, smaller states slow implementation of the directive has also
are more open than larger states. However, hampered the process.
this is often due to the absence of indigenous ■■ Energy markets Liberalisation of energy markets
firms able to supply the products rather than has been a long-term EU objective (see Chap-
to the operation of a non-discriminatory ter 11) that has sharpened in strategic impor-
policy. tance by recent events in Russia and by the
■■ Cross-border mobility Despite recent progress potential impact of US shale reserves on the
on this issue (see Chapter 14), some bar- competitive position of European business.
riers to full mobility remain through the The aim is to not only to free the supply of
96
Case Study 5.2

The single market and the euro crisis
One of the least acknowledged side-effects of the euro crisis (see Chapter 8) is its potential impact
on the Single European Market. These effects arise from the nature of the problem itself and from
the solution many states are advocating to the crisis. The European Commission has become increas-
ingly aware that the SEM is less popular with Europeans than ever before and might in some way be
responsible for some of the problems resulting from the euro crisis. In the run up to the euro crisis, the
SEM exhibited diminishing momentum and – as other sections of this chapter show – there are large
gaps in the programme that need to be filled for it to realise its full dynamic potential. There is a fear
that the one of the longer term fall-outs from the euro crisis is that it could discredit the liberal market
philosophy that underpins the SEM. This is especially pertinent given that the liberalisers of the EU
(the UK, Nordic and some of the Central and Eastern European countries) are no longer setting the
direction of the European project.
Dullien (2012) argues that the SEM has been fundamentally altered by the euro crisis. In prac-
tice, the effects of this crisis depend upon how the situation resolves itself. At the time of writing in
2012, Dullien outlined a number of possible scenarios, a couple of which seem less likely. It is evident
that if a state is forced to leave the euro, the consequent impact on business and the SEM from the
re-introduction of national currencies would be massive. While the euro crisis temporarily increased
political and economic risk across the EU – with the related effects on intra-EU trade, investment
and mobility via the renationalisation of economic activities – this effect would be short-lived. In the
absence of a break-up, Dullien argued that the second worst outcome would be for the EU to muddle
through with no strong move to fiscal union. In this scenario, financial integration would be revered,
leading to the re-emergence of a fragmented capital market, limiting innovation and creating divergent
monetary conditions across the EU. This would also be compounded by greater resistance to the free
movement of people as a result of the stagnation that would result from such a limited approach. In
short, it is argued that the SEM would still have an extensive reach but would be shallower.
The final – and less risky option for the SEM – is deeper fiscal integration, creating a fully fledged
banking union based on a system of mutual support between the respective states. While such move-
ment towards a federal solution to the euro crisis may deliver benefits in terms of growth potential
through lower interest rates, it also pose risks for the SEM. The most immediate fear is that such a
process would effectively formalise a two-speed Europe with some states (notably the UK) left on the
periphery. It is implied within the new supervisory arrangements for the eurozone that the new govern-
ance system will apply to non-euro states with the implication that failure to adopt this arrangement
would limit the ability of non-compliant financial institutions to do business in the eurozone. Conflict
could also emerge via the financial transaction tax that will be levied on banks to pay for bank rescues.
If some states do not participate, this could lead to losses of revenue, creating political pressure for
either compensation or capital controls to limit evasion. This risks turning already Eurosceptic states
further against the EU. The outcome for the SEM would be that deeper integration in the core would
97
lead to disintegration in the periphery and shrink the SEM. Dullien argues, however, that this is the least
likely of the options.
However, any diminution of EU power could erode its efficacy and influence in global trade negotiations
and international economic policy coordination. If the SEM does shrink in size, it becomes less attractive
for other states to conclude deals with it. Although it has not been at the forefront of policy makers’ minds,
there clearly is a need to consider what the implications are for the SEM of the strategies followed by the
EU in its attempt to resolve what, at some levels, can be termed an existentialist crisis. These are issues
not just for eurozone states but also for non-euro EU member states who need to consider how much they
are prepared to become detached from the core – a prospect which is of great concern to business. How
the interplay between the SEM and the euro crisis turns out will be driven by the capability of business to
defend its interests against a background of rising scepticism about the benefits of European integration.
Case question
To what extent is more rather than less free market the best solution to the euro crisis?
energy across borders but also to ensure that multi-scalar nature of TENs, national thinking in
infrastructures are interconnected to support the design and development of infrastructure still
broader security of supply issues. Much pro- predominates.
gress has been made but the process is still not
complete.
■■ Transport markets A single market in transport SEM implementation
was always part of the SEM (see Chapter 10).
Over the years, the single market transport The EU publishes an annual scoreboard indicat-
remit has been extended to cover all transport ing progress towards the SEM in line with the
modes. Rail has proved to be the most difficult four fundamental freedoms identified above and
to liberalise and has encountered resistance in related areas such as taxation, employment and
from incumbents who are resistant to the pro- social policies as the SEM legislative programme
posed separation of service and infrastructure extends beyond the original 280 pieces of leg-
provision. islation. Indeed, it now concerns nearly 3,000
■■ Infrastructure The need for physical links to sup- directives and regulations. Those states with the
port the legal access to other European markets highest number of infringement cases against
granted by the SEM has long been accepted them are all in Southern Europe – namely, Italy,
and underpins the TENs initiative (see Case Spain and Greece. The most compliant are the
Study 5.1). However the sums needed to real- Baltic states. Figure 5.1 highlights the main areas
ise these networks are vast (around €1 tril- in which infringement cases were pending as of
lion between 2014 and 2020) – most of which November 2013.
most come from outside the EU at a time of The Commission received the largest
limited capacity for increased public spending number of complaints in relation to the free
in many parts of Europe. Moreover, despite the movement of goods from the automotive,
98
pharmaceutical products and food sectors. . right to provide services remained in the state
Moreover, the Commission suspects that states of destination, resulting in a weakening of ser-
have not notified it of all decisions whereby vice liberalisation.
they deviate from the principle of mutual rec-
ognition – as they are compelled to do by law.
There is also an evolving caseload in e-com- Relaunching the
merce where – contrary to popular belief that single market
such trends would make international trade
easier – there is a strong home bias. However, Within the context established of the euro crisis
there is little evidence to suggest that this is and the emergent issue of legitimacy for the Euro-
due to discrimination. pean project among the citizens of Europe, the EU
The legislation with regards to services is sought to build upon what has arguably been its
considerably less advanced and significant price greatest success. The agenda for the relaunch of
divergence persists. In 2000, a services strat- the SEM seems distant from the embedded neo-
egy was proposed with a view to removing the liberalism of the initial programme as the strat-
many barriers facing services in the broader egy has been re-focused on the broader growth
European environment. The resulting Services agenda as encapsulated within the Europe 2020
Directive in 2004 initially proposed the prin- programme (see Chapter 1). Embedding the SEM
ciple of mutual recognition in this area but this within this agenda suggests a sustained confidence
was strongly opposed and the country of ori- in freer markets as the main growth generator for
gin principle was rejected and control over the the EU – despite the widespread disillusion with
180
160
140
120
100
80
60
40
20
0
Direct Taxation
Indirect Taxation
Water Protection
Air Transport
Waste Management
Health and Consumers
Inland Transport
Services
Social Security/Mobility
Justice/Non-discrimination
Environment
Air Pollution
Agriculture
Free Movement of Goods
Public Procurement
Other
Figure 5.1 Open infringement cases (as of November 2013)

Source: EU Commission, DG Internal Market.
99
Case Study 5.3

A single market for Intellectual Property Rights (IPR)
Given that innovation is at the core of the Europe 2020 programme (see Chapter 1), the EU has sought
to prioritise the protection of IPR. In 2013, an estimated 26 per cent of EU employment (57 million
jobs) and 39 per cent of its GDP were in IPR-intensive industries. Indirect employment effects of the
IPR industries brought the total employment related to these industries up to 35 per cent of total EU
employment. More generally, over half of all EU industries can be considered IPR-intensive. While all
industries to a greater or lesser extent use some element of IPR in the production process, it is the
IPR-intensive ones that are the focus of EU strategy. Of these firms, 21 per cent are in trademark indus-
tries; 12 per cent in design-intensive industries; 10 per cent in patent-intensive industries, with smaller
amounts in copyright and GI (geographical indications)-intensive industries. In addition, wage premiums
are higher in IPR sectors with wages 41 per cent above average. Finally the bulk of EU trade is in IPR-
intensive industries and makes up a higher share of EU exports than imports. Overall, over 90 per cent
of EU exports and 88 per cent of its imports are in IPR-intensive activities. However, the EU runs a
trade deficit in IPR-intensive activities: in 2013, this deficit was €174 bn or 1.4 per cent of EU GDP.
To further support the development of these industries, the EU has proposed the creation of a single
market for IPR. The focus of this strategy is incentivising innovation which, in turn, is anticipated to
boost investment. The EU argues that the current European environment for IPR is very fragmented
with spatial variation across the continent in aspects such as the high costs of licensing transactions.
Problems have also been created for innovators, users and consumers by complexity and legal uncer-
tainty. Moreover, technological change places strains on existing rules as the way products are devel-
oped, produced and consumed is altering. In addition, the enforcement of IPR within Europe and at its
borders is highly variable. This is especially the case where the EU’s enforcement framework has not
been updated to take account of the digital environment. Moreover, it is evident that in global cyber-
space these issues have a multinational dimension.
Actions in the area of a single market in IPR start with an effective framework of patent protec-
tion and litigation. The aim of these measures was to militate against the existing system, which is
complex, fragmented and costly, and to unify the system to avoid the costs of multiple filings. The EU
also proposes to modernise the trademark system across Europe. While mutual recognition of national
trademarks and a Community trademark exist, there is still work to be done in terms of making the
system more efficient, effective and consistent. Digital copyright is also to be supported by a single,
comprehensive framework. This is to be based on greater uniformity in areas such as copyright govern-
ance, technology and database management, user-generated content, private copying levies, access to
online cultural/heritage assets as well as ensuring rights for performers in relation to audiovisual works
and resale rights. Another initiative is related to the complementary protection of intangible assets – an
issue which often falls into the grey areas between IPR and other areas of the law. Items falling into this
category include trade secrets and non-agricultural geographical indications where national laws are
highly variable. A further area of action lies in the coordinated fight against counterfeiting and piracy
100
where the EU has started to develop a common legal framework as a means of allowing rights owners
to seek redress for copyright infringement. The Commission is also aware that this must be supported by
schemes to promote public awareness of the issue. The final element of the strategy is to use the SEM
in IPR as a platform for international action on the issue. This will involve action with other states on
the coordination of IPR frameworks on an international basis and also offer support for states that are
outside such agreements or where their legal systems are less mature in this respect. The system will
also seek greater protection for European IPR at the EU’s borders.
Case question
Select an industry for which IPR is important. Identify how this industry can be harmed by failure
to protect its intellectual property and how it might benefit from the EU’s IPR strategy.
Anglo-Saxon neo-liberalism in the aftermath of ■■ sustainable growth: the promotion of market

the global financial crisis. According to the Com- reforms to support sustainable development
mission, the relaunch faced three challenges: through aiding social, economic and environ-
mental progress;
1 the erosion of political and social support for ■■ smart growth: to aid progress towards the
market integration; development of a knowledge economy;
2 the uneven policy attention given to the devel- ■■ inclusive growth: that is, growth that perme-
opment of various components of an effective ates into all levels and segments of the Euro-
and sustainable SEM; pean economy.
3 the sense of complacency that emerged based
on the erroneous belief that the SEM was These levers were supported by a set of 50
complete and could be retired as a political complementary actions to build on the political
priority. momentum provided by the themes within the
New Single Act. It was hoped that these measures
In developing a new strategy for the SEM – would be implemented by 2012 as a means of cele-
and in reflection of the above concerns – there brating two decades of the SEM.This target was not
was a need for a stronger SEM based on consensus met: only 36 of the 50 proposals were presented,
and with a greater emphasis on delivery. despite all 12 of the core actions having been tabled.
In practice, the relaunch of the SEM was an The translation of this new agenda into effec-
attempt to keep the momentum going behind tive policy measures depended upon four condi-
the SEM. To this end, the Commission identified tions being met, namely:
50 proposals which – after consultation within
business and consumer groups – were whittled 1 the involvement of civil society and the pro-
down to 12 ‘levers’ to form the basis of a new motion of a culture of evaluation to ensure that
Single Market Act (Table 5.1). These levers were all stakeholders are involved in the process and
designed to be consistent with the main themes of that its effects are seen to permeate the EU
the Europe 2020 strategy, namely: socio-economic strata;
101
2 the creation of partnerships and the encour- (as of 2014) is not needed to be added to in the
agement of cooperation (especially between next phase in any great numbers. However, there is
member states and the European Commission) growing pressure for the EU to choose regulations
to ensure that all are involved in the decision- over directives (the latter currently account for 80
making process to help establish greater legal per cent of SEM rules) as the former have more
certainty; clarity, predictability and effectiveness. This is not
3 having the necessary information to facilitate possible in all cases and so can only be used when
better implementation of SEM rules and to the legal conditions allow. Moreover, there has to
enable stakeholders to know their rights and be a commitment from member states to imple-
to be able to enforce them; ment the necessary legislation. In 2014, the trans-
4 a level playing field for uniformly applied position deficit (that is, the difference between
rules to ensure national barriers are ultimately the rules agreed and those implemented) is 0.7
removed. per cent – the lowest level ever. Despite this, the
impact of the SEM remains patchy with over 70
Delivering a stronger SEM requires an adjust- directives yet to produce their expected effects.
ment of the process. The Commission itself recog- Moreover 55 per cent have not been implemented
nises that a number of changes need to take place. by their deadline. This decentralised system of
The regulation of the SEM through the acquis com- member state enforcement is the cause of this and
munautaire of 1,521 directives and 976 regulations does require stronger central enforcement.
Table 5.2 The key drivers of the Single Market Act II
Drivers
Developing fully Fostering the mobility Supporting the digital Strengthening social
integrated networks of citizens and business economy in Europe entrepreneurship, cohesion
across borders and consumer confidence
Key Actions
Open domestic rail Develop EURES Make online payment Improve coherence and
services to operators portal to aid EU-wide services more enforcement of product
from other member job placement and efficient safety and market
states recruitment tool surveillance rules
Establish a true single Facilitate access by Enable the Enable all EU citizens to
market for maritime businesses to long-term efficient deployment have access to basic payment
transport by remov- investment funds of advanced account, ensure bank account
ing internal barriers to information fees are transparent and
intra-EU movement infrastructures comparable and make
switching bank accounts easier
Speed up implementation Modernise EU insolvency Make electronic
of the Single European rules to allow second invoicing standard for
Sky chance for entrepreneurs public procurement
Improve implementation
and enforcement of cross-
border energy markets
102
The end point of these debates was the formal businesses. The Commission seeks to do this
launch by the Commission in 2012 of the Single by focusing on four of the key levers identified
Market II (SMA II). The document marks the next above (see Table 5.2).
formal phase of the SEM and brings together a
set of policy initiatives within a single strategy.
The narrative of the SMA II is shaped less by una- Conclusion
bashed confidence in markets and more by a need
to act as a growth stimulus. As such, the SMA II The SEM forms the cornerstone of the process
is very much to be treated as part of the broader of European integration and links into many of
growth package proposed by the Commission. other grand schemes relating to the EU project.
However, the context of the strategy is that – In particular, the SEM provides the platform for
given the constraints imposed by fiscal austerity – EMU as well as for the broad-based competitive-
supply-side action is necessary to secure the ness theme that has become embedded within
longer term objectives of growth and sustainable many policies. However, progress towards the
employment. completion of the SEM has been chequered. As a
Building on the 12 levers approach, SMA result, the Commission has relaunched the
II offers a further set of priority actions SEM, seeking – within the context of its growth
designed – so the Commission hopes – to strategy – to add a renewed political and eco-
generate real effects for both consumers and nomic impetus to the process.
Key points
■■ The SEM programme seeks to unify fragmented national markets into an integrated whole.
■■ The EU will only truly be a SEM when all goods and services that can be traded are traded
across Europe.
■■ There has been a perceived loss of consensus on the benefits of the SEM.
■■ The EU has relaunched the SEM to address these concerns and to add impetus to market
integration.
Activities
1 Research one sector and assess how it has been affected by the development of the SEM.
2 Working as a group, assess how either the rail or the airline sector has been impacted by the SEM
(Chapter 10 will help you with this).
3 Using the example of one non-EU European state, assess how it has been affected by the development
of the SEM.
103
1 How has the advent of the SEM affected the process of European integration?
2 Explore, with examples, how the SEM has changed the behaviour of European firms.
3 Do you agree with the sentiment that the financial crisis of 2007–8 has eroded many of the benefits of
the SEM?
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104
Chapter 6
European competition policy

The guardian of integrated markets
Competition is a painful thing, but it produces great results.

Jerry Flint (1931–2010), journalist on Forbes magazine
■■ appreciate the importance of competition for the competitive positioning of European business;
■■ identify the main competition provisions of the EU treaties;
■■ understand the form and nature of the reform of EU competition policy;
■■ identify a new and emergent theme in the EU’s competition policy agenda;
■■ comprehend the international aspects of EU competition policy.
A prevailing belief within modern capitalism is that in a particular sector collude to raise prices above
nothing is better for competitiveness than compe- the competitive market rate. The initial focus of
tition itself. For this reason, competition policy this chapter is to examine the perceived benefits
is integral to state involvement in the economy. of competition. It looks at traditional economic
States use competition policy to attain the desired thinking before moving on to examine the role
intensity of competition by establishing a series and shape of competition policy. Thereafter, the
of rules and regulations which limit the ability of themes and form of competition policy within the
enterprises to operate in a manner which is con- EU are explored. The chapter then examines the
trary to this objective. In other words, states aim processes of change that are affecting competition
to prevent and punish behaviour that results in policy development within the EU, notably trends
anti-competitive harm, such as when enterprises towards European and global integration.
105
The basis and form of that monopolies are not necessarily detrimental if
competition policy they are not accompanied or supported by insur-
mountable barriers to entry. This is important for
Economic theory presents competition as a social it implies potential competition has as big a role to
good and its maintenance is regarded as pivotal in play within market structures as actual competi-
ensuring efficiency gains, both within enterprises tion. Knowing that other firms have the right and
and in the economy as a whole. This improved effi- ability to enter the market should act as a constraint
ciency is expressed in many ways: first, in terms upon the actions of incumbents even if they hold a
of prices which are expected to fall as competition monopoly position. This challenge to the tradition-
intensifies; second, from the pressure for greater al policy stance has been supported by the gradual
cost efficiency within enterprises; and third, from erosion of the notion of ‘natural monopoly’ (see
the greater choice of goods and services which Chapter 11). Competition is increasingly possible
arise as more firms enter a particular market. and prevalent within sectors previously regarded as
While policy seeks to increase the intensity of naturally monopolistic, whether it is through bid-
rivalry between enterprises, thereby driving prod- ding for a franchise (as in the case of the UK rail
uct and process innovation which in turn fuels sector) or where services are provided in a compet-
competitiveness, it may also be regarded by an itive manner over a commonly owned infrastruc-
enterprise as a threat to its future survival in the ture (as witnessed in many of the network sectors).
market. Enterprises may try to counter this threat In line with the structure-conduct-performance
through cooperation, thereby avoiding deadly com- (SCP) paradigm that has dominated industrial eco-
petition, or by taking over a rival and thus not only nomics since the 1980s, the ability of policy to
removing the threat but also benefiting from the influence the performance of business comes from
acquired enterprise’s assets and the increase in its measures that alter market structure or amend
market share. Of course, an enterprise may deal firm behaviour. In either case, the effect should be
with the threat by requesting a subsidy from its gov- an impact on firm performance that works to the
ernment, termed state aid, thereby giving itself an benefit of the economy. As a consequence, there
advantage relative to its rivals who do not receive are two broad types of competition policy:
such aid. Clearly these actions run counter to the
SEM’s objective of increasing competitive intensity. ■■ form-based: where the analysis of competition
Competition policy has traditionally been based is based on an examination of objective, often
upon the notion that the larger the number of firms quantitative, criteria such as market share or
in a market, the greater the benefits to the economy structure;
concerned. This stance was inevitably corrupted as ■■ effects-based: where the examination of compe-
the state started to play an increasingly prominent tition is based upon the effects of the actions of
role within the economy.This traditional viewpoint enterprises within the sector concerned.
was based upon the premise that, aside from state
control, monopolies are always and everywhere
bad. Thus, where monopolies were deemed to be The core features of EU
‘natural’, as was the case for many of the network competition policy
sectors, there was a strong case for state own-
ership. This position has been increasingly chal- Competition policy in the EU takes effect at both
lenged as policy makers have started to realise national and supranational levels. In other words,
106
both the EU and member states require competi- businesses (in compliance) and for the regulators
tion instruments to vet cases that fall within their (in administering).
respective jurisdictional domains. Moreover, a Measures within the EU’s competition policy
jurisdictional or subsidiarity test is required to reflect, in both a reactive and proactive man-
determine if a case falls under EU or member ner, the dynamic inherent within the integra-
state law. EU competition instruments include tion process. These rules seek to ensure that the
such a test, though the nature of the test is not actions of all operators, whether publicly owned/
necessarily consistent across these instruments, it controlled enterprises or private businesses, are
may be effects-based (Article 101 and 102 TFEU, compatible with the objectives of the free and fair
for example) or form-based (European Com- competition encapsulated within the SEM pro-
munity Merger Regulation). This then begs two gramme. Thus policy (as identified in Box 6.1)
questions which will be later addressed. First, has the ability to liberalise protected markets, to
who will apply the EU competition law: will it remove competitive distortions sourced from the
be the European Commission’s Competition state and to curtail the activities of enterprises
Directorate in Brussels, a member state competi- that abuse dominance or seek, via collaboration,
tion authority or a national court – clearly, it is to limit the intensity of competition.
important for an enterprise to know with which Within the context of the Treaty of Rome, EU
authority it is dealing? Second, do only EU enter- competition policy was an instrument to achieve
prises and the EU subsidiaries of foreign-based the specified objectives of balanced development,
MNCs come under EU competition instruments, free trade and harmonious growth. The Treaty on
or does EU competition law have extraterritorial European Union has broadened these objectives
reach – does it apply to the actions of foreign- to include social and environmental concerns as
based enterprises? well as the evolving priorities of the EU’s indus-
The need for EU competition rules is based trial strategy. In terms of meeting these objec-
upon a desire to maintain the level playing field tives, competition policy seeks consistency with
at the heart of the SEM (see Chapter 5) accord- other policy areas. If there is a clash in policies (as
ing to which all firms should face the same sets there has been between competition and indus-
of rules and conditions with a simultaneous trial policies), it is more often due to the nature
limit upon the discretion available to the mem- of the policies followed by the member state(s).
ber states insofar as their actions undermine this Clashes between EU industrial and competition
objective. Such an administration of rules will policies are gradually being alleviated as the for-
also lead to greater consistency and predictabil- mer starts to stress open and competitive mar-
ity in the outcome of policy. Integration and the kets. As a complement to the broad pro-market
increased interaction of firms across borders also themes stressed by industrial policy, competition
have implications for the development of national policy has emphasised the following themes.
policy and the way it is administered. Firms crave
consistency and efficiency for the policy frame- ■■ State aid: direct support designed to push the
work in their markets. Frequently, this requires managed, market-led decline of the ‘old econ-
policy implementation by a single body – a ‘one- omy’ industries (such as steel) and to lower
stop shop’ approach. The vetting of the same case their use in those sectors where market forces
by a multitude of competition authorities is both are gradually being extended. Direct support
time consuming and a waste of resources for both is put forward in other sectors to meet the
107
EU competition policy instruments

Box 6.1
Apart from the European Community Merger Regulation, EU policy instruments are based upon
Articles in the Treaty of Rome (subsequently renumbered in the Treaty of the Functioning of the Euro-
pean Union).
Article 101 prohibits any collusion between undertakings which restrict competition to the extent
that it has an effect upon trade between states and therefore inhibits the development of a single mar-
ket. Activities that are typically illegal under this Article include price fixing, quantitative restrictions
on production, market sharing and the tying of supplementary conditions to sales. Such agreements
may be allowed if they are able to fulfil the following conditions simultaneously:
■■ the agreement helps improve production and/or distribution and promotes technical or economic
progress;
■■ there are significant benefits to consumers;
■■ restrictions are avoided that are not indispensable to the attainment of the above conditions;
■■ the agreement does not preclude competition in a substantial part of the market for the product in
question.
Article 102 prohibits undertakings with a dominant position from abusing this advantage to the ex-
tent that their actions preclude competition within the single market or at least in a significant part of
it. Measures considered ‘abusive’ include predatory pricing, unfair trading conditions and discrimination
between consumers or suppliers. There is no exemption clause so any conflict between scale efficiencies
and competition is deemed not to exist due to the ease of market access.
Article 106 applies the conditions of Articles 101 and 102 to state-owned enterprises or firms that
have been given special or exclusive rights. Thus despite being neutral on property rights, the Treaty
maintains that state ownership does not imply a right to distort competition. Member states are al-
lowed to grant special or exclusive rights for certain ‘legitimate national objectives’ but they should
not contravene the rules of competition. If the application of competition rules threatens to undermine
essential public service elements of these enterprises, then these special or exclusive rights are exempt.
Article 107 specifies that any assistance given by the state which distorts or threatens to distort
competition by favouring certain undertakings or the production of certain goods, in so far as such ac-
tion distorts trade, is incompatible with the common market. Aid is assessed according to the ‘market
economy investor principle’ which means aid is compatible with the SEM if the parties can prove a
commercial investor would have behaved in a similar manner. If aid promotes technological or econom-
ic development, provides advantages to consumers, enables the relief of natural disasters or of a serious
disturbance within the economy of a member state then it is permissible under EU law.
The European Community Merger Regulation (ECMR) seeks to prevent a merger which would sig-
nificanly impede effective competition in the common market or a substantial part of it; in particular
as a result of the creation or strengthening of a dominant position. Only mergers meeting the Commu-
nity Dimension tests are vetted under EU law, the rest are dealt with at member state level, using their
own domestic law. This is intended to satisfy the key principle of subsidiarity in this field.
108
concerns of technological and regional devel- Policy – continues with the EU’s reform agen-
opment (for example, to attract FDI). da in relation to private actions by customers
■■ Liberalisation: this extends the benefits of the and enterprises to seek compensatory justice in
SEM to consumers by lowering prices in key, respect of harm caused to them through the anti-
previously protected, services such as tele- competitive behaviour of other enterprises.
communications and energy. The process also The landmark reform or modernisation of
seeks to extend and enhance infrastructure Articles 101 and 102 TFEU became law on 1 May
quality and capacity as a means of delivering an 2004, bringing in a radical change not only to
improvement in the quality of services. how the exemption architecture worked but also
■■ Cooperation: this allows for inter-firm coopera- to which competition authorities have the legal
tion in pre-competitive actions such as R&D right to enforce the Articles in full. The reform
or in areas where the market is global in nature has not altered Article 101(1)’s prohibition of
(such as aerospace). anti-competitive agreements which may affect
trade between member states and which distort
The above are in addition to the themes of competition within the common market. Arti-
protecting competition engendered within Arti- cle 101(2) declares such agreements to be void,
cles 101 and 102 TFEU (see Box 6.1). The desire unless exempted on specific grounds available
is to draw a distinction between the activities of under Article 101(3). Prior to the reform, only
firms that seek to progress and restructure Euro- the Commission could grant these exemptions.
pean industry and those activities that partition This individual notification exemption system,
markets (thereby denying the realisation of the where the Commission informs the notifying
SEM) and delay the onset of structural adjust- enterprise if it meets the exemption require-
ment. Thus, competition policy, in line with the ments, overwhelmed the Commission. The
objectives of industrial policy, seeks to establish opportunity cost of the sheer volume of notifi-
the conditions under which enterprises can be cations was that the Commission was limited to
successful on a global basis. initiating investigations against the most serious
infringements, including the emergence of com-
petition-distorting hardcore cartels. Moreover,
Reform of competition policy because the Commission was so overstretched,
the greater majority of these notifications were
The EU’s competition policy agenda is not static not formally dealt with under the procedure,
but dynamic and evolving: this is explored in this resulting in the issuing of a legally non-binding
section in relation to the landmark changes that comfort letter. Clearly this was not satisfactory to
have been made to Articles 101 and 102 TFEU, the concerned notifying enterprises which were
including who can apply them and how they seeking legal certainty on the matter.
now work in practice, for this is of key interest The reform not only brought in a new system
to enterprises that come under their reach. The – the direct exemption approach – but also legally
agenda is then examined in terms of the proposed empowered national courts and national competi-
changes to the EU’s merger control architecture, tion authorities (NCAs) as well as the Commission
specifically those contained in the 2014 White to sanction these exemptions. Unlike the former
Paper, and what this would mean for business. architecture, the direct exemption approach
The next section – A New Theme in Competition sees enterprises acting as quasi-competition
109
regulators, for they make the decision, without is interested in pursuing the case. Importantly,
recourse to a competition regulator, as to wheth- such cooperation has been made possible by
er they meet the 101(3) exemption requirements. the establishment of the European Competition
This burden and cost of this self-regulation falls Network, the value of which cannot be underes-
squarely on the shoulders of business and frees up timated. However, the 2009 review of the mod-
resources in the Commission. Of course, there is ernisation found little evidence of reallocation of
a real risk that enterprises may not take this self- cases between NCAs nor did it find many parallel
assessment as seriously as they should, or not do investigations by NCAs concerning the same case.
it at all: enforcers would struggle to know this, In other words, for the greater part, enterprises
unless they received a complaint or information under investigation in these cases are enjoying the
leading to an investigation. Obviously, a manda- benefits of a one-stop shop approach. Of course,
tory notification system would not have this risk, it must also be understood that the Commission
and as NCAs could have dealt with the bulk of has the legal right to investigate a case even if an
such notifications, the net result would still be a NCA has already started to do so.
freeing up of resources for the Commission. In The adoption of the new exemption approach,
fact, an enterprise can still notify a regulator if it the ability of national regulators and courts to
requires legal certainty in respect of an exemption apply Articles 101 and 102 TFEU in their entire-
but the point of self-regulation is that the majority ty as well as the Commission’s ability to attach
of enterprises will not avail themselves of this pos- degrees of priority to a complaint or seek to
sibility. The Commission had already established reallocate it enable the Commission to use its
an umbrella block exemption to reduce the need freed up resources to focus upon investigating
for individual notifications. This approach, intro- and prosecuting the most serious infringements.
duced in late 2001, offered increased flexibil- Indeed, the Commission, in its first review of the
ity and developed an economics-based approach working of the reformed architecture, claimed
(agreements would be assessed on market power) that this has been achieved, not only in respect
and the potential for self-assessment. of complaints but also because it can be more
The decentralisation of Articles 101 and 102 proactive in undertaking inquiries in key sectors
TFEU does not simply concern the above exemp- of the EU economy, including the energy, retail
tions – NCAs and national courts are able to apply banking, business insurance and pharmaceuticals
the said Articles in their entirety. In other words, sectors. The Commission was also in favour of
the bulk of cases will be dealt with at a national decentralisation of Articles 101 and 102 TFEU
level, thereby freeing up Commission resources. because it believed that it would lead to a ‘more
In fact the Commission had already started this level playing field’ for enterprises and hence be
process before the modernisation. The Commis- supportive of the SEM. This was because NCAs
sion, supported by the Community Courts, is are legally required to apply the said Articles in
able to attach degrees of priority to a complaint cases where the ‘may affects trade’ jurisdictional
and reject it if its centre of gravity is essentially test is met, whereas in the past they might have
but not exclusively national. Moreover, under the dealt with them under their own national law,
reformed architecture, the Commission has the which is obviously not uniform across all member
possibility to reallocate a complaint to a relevant states. Of course, and in line with the principle
NCA if it deems the complaint a non-priority but of subsidiarity, cases that do not satisfy the afore-
it is still of prima facie interest to an NCA which mentioned test may be dealt with under national
110
competition law, though this is not a requirement SEM. This reveals how radical the modernisation
under EU law. In reality, and this is important for of these two Articles has been. The risk was that
enterprises to appreciate, the greater majority of some NCAs would lack the resources and/or
NCAs operate this parallel application, or double ability to take on this new role. For example, the
legal base, and if the case is deemed not to meet Commission for the Protection of Competition of
the affects trade criterion, it can still therefore be Cyprus decided that it lacked the power to apply
assessed under national law. Articles 101 and 102 TFEU, because national law
In line with the objective of creating a level made no provision to this effect. The situation was
playing field within the SEM, the parallel applica- duly remedied. Moreover, to maximise the likeli-
tion of national competition law to agreements, hood of consistent decision making across NCAs,
concerted practices and decisions of undertakings the Commission legally requires them to inform it
is subject to an obligation of convergence with prior to or just after commencing the first formal
Article 101(1) TFEU. Put simply, where such con- investigative measure.To reinforce this, at least 30
duct meets the affects trade test but is not prohib- days before an NCA adopts a decision to end an
ited by 101(1) or falls under the 101(3) exemption infringement, accept commitments or withdraw
rule, then it cannot be prohibited under national the benefit of the blocked exemption, it must
law, thereby reflecting the primacy of Community provide the Commission with a summary of the
law. However, it is important for enterprises to case and the envisaged decision. Finally, and as a
appreciate that in one area, unilateral behaviour, last resort, the Commission can take ‘corrective’
member states are not precluded from adopt- action against an NCA by relieving it of the case.
ing and applying stricter national laws. Therefore The application of EU merger law still reflects
unilateral behaviour capable of affecting trade the orthodoxy that it is best for one regulator to
between member states can thus be prohibited by apply it to ensure consistent decision-making –
national law, even if it occurs below the level of the Commission currently has this exclusive right –
dominance or is not seen as abusive under Arti- thereby protecting the regulatory level play-
cle 102 TFEU. In other words, this is an excep- ing field. However, a number of voices have
tion from the level playing field and could mean challenged this: partly as a consequence of the
that enterprises engaging in cross-border business apparent success of the aforementioned alter-
within the SEM may face a variety of standards as native approach operated in EU antitrust law;
to their unilateral conduct. This is also echoed in partly because EU merger control is well estab-
national law counterparts of 102 TFEU, for they lished with a back catalogue of Commission
may foresee different standards for assessing dom- decisions and Court judgments to guide NCAs
inance as well as stricter provisions regulating the when applying it; and partly because NCAs
conduct of dominant enterprises. now have the experience of dealing with more
The decentralisation of Articles 101 and 102 mergers than the Commission, albeit under
in their entirety, enabling all NCAs and national their own law. Further, and most importantly,
courts to fully apply them, stands in stark con- it can be argued that such a cooperative rela-
trast to the once prevailing orthodoxy that EU tionship, with NCAs having the legal right to
competition law should only be applied by one vet mergers under EU merger law in certain
regulator, the Commission, so as to ensure con- circumstances, could improve the efficacy and
sistent decision making, thereby guaranteeing the efficiency of EU merger control, creating a true
regulatory level playing field which buttresses the European Merger Area. More specifically, it
111
would bring about the end of the misallocation this would require a more ambitious overhaul of
problem – and the concerns associated with it – the current system of merger control law than it
that has dogged the European merger control was proposing. However, the two main propos-
regime since it became operational in 1990. als made by the White Paper are still of interest
The misallocation problem simply refers to to enterprises operating within the Community.
cases that should be dealt with under EU merger The first concerns the aforementioned referral
law, because they have a potential cross-border mechanisms. The referral mechanisms seek to
competition impact, but are dealt with under prevent or correct the misallocation of cases that
national law, or vice versa. This arises because would otherwise arise from the workings of the
the thresholds or Community Dimension tests threshold tests, and operate both before and after
that make the stated allocation decision are form- the notification of the merger, with the referral
based and therefore lack the necessary diagnostic request, which is not mandatory, coming from
capability to carry it out accurately in all cases.The the merging parties in the former and the rele-
majority of misallocated merger cases are those vant NCA in the latter. The White Paper aims to
that should be dealt with under EU law but are improve the operational effectiveness of both the
vetted at member state level, thereby potentially pre- and post-notification centralisation referral
having to face the burden and uncertainty of mul- routes. The former would be made simpler and
tiple investigations under two or more national faster in an effort to make more merging parties
laws. Clearly, this is an inversion of the principle engage with it so as to reduce the main form of
of subsidiarity as well as undermining the one- misallocation, cases with a potential Community
stop approach to the vetting of mergers. A radical competition concern being wrongly allocated to
solution would be to allow NCAs to cooperate to national law. In relation to the latter, the Euro-
guarantee the one-stop shop and to apply EU law pean Commission only has the legal right to vet
to such cases. Furthermore, cases which involved a referred case in respect of the territories of the
three or more NCAs would be automatically real- member states that sought referral or joined the
located to the sole jurisdiction of the Commission referral request. The White Paper proposes that if
as it has the capacity to deal with such complex a member state refers such a case to the Com-
cases. Indeed, such modernisation could remove mission, and no other member state competent to
the need for current cumbersome reallocation vet the merger disagrees – if they do, the referral
or referral mechanisms, thereby streamlining the does not happen – and if the Commission accepts
working of EU merger control regime. Of course, the referral, then the Commission would vet the
these are just some of the possible options but merger for the whole European Economic Area.
they nonetheless give a flavour of the debate sur- This would prevent parallel reviews by NCAs,
rounding the future direction of the EU’s merger and reduce compliance costs for business.
control architecture. The White Paper’s second main proposal is
On the matter of a European Merger Area, the a radical extension of the scope of the Merger
2014 EU Merger White Paper Towards a more effec- Control Regulation to encompass certain acqui-
tive EU merger control explicitly invited the Com- sitions of non-controlling minority shareholdings
mission and NCAs to consider moving towards a in another enterprise that are likely to cause anti-
system in which each applies the same substantive competitive harm to rivals and consumers. Cur-
EU laws. However, this was not taken forward rently no such power exists under EU merger law
by the White Paper which acknowledges that nor can the issue be effectively dealt with under
112
EU rules prohibiting anti-competitive conduct for damages under national law for infringements of the
(Articles 101 and 102 TFEU). In other words, to competition law provisions of the Member States and
echo those of the Commission, there is an enforce- of the European Union (hereafter termed the 2014
ment gap in relation to non-minority sharehold- Directive).
ings which have an anti-competitive cross-border Infringement of EU antitrust rules, such as
effect. An illustration of this problem is explored price cartels or the abuse of a dominant position,
in Case Study 6.1. This enforcement gap is not can cause concrete harm to the infringers’ cus-
just at the EU level, however, for currently only tomers and consumers. The Community Courts
three member states – Austria, Germany and the have provided the legal base enabling private com-
UK – have national laws enabling them to vet pensatory damage actions to gain redress against
such shareholdings. If this Commission proposal such conduct. The Community Courts have rec-
becomes EU law, it will be important to see if ognised that the full effectiveness of Article 101
member states follow suit, thereby ending this TFEU would be put at risk if it were not open
enforcement gap, and in so doing, possibly bring to an individual to claim damages for loss caused
about a high degree of legal convergence and cer- to them by conduct liable to restrict or distort
tainty. Of course, it may turn out very differently. competition. The same is assumed to hold true
for Article 102 TFEU. The absence of EU proce-
dural rules governing such actions creates diffi-
A new theme in competition culties in seeking damages under these Articles. In
policy: private enforcement other words, and as spelt out by the Community
Courts, it is for each member state to lay down
Reform of EU competition policy has not been such procedural rules at a national level and to
limited to the public enforcement sphere, for guarantee that these rules are not less favourable
the European Commission has also pursued the than those for equivalent domestic actions for
establishment of the legal right of consumers, damages (principle of equivalence), nor to make
private enterprises and public authorities under it practically impossible or excessively difficult
EU law to seek compensatory damages from an for the individual to exercise these rights (prin-
enterprise whose anti-competitive behaviour has ciple of effectiveness). Of course, this does not
caused them harm. The EU Commission recog- mean that national procedural rules are identical.
nises that such private actions reinforce the deter- Quite the opposite is true and this can encourage
rent effect of public competition rules. forum shopping according to which an individual
EU law is absolutely clear that an individual seeks out the national jurisdiction that will yield
who has suffered harm caused by an infringe- the most favourable outcome.
ment of Articles 101 or 102 TFEU must be able The possibility of a successful outcome – and
to obtain full compensation which returns the hence whether or not to seek damages in the first
person to the position s/he would have been in place – is influenced by whether it is a stand-alone
if the infringement had not occurred. The ability or a follow-on action. The former is where the
to achieve this, however, remains incomplete and claimant has to prove that there has been a breach
somewhat problematic in practice, as revealed of EU antitrust law that has financially damaged
below. However, some progress has been made, them, effectively requiring the claimant to act as a
some driven by the EU Commission, such as the quasi-competition regulator but without the same
new 2014 Directive on certain rules governing actions resources or experience. This is particularly risky
113
Case Study 6.1

Ryanair and the enforcement gap
The radical objective of the EU’s 2014 Merger White Paper Toward more effective EU merger con-
trol is the proposed extension of the scope of the ECMR to encompass certain acquisitions of non-
controlling minority shareholdings in another enterprise, be it horizontal, upstream or downstream to
the acquirer, that are likely to cause anti-competitive harm to rivals and consumers. The Commission
contends that currently there exists an enforcement gap here. It points out that the ECMR only applies
to mergers or ‘concentrations’ which concern an acquisition of control by one or more enterprises over
another enterprise. If the merging entity meets the Community Dimension test, then it has to notify the
Commission and the merger may only be implemented once the Commission has approved it. However,
when the acquisition of a minority shareholding is unrelated to the acquisition of control, the Com-
mission has no legal power to investigate it, even if the shareholding has the potential to cause anti-
competitive harm. Only the merger party’s pre-existing minority shareholdings in a competitor or an
enterprise active in a downstream or upstream market can be taken into account by the Commission
when it assesses the merger in respect of a separate acquisition of control. Moreover, if such a minor-
ity shareholding is acquired after the concentration has been approved under EU merger law, then the
Commission has no legal authority to assess the shareholding on competition grounds.
The Commission asserts that the ownership of a minority share can lead to anti-competitive harm
for a number of differing reasons. In general, the effect on competition arises from the size of the
minority stake, the resulting financial interests, and the degree to which the acquirer can influence the
conduct of the target enterprise. On this matter, the Commission gives the following theoretical pos-
sibilities. First, acquiring a minority shareholding in a competitor may lead to anti-competitive effects
because such a shareholding may increase the acquirer’s incentive and ability to raise its own prices,
knowing that customers would switch to the competitor and the acquirer would benefit from the rival’s
increased profits. Of course this would not be the case if customers switched to a competitor in which
the said acquirer held no stake.
Second, anti-competitive effects may also arise when the acquirer’s minority stake in the competitor
enables it to influence the competitor to compete less aggressively. This could happen when the acquirer
has a seat on the target’s board of directors or can veto certain shareholders’ resolutions concerning
strategic investments, entering new geographical markets, and raising capital, among others. Third,
horizontal minority shareholdings may lead to coordinated anti-competitive effects by increasing the
acquirer and target’s ability and incentives to tacitly or explicitly collude in order to achieve super-
normal profit. Finally, non-horizontal minority shareholdings may enable the acquirer to influence the
target so as to make it harder for its competitors to be supplied by the target (input foreclosure) or to
sell their products to the target (customer foreclosure).
The above is the theoretical case as to why the scope of ECMR should be extended to cover certain
minority shareholdings. However, the Commission has also put forward real world cases to support its
proposed extension of the ECMR. A prominent one concerned Ryanair and its Irish competitor Aer
114
ingus. Ryanair initially acquired a minority stake in Aer Lingus but later sought to acquire full control
L
of its rival. While the Commission prohibited Ryanair’s two attempts at acquiring control over Aer Lingus
on the ground that it would create a monopoly or near monopoly on many air routes between Ireland
and other European cities, it had no power to order Ryanair to divest the 29.8 per cent stake it held in
its competitor. This was confirmed by the General Court. Yet Aer Lingus argued that Ryanair’s minority
shareholding would have significant negative effects on competition between the two airlines, as Ryanair
would use it to weaken Aer Lingus’s ability to compete.
Fortunately the UK’s Competition Commission was in a position to assess the alleged anti-
competitive effect of the said minority shareholding, albeit only in respect to flights between Ireland
and the UK. The UK is one of three member states – Germany and Austria being the other two – that
have the necessary domestic law enabling them to vet such minority shareholdings. In its findings,
made public in August 2013, the Competition Commission found that the said minority shareholding
gave Ryanair the ability to influence the commercial policy and strategy of Aer Lingus. In particular,
the shareholding could be used to prevent Aer Lingus from being acquired by, or combining with, an-
other airline. Moreover, it would allow Ryanair to block shareholders’ resolutions that were necessary
for issuing shares or raising capital for major investments. The Competition Commission accordingly
required Ryanair to reduce its shareholding in its rival to 5 per cent and not to acquire further shares.
Ryanair subsequently appealed the decision. The European Commission’s position was that it would
have been the best placed regulator to vet the case, because Ryanair’s stake in Aer Lingus affected
flights between Dublin and European destinations other than those in the UK, but it was unable to do
so as it lacked the legal authority.
The Commission has employed both economic theory and real world examples to establish why
the scope of the ECMR should be extended to vet certain acquisitions of non-controlling minority
shareholdings in enterprises. Of course, this is just the beginning, for such an extension has to work ef-
fectively in practice. The Commission must avoid finding itself swamped by the sheer volume of cases,
with many having no anti-competitive concern and others having a concern that is more suited to
being vetted at member state level. The latter may require some form of referral mechanism to be in
place but currently this could not work as the great majority of member states do not have domestic
competition law covering such shareholdings, so they are not in a position to receive or refer cases
to the Commission.
Case questions
1 Explain what the Commission means by the enforcement gap.
2 Why might minority shareholdings lead to anti-competitive harm?
3 Assess the view that the Commission’s proposal to extend the scope of the ECMR will not fully
eliminate the enforcement gap.
115
for an individual or SME, especially as they have as that prepared by an involved party, including
the onerous job of evidencing the claim, which witness statements. However, this right of dis-
could prove to be even more costly if they lose. closure is qualified by the requirement that such
However, this situation has improved as the nation- information requests must be proportionate: that
al court dealing with the claim, upon the request is, they must not be non-specific or overly broad
of the claimant, can now order the defendant or a searches for information which are likely to be of
third party to disclose relevant evidence which lies little relevance to the parties in a damages case.
in their control. This, of course, may encourage An important exception to the above right to
the defendant to destroy incriminating evidence information from an NCA file is the leniency pro-
prior to any anticipated case against it for damages. cedure under Article 101 TFEU. The Commission
Follow-on action is less risky and therefore views its leniency programme, which dates from
more attractive to potential damage actions 2002, as a success in drawing out of the shadows
because, as its name suggests, the action follows secret cartel participants whose voluntary cooper-
on from the final decision of a competition regu- ation has thrown light on the activities of the oth-
lator reaching a final decision in an Article 101 er cartel members. Such cooperation is based on
or 102 TFEU case. The 2014 Directive is clear the understanding that the cooperating enterprise
that this final infringement decision should not gains immunity from, or a reduction in, the fine
be re-litigated in follow-on damage actions. In for being a member of an illegal cartel. The Com-
other words, such a finding should be deemed mission believes that allowing damage claimants
to be irrefutably established in actions for dam- the right of access to the file of a voluntarily coop-
ages brought in the member state of the NCA or erating cartel participant could deter such coop-
review court relating to the infringement. How- eration in the future, especially if statements from
ever, when the damages action is before a court the cooperating enterprise are self-incriminating.
in a different member state to that of the NCA The Commission is simply not willing to take this
which reached the infringement finding, the risk. Therefore the 2014 Directive is explicit that
court only has to treat the finding as prima facie such leniency programmes operated by the Com-
evidence of the fact that an infringement of commission and NCAs are exempt from the disclosure
petition law has occurred. So the claimant may of evidence to damages claimants. This restriction
have to re-litigate the breach. This also creates the does not appear to apply to other cartel mem-
possibility that the national court will come to a bers.With some justification it can be argued that,
different decision to that of the NCA, increasing without the success of the leniency programme
the claimant’s risk as well as threatening the regu- (see Case Study 6.2), the offending cartels may
latory level playing field. not have surfaced and therefore the possibility of
On a positive note, the 2014 Directive damages would probably not have arisen, at least
guarantees the claimant in a follow-on action not for some time.
access – via a disclosure order from the court One possible way for a claimant to reduce
dealing with the damages claim – to certain infor- risk in a damages action is to join with others in a
mation that the NCA is holding that may help it similar situation in respect of an infringement and
evidence its claim. This covers information pre- thus act collectively to seek redress. However, the
pared by the Commission or an NCA in the course 2014 Directive does not require member states
of its enforcement proceedings that has been sent to introduce collective redress mechanisms for
to the parties involved in the proceedings as well the enforcement of Articles 101 and 102 TFEU.
116
This is inconsistent with the Commission’s Rec- grounds, as the direct purchaser, to seek compen-
ommendation of June 2013 on compensatory sation. In this instance the harm is in the form of
collective redress mechanisms in member states actual loss which results from the price difference
concerning violations of rights granted under EU between what was paid by the manufacturer and
law, which wanted all member states to establish what would have been paid in the absence of the
these mechanisms. In reality, the regulatory level infringement. If the manufacturer passes on the
playing field is incomplete and inconsistent here: price increase or overcharge, in part or in full,
only some member states having adopted collec- to its own purchasers, then the stated actual loss
tive redress procedures, and where they have done it has suffered is reduced or ended. If this is the
so, the procedures are not necessarily uniform case, then the 2014 Directive declares that, in
between the member states concerned. However, principle, it is appropriate to allow the infringer
a positive development in this area is the encour- to invoke a passing-on of actual loss as a defence
agement of Member states to enable collective against a claim for damages, and it rests upon the
redress through consensual dispute resolution infringer to prove this defence.
structures – out of court settlements, arbitration However, this is not the end of the story. The
or mediation –to make the process quicker and aforementioned car manufacturer (the direct pur-
cheaper for all parties concerned. This of course chaser) when passing on the overcharge in higher
will be more attractive to claimants who are seek- prices to its purchasers (the indirect purchaser)
ing to avoid lengthy court litigation and the asso- may see its sales fall as a consequence. If so, the
ciated financial costs. In fact, the 2014 Directive car manufacturer has the legal right to claim
declares that such consensual dispute resolution compensation from the infringer for the loss of
should cover as many injured parties and infring- profit that this has caused. Of course, if the over-
ers as legally possible, and accordingly it seeks to charge has been passed on by the manufacture to
facilitate the use of such structures. its purchasers, the latter become eligible to seek
The development of the right to claim dam- compensation but they may lack the information
ages for harm and how much can be claimed are needed to prove the harm; indeed, they might not
not necessarily straightforward and involve direct be aware of the original price fixing by the cartel.
purchasers, indirect purchasers and the passing- The Commission understands this and therefore
on defence. What follows is a rather simplified the 2014 Directive declares that the indirect pur-
illustration but it nonetheless brings out the key chaser will have proven the actual loss has been
points in relation to these terms and the right to passed on to it if it can show that:
claim damages. As a matter of routine, a manu-
facturer of cars in the EU purchases a significant 1 the defendant has infringed competition law;
amount of components from its suppliers and the 2 the infringement has led to an overcharge for
finished cars are sold to consumers in the SEM. the direct purchaser of the defendant;
The said manufacturer of cars is the direct pur- 3 the indirect purchaser has bought goods or
chaser and the consumers are the indirect pur- services that were involved in the said infringe-
chasers of components, and both have legal rights ment, or has bought goods or services that
under EU law in the case of harm. If the compo- contain them.
nent suppliers act as a cartel, thereby raising the
price to the manufacturer, and thus are in breach Therefore the indirect purchaser does not actu-
of Article 101 TFEU, then the manufacturer has ally have to evidence that it was the recipient of
117
the overcharge. The above is rebuttable, with the actions but it is very likely that this will need fur-
burden falling on the infringer to demonstrate ther modification and fine tuning. Overall, this
credibly that the overcharge was not, or was not should be viewed as a positive development.
entirely, passed on to the indirect purchaser. It
is probable that an indirect purchaser taking a
follow-on action will find satisfying the above The international dimension
much less daunting than one considering a stand- of EU competition policy
alone action.
A further issue faced by direct purchasers, and The EU’s competition policy agenda recognises
especially indirect purchasers, is the difficulty in the challenges posed to competition policy by
proving the amount of harm suffered. The quanti- the growing economic interdependence resulting
fication of harm means assessing how the market from globalisation. The EU has two fundamental
in question would have evolved had there been goals in relation to regulating competition matters
no infringement. The Commission has correctly with an extraterritorial dimension: the first is to
recognised that this quantification can be a costly, secure access to overseas markets for EU firms by
fact-intensive process that may require the appli- removing beyond-the-border competition distor-
cation of complex economic models, and that this tions in these markets, and the second is to ensure
in itself may act as a substantial barrier preventing that competition in the SEM is not distorted by
claims for compensation. The Commission’s solu- anti-competitive conduct, such as international
tion is to pass the task to national courts to esti- cartels, of non-EU companies. In order to achieve
mate the amount of harm when a claimant finds these goals, the EU has evolved both cooperative
it is practically impossible or excessively difficult and non-cooperative approaches: the former is
to carry out the quantification on the basis of the predominant at both a multilateral and bilateral
available evidence. Of course some national courts level and has been used in pursuit of both goals
may struggle with this, partly as a consequence of whereas the non-cooperative approach is used
their own inexperience in such quantification and unilaterally, primarily, but not only, to achieve the
partly because of an absence of Community rules second goal.
on the quantification of harm. This lack of Com-
munity rules, and the 2014 Directive’s require-
ment that member states empower their own Multilateral cooperation
national court with such procedures, will prob-
ably not lead to regulatory convergence. The EU has viewed the World Trade Organisa-
Private enforcement is a near revolutionary tion (WTO) as the natural home for the adoption
change of direction for EU competition policy, of a multilateral competition rule set because it
which has traditionally relied on public enforce- regarded the ending of beyond-the-border pri-
ment. Private enforcement not only reinforces vate restraints to trade, such as anti-competitive
the deterrent effect already established by pub- behaviour of firms, as complementing the WTO’s
lic enforcement but also rightly facilitates legal existing trade liberalisation role. In other words,
redress for individuals and enterprises damaged by directly advancing the EU’s first goal of regu-
by the infringement. The Commission and the lating international competition matters, a multi-
Community Courts have been actively putting in lateral set of competition rules would contribute
place a legal architecture to enable such private to the establishment of a non-discriminatory
118
governance or regulatory environment in non- ■■ the important role of competition authorities

EU markets that would give equal treatment to in competition advocacy;
EU companies seeking to access these markets. ■■ the basic principles of national jurisdiction in
The choice of the WTO as the most appropri- relation to anti-competitive practices with an
ate forum for establishing a non-discriminatory international dimension;
regulatory environment was reinforced by the ■■ the need for voluntary capacity building and
growing and widespread scope of WTO mem- technical assistance for transition and develop-
bership to include key emerging and developing ing countries establishing competition regimes
economies as well as mature ones. However, such as part of the Doha Round; and
a regulatory environment requires more than just ■■ the importance of international cooperation
competition rules: it must also contain enhanced and the principles which should guide such
rules in other governance fields such as foreign cooperation.
direct investment and public procurement. This
would see an enhanced governance role for the However, the EU backtracked in an area that
WTO in addition to its traditional market open- could have supported goal one. In July 1999, the
ing role. Indeed, as it turned out, this led to an ini- EU was clear that an MCF at the WTO should
tially very ambitious, and possibly over-complex, include domestic competition rules on restrictive
agenda for the Doha Round. business practices and abuse of market power. By
The EU played a pioneering role in securing a November 2002, the EU accepted that a WTO
place for competition policy on the WTO’s Millen- Agreement would not require these provisions
nium Round agenda, which duly became the Doha to be made mandatory. By leaving it to individual
Round launched in November 2001. At the heart countries to determine whether or not to have
of the EU’s position was its own Multilateral Com- these substantive provisions – and if adopted, their
petition Framework (MCF) which, in line with legal form and assessment methodology – the
goal one, envisaged that all WTO members would certainty and predictability that might otherwise
adopt core principles of non-discrimination, trans- have been achieved within a multilateral agree-
parency and procedural fairness in their respective ment would be damaged. This about-face may
domestic competition regimes.This would require have occurred (and this is speculation) in order to
WTO members without their own domestic com- save other MCF proposals given that agreement
petition policy to establish one. If these principles on the aforementioned was highly unlikely and
were adopted by all WTO members, EU enter- could potentially derail the wider MCF agenda.
prises would be guaranteed, as far as possible, a The EU’s MCF position went beyond com-
level playing field that fosters greater certainty and petition rules to include voluntary international
predictability and which, in turn, supports market cooperation proposals as part of the proposed
access. In addition to the said core principles, the multilateral competition policy agreement. These
EU’s MCF proposals also advocated: cooperation proposals had the potential to pro-
gress both goals one and two. In relation to the
■■ the need to treat hardcore cartels as a serious latter – the protection of competition within
breach of domestic competition law; the SEM – the envisaged voluntary case-specific
■■ the need to narrowly define sectoral exclu- cooperation between regulators could help the
sions and exemptions in a transparent and pre- Competition Directorate gain information from
dictable way; the foreign regulator concerning a case of mutual
119
interest that it would otherwise have difficulty November 2001 when the Doha Ministerial dec-
obtaining. Moreover, the EU’s proposals concern- laration explicitly recognised the case for an MCF
ing cooperation were intended to complement, to enhance the contribution of competition policy
and not to replace, existing bilateral and regional to trade and development.
cooperation structures, thereby expanding and The WTO negotiations in respect of the MCF
deepening overall cooperation in this field. were scheduled for the Ministerial after the 2003
A major criticism of the EU’s MCF propos- Cancun Ministerial but the negotiations did not
als was that they were not really necessary as, on happen. In fact, the Cancun Ministerial was the
the eve of the Doha Round, the growing number beginning of the end for competition policy as
of domestic competition regimes stood at nearly a part of the Doha Round. At this Ministerial,
100 and these regimes already had a high degree a considerable number of developing and least
of convergence on the fundamentals of competi- developed countries refused to entertain com-
tion law and policy, including the core principles petition policy as part of the agenda. Individual
of non-discrimination, transparency and proce- countries had varying reasons for this but several
dural fairness. The EU’s response was emphatic. factors were key in shaping their response. The
It viewed the adoption of domestic competition first factor was the perceived hard line taken by
regimes as a basis on which a MCF could be nego- the EU and US on agricultural export subsidies
tiated at the WTO for the mutual benefit of all and domestic agricultural support. The second
members – the stepping stone view. According to was the linking of competition policy to the oth-
the EU, the adoption of the MCF would lead to er three Singapore issues as a single undertaking
deeper convergence in this important field, mak- which proved unacceptable to many developing
ing members’ competition policies more trans- countries. Underlying this was the lack of capac-
parent and predictable and thereby supportive of ity in some developing countries already involved
goal one. Furthermore, the EU thought this con- in trade talks outside the WTO negotiations to
vergence could serve as a stronger foundation for undertake negotiations in completely new are-
mutual trust and cooperation between competi- as where they had little technical experience.
tion regulators, which is supportive of goal two. Finally, at least in the view of the EU trade nego-
The EU’s pioneering of an MCF at theWTO initiator, Pascal Lamy, some African, Caribbean and
tially met with success when the December 1996 Pacific (ACP) countries, together with other least
Singapore Ministerial agreed to set up a working developed countries feared the erosion of bilat-
group to study issues relating to the interaction eral preferences, especially with the EU, result-
between trade and competition policy. FDI rules, ing from continuing liberalisation at a multilateral
public procurement and trade facilitation were level, notwithstanding the prospective gains with-
also included in addition to competition, and the in reach in other areas.
four were treated as a single undertaking, leading Whatever the precise nature of the opposition
them to be called the ‘Singapore Four’. The Sin- to the Singapore Four, it was sufficient for the EU
gapore Four represented a potentially significant negotiator, on the advice of the Chairman of the
increase in the governance role of the WTO and, Cancun Ministerial, Luis Ernesto Derbez, to pro-
from the EU’s perspective, would help facilitate pose the dropping of competition policy and FDI
access for EU companies to the markets of other rules from the agenda. However, progress still
WTO members, including key emerging mar- eluded the negotiations and this caused the Min-
kets. Another significant step forward occurred in isterial to end prematurely. Yet the communiqué
120
at the conclusion of the Ministerial gave the EU such as abuse of a dominant position, cartels,
hope that all four Singapore issues would remain enforcement and mergers. The OECD claims,
part of the Doha Round but in August 2004, the among other things, that this has led to substan-
WTO’s General Council decided that three of the tial analytical convergence, the establishment of
four Singapore issues – competition policy, FDI strong networks of enforcement authorities as
rules and public procurement – would no longer well as advanced cooperation. Furthermore, as
be part of the Doha Round. Thus the EU’s mul- explained below, the OECD’s Recommendation on
tilateral, WTO-based focus on the cooperative Anti-competitive Practices Affecting Trade has played
track for achieving goal one and contributing to a major role in providing a template for bilateral
the progress of goal two had failed. competition agreements between regulators. In
However, at the multilateral level, all was not particular it has facilitated the development of the
lost given the establishment of the International EU’s bilateral competition agreements, both with
Competition Network (ICN) and the work of the mature economies and, more recently, with key
OECD in this field, although neither body has emerging economies in its attempts to progress
the goal of establishing a multilateral competition goals one and two.
rule set. Indeed, such a goal is no longer that rel-
evant because, as of 2013, there were over 120
competition regimes in operation, many of the Bilateral cooperation
newer NCAs established in emerging and devel-
oping economies such as China and Vietnam. Prior to the Doha Round, the EU had two broad
Therefore, the EU’s cooperative track, irrespec- approaches to bilateral agreements. The first
tive of whether it is multilateral or bilateral, has approach concerned aspiring members, all of
become more focused on achieving cooperation which, apart from Turkey, are now EU members,
between the Commission and other regulators and have accepted EU competition law as part
as well as increasing convergence between their of the acquis communautaire. Moreover, in accept-
respective competition regimes and how they are ing the Stabilisation and Association Agreements
applied in practice. The ICN has been established (SAA) as part of their preparation for full EU
to carry out this role. membership, current membership candidates (for
The ICN is a voluntary forum for competition example, Montenegro and Serbia) and potential
authorities in which they can maintain contact candidates such as Kosovo (with whom the EU is
with each other and thereby address common in the process of negotiating a SAA) are required
competition concerns. It therefore seeks to facili- to adopt competition rules equivalent to Articles
tate a dynamic dialogue that fosters consensus 101 and 102 TFEU in so far as they affect trade
and convergence around core competition policy between themselves and the EU in line with both
principles to create a global level playing field. goals one and two. As in the earlier cases, eventual
The OECD’s Global Competition Forum also full membership will require complete accept-
provides a further forum for high level competi- ance of EU competition policy.This first approach
tion officials to meet on a regular basis. Moreover, was also extended, at least in part, to the bilat-
the ensuing discussion benefits from the OECD’s eral European-Mediterranean Association Agree-
Competition Committee whose work has includ- ments (EMAAs) negotiated within the framework
ed a number of Best Practice Roundtables cover- of the 1995 Barcelona Declaration and largely in
ing a range of competition topics under headings place by the mid-2000s. In the case of the EMAA,
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the requirement was to adopt competition policy of this type – the 1991 competition bilateral with
instruments equivalent to Articles 101, 102 and, the US. The agreement recognises, for example,
occasionally, 107 TFEU and, in some cases, to that the sharing of information facilitates effec-
adopt competition policy bilaterals. Subsequent- tive application of their respective competition
ly, the EU has decided to seek deeper and more laws. Therefore, each regulator will provide their
comprehensive Free Trade Areas (FTAs) with sev- counterpart with any significant non-confidential
eral Mediterranean countries which potentially information about anti-competitive activities that
include further competition policy initiatives. are relevant to, or may warrant, enforcement
The second approach concerned the negotia- activity by the other party. For example, the pro-
tion of competition cooperation bilaterals with vision of information by the US to the EU about
major partners. Of course, in order for such a monopoly being abusive in both territorial
cooperation to be made possible, the partners domains could meet both goals. In the case of goal
needed to have both core competition princi- two, the provision of this information to the EU
ples and substantive legal provisions in place. The regulator may help bring this matter of abusive
template for such bilaterals was provided by the behaviour within the EU to an end. In the case of
OECD Recommendations on Anti-Competitive goal one, action by the US against the monopoly
Practices Affecting Trade, originally drawn up in on its territory could help EU business compete
1967 and subsequently modified on a number of therein.
occasions, the most recent being 1995. As has already been noted, the focus of the
In general, and echoing this template, coop- EU’s cooperative track switched to give greater
eration includes one or more of the following: weight to the multilateral approach in anticipation
of the launch of what became the Doha Round to
■■ exchange of information on general issues the extent that, in 1999, it imposed a moratorium
related to the implementation of competition on commercial bilaterals. However, with pro-
rules; gress at the Doha Round protracted and difficult
■■ cooperation and coordination of the actions of to achieve, and with the demise of three of the
both parties’ competition authorities; Singapore Four governance items, including com-
■■ a ‘traditional comity’ procedure by which each petition, and the fear that US and Japan were per-
party takes into account the interests of the forming better than itself in the world’s rapidly
other party; growing markets, especially Asia, the EU sought
■■ a ‘positive comity’ procedure whereby one to negotiate bilateral agreements with these up
country can ask the other to act in those and coming economies (see Chapters 15 and 18).
instances where the actions under consid- This change in direction formed a key part of the
eration fall within one jurisdiction but affect EU’s Global Europe strategy, with the focus on a
another’s interests. new generation of commercial bilaterals that were
both broader and deeper than the previous ones,
Under the second approach, bilateral agree- including competition policy and other govern-
ments were reached with the US and later Can- ance rules. In other words, these bilaterals (Free
ada, Japan, and most recently Switzerland. The Trade Agreements, Association Agreements and
motive for the EU seeking such cooperative bilat- Cooperative Partnership Agreements) reflected
erals is to further goals one and two. This can be what the EU had sought to achieve through the
illustrated in relation to the EU’s first agreement Doha Round.
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These new commercial bilaterals specifically understanding on competition cooperation with

include a competition chapter and may be com- several of them, including Brazil, China and India.
plemented by a dedicated competition bilateral Of course, if such cooperation fails or is not avail-
or a memorandum of understanding. Indeed, if able then the EU needs to be able to act on its
the negotiations fail concerning the former, the own, that is, to act unilaterally.
latter, which is much less complex, still may
be achieved, as in the case between the EU and
China. The competition chapter, as exemplified Unilateral action
by the recent EU–Korea FTA (see Chapter 17),
requires both parties to have the aforementioned The non-cooperative track of the extraterritorial
core competition principles that would be applied dimension of the EU’s competition policy refers
to their respective substantial provisions concern- to its ability to act unilaterally against non-EU
ing restrictive agreements, concerted practices, enterprises whose conduct outside the Commu-
abuse of a dominant position and effective control nity could significantly distort competition within
of mergers in so far as they affect trade between the SEM. In other words, to achieve goal two, the
the two parties. The chapter further requires that EU’s competition policy instruments must legally
the parties shall maintain a competition regula- have extraterritorial reach to vet such behaviour.
tor responsible, and appropriately resourced, for However, the EU does now have a plethora of
the implementation of the aforesaid laws. Clearly competing jurisdictional constructs – the single
this, in some respects, goes beyond the EU’s MCF economic entity doctrine, the implementation
proposals for the Doha Round. Moreover, it is criterion and the effects doctrine – that enable its
clear that this is intentionally supportive of goal competition law to be applied extraterritorially.
one – to secure access for EU firms to the other The single economic entity doctrine came
party’s markets and to create a level playing field to the fore in the 1972 Dyestuffs case before the
therein. CJEU (Court of Justice of the European Union).
Thus the competition chapter provides the The Commission had fined ICI (Imperial Chemi-
regulatory competition framework and is com- cal Industries) and several other dye producers
plemented by the cooperation bilateral or memo- and their subsidiaries for acting in concert to
randum of understanding which determines how raise prices, thereby breaching Article 101 TFEU.
the respective regulators are to cooperate and On appeal before the court, ICI challenged the
coordinate their activities. This includes some or Commission’s reasoning as to why it came under
all of the elements stated in the list above, and Community jurisdiction, as the company was reg-
may also include an offer of technical assistance istered in the UK which was not then a member
from the EU when the partner has only recently of the EU. However, the court accepted the Com-
established their domestic competition rules. Of mission’s argument that it had jurisdiction based
course, even without the said competition chapter, on the single economic entity doctrine. The court
so long as the partner has the necessary domestic ruled that where a subsidiary in the common mar-
competition rules, a competition bilateral is pos- ket has a separate legal personality to that of the
sible. Indeed, this has turned out to be the case for parent company registered outside the Commu-
the EU. Despite slow progress in reaching FTAs nity, it is still possible for that subsidiary not to
with several key emerging economies, the EU has act independently in its conduct in the common
nonetheless been able to conclude memoranda of market, but to carry out, in all material respects,
123
the instructions of the parent company. In such a Therefore, with respect to goal two, the imple-
situation, it would be correct to impute the con- mentation criterion gave greater jurisdictional
duct of the subsidiary to the parent as they form a scope than the single economic entity doctrine, as
single economic entity, and in this event, the enti- the latter requires the non-EU company to own
ty falls within the scope of EU competition law. and control a subsidiary within the Community.
Thus the Dyestuffs ruling made extraterritorial In 1990, a further jurisdictional construct
jurisdiction based on the single economic entity became EU law, but this time in relation to merg-
doctrine EU law. However, in relation to goal two, er control. The Community Dimension (CD) or
the limitation of this doctrine is that jurisdiction threshold test was a cornerstone of the then new
over the parent based outside the EU only arises EU’s Merger Control Regulation (MCR) and
if it has a subsidiary in the Community itself. If remains at the heart of the current ECMR. The
an enterprise has no such subsidiary within the CD test, which is based on whether the proposed
Community and the conduct of the enterprise merger meets specific fixed global and Commu-
outside the EU directly and substantially distorts nity sales-turnover thresholds, determines Com-
competition within the SEM, then under the sin- munity jurisdiction. Hence, if the CD test is met,
gle economic entity doctrine the Commission irrespective of whether the merging parties are
cannot claim jurisdiction. EU or non-EU, they come under EU merger law
The above jurisdictional lacuna was remedied to assess if the merger would significantly impede
by the CJEU in its 1988 Wood pulp ruling. This effective competition within the common market
case concerns the Commission’s decision to fine or substantial part of it. This, therefore, appears
several non-EU pulp producers for a breach of to satisfy goal two.
Article 101 TFEU. The Commission asserted In the seminal 1999 Gencor case, the EU’s
that the agreement and practices of the produc- applicability of extraterritorial jurisdiction not
ers acting in concert affected prices announced only in respect of the CD test but also in regard
and/or charged to EU customers as well as on the to the implementation criterion and the effects
resale of pulp within the common market. Before doctrine was challenged. The case concerned the
the court, the applicant asserted that the Com- proposed merger between Gencor Ltd and Lon-
mission’s approach was contrary to public inter- rho Plc in which their interests in the platinum
national law which precluded the Community group metal (PGM) were to be brought together
from regulating competition restrictions adopted in a jointly controlled company, Impala Holdings
outside of the Community by mere reference to Limited (Impala). The matter was made more
the repercussions of the conduct within the Com- complex when the Anglo-American Corporation
munity. The court saw it differently: jurisdiction of South Africa Limited (AAC), the main com-
could be claimed if the breach of Article 101 petitor of Gencor and Lonrho in the PGM sector,
TFEU was implemented in the EU, and in the acquired a 6 per cent stake in Lonrho with the
case of non-EU pulp producers, this was satisfied right of first refusal over a further 18 per cent.
by the coordination of prices within the SEM. The Commission prohibited the proposed merg-
Moreover, the court was absolutely clear that the er on the ground that it would create a dominant
implementation criterion had been met by the duopoly position between AAC and Impala in the
behaviour of the said producers, irrespective of world platinum and rhodium markets as a result
whether or not this involved subsidiaries, agents, of which effective competition would have been
sub-agents or branches within the Community. significantly impeded in the EU.
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Before the General Court (GC), Gencor’s main Community Courts have sanctioned or upheld a
argument was that the MCR did not confer juris- number of overlapping jurisdictional constructs
diction on the Commission because the economic that enable the Commission to vet non-EU enter-
activities conducted by the proposed merger – the prises whose actions have the potential to distort
mining and refining of PMGs – took place within a competition within the SEM. Of course, the sanc-
non-member state, South Africa, whose domestic tioning of competing jurisdictional constructs
competition authority had approved the merger. In suggests overkill and raises the possibility that the
other words, the jurisdictional scope of the MCR Commission would face challenges in respect of
is restricted to economic activities within the EU. jurisdiction based on two or more jurisdictional
The GC disagreed, ruling that, for a merger to constructs within a case. Indeed, this has already
have a CD, it was unnecessary for the concerned arisen in the Liquid Crystal Displays case (see Case
enterprises to be registered in the EU or for the Study 6.2).
production activities related to the merger to
be located within it in order to for the proposed
merger to come under EU jurisdiction. They sim- Conclusion
ply had to meet the aforementioned sales thresh-
olds for EU jurisdiction to apply. The EU’s competition policy agenda is dynamic
Gencor also argued that the EU could neither and evolving as it not only seeks to establish a
claim jurisdiction based on the implementation regulatory level playing field which buttresses the
criterion or on the basis of the effects doctrine. SEM but also strives to improve market access
On both counts, the GC disagreed. Therefore for EU enterprises in a globalised world. This is
the Community Courts have applied the imple- particularly important in key emerging markets
mentation criterion in both an Article 101 TFEU where the majority of economic growth is antici-
case (Wood pulp) and the Gencor-Lonrho merger. pated to occur in the future. The Commission is a
In other words, the implementation criterion major driving force behind this evolution. It has
has the extraterritorial reach to deal with non- played a key role in moving forward the private
EU enterprises that breach Article 101 TFEU or enforcement agenda which not only enables an
mergers that would significantly impede competi- enterprise to claim damages when harmed by an
tion in the common market or a substantial part infringer of either Article 101 or 102 TFEU but is
thereof. This is clearly supportive of goal two. In seen as reinforcing the deterrent provided by pub-
relation to the effects doctrine, the GC concluded lic enforcement. However, the legal architecture
that the doctrine’s conditions had been met in the enabling such claims requires further develop-
case. This ruling by the GC on the effects doc- ment to be more claimant-friendly and to achieve
trine has been interpreted as making the doctrine a greater degree of uniformity of procedure so as
EU law, although the CJEU is yet to rule on the to attain a more level regulatory playing field. The
matter. Arguably, therefore, the effects doctrine Commission, under the merger control architec-
can be used to assert jurisdictional competence ture, is also attempting to end the enforcement
in Article 101 and 102 TFEU complaints and in gap in relation to minority shareholdings that have
a merger case. Of course the same can be said of the potential to create anti-competitive harm
the implementation criterion. across two or more member states.
Thus, in respect of goal two, the non-cooperative The EU has recognised that it cannot afford to
track has achieved considerable success, as the ignore the onward progress of globalisation, and
125
Case Study 6.2

The EU and the Liquid Crystal Displays case
In December 2010, the Commission fined six Liquid Crystal Display (LCD) panel producers a total of
€648 million for operating a price-fixing cartel between October 2001 and February 2006. LCD panels
are the main component of thin, flat screens used in televisions, computer monitors and electronic note-
books. The six were Samsung Electronics and LG Display of Korea, and Taiwanese firms AU Optronics,
Chimei InnoLux Corporation, Chungahwa Picture Tubes and HannStar Display Corporation. These sup-
pliers are global players, with the cartel meeting about 65–80 per cent of world demand for large size
LCD panels during the period of the infringement. This, of course, meant that the cartel would not just
be of interest to the Commission, but also to other regulators including the US Department of Justice
and China’s National Development and Reform Commission.
During the above mentioned period, the Commission found that the cartel agreed prices, including
price ranges, exchanged information on future production planning, capacity utilisation, pricing and
other commercial conditions. The Commission further found that the cartel’s multilateral ‘crystal meet-
ings’ took place at least monthly, normally in a hotel in Taiwan, for the purpose of not only entering
into anti-competitive practices but also to ensure compliance with the arrangements previously entered
into – the cartel took the possibility of cheating by one or more of its members very seriously. This led
the Commission to conclude that these meetings had a direct impact on EU customers because the vast
majority of televisions, computer monitors and notebooks incorporating the said LCD panels and sold
in the SEM came from Asia.
As these are non-EU companies, the Commission felt it necessary to explain the basis on which they
could be vetted under EU competition law, specifically Article 101 TFEU. The Commission asserted ju-
risdiction based on the Community Courts’ Wood pulp and Gencor rulings (see page 124 and 125). The
Commission declared that, based on the CJEU’s ruling in Wood pulp, the decisive factor in the determi-
nation of the applicability of Article 101 TFEU in cases where the participants of a cartel are seated
outside the Community is whether the agreement, decision or concerted practice was implemented
within the EU. The Commission further added that the GC in its Gencor ruling had established that EU
competition law is applicable if the conduct at issue has immediate, foreseeable and substantial effect
in the Community – the so-called effects doctrine.
However, the Commission’s jurisdiction in the case was challenged by some members of the cartel,
arguing that the Commission had not demonstrated that the implementation criterion or the effects
doctrine had been satisfied. The Chimei InnoLux Corporation asserted that the Commission had failed
to apply the implementation test deriving from the Wood pulp ruling, and that the effects doctrine’s
conditions would not be met as no direct, foreseeable and substantial effects were shown in the Com-
mission’s statement of objections. Similarly, LG Display argued that the Commission’s statement of
objections did not clearly show that the implementation criterion or the effects doctrine had been
satisfied. The enterprise further claimed that the characteristics of the market in question showed that
that the agreement was not and could not be implemented in the EU. AU Optronics contended that the
126
Commission should have established that the alleged agreement had an effect on sales to direct cus-
tomers within the EU and that those effects were substantial, immediate and foreseeable. It further
submitted that the Commission, under the principle of international comity, is required to refrain from
applying domestic laws when so doing would impinge on the territorial sovereignty of another state. In
a similar vein, LG Display contended that the Commission should apply the international legal principle
of comity, including the cooperation agreement with South Korea concerning cooperation on anti-
competitive activities. In other words, the Commission should consult with other regulatory authorities
to determine whether it was the best placed authority to investigate the case.
The above forced the Commission to apply both the implementation criterion and the effects doc-
trine so as to establish its jurisdiction in the case. Concerning the former, the Commission asserted that
contemporaneous evidence revealed that in addition to explicitly discussing some of their main custom-
ers in Europe, the parties were analysing and referring to the effects of the implemented agreement
on the European market and therefore sought their agreement to be implemented and have effects with-
in the EEA. Concerning the latter, the Commission declared that, based on the sale of the LCD panels to
the EEA in the form of direct EEA sales and direct EEA sales through transformed products, it can be
established that the infringement had immediate, foreseeable and substantial effect in the Community
in the sense of the Gencor case law. In relation to the three conditions, the Commission concluded that
the infringement immediately affected EEA markets since the agreements and concerted practices di-
rectly influenced the setting of price for LCD panels delivered directly or through transformed products
to European customers. Second, that the effect on the European market was foreseeable as the price
rise or the maintenance of higher prices and the reduction of output were to have evident consequences
on the conditions of competition at the downstream level for all IT and television applications. Finally,
that the effect of the agreement was deemed to be substantial due to the seriousness of the infringe-
ment, its long duration and the impact of the parties on the European market for the said final and
intermediate products.
In relation to the arguments of AU Optronics and LG Display concerning the principle of interna-
tional comity, the Commission asserted that it was not in breach of this and nor was this the case in
respect of its competition cooperation agreement with Korea. Indeed, in line with this agreement, the
Commission had consulted with the Korean competition authority and the latter did not claim that any
important interests mentioned in Article 5 of the agreement was affected. Moreover, the Commission
pointed out that both the OECD Recommendations on Anti-Competitive Practices Affecting Interna-
tional Trade and the EU–Korea competition cooperation agreement allowed a competition authority
full freedom to adopt decisions in competition cases within their own jurisdiction.
Having established jurisdiction, the Commission duly found the cartel to have breached Article 101
TFEU, with the next step being to determine the fine for each member. In deciding the amount of the
fine, the Commission must take stock of the gravity and duration of the infringement, with the upper
limit being set at 10 per cent of total turnover for the previous business year for the fined enterprise.
In the LCD case, Samsung Electronics received full impunity from being fined under the Commis-
sion’s 2002 leniency programme, as the enterprise brought the cartel to the Commission’s notice and
127
provided valuable information to prove the infringement. Likewise, some other members of the cartel
saw a percentage reduction in their fine, though this varied from enterprise to enterprise, according to
the cooperation they provided to the Commission. However, Chimei InoLux Corporation and HannStar
Display Corporation received no such reduction and were accordingly fined €300 million and just over
€8 million respectively. Of course, this was not necessarily the end of the financial cost to the members
of the cartel because they could also face claims for damages. Indeed, the Commission’s LCD press
release pointed out that any person or enterprise affected by anti-competitive behaviour as described
in the LCD case can seek damages. It further informed that, even though the Commission has fined the
companies concerned, damages may still be awarded without these being reduced on account of the
Commission fine.
Case questions
1 Explain why the LCD agreement breached EU competition law.
2 Given that the six companies in the agreement were Asian, on what grounds did the Commission
claim legal jurisdiction in the case?
3 Assess the view that the LCD decision represents a further success story for the Commission’s
leniency programme.
4 Why might private enforcement now be a realistic possibility in these types of anti-competitive
infringements?
of course the growing economic importance of of the Singapore Four, including competition
key emerging markets. The international dimen- policy), and partly because the agreeing of bilat-
sion of its competition policy agenda has there- erals under the Global Europe strategy is proving
fore focused on helping to ensure market access very time consuming too – though the agreeing
for EU enterprises in these economies as well of memoranda of understanding on competition
as protecting against non-EU enterprises whose cooperation with emerging economies, including
conduct outside the Community could signifi- Brazil, China and India, has proved to be much
cantly distort competition within the SEM. In more successful. In relation to the latter, the
relation to the former, progress has been limited, Community Courts have sanctioned competing
partly on account of the protracted negotiations jurisdictional constructs to give its competition
at the Doha Round (including the demise of three policy extraterritorial reach.
128
Key points
■■ Competition policy supports the intensity of competition in order to sustain the objectives of
the EU.
■■ EU competition policy has extensive powers to regulate the activities of enterprises when these
activities contravene Treaty objectives.
■■ Policy reacts to the process of integration via a gradual extension of policy scope and of new
powers.
■■ Globalisation has required the EU to refocus its competition policy.
Activities
1 Take one recent competition decision by the EU and research how the form and nature of a competi-
tive threat was established.
2 Using the example of one sector with which you are familiar, analyse the impact of competition on a)
market structure, b) competitors and c) consumers.
3 Research the Liquid Crystal Displays complaint. On what grounds could the Commission establish its
jurisdiction in this case?
4 Research the efforts by the WTO to develop provisions on competition policy. How warranted are such
actions now?

1 Why do states need competition policy?
2 What is the nature of the interface between economic integration and EU competition policy?
3 Why is the development of private enforcement for damages deemed important? Why is the 2014
Directive fundamental to enabling such actions?
4 What was the justification for the proposed reform of the ECMR?
5 Should competition policy play a future role at the WTO?
129
Bibliography
Davison, L. (2015) ‘EU Merger Control: a set of proposals European Commission (2014) Commission Staff Working
to enhance the operational effectiveness of the current Document Accompanying the Document White Paper:
architecture of separate jurisdictional zones’, Liverpool Towards more effective EU merger control, SWD
Law Review, 36 (1). (2014) 221 Final.
Davison, L. and Johnson, D. (2015) ‘An exploration of the European Commission (2014) White Paper: Towards more
EU’s twin-track approach to the achievement of its effective EU merger control, COM (2014) 449 Final.
international competition policy goals’, Liverpool Law
Graham, C. (2013) EU and UK Competition Law, 2nd edn,
Review, 36 (1). Harlow: Pearson.
Directive of the European Parliament and of the Council Koppenfels, U. (2015) ‘A fresh look at the EU Merger
(2014) On Certain Rules Governing Actions for Dam- Regulation? The European Commission’s White Paper
ages Under National Law for Infringements of the Com- “Towards more effective EU merger control”’, Liver-
petition Law Provisions of the Member States and of pool Law Review, 36 (1).
the European Union, PE-CONS 80/14.
130
Chapter 7
Promoting structural change

EU industrial and enterprise policy
Most of us understand that innovation is enormously important. It’s the only insurance against
irrelevance. It’s the only guarantee of long-term customer loyalty. It’s the only strategy for out-
performing a dismal economy.
Gary Hamel, American writer on strategy
■■ understand how the EU is seeking to stimulate structural economic change in Europe;

■■ comprehend the role that industrial policy plays in the process of change;
■■ be aware of the role of entrepreneurship in the process of industrial renewal;
■■ understand the role of enterprise policy in stimulating industrial change.
Chapter 2 offered an insight into the commercial macro-economic policies that stimulate invest-
structure of the European economy, highlighting ment. The EU’s growth strategies aim to do more
the importance of business of all sizes to its pros- than simply provide a passive set of measures that
perity. In the collection of competition states that allow businesses to grow and thrive. Integral to
is the EU (see Case Study 2.3), the focus of pol- its strategy is the desire to stimulate entrepre-
icy making has been on encouraging the founda- neurship in all forms of business as a precursor
tion and growth of businesses (both existing and to stimulating innovative change throughout the
new) as a foundation stone of its growth strategy. European economy. This chapter focuses on two
While Europe clearly has a diverse set of busi- sets of inter-related policies – industrial and enter-
nesses, many of their needs are similar in terms prise policy – to examine how each targets the
of the desire for low risk micro-economic and goal of promoting sustainable long-term growth.
131
The approach taken here is that enterprise policy political bias, for example, can lead to inefficient
is a subset of industrial policy and, thus, the lat- outcomes. Despite a shift away from activist poli-
ter establishes the context for the former and, as cies during the 1980–1990s, the emergence of
such, industrial policy is examined first. ‘strategic trade policy’ (STP) offered a renewed
justification for direct involvement. STP was
based on the premise that – in the presence of
The nature of imperfect competition – the development of stra-
industrial policy tegic industries (via direct intervention) would
lead to higher returns. Thus to retain these profits
Conventionally, industrial policy has been justified within their borders, states have a direct incentive
on the inability of the market to deliver outcomes to create national champions through the artifi-
that reflect the broader socio-economic interests of cial creation of a dominant position. This has been
the state and seeks to reallocate an economy’s supported by activism to support new industries
resources to enable it to generate a sustainable and to ensure supporting national and/or regional
and credible growth trajectory. Generally, the standards are adopted as the global norm, thereby
reallocation of resources occurs through one or creating a competitive advantage for indigenous
more of the following sets of policy measures: companies.
Despite this theoretical rationale for a return
■■ generic policies: these apply equally to all sec- to activism, there has been little change in indus-
tors and include measures such as education, trial policy across most industrialised states as
healthcare and others that improve the general they actively seek to promote structural change
economic environment at both a micro- and rather than to limit it. Instead of working in spite
macro-economic level; of or even against markets, policy is increasingly
■■ selective policies: these apply to particular complementing the changes associated with these
sectors. forces. Consequently, policy aims to harness mar-
ket forces to improve the competitive positioning
Selective policies are generally more activist of industry to secure growth and provide sustain-
than generic policies but, in practice, industrial able employment. The traditional role of indus-
policy tends to exist as a hybrid of both sets of trial policy as a device to maximise the interests
policies. Within this context, policy can be dif- of nationally owned corporations is out of date,
ferentiated between negative and positive actions. a concept that is disappearing as a result of the
The former aims to slow down the process of increased interactions between states. Interna-
change (for example, by protecting declining tional competitiveness is no longer simply an

sectors from international competition) whereas issue for indigenous firms but for all enterprises
the latter aims to accelerate transition within a located within an economy. An economy’s success
framework of pre-established socio-economic in international markets is dependent upon the
priorities. In a global economy, the domination of competitiveness of all enterprises that source or
positive actions should come as little surprise. locate themselves within it. Such policy themes
The dominance of the logic of the competi- need to minimise negative effects of socio-economic
tion state as a basis for policy has led to counter- change as well as political impacts. Increasingly,
accusations of government failure. Intervention therefore, industrial policy attempts to manage
based on poor knowledge/information and the consequences of structural change to ensure
132
that such changes have an overall positive impact of the role and the benefits of market forces. It
upon the economy. This implies that changes also reflects the intimacy of state-business rela-
occur with no large transitional costs in terms of tions within some states where intervention is
output or employment. Thus, ideally, resources often desired by enterprises to enhance and sup-
no longer required in declining sectors can read- port their international positioning. This has had
ily be absorbed into growing or emerging areas of its most vivid expression in the durability of the
the economy. ‘national champions’ policy followed by certain
Rodrik (2004) argues that the role of indus- member states. In these cases, the national pres-
trial policy is more about collecting information tige attached to these enterprises is little more
than it is about policies per se. The interaction than economic nationalism and a thinly veiled
with the private sector on externalities and their form of protectionism. Moreover, the ability of
remedies lies at the heart of what industrial pol- states to pick winners has, in practice, proved to
icy should be about. Strategic cooperation seeks be extremely flawed.
to reveal the main barriers to restructuring and
what would be the main interventions needed to
limit resistance to change. This positions industri- The evolving supranational
al policy as a discovery process based on mutual industrial policy
learning involving both public and private sec-
tors. It is this learning that lies at the heart of A major theme of the Europe 2020 agenda (see
the innovation and change that drives advances Chapter 1) is the promotion of an industrial
in industrial competitiveness. Rodrik argues that policy that enables the European commercial
change is based on self-discovery but that this eco-system to adjust to the continuing process of
process is subject to information asymmetries globalism. Such an approach represents a strong
which the state – especially in the case of smaller sense of continuity with the neo-liberal themes
businesses – can help the business to overcome. that have formed the cornerstone of industrial
This position is reflected in the work of Foreman- strategy for nearly three decades. These issues are
Peck and Federico (1999) who argue that within reflected in an emerging framework intended to
a globalising environment, industrial policy has stimulate the EU’s international competitiveness
to be active on three levels by: and is based on assumptions that:
1 creating a landscape (the legal and institutional ■■ intangible factors (such as education) are more
framework); powerful drivers of medium term competi-
2 modifying the ecological environment (the tiveness than tangible factors (such as state
technology, and the market inputs and output); subsidies);
3 changing the fauna (the relative importance of ■■ innovation and intellectual property are
each firm). the strongest drivers of the competitive
environment;
While this new agenda reaffirms belief in mar- ■■ relative costs and productivity affect growth
ket forces as the main method of structural and and profits – though ‘capital deepening’ (that
strategic adjustment, the addiction to intervention is high levels of capital intensity within enter-
in some states remains strong. In many instanc- prise operations) tends to be counter-productive
es, this is derived from a long standing mistrust in terms of both profits and employment.
133
Case Study 7.1

The EU’s raw materials strategy
Ensuring a secure and reliable supply of raw materials is paramount for the well-being of a wide range
of industries. The EU itself is a major supplier of gypsum and natural stone and is largely self-sufficient
in construction materials. The EU is also one of the world’s largest producers of certain industrial min-
erals. However, the EU is heavily dependent upon the imports of primary and secondary (i.e. recycled)
raw materials and high tech metals. This is not only a European issue but also a global one and has
driven the EU’s raw material initiative which attempts to address issues of common concern regarding
the management of these matters at the European level.
The initiative identifies the raw materials that are critical for the European economy based on
their economic impact and importance, on the high risks associated with their supply and on the lack
of available substitutes. In 2010, an initial critical list was drawn up consisting of 14 non-energy, non-
agricultural critical materials. This exercise was repeated in 2013 when a further six materials were
added to the list on similar grounds. The 20 critical raw materials are set out in Table 7.1.
While there may be problems regarding the methodology used in compiling this list, it is worth
stressing that all raw materials are important for business and that non-appearance of a particular
material on the list does not diminish its importance for the economic performance of the European
economy. It is also worth noting that the list itself is likely to change as political and economic events
lead to shifts in economic priorities and/or supply risk. Of the 54 materials analysed, around 90 per
cent, notably many base, speciality and precious metals and rubber, are sourced from outside the EU.
China is the major supplier of many of these materials but Russia and South Africa are also important,
especially for the platinum group of materials. Supply from EU sources of the 20 critical raw materials
listed in Table 7.1 is severely limited.
It is expected that in the long-term, market forces will create the conditions for new mining and
recycling projects globally and the EU wants to ensure that such processes do not undermine access to
these raw materials but improve it. However the EU does face serious challenges when addressing these
issues in global markets, namely:
■■ the availability and price development of raw materials which can radically alter EU access to
these commodities;
Table 7.1 The 20 critical raw materials

Antimony Phosphate rock Magnesite Coking coal
Gallium Borates REEs (light) Natural graphite
PGMs Indium Cobalt Tungsten
Beryllium REEs (heavy) Magnesium Fluorspar
Germanium Chromium Silicon metal Niobium
134
■■ new industrial strategies and the risks of dysfunctional global markets which together can combine
to cause an increase in demand for these products but also restrict supply.
In response to these vulnerabilities in its economy, in 2014 the EU launched a raw material initiative
(following similar initiatives from Japan and the US) based on three themes:
1 Ensure access to raw materials sources from international markets on identical conditions to those
available to the EU’s main rivals
This aspect of the strategy necessarily involves active participation by the EU in materials diplomacy
to achieve better security of supply. This will require enhanced international coordination in established
international organisations (such as the G-8 and the OECD) to explore opportunities for cooperation
for mutual security of supply. These measures will need to be supported by action in EU trade, regula-
tory and development policies. In the former two, the EU should seek to limit trade distortions in the
supply of these materials and in the latter to coordinate access to materials with development aid and
support to both strengthen states and promote a sound investment climate and sustainable manage-
ment of resources.
2 Establish the necessary framework conditions to ensure secure supply of raw materials from
indigenous EU sources
This theme depends on establishing the right framework conditions by ensuring access to land through
streamlining administrative conditions to manage competing land uses and by speeding up the issue of
relevant permits. Integral to this is better knowledge of resource availability within the EU based on more
effective geological surveys and the support – through research programmes – of methods to enhance
extraction and processing. This will be supported by action on cohesion policy where themes overlap and
by promoting and addressing skills shortages and an awareness among the public of these materials.
3 Generate increased efficiency in the use and recycling of these materials as a means of lowering
the EU’s consumption of these materials, thereby reducing import dependency
This theme aims to spread awareness and implementation of resources efficiency in the use of these ma-
terials. It also focuses on increasing the production and consumption of resource-efficient products as
well as the more extensive promotion and usage of recycled materials. Achieving these objectives means
working with third countries to ensure waste is treated in a manner compliant with EU objectives.
Case question
Working in groups, chose one of the materials on the list in Table 7.1 and assess the political and
economic risks faced by its consumption.
Such neo-liberal approaches stress that economic growth and promote long-term
European competition states should be look- employment opportunities. Underpinning such
ing to structurally adjust to the global market a policy is the creation and sustenance of a set
place through diverting resources towards sec- of industries that are able to compete success-
tors that are more likely to generate sustained fully on the global stage. In Europe’s case, the
135
challenge is often set in the context of reallocat- national/intergovernmental industrial policy

ing resources to: actions as compatible with EU law and establish-
ing broad generic frameworks for promoting
■■ manage the rise of emerging and growing the industrial competitiveness of European-
industries; based business. To this end, the contribution
■■ manage the performance of declining and/or of the EU to industrial policy is threefold and
poorly performing industries. works through:
Community interest as a justification for 1 establishing the boundaries within which

strengthening the EU’s role in industrial policy industry and small businesses can pursue their
tends to be defined in an uncontentious manner, ambitions. To this end, policy aims to establish
partially as a result of the desire of European states a predictable legal framework which can be
to ensure industrial policy is compatible with the adapted to specific needs;
principle of subsidiarity. Consequently, the Com- 2 establishing the necessary conditions to enable
munity interest is identified by common concerns industry to be successful and to realise its com-
and issues such as the legacy of industrial change. petitive potential;
Importantly, this should not be taken as proof of 3 ensuring that the frameworks, institutions and
a convergence between states in the substance of instruments necessary for a vibrant business
policy: it may simply reflect areas of mutual con- and industrial environment are in place and
cern. Where there is a convergence of policies, it work effectively.
is debatable whether this is driven by the EU or is
a natural consequence of the process of business EU industrial policy takes the position that
interaction across borders. The case for a Europe- structural change is not an issue for the state but
an industrial policy has to be based upon a prima for the agents of change themselves – that is,
facie case for supranational industrial policy and enterprises. Policy actions are merely the cata-
the erosion of the viability of national policies. lyst of competitiveness by stimulating change via
There is little point in shifting the jurisdiction of developing clear and predictable conditions for
policy beyond the national domain if the degree business. This means policy needs to eliminate
of market internationalisation is not that appar- inefficiencies derived from competing policies;
ent. Thus policy needs to be conducted as locally to reduce the unfairness derived arising from
as possible to benefit from the levels of specific the unequal allocation of resources between EU
knowledge and complexity of industry that can states; to reduce the potential and incentives for
otherwise undermine broad policy actions. ‘beggar-thy-neighbour’ scenarios; to account for

While national policy is the main driver of policy spillovers; to collect appropriate informa-
the process of change, the integration of markets tion and conduct pertinent analysis and informa-
is breeding a degree of convergence between tion regarding common problems; and to develop
national policies which is broadly in line with a consensus between states and implement policy
measures being established at the supranational in a coherent and transparent manner.
level. The power of European industrial policy In facilitating the process of strategic change,
is a direct derivative of the powers granted the EU requires all policies to be mutually sup-
to the Commission by the member states. portive to deliver a more competitive economy.
To date, this has in practice meant sanctioning Thus industrial competitiveness lies not only
136
Case Study 7.2

The challenge of rare earth materials
Rare earths are a sub-group of raw materials that comprise 17 chemical elements (such as lanthanum,
cerium and neodymium) that are essential for a vast amount of high technology products across sec-
tors such as green technology, medical, aerospace and defence. The problem is that these materials are
found in such low concentrations in the earth’s crust that their extraction and commercial exploitation
is extremely difficult.
Currently, China has a near monopoly on the largest reserves of rare earths, possessing about
36 per cent of the world’s reserves forming about 97 per cent of the global market. This has given
China a strong competitive advantage across a number of sectors, enabling it to lead scientific
research in related fields and to act as the world leader in the production of alloys and final prod-
ucts. Moreover, China is negotiating a series of bilateral agreements to secure further quantities of
these rare earths.
Although other developed states also possess reserves of rare earths, they lack the processing know-
how to develop them and it will take up to 15 years to develop the necessary critical mass for any state
to emerge as a credible rival to China. This inferior position of western states is compounded by China’s
strategic use of its rare earth assets to wield political power and its restrictions on exports of these ma-
terials in favour of meeting domestic needs, causing the prices of these commodities to oscillate wildly
with a consequent impact on business, notably in the electronics sector.
This highly distorted market led the former Chinese leader, Deng Xiaoping, to note in 1992, ‘there
is oil in the Middle East; there are rare earths in China’. The result is a need for the EU (and other
developed states) to develop a credible rare earths strategy as a means of gaining security of supply
at reasonable prices. The US, for example, with ambitious green technology targets has restarted
rare earth production – a process that had initially ceased in 2002. The EU has fewer options but
has sought to put pressure on China, particularly in relation to what it deems unfair export strate-
gies. Nonetheless, the EU faces a challenge to increase its self-sufficiency in rare earths and is using
various tactics in pursuit of this goal, including improving human capital and increasing the recycling
of rare earths and indigenous production where feasible. In relation to the latter option, the EU is
looking to Greenland (with 6 per cent of reserves) to provide an alternative source of rare earths.
Meanwhile, companies have already developed methods of extracting these materials from electronic
waste. Stockpiling materials from key partners could also help protect EU companies from monopo-
list pressure.
Case question
Working in groups, identify which European sectors and product groupings are especially vulnerable
to disruptions in the supply of rare earths.
137
within the domain of what would conventionally a translation in national economies. Some states
be considered ‘industrial policy’ but also has to are reluctant to accept anything which may mean
take into account: the creation of jobs at the cost of moving to US-
style uncertainty. Over time, the EU may have
■■ a ‘better lawmaking’ approach that will contin- little choice but to accept some hybrid of EU/
ue to give industry the benefit of a market that US models as the information society and more
is integrated and ensures that any regulatory intense international competition start to become
burden is not too cumbersome; a reality for more and more enterprises.
■■ the mobilisation of all community policies that In 2014, the European Commission published
aid competitiveness; an updated statement of its position on industrial
■■ the specific needs of various industrial sectors policy – For a European Industrial Renaissance –
within these policies. which emphasised that the process of adaptation
to intensified globality has been delayed by the
A common theme is identification of the euro crisis. The resulting period of austerity not
strengths and weaknesses of the European econ- only supressed demand but also forced many firms
omy as a basis for policy direction. It is these to rein back investment. These problems were
strengths that are perceived as necessary for secur- compounded by the slow pace of reform in those
ing the success of the European economy on a eurozone states which have been at the forefront
global stage. All businesses located within the EU, of poor economic performance. In short, many of
irrespective of the nationality of ownership, are the problems that have bedevilled the EU econo-
to be the focus of policy measures. Consequently, my in the era of globality have not been addressed.
policy needs to ensure not only that indigenous This responsibility for this lies with member states
industry has the basis for global success but also and their willingness to promote change. In pre-
that the European economy is an attractive loca- vious policy pushes, the EU has sought to offer
tion for foreign direct investment. Increasingly, advice to member states and not to make them
the EU believes that the development of indig- comply. As a collection of competition states, the
enous industry requires the development of more emphasis has been on micro-economic reform
fulsome alliances (often with non-EU companies) that states have been slow to implement.
to assist the rationalisation of production among The EU’s strategy is based on moving its indus-
European enterprises as well as the promotion of tries out of low cost segments where they cannot
the dissemination of ‘know-how’ throughout the compete into higher value market segments. This
entire economy. represents a longer term shift in emphasis within
The integrated approach treats national indus- the programme as the EU recognises that it cannot
trial policies as important: there is a need for each compete with low cost states. This shift towards
state to learn from each other in terms of how higher value-added segments relies on boosting
to adjust to globalisation, economic integration, what the EU spends on R&D (see Figure 7.1): the
structural adjustments and the technological rev- aim is to increase R&D spending to 3 per cent of
olution. The largely passive nature of European GDP by 2020 (see Chapter 1) with a particular
industrial policy mirrors the relative lack of pow- focus on digital technologies and other knowledge-
er of central supranational institutions in indus- intensive sectors. Such themes lie at the heart of
trial policy development. These measures are not the Horizon 2020 research programme which will
the exclusive preserve of the EU and need to find fund a series of near-market research programmes
138
3.5
% GDP 2.5
1.5
0.5
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
EU-28 China US Japan EU 2020 Target
Figure 7.1 R&D as percentage of GDP

Source: EC, 2014.
to foster a greater volume of private sector fund- The aim is to utilise these generic technologies
ing. This process of adjustment is to be supported right across the European commercial base.
by €100 bn from the regional funds between 2014 In addition, the 2014 document on a Euro-
and 2020 and by adoption of the notion of ‘smart pean industrial renaissance stresses the following
specialisation’ which implies that the EU intends themes.
not only to cushion change in its less developed or
performing areas but also to create positive adjust- 1 Resource efficiency and access This involves a
ment within them. number of themes to promote firm survival
These actions are to be supported by a broad- and efficiency, including improved access to
er shift in flanking policies, such as competition finance in recognition of the greater difficul-
policy, to allow scale benefits where necessary ties encountered by firms, especially smaller
without conflicting with the desire for plurality. firms, in obtaining finance following the onset
This flanking policy reform is driven by the EU’s of the euro crisis; efforts to militate against
desire to focus its efforts on six key areas where it sharp rises in the price of energy, especially
is seeking a competitive advantage, namely: where major rivals have tapped into new
cheap sources; and securing access to cheaper
■■ advanced manufacturing (such as through the and more reliable sources of raw materials (see
spread of additive processes); Case Studies 7.1 and 7.2).
■■ key enabling technologies that have a wide- 2 Skills and industrial change Improved skills are
spread impact; important for the process of change. How-
■■ bio-based products; ever, this theme is not only about improving
■■ clean vehicles and vessels; the quality of skills but also about ensuring
■■ sustainable construction and raw materials; that labour markets work effectively across
■■ smart grids and digital infrastructures. space and also across sectors where the skill
139
sets required by industry are in a state of The nature of

flux. This requires reforms in relation to entrepreneurship
both skills development and to facilitating
mobility. The ability of entrepreneurship to generate
renewal and sustain change within economies is
an increasingly important factor generating com-
European Union petitiveness.The perceived link between scale and
enterprise policy economic growth resulted in the neglect of entre-
preneurship in the policy process but this link
SMEs continue to be a core focus of the EU’s broke down as knowledge became more impor-
industrial strategy. By the end of 2013, the EU tant to commercial success. Entrepreneurs with
had provided support to over 300,000 SMEs superior knowledge had an incentive to leave the
through various financial institutions and funding employment of an incumbent firm and to utilise
methods. As a priority within Europe 2020, SMEs this knowledge for their own commercial benefit.
have gained increased importance, not only for A key theme in the current growth strategy is the
their role in economic recovery and change but creation of an environment that enables all busi-
also because these businesses were more adverse- nesses to flourish, especially SMEs which are seen
ly affected by the crisis within the European econ- as important not merely to job creation and com-
omy than any other group of businesses. At the petitiveness but also to unlocking personal poten-
height of the crisis, these firms lost 9.3 per cent tial and adding to the broad social well-being
of value-added and about 0.5 per cent of their of the EU economy. Thus, there was a need for
workforce – the exception was Germany where policy to support the growth and development of
both indicators of SME performance were posi- European businesses and to maximise their con-
tive. An estimated 50 per cent of all start-ups fail tribution to the development of the European
within their first five years and between 2008 and economy. However the EU has a weak entrepre-
2013, although the number of micro-enterprises neurial culture, a characteristic driven by a num-
grew by 2 per cent, the number of SMEs remained ber of factors, including:
largely static suggesting that SMEs have problems
scaling up. In developing policy towards SMEs, ■■ the tendency of Europeans to be risk averse
the European Commission has deemed a number and unwilling to accept the uncertainties con-
of factors to be important. At the macro-economic nected with self-employment;
level GDP growth and trade are important the dearth of entrepreneurial role models for
■■
whereas at the micro level, the sectoral compo- young people;
sition of the economy, the active promotion of ■■ difficulties in starting and operating a business.
R&D and the knowledge intensity of activities
seem to be especially important. Before examin- The impact of entrepreneurship depends
ing how these themes feed into policy, the nature upon the context of the business. If entrepre-
of entrepreneurship itself is considered. Although neurial activities arise out of necessity (i.e. in the
entrepreneurship is not a characteristic exhibited absence of any other alternative) – as is the case
solely by SMEs, entrepreneurship policy does in many developed states – the effects will tend
mostly focus on this group, and reflects a market to be negligible. If entrepreneurialism occurs
failure perspective. out of choice, it can offer greater opportunity
140
for growth. In Europe, entrepreneurship tends The key word is change and how change is linked
to be opportunistic as firms attempt to create to new and emergent enterprises.
new niches and, as such, are more likely lead to The process of entrepreneurship is not sim-
more growth and create new employment. Over- ply about the creation of a climate that is ripe for
all, entrepreneurship involves a number of key innovative start-ups or for facilitating high growth
elements: SMEs but it is also about fostering corporate
entrepreneurship. As seen in Chapter 2, despite
■■ Exploitation of creativity and/or innovation: being relatively low in number, LSEs nevertheless
entrepreneurship is a mindset encompassing have a significant impact on the performance of
the ability of an individual to spot an opportu- the European economy. Although these firms do
nity and exploit it. In order to create, change not face the same pressures from the absence of
and compete in a new market, a firm has to scale faced by SMEs, there has been a tendency
be based around innovation or creativity. within large businesses to eschew corporate
These traits need to be supported by sound entrepreneurship. On the pretext of stimulating
management. innovation within what can be sclerotic struc-
■■ Entrepreneurs: there must be a capability to tures, there has been a trend in larger businesses
understand and undertake risk during the con- to foster such practices to overcome an aversion
struction of new businesses. Entrepreneurs to risk taking and even to promote corporate
with these characteristics also value independ- renewal. This process of intrapreneurship is often
ence and self-realisation. outside formal corporate processes. The loss of
■■ Application of entrepreneurship: this can occur market share and the relatively poor performance
across any sector or type of business, including of Europe’s large-scale enterprises have led to
all self-employed and firms of all sizes. policy approaches that foster a more widespread
process of innovation-driven entrepreneurship. As
The above emphasises that the function of a direct policy measure, however, policy towards
enterprise is to change the nature and pattern entrepreneurship in SMEs has been the primary
of the modern economy by promoting change and most high profile of the EU’s efforts to estab-
through technology, innovation or new practice. lish a more entrepreneurial Europe.
Definition of small and medium-sized enterprises

Box 7.1
Member states have traditionally employed differing definitions of what constitutes an SME. However,
in order to operate a common policy for SMEs and to provide an appropriate focus for policy, a single
definition of SMEs was required. The Commission has, therefore, adopted a definition that applies to all
Community programmes for better targeting of policy initiatives.
To be classified as an SME, and therefore to benefit from EU enterprise policy, a firm must satisfy
the employees measure and one of the financial criteria. In addition, the firm must be independent: in
other words no more than 25 per cent of the enterprise can be owned by another enterprise or group
of firms.
141
Table 7.2 Criteria for SMEs
Medium-sized Small Micro-enterprise

Maximum number of employees <250 <50 <10
Maximum turnover (€mn) <50 <10 <2
Maximum balance sheet (€mn) <43 <10 <2
Source: European Commission.
While SMEs offer commercial potential, they person in a similar position will find it difficult to
do face specific problems.The European Commis- start again. The issue then is one of allowing hon-
sion’s own figures suggest that over half of SMEs est bankrupts to make a fresh start. In treating all
fail within five years of start-up. The Commission bankrupts the same, the law does not distinguish
identifies five factors to explain this phenomenon: between the reason for bankruptcy (for example,
between the fraudulent and the unlucky).The result is
■■ the increasingly intricate legal, fiscal and that honest bankrupts can be stigmatised. As venture
administrative environment which is particu- capital markets start to mature, this problem could be
larly burdensome for SMEs; overcome. Stricter bankruptcy laws tend to occur in
■■ an inability to access research programmes and locations where there is an absence of venture capital
exploit their results; and where lending is by commercial banks
■■ relatively inadequate management and training The rationale for policy action on entrepre-
capabilities; neurship is based on three market failures. The
■■ additional borrowing costs arising from the first is the need to exploit the advantages derived
higher risk attached to lending to SMEs; from network externalities. These are advantag-
■■ scale impediments in accessing new markets. es gained from geographical proximity to com-
plementary firms and which enable the firm to
These problems are compounded by more access knowledge spillovers. This implies that the
generic problems related to their relatively poor value of entrepreneurs is increased when they are
productivity (when compared to larger enterpris- located near other entrepreneurs. Consequently,
es) as well as lower returns to scale and poorer policy has sought to create clusters of SMEs. Mar-
labour/working conditions. ket failure is based on the failure of these clusters
The reasons for risk aversion by financiers may to emerge. The second market failure concerns
be perfectly rational given the higher risks and the existence of knowledge externalities: if SMEs
lower rewards available within Europe: rewards are to benefit from the knowledge created by
are lower because of relatively higher taxes and other parties, there is a need to be close to them.
risks are higher because of European bankruptcy Thus even if a firm fails, their experience needs
laws. In the EU, these laws are generally designed to be registered with other firms. Finally, the
to protect banks rather than to give the bankrupt prevalence of learning or demonstration effects
a second chance as is the case in the US where is important in those locations where enterprise
business failure can be positive in the minds of has been absent. Where a business starts up, oth-
investors if entrepreneurs can demonstrate they ers may seek to learn from its experience and
have learned from the experience. In the EU, a transfer it to their own activities.
142
Themes in EU enterprise by the continuing failure of EU member states to

strategy match the investment in education and training of
their major rivals, a factor which Europe 2020 is
As highlighted in Chapters 1 and 2, the struc- attempting to address (see Chapter 1).
ture of European industry is changing, reflect- Despite more intense competition on the
ing the EU’s reliance for an increased proportion global stage, European business remains a dom-
of its wealth upon services and less on the tra- inant manufacturing force (see Chapter 2).
ditionally dominant manufacturing sector. The However, this should not be allowed to hide the
complexity of the modern commercial envi- competitive problems facing the EU. These are
ronment created by the process of globalisation especially noticeable within high technology
(and associated trends) is increasing pressure sectors where the EU is failing to compete not
upon European business to develop new sources only in the high value-added end of the mar-
of competitive advantage. To this end, industrial ket (such as electronics and office machinery)
policy has emerged as a means of providing direc- but also in the medium-to-high technology sec-
tion and support for such change as EU states tors in which the EU specialises, and in mature
move towards relying upon the service sector and capital-intensive sectors where the take up of
knowledge-based or capital-intensive industries ICTs has been slow. Low productivity growth
to sustain and enhance their position within the in these sectors and their overall importance to
global economy. This places a heightened empha- the EU economy means that the EU faces a real
sis upon the quality of an economy’s factor base. competitiveness problem. Reasons for this poor
This is especially pertinent for labour which is the performance have been attributed to:
only factor of production that cannot be easily or
quickly duplicated across the global economy. ■■ great difficulties in accessing private research
If such structural changes are predicted, they finance for R&D in Europe;
can work to the benefit of the economy. This is ■■ a culture that is too risk averse;
rarely the case due to limited knowledge and ■■ insufficient collaboration between public
political pressures that limit the effect of these research bodies and the private sector;
changes. In general (and in response to intensify- ■■ a much lower proportion of researchers in the
ing global competitive pressure), most of Europe’s population compared to Europe’s main rivals.
competitive sectors have made substantial efforts
to adjust to the new environment. Many have These concerns have been highlighted by the
upgraded their production infrastructures and emergence of new economic powerhouses in the
implemented new forms of organisation. Many shape of India and China (see Chapter 18). China
sectors considered medium-to-low technology is shifting away from a focus on labour-intensive
(such as textiles, food-processing and retailing) activities towards those which rely on increased
have increased their technological capability, technological specialisation. As these states devel-
for example. This has led to a change in labour op further, they will act as a magnet to global
demand in favour of higher skilled employees, business and potentially undermine investment in
thereby underlining the importance of human the EU and hinder its ability to grow. In the short
capital and investment in employee capabil- term, Chinese growth has had an immediate effect
ity (see Chapter 14) to the competitiveness of on the cost-sensitive sectors of the EU economy –
European business. However, this is not helped a trend which could spread to other sectors.
143
It is apparent that creating a more entrepre- and employment performance of EU SMEs when
neurial EU means coordination among all parties compared to those of their main industrial rivals.
involved in developing policy that supports enter- These problems were compounded by the 2008
prise development and emergence, not only at EU credit crunch which further limited small busi-
but also at member state level. There also needs ness difficulties in accessing the finance needed
to be learning from the best in terms of what to grow. The SBA is underpinned by a belief that
makes enterprises successful and of the positive the best possible base for a vibrant SME sector
role that entrepreneurs can play in the modern is a widespread recognition of the importance
economy. This must be supported by more posi- of enterprise to the socio-economic context of
tive attitudes towards entrepreneurs in general. the EU. In this regard, enterprise should be an
While it has no formal powers to harmonise laws, attractive option for EU citizens which may mean
the European Commission has been lobbying for reducing the risk for those who wish to set up a
change as it believes that EU laws are basically new business.The SBA aims to encourage a ‘Think
outdated in two main areas: first, in terms of the Small First’ approach to policy making across a
legal restrictions placed on bankrupt companies, wide range of activities from regulation to public
including restrictions on starting up new business service. The aim is to integrate existing enterprise
and, second, in terms of the discharge period (the policy instruments into a single framework based
timeframe over which an entrepreneur is liable on a proactive partnership between the EU and
for the repayment of debts). In some states, the peri- member states.The SBA is based on ten core prin-
od of discharge is as long as six to seven years. ciples. These involve:
SMEs are widely perceived as vulnerable to
the impact of regulatory and administrative costs. 1 creating an environment in which entrepre-
The EU estimates that SMEs can be impacted neurs and family businesses can thrive and in
more severely than larger firms by such burdens. which entrepreneurship is rewarded;
The EU has long wished to simplify the regulatory 2 ensuring that honest entrepreneurs who have been
process especially for micro-enterprises. declared bankrupt quickly get a second chance;
3 designing rules according to the ‘Think Small
First’ principle;
The Small Business Act 4 making administrations responsive to the
needs of SMEs;
The cornerstone of the EU’s strategy towards 5 adapting public policy tools to SME needs and
enterprise, which is also captured in Europe 2020, facilitating their participation in public pro-
is encapsulated within the Small Business Act curement and better use of state aid facilities
(SBA). The SBA was adopted in June 2008 and for SMEs;
seeks – for the first time – to establish a com- 6 facilitating the access of SMEs to finance and
prehensive policy framework for SMEs across developing a legal and business environment
national and supranational levels as a means of supportive of timely payments in commercial
improving the overall approach to entrepreneur- transactions;
ship across the EU. This reactive measure is a 7 helping SMEs to benefit more from the oppor-
response to the perceived inadequacy of previous tunities offered by the SEM;
measures in meeting the needs of the small busi- 8 promoting the upgrading of skills in SMEs and
ness, especially regarding the lower productivity all forms of innovation;
144
9 enabling SMEs to turn environmental chal- when evolving regulatory and administrative
lenges into opportunities; structures and procedures. This can be supported
10 encouraging and supporting SMEs to benefit by positive measures that militate against costs of
from growth markets. compliance through devices such as e-government;
the promotion of best practice among public
In support of these measures, the Commission administrations as a way of supporting SMEs
is proposing a general exemption from the regula- and affording SMEs more opportunities through
tion of state aids in the field of assistance towards a more open and transparent public procure-
SMEs especially where they lead to the support of ment process. Such opportunities are also closely
training, employment, etc. There are also propos- linked to increasing the awareness of SMEs of the
als for reduced VAT rates, a measure to simplify opportunities created by the SEM. This is often
VAT rules and action on late payments. a problem related to scale, according to which
The SBA reflects a more proactive series of SMEs have minimal capabilities for information
measures by the EU to facilitate change. In an search to understand the opportunities created by
environment where an estimated 45 per cent the market opening process. Beyond the borders
of Europeans would prefer to be self-employed of the EU, the priority is to extend the capabilities
(compared to 61 per cent in the US), there is a of SMEs into international markets.
perceived need to make self-employment more Perhaps the most salient issue tackled by
attractive. This requires a root and branch change, the SBA is the persistent problem of access to
starting with reform of the education system.This finance – a problem compounded as a direct leg-
problem is compounded by the fact that nearly acy of the credit crunch. Despite the public funds
six million SME owners will retire over the next available to SMEs, the high degree of risk aversion
decade. To compensate for this, it is desirable to from private investors represents a major barrier
promote entrepreneurship among groups who to SME growth. This is compounded by the weak
would otherwise be excluded from this process. equity position of many SMEs and a common ten-
This depends on the spread of best practice and dency towards late payment with the consequent
the widespread dispersion of enterprise educa- effects upon corporate cash flow. This latter prob-
tion. Moreover the EU – as suggested – seeks lem is a common cause of SME insolvencies with
to remove the stigma of failure from entrepre- around 25 per cent in any given year due to this
neurs and to allow ‘failed’ entrepreneurs a second late payment problem, impacting on over a quar-
chance. It is estimated that bankruptcies affect ter of a million jobs. In response to this problem,
some 70,000 SMEs annually in Europe, involving the European Investment Bank has established the
2.8 million jobs. Almost half of those who have Microfund. In no small part, however, a key com-
failed have admitted to be reluctant to start again ponent of boosting the performance of SMEs lies
due to the stigma of failure.This represents the loss in improving their skills base for the purpose of
of a potentially important resource for Europe. stimulating a broader innovation process. Again,
The SBA also seeks to address the persistent this is linked to improving the quality of education
problem of administrative compliance. In 2010, systems, especially in relation to technological
36 per cent of SMEs felt that compliance costs competences. Central to this is the integration of
were constraining their businesses. Hence there SMEs into the research community. In 2010, only
is an aspiration for local and national administra- 30 per cent of SMEs claimed to have new prod-
tions to follow the ‘Think Small First’ principle ucts or income flows from new products. One
145
way of rectifying this situation is to enable SMEs to make investors aware of the opportunities
to exploit the advantages that emerge from new available within these investment segments;
‘green markets’. This is not simply about product ■■ pushing for better market access: in terms of both
innovation but is also about process change and the SEM and global markets by more effective-
the consequent efficiencies that can emerge, such ly militating against risk and by offering better
as from improved energy efficiency. information;
To date (2014), the SBA has had a mixed ■■ aiding SME resource efficiency: by encouraging
impact with delays in the implementation of key the spread of digital technologies and efficient
directives on e-invoicing and late payment occur- online administrative tools;
ring through lack of agreement. It is generally ■■ promoting the virtues of enterprise: for job crea-
agreed that, as the recession has bottomed out, the tion and growth.
access to finance by SMEs has gradually improved.
Although the EU has become more active in the
area, this improvement has been largely market SME internationalisation
and not policy driven. There has also been good
progress in improving access to public procure- Given the importance of exports to the EU’s
ment and changes to standards processes have growth strategy and of SMEs to the process of
made them more SME friendly. Furthermore, change, it is worth considering actions to promote
there has been some success in both putting the role of these companies in the export process.
SMEs at the heart of the innovation process and in By 2014, only 8 per cent of the EU’s SMEs were
increasing the profile of SMEs and entrepreneur- exporters compared to 28 per cent of LSEs. In
ship among the population as a whole. addition, only an estimated 12 per cent of SMEs’
At the level of the member states, the main inputs were acquired in non-EU markets. These
measures within the SBA have been sporadically markets are key to SMEs, especially set against the
implemented with targets for the reduction of the background of a stagnant home market. Inevita-
administrative burdens on SMEs being especially bly, trade barriers represent a greater burden for
notable for their lack of consensus and progress. SMEs than LSEs, partly due to a lower capability
Moreover, the key finance issues will not be effec- to adapt to the risks created by this process. How-
tively resolved unless member states show greater ever EU SMEs are more internationally active
commitment. There has also been little progress than SMEs in either Japan or the US. Although
in most member states regarding the reform of only a small fraction of EU SMEs are internation-
bankruptcy laws. Overall, the EU has sought to ally focused, nonetheless 25 per cent of SMEs had
add new impetus to the process by: exported during the three years to 2013 (13 per
cent of SMEs exported outside the SEM), thereby
■■ making smart regulation a reality for SMEs: this suggesting there were a lot of irregular exporting
means pushing the ‘Think Small First’ prin- SMEs. The majority of the exports of EU SMEs
ciple further and faster through promoting are to other European states. Consequently, the
quick and resource-efficient administration; major growth poles in the global economy, nota-
■■ paying closer attention to the financing needs of bly the BRICs, are largely neglected by EU SMEs.
SMEs: the EU is pushing for improved access Indeed, only 7 to 10 per cent of EU exporting
to finance at both national and sub-national SMEs sold to these markets. When SMEs do
levels with improved communication channels engage in international activity, they tend to do
146
Case Study 7.3

Fostering entrepreneurship education
Part of the EU’s growth strategy is a reassertion of the determination to develop and promote entre-
preneurship more fully within the EU. While this has been an objective for a sustained period, economic
crisis has provided renewed emphasis on the attainment of this objective. Central to the realisation of
this objective is the establishment of a stronger culture of entrepreneurship and entrepreneurial mind-
sets of Europeans across all income and age spectrums. Entrepreneurship education is key to realising
this objective. There is, across the EU, a broad consensus on the aims of entrepreneurship education,
both in terms of generic capabilities (such as self-confidence, adaptability, risk assessment, creativity)
and of a set of more bespoke business skills and knowledge. However, turning discourse into policy
requires that entrepreneurship education moves from the periphery of the curriculum to its core at all
levels and types of education.
Despite consensus on the required action, implementation has been very uneven across the EU. Only
a small number of countries have coherent and consistent strategies. In general, states have a generic
framework for action with many setting ill-defined targets and indicators. The focus tends to be on
entrepreneurial competences across the entire student population. Approaches tend to be ‘bottom-up’
with minimal government intervention: the wide range of practice and approaches reflects a lack of
consistency towards the subject both within and across states. Current practice regarding the process
of entrepreneurial education in Europe is characterised by:
■■ the pivotal role played by teachers in initiating the subject;

■■ the absence of a systemic approach in the curriculum;
■■ the use of a wide variety of resources of varying quality by teachers;
■■ the key role played by private associations and organisations;
■■ recognition that only businesses can offer real, practical experience;
■■ the importance of regional and local bodies in providing links between educators and business.
The above indicates that much entrepreneurship education tends to be ad hoc and is frequently a
reflection of the idiosyncrasies of a particular educational establishment. The removal of such incon-
sistencies requires teaching methods to reflect experiential learning; that students learn in businesses
and that governments facilitate and coordinate curriculum changes. The emergent consensus for greater
coordination and coherence has led to the suggestion for a more prescriptive approach to entrepreneur-
ship education which embeds it throughout all stages of the system with a shift from how to run a busi-
ness towards developing a more general set of competences. The aim is to achieve a greater consensus
among all relevant stakeholders and involve them in establishing learning objectives and outcomes,
targets and indicators.
In the light of these changes – and despite the very strong local dimension of entrepreneurship
education – there was seen to be a role for supranational bodies in supporting a coherent and coor-
dinated approach. The European Commission’s role falls into one or more of the following functions.
147
First, it can act as a catalyst to stimulate and spread best practice, including acting as a de facto moni-
tor of the system. Second, it can establish a platform through which educators, businesses and other
stakeholders can interact to share experiences as well as facilitate new links and strategies. Third, it can
act as an enabler by mobilising resources through its own and member states programmes to support
educational activities within this domain. Fourth, through the establishment of a European Centre for
Entrepreneurship Education, it can act as a core vehicle to oversee and implement other activities as
well as act as a nexus for local, regional and national bodies. Finally, the Commission has the opportu-
nity to lead actions through its Directorates, especially the Enterprise and Industry and Education and
Culture Directorates which can better coordinate actions within the Commission.
Case question
Can entrepreneurship be taught?
so as exporters or – as is more common – as indi- both passive and active (the latter in the sense that
rect exporters through intermediaries, the least SME internationalisation becomes a core focal
risky method of internationalisation. The barriers point of the process of change). There is wide-
to SMEs’ internationalisation fall into two broad spread acceptance that measures such as export
categories: credit and other financial measures have a direct
bearing on the process of SME export intensity.
1 internal, firm-specific factors, such as firm To overcome the traditional impediments to
size, skill base, and innovative capability; the integration of SMEs into international mar-
2 external factors, such as cost, temporal factors kets, the EU has acted in a number of ways.Though
and logistic costs. constrained by its limited budget, the EU has set
up a number of specialist information centres to
Unsurprisingly, export activity decreases with overcome deficiencies regarding knowledge and
firm size with the lowest export activity among finance in foreign markets. It has also sought to
micro-enterprises. Also the majority of SME develop measures within multilateral forums to:
exports go mainly to European markets, if not
within the EU then to other members of the EEA. aid network development to share best
■■
Those SMEs that are active in ICTs are more like- practice;
ly to be active outside the EU. It is evident that the ■■ assist foreign investment;
regulation of export activity is a key driver of the ■■ establish inter-firm cooperation agreements
pattern of SME internationalisation and includes for the purposes of market entry;
factors such as customs regulations and domestic ■■ offer training for improvements in the quality
transport infrastructure. Thus, the overall busi- of management within firms;
ness climate within the home state is a central ■■ support enterprises which exhibit the highest
determining factor of SME export success and a growth potential;
key function of policy and government is to create ■■ improve access to SME supporting services;
good business conditions. These measures can be ■■ alleviate trade barriers with third countries.
148
Pragmatism is essential in this environment to ■■ Recognition by policy makers that SME inter-
enable SMEs to exploit the opportunities afford- nationalisation is about more than just export-
ed by the SEM as well as to meet the challenges ing and that policy needs to be multi-faceted in
posed by the emerging internationalisation of terms of the support that it offers.
markets on a broader scale. ■■ All SMEs, no matter how they engage with the
To promote internationalisation, actions by international environment, identify the same
policy makers cover many different areas. These problems. This suggests that policy needs to be
have mainly focused upon the provision of infor- targeted across a broad range of options.
mation, financial support, and counselling and
inward investment support. The generic aim of
these policies is to reduce the risks that SMEs face Conclusion
in the internationalisation process through meas-
ures such as export insurance and credits. There is At the core of realising a competitive European
a trend within some states to increase the degree economy is the creation of the appropriate condi-
of customisation of support. The lack of support tions under which businesses can be formed and
in some states for SMEs may be driven by an thrive. In order to meet this objective, the EU
assumption of these businesses that policy needs has long maintained a set of rather passive indus-
to be based upon a stages approach to internation- trial policies that attempt to create the condi-
alisation. Thus many feel that support for cooper- tions in which businesses can prosper rather than
ation, for example, would not be as forthcoming. attempt to take a more active approach in choos-
This needs to be corrected in the following ways: ing industrial champions. In part, this reflects the
process of subsidiarity at work within this area
■■ Policy (given the limited time and capacity of of policy. Enterprise policy is, in effect, a sub-
managers) should seek to perform some of division of this industrial policy but is treated to
the practical tasks on behalf of the manager, all intents and purposes as a separate policy area
especially when they have no international by the EU. This is an area long assumed to be a
experience. weak spot for the EU economy. Once again, this
■■ SMEs often need targeted support with the policy does not try to pick ‘winners’ but to cre-
result that policy should focus on the specific ate conditions under which this group of busi-
needs of the business. nesses can flourish.
Key points
■■ Structural change is a core challenge for the European economy.
■■ Industrial policy seeks – via a series of pro-market measures – to promote change.
■■ The focus is on a passive policy strategy based on working with market processes.
■■ A favourable environment for SMEs is essential to this process of change.
■■ In order to promote a more entrepreneurial Europe, the EU has launched the Small Business Act.
149
Activities
1 Analyse the case of either a green technology or a biotechnology company and develop a SWOT analy-
sis to identify the major challenges for their competitiveness in global markets.
2 Identify the main challenges for SMEs in the internationalisation process.
1 How can industrial policy best be rationalised?
2 What do you understand by structural change?
3 Can a policy of pursuing European champions ever be justified?
4 Does there need to be policy specific to SMEs? Why?
Bibliography
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Bailey, D., Propris, L., Sugden, R. and Wilson, J. (2006) Renaissance, COM (2014)14 Final.
‘Public policy for economic competitiveness: an ana- Foreman-Peck, J. and Federico, G. (eds) (1999), European
lytical framework and a research agenda’, International Industrial Policy: The Twentieth Century Experience
Review of Applied Economics, 20 (5), pp. 555–72. (Vol. 1), Oxford: Oxford University Press.
European Commission (2008) “Think Small First” a Geroski, P. (1989). ‘European industrial policy and indus-
“Small Business Act” for Europe, SEC (2008) 2101. trial policy in Europe’, Oxford Review of Economic
European Commission (2012) Reigniting the Entrepreneur- Policy, 5 (2), pp. 20–36.
ial Spirit in Europe, COM (2012) 795 Final. Rodrik, D. (2004) Industrial Policy for the Twenty First
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2012–13. No. RWP04–047.
150
Chapter 8
Economic and monetary union

A step too far for European integration?
If the euro fails, Europe fails.

Angela Merkel, German Chancellor
This chapter will help you understand:
■■ how and why the single currency came into existence;

■■ the nature of EMU and the requirements, risks and benefits associated with it;
■■ the impact of the eurozone on the European business environment;
■■ the causes and consequences of the crisis within the eurozone;
■■ how the eurozone crisis may reshape EMU.
Monetary union has become a central plank of for full monetary integration by the turn of the
the European project. Initial plans in the 1970s millennium. However less than a decade after its
emerging from the Werner Report were thwart- formation, EMU also plunged into crisis, leading
ed by the oil crisis and the resultant Eurosclerosis. many to also question the wisdom of the project.
Monetary integration gained renewed momen- Inevitably this chapter focuses on the causes and
tum in 1979 with the formation of the European implications of the euro crisis. Before these can
Monetary System (EMS) based around a semi- be explored in any meaningful sense, the form
fixed Exchange Rate Mechanism (ERM). This and nature of EMU and its early performance are
system plunged into crisis in the early 1990s, examined. Thereafter, the chapter moves on to
stimulating a core group of states to push forward analyse the nature of the euro crisis itself.
151
What is EMU? The above characteristics are essentially tech-

nocratic and economic in nature but EMU also
A key part of the Treaty of Rome was the creation has a highly controversial political dimension. At
of a common market but it contained no explicit a minimum, EMU requires a surrendering, or
commitment to the objective of economic and pooling, of sovereignty in certain areas of policy
monetary union. EMU is the possible, albeit not making; namely the national determination of
inevitable, next stage of integration after a com- interest rates and of exchange rate policies and
mon or single market (see Chapter 5). Indeed, the acceptance of constraints in the exercise of
the existence of separate national currencies was macro-economic policy. It also requires politi-
regarded by some as one of the remaining barri- cians to undertake the frequently unpopular poli-
ers to the attainment of a barrier-free single mar- cies needed to qualify for membership of EMU
ket. As interdependence increases with the free and in the longer term to introduce the struc-
movement of goods, services, capital and labour tural reforms needed to ensure that their econo-
so the logic of increased common rules in areas mies can thrive within EMU and that EMU itself
such as competition policy and greater economic runs smoothly. Although many current eurozone
coordination and cooperation increases to the members showed tremendous political commit-
extent that separate economies and markets are ment to meeting the eligibility criteria for euro-
melded together. Furthermore, in a highly inter- zone membership by restraining public spending
dependent market, the logic for monetary union and other deflationary measures, for example, it
increases to ward off the possibility of divergent is the reluctance of some states to embark upon
monetary policies distorting and undermining more fundamental structural reforms in their
the benefits of interdependence or of competitive economies that is potentially building up seri-
policies setting off inflationary pressure. ous problems for EMU. Moreover EMU inevita-
Economic and monetary union therefore bly gives rise to a broader political debate about
embraces the following characteristics: how far economic and monetary union spills over
into the need for greater political unity among its
■■ policy harmonisation to remove obstacles to members, the future role and nature of the EU in
factor mobility.This corresponds to the achieve- general or, indeed, whether political union should
ment of the four freedoms (mobility of capital, precede monetary union for EMU to work. These
services, goods and labour) – the heart of the questions underpin some of the British popu-
SEM and of Stage one of EMU (see page 88); lation’s concerns about the euro – despite the
■■ a more marked and wider range of com- efforts of pro-euro campaigners at least to keep it
mon policies, especially in relation to macro- as an essentially economic issue.

economic policy; The above factors may characterise EMU but
■■ irrevocably fixed exchange rates or, as in the they do not in themselves determine whether the
case of the EU, a single currency; EU is a suitable grouping for launching EMU. The
■■ a common monetary policy – that is, one theory of Optimum Currency Areas (OCAs) sets
interest rate and exchange rate policy deter- out the conditions which should prevail if two or
mined by a single central bank; more countries are to give up their separate cur-
■■ some pooling of foreign exchange reserves; rencies and replace them with a single currency. A
■■ possible inter-state transfers to offset econom- high level of interdependence through trade and
ic distortions arising from EMU. capital flows is clearly necessary but according to
152
Robert Mundell, the originator of OCA theory, entry conditions. Despite this potential for asym-
three further conditions must be satisfied for a metries among EMU members, the more closely
common currency to be beneficial: the countries integrate, through the SEM and oth-
er policies, including EMU, the greater the level
1 There should be an absence, as far as possible, of interdependence and synchronisation of busi-
of asymmetric shocks – that is, external eco- ness cycles which, although not totally removing
nomic shocks that affect individual members the possibility of asymmetric shocks, significantly
of the EMU differently. The greater the degree reduces their power to undermine EMU.
of economic convergence among participating The eurozone scores less well in terms of
states, so the likelihood of asymmetric shocks labour mobility and wage flexibility. Although
diminishes. Such shocks become a problem the SEM has played its part in reducing barriers,
within EMU systems because of the centralisa- obstacles to the free movement of labour, includ-
tion of interest rate and exchange rate policies. ing high cultural and language barriers, remain.
2 A high degree of labour mobility and wage Labour markets in some member states remain
flexibility is needed so that when shocks do highly regulated and generally inhibit the ability
occur, individual economies within the union of labour markets to adjust to compensate for the
are able to adjust via labour migration or absence of differentiated monetary policy. More-
changes in wages given they can no longer rely over, although OCA theory emphasises the need
on changes in autonomous national monetary for labour market flexibility as an adjustment tool,
policy to correct for economic imbalances the mobility of goods, service and capital plus
between countries. the SEM also generally facilitate the workings of
3 A centralised fiscal policy that can redistribute EMU. Capital is highly mobile throughout the EU
resources to member countries performing and the single market in most goods and services,
poorly should be in place. although far more perfect (see Chapter 5), has
made significant progress since the programme’s
This raises the question of whether the euro- inception in 1985.
zone meets the criteria of an OCA. The process of The EU also lacks any strong central redistrib-
European integration prior to EMU has increased utive element to compensate for tensions within
cultural, economic and political links among the eurozone. Its budget is tiny compared to those
European countries but significant differences of member states and, although the Cohesion and
remain (see Chapter 1). There are strong region- Structural Funds are intended to bring about some
al sub-groupings within the EU: Finland, for degree of redistribution, member state resistance
example, has more in common and greater link- to increasing the EU budget and to its tax raising
ages with its Nordic and Baltic neighbours than powers means the prospect of the EU taking on
with the countries of southern Europe and vice this role in any meaningful way remains distant.
versa. This was compounded by the expansion On a theoretical level at least, the prospects
to Central and Eastern Europe who often found for EMU within Europe never appeared bright
themselves in an asymmetric conundrum. While due to the persistent divergences between
some of these states have since joined the EMU states. However, the political commitment of
(or have an open-ended commitment to do so), member states to launch EMU was underesti-
the pressure on these states to reform generated mated by many and, having made that commit-
short-term deflationary effects to adjust to the ment, the will to make it work should not be
153
Milestones in the development of the single currency

Box 8.1
1969 Hague Council calls for economic and monetary union by 1980
1970 Werner Report endorses the goal of EMU by 1980
Mar. 1972 Currency snake launched
Apr. 1973 European Monetary Cooperation Fund (EMCF) established to provide financial sup-
port to maintain stable exchange rates
1979 EMS, including the ERM, founded to create a ‘zone of monetary stability’ within
Europe
1989 Delors Report proposes a three-stage approach to EMU and is adopted by the Madrid
Council in June
Jul. 1990 Stage one of EMU begins
Oct. 90 UK joins ERM
Dec. 1991 European Council approves the Maastricht Treaty which establishes a three-stage
timetable to achieve EMU. The UK and Denmark secure an ‘opt-out’ from Stage three
Sept. 1992 ‘Black Wednesday’ – UK sterling and the Italian lira suspend membership of the ERM
following massive speculation
Aug. 1993 Normal fluctuation band widened from 2.25 per cent to 15 per cent either side of the
central parity of currencies within the ERM
Jan. 1994 Stage two of EMU begins with the establishment of the EMI – successor to the EMCF
and forerunner of the ECB
Dec. 1995 Madrid Council confirms 1 January 1999 as the start of Stage three of EMU
Dec. 1996 Dublin Council agrees the terms of the Stability and Growth Pact
Oct. 1997 UK Chancellor of the Exchequer, Gordon Brown, commits the UK ‘in principle’ to
e urozone membership and sets out five economic tests that must be satisfied before
Britain joins
May 1998 Brussels Council decides 11 member states (Belgium, Germany, Spain, France, Ireland,
Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland) are eligible for
adoption of the euro
Jan. 1999 Stage three of EMU begins with the ‘irrevocable fixing’ of the conversion rates between
participating currencies. The European System of Central Banks (ESCB) starts to
conduct a single monetary and foreign exchange policy and electronic trading in euros
begins
Sept. 2000 The Danish people vote against joining the euro by 53.1 to 46.9 per cent
Jan. 2001 Greece joins the euro
Jan. 2002 Euro notes and coins enter circulation in 12 member states. Initially in ‘dual circula-
tion’ alongside national currencies, but the euro becomes the sole currency by the end
of February
Jun. 2003 Gordon Brown announces that the UK passes only one of his five economic tests and
rules out UK membership for the foreseeable future
Sept. 2003 Sweden votes in referendum against joining the euro by 56.2 per cent to 41.8 per cent
154
Nov. 2003 Effective suspension of the Stability and Growth Pact (SGP) following persistent
breaches of the budget rules by France and Germany
Jun. 2004 Estonia, Lithuania and Slovenia join ERM II
Mar. 2005 Terms of the revised SGP agreed
Apr. 2005 Cyprus, Latvia and Malta join ERM II
Nov. 2005 Slovakia joins ERM II
Jan. 2007 Slovenia joins EMU
Jan. 2008 Cyprus and Malta join EMU
Jan. 2009 Slovakia joins EMU
Oct. 2009 Greece reveals black hole in budget – euro crisis begins
Jan. 2011 Estonia joins EMU
Jan. 2014 Latvia joins EMU
Jan. 2015 Lithuania joins EMU
underestimated either: something borne out by by the European Monetary Cooperation Fund
the events surrounding the euro crisis. From (EMCF). The upheaval in international finan-
the earliest years of the eurozone project, there cial markets that led to the end of the post-war
were signs that some member states were shy- Bretton Woods financial agreement, inflation and
ing away from the unpopular reforms needed in high unemployment in the industrial world dealt
their economies to make EMU work: storing up a fatal blow to any serious attempts to meet the
tensions that contributed to the problems that 1980 EMU deadline.
eventually beset the group. The second attempt at European monetary
integration was the European Monetary System
(EMS), which was established in 1979 and formed
The road to EMU the backbone of European monetary arrange-
ments until the creation of EMU. The EMS was
The final realisation of the single currency in not intended to lead to EMU but to create a ‘zone
2002 – when euro notes and coins came into cir- of monetary stability’ – that is, to act as an anti-
culation – was the third modern day attempt at inflationary anchor in a world increasingly beset
European monetary integration.The first began in by inflationary problems. The ERM was a key part
1969 when the Hague Summit strove to relaunch of the EMS: participation in the ERM required
the process of European integration by, among members to maintain their currency within
other things, introducing EMU by 1980. This specified fluctuation margins of ±2.25 per cent
objective was reinforced by the Werner Report, either side of the ECU central rates. Higher infla-
adopted by the EU in 1971, and resulted, in 1972, tion countries such as Italy were permitted fluc-
in ‘the snake in the tunnel’ – an adjustable fixed tuations of ±15 per cent. The ECU, or European
exchange rate system in which member curren- currency unit, was a basket of currencies partici-
cies fluctuated within a margin of ±2.25 per cent pating in the ERM, with each currency weighted
against the US dollar in a system administered according to its role in intra-EU trade.
155
Currency realignments were permitted to problems were compounded by political uncer-

reduce tension in the system. In the ERM’s initial tainty arising from the rejection of the Treaty by
phase, states persistently devalued within the sys- the Danish referendum and the unwillingness of
tem and its ability to act as a disciplinary device to the British to sign. The upshot was opt-out claus-
promote convergence in terms of key monetary es for the UK and Denmark which allowed both
indicators (that is, inflation and interest rates) countries to refrain indefinitely from adoption of
was severely curtailed. By the mid to late 1980s, the single currency.
the ERM had become more credible as a means of The Maastricht Treaty resulted from the resur-
delivering convergence as member states showed a gence of the integration begun by the SEM cam-
greater commitment to its rules and procedures. paign. By 1988, a committee had been established
Consequently, inflation and interest rates converged under Commission President Jacques Delors to
and membership of the ERM expanded to include consider the issue of EMU and the steps needed to
all EU states bar Greece. As the ERM expanded, achieve it. The result was the 1989 Delors Report
tensions within the system grew: as the effects of which fed directly into the Maastricht Treaty. The
the early 1990s recession and German reunifica- Treaty, among other things, set out the timetable,
tion took hold, the policy requirements and pref- the eligibility criteria for EMU membership and
erences of states started to diverge. Typically some details of the institutions and framework of rules
states had unemployment problems whereas others for EMU. The timetable comprised three stages:
had inflationary difficulties. Such differences could
not be sustained within the ERM framework and in ■■ Stage one, which began on 1 July 1990,
September 1992, the UK and Italy left the ERM. required the removal of all remaining obstacles
Instability continued with the Spanish, Portuguese, to capital flows; the participation of all mem-
Irish and French currencies proving particularly ber states’ currencies in the ERM and greater
vulnerable and in August 1993, the fluctuation policy coordination and convergence of eco-
bands were widened to ±15 per cent where they nomic performance.
have remained even within the reformed ERM ■■ Stage two, which began on 1 January 1994,
formed after the introduction of the euro: ERM II. involved the creation of the European Mon-
However with the gradual expansion of the euro- etary Institute (EMI), a transitional institution
zone, only Denmark was a member of ERM II in intended to prepare the EU for Stage three
January 2015 and it operated within the conven- when it would be replaced by the ECB. Dur-
tional narrower band of ±2.25 per cent but within ing this stage, any central bank that was not
an effective band of less than ±1 per cent. already independent of its national govern-
The timing of the crisis in the early 1990s was ment, was to become independent.
unfortunate as the EU had just committed itself ■■ Stage three, which began on 1 January 1999,
in the Maastricht Treaty to a progressive move began with the irrevocable fixing of participat-
to EMU by the end of the decade. For the more ing currencies. The European System of Cen-
sceptical states, the crisis reinforced a belief that tral Banks (ESCB), composed of the ECB and
moves towards EMU were premature whereas, independent national banks, took over respon-
for the more Europhile states, the crisis con- sibility for monetary and exchange rate policy.
firmed their view that, in a world of free capital
movements, a single currency was the best way to In practice, insufficient member states were
achieve the desired currency stability. Economic adjudged to be ready for EMU by 1997. In May
156
1998, amid some degree of cynicism and accu- convergence between member states in terms
sations of creative accounting, the European of economic development and performance.
Commission declared that 11 states met the nec- The endpoint of the convergence process is a
essary conditions to adopt the euro on 1 January state of ‘cohesion’ between states. This does not
1999. It was clear that not all states would meet imply uniform economic development and per-
a strict interpretation of the nominal criteria formance – merely harmonious economic condi-
outlined within the Treaty. However, the Com- tions. Convergence comprises three distinct, yet
mission decided that as long as the criteria, espe- ultimately related, processes – nominal, real and
cially those for public finances, were moving in institutional convergence:
the right direction, then membership could go
ahead. Only Greece was excluded for economic ■■ Nominal convergence: This is convergence in
reasons. The others – Denmark, the UK and terms of macro-economic performance as
Sweden – remained outside EMU, largely for indicated by core fiscal and monetary vari-
political reasons. ables and is the form of convergence referred
The decision to maximise the number of states to within the Maastricht Treaty. In practice,
within the initial moves towards EMU, despite there is little economic rationale for the Maas-
their apparent deviation from the Maastricht tar- tricht criteria other than to prove that states
gets, derived largely from political expediency can live with, and are committed to, what are
(notably so in the case of Italy) and recognition essentially criteria for sustaining price stability.
that the level of benefits from EMU are directly Thus entry into EMU requires states to meet
linked to the size of membership. In addition, the following criteria:
an improving general economic environment
● budget deficits must be no more than 3 per
would, according to the Commission, eventually
cent of GDP;
eliminate deviations from the targets. Moreover,
● government debt must be no more than 60
Greece made strenuous efforts to reduce inflation
per cent of GDP;
and its budget deficit and joined the eurozone in
● interest rates must be no more than 2 per-
2001 – in time for the entry of notes and coins
centage points above the average of the
into circulation. Within three years, it became
three ‘best’ performing states;
apparent that Greece’s last minute qualification
● inflation rates must be no more than 1.5
for eurozone membership was due more to an
percentage points above the average of the
imaginative interpretation of key economic sta-
three best performing states;
tistics rather than a sudden conversion to mon-
● states must demonstrate exchange rate sta-

etary and fiscal discipline. This disclosure would
bility by maintaining their currency within
become an embarrassment for the EU and was
the normal band of the ERM for at least
the ultimate trigger for the advent of the euro cri-
two years prior to entry.
sis in 2009.
In addition to establishing a timetable for Even after Stage three was launched, the con-
EMU, the Maastricht Treaty set out the condi- vergence criteria remained important for two
tions (generally known as the ‘convergence cri- reasons. First, the budget and debt criteria
teria’) with which member states must comply remain at the heart of the Stability and Growth
to be considered eligible for eurozone member- Pact (SGP) which is intended to provide the
ship. The ultimate success of EMU depends upon framework for continued fiscal discipline
157
once EMU is operational. Second, EU mem- potential members also have to guarantee the
bers outside the eurozone wishing to become independence of the national central bank.
members of the eurozone must also meet
the convergence criteria. Given that the first Achieving nominal convergence by 1999 was a
incarnation of the ERM effectively disappeared core political objective for many member states.
upon the launch of Stage three, ERM II was set The monetary criteria did not pose much of a
up as an exchange rate waiting room for pro- problem as they had been provided for within the
spective EMU entrants. Membership of ERM existing framework provided by the ERM. The
II peaked at nine members but eight of these fiscal policy criteria proved more problematic.
members have since left to join the eurozone In the short term, the fiscal retrenchment neces-
with only Denmark remaining a member of sitated by efforts to meet the criteria magnified
the system in 2015. Europe’s unemployment problem and created a
■■ Real convergence: Eligibility for EMU member- fear that the nominal convergence criteria could
ship rests entirely on compliance with the con- lock Europe into permanent mass unemployment.
ditions for nominal convergence. However, in
the longer term, it is the degree of real con-
vergence that will determine the success of the Benefits and risks of EMU
eurozone. Real convergence implies that levels
of unemployment and industrial and economic Given the difficulties involved in establishing
development between states should broadly eligibility for eurozone membership (and its
approximate. While there are no set criteria, eventual crisis), it is pertinent to ask why 12 EU
certain core indicators need to converge to members went ahead with the project and why
ensure that harmony can be established with- this was – over time – expanded to 18 partici-
in the management of a single currency. For pants. The potential benefits of eurozone mem-
example, vast differences in unemployment bership and the potential costs/risks associated
between states could imply differing policy with the eurozone are set out in Table 8.1. Many
priorities between constituent parts of EMU. of these are difficult to quantify. Where they have
The EU sought to strengthen real conver- been assessed, the gains do not appear to be par-
gence by including provisions for a Cohesion ticularly great. In the case of transactions costs,
Fund within the Treaty upon European Union for example, it is estimated that EMU saves some
but the burden for achieving real convergence 0.5 per cent of the EU’s GDP. These relatively
falls mainly on the willingness of individual small benefits are also unevenly spread: smaller
member states to undertake often unpopular states with a higher dependence upon intra-EU
structural reforms, particularly in the field of trade will benefit the most. In practice, many of
labour market flexibility. the gains from EMU will only be realised over
■■ Institutional convergence: The move towards the medium to long term (for example, through
EMU also implies increasing uniformity in greater price stability stimulating higher levels of
terms of economic management. The most investment).
obvious form is to achieve a consensus between These effects are also unevenly spread across
states around the priorities of economic policy businesses. The biggest beneficiaries are those
(namely, low and stable inflation). As part of enterprises which derive the highest proportion of
the commitment towards this policy objective, their revenues from foreign markets. Thus larger
158
Table 8.1 The costs and benefits of EMU
Costs Benefits
■■ short-term deflation ■■ elimination of transaction costs in intra-EU trade
■■ loss of the exchange rate as a ■■ lower interest rates
tool of national economic policy ■■ uniform interest rates
■■ loss of power to set interest rates ■■ removal of exchange rate uncertainty in intra-EMU trade
and control the supply of money ■■ aids development of a genuine SEM by increasing price transpar-
■■ potential problems related to a ency and promoting international specialisation
lack of ‘real’ convergence and ■■ removes the option of competitive devaluations between EU states
potential policy conflicts ■■ financial integration
■■ the inappropriateness of one ■■ economic cushioning from domestic political instability
monetary policy for so many ■■ creates a new international currency to represent the EU’s combined
states. economic weight.
enterprises are expected to benefit more from convergence will not occur because of continuing
EMU. These benefits will extend to large non-EU differences in transport costs, spatial variations in
companies with extensive investments throughout tastes and preferences, the costs of cross-border
the EU. However not all large companies will ben- shopping, local cost differences and different com-
efit. Enterprises with a strong domestic market petitive situations. Overall, the EU market should
(such as utilities) will seemingly gain little until exhibit less fragmentation with internationalisa-
their markets start to exhibit a greater degree of tion of markets affecting an increasing number
internationalisation. For SMEs, the impact is more of enterprises (regardless of size) as each is more
difficult to predict. Although many SMEs have a able to sell its goods to a more geographically dis-
strong tendency to serve local markets, there are persed market. This process will be enhanced as
a number with a high export focus (such as IT inter-state direct mail and electronic commerce
companies) which can expect to benefit from the become more widespread.
introduction of the euro. In practice, many of the positive and negative
For many businesses, EMU should speed up aspects of EMU will only manifest themselves
price convergence through enabling consumers to over the medium to long term. Advocates of the
compare prices across member states more easily process play up the fact that the benefits of EMU
because of enhanced price transparency.This trans- are directly linked to its size. As EMU member-
parency will extend to wages and other labour ship expands, so the benefits to European business
costs which some trade unions hope will lead to will grow. Opponents regard EMU as primar-
EU-wide collective bargaining – a hope which, ily a political exercise with negligible benefits.
still, remains largely unfulfilled. Price transparen- The core concern, therefore, has to come down
cy could also change supply patterns as the elimi- to whether the states are sufficiently similar for
nation of exchange risk and greater transparency them to co-exist with a common currency.
within the euro area will make it easier for firms to Further problems could limit the ability to sus-
optimise their sourcing. Price transparency should tain convergence, including the perception that
also lead to price convergence within sectors such not all EMU states are at the same stage of the
as banking, financial services, cars, chemicals trade cycle. A core cause of the euro crisis was
and pharmaceuticals. However, complete price that the ‘one size fits all’ monetary policy was
159
no longer appropriate given divergent growth ruled out in terms of trade with other EU states.
trends. The implication of a single monetary pol- This places emphasis upon firms to alter costs and
icy is that, unless economies are perfectly aligned exhibit greater flexibility if they are to compete
(which does not happen within, let alone between successfully in both European and global markets.
states) some countries will have an inappropriate Flexibility requires governments to free up mar-
interest rate. Thus, in the formative years, more ket forces within the European economy in both
attention needed to be paid to how economies factor and product markets.
could boost their factor mobility to balance out
such differences and to whether closer integra-
tion actually helped bring these cycles into closer The first decade of
alignment. The experience of the euro crisis sug- EMU: a mixed record
gests that factor flows were limited with sharp
differences in unemployment being sustained Over the period of 1999–2009, the record of
with only limited mobility being evident. EMU was mixed. While its introduction was rela-
Throughout its formative years, the absence of tively smooth, there were complaints from con-
real convergence between states represented the sumers in some countries that businesses took
main threat to EMU, exposing it to asymmetric advantage of the changeover to round up prices:
shocks whereby different parts of the zone were the effects of this were, in practice, negligible.
affected by external shocks in markedly different More serious was the initial weakening of the cur-
ways (for example, some states could see unem- rency in foreign exchange markets: as the euro did
ployment rise, others could see inflation increase). not have the full functionality of a currency given
If this is the case, a single monetary and exchange that notes and coins did not come into circula-
rate policy becomes difficult if not impossible to tion until January 2002 it did not operate as a full-
sustain. Only if shocks are symmetric or if there is blown currency until then. From the beginning
an adequate response mechanism (in terms of fis- of 2002, the euro steadily strengthened to reach
cal transfers or resource mobility and flexibility) levels against the dollar that were above those pre-
to compensate for such effects will an EMU work. vailing at the time of the euro’s launch. The issue
As none of these conditions exist in the EU, EMU is not whether a currency is strong or weak but its
should, in theory, be a non-starter for this group stability (at a rate which is neither seriously over-
of states. Despite this being a theoretical extreme nor under-valued) which is likely to have a longer
(all states are themselves subject to asymmetric lasting trade and investment impact.
shocks or have inadequate resource mobility or The main problems in the first decade stemmed
flexibility to compensate for such effects; for from two core factors:
example, most states have regional variations in
unemployment), it does imply that EMU needed 1 The ineffectiveness of the SGP as a bulwark against
to be accompanied by structural reform of labour fiscal profligacy
markets. Agreed in December 1996, the role of the SGP
The move towards EMU highlighted new chal- was to ensure that states kept to the conditions of
lenges for policy makers in complementing the nominal convergence (see page 157). Such action
competitiveness of indigenous enterprises. The was considered necessary because, if countries
option of a competitive devaluation to secure within a monetary union run large fiscal deficits,
competitiveness in foreign markets is explicitly the single capital market means that financing of
160
this debt will lead to higher interest rates for the states delayed such reform for reasons of short-
whole union. Indeed, monetary union may even term political expediency. Of the big three econ-
encourage expansionary fiscal policies if mem- omies, only Germany – under the 2004 Hartz
ber states perceive that the cost of financing their reforms – has undertaken substantive reform.
debt is spread over more countries (this would of Italy and France have yet to do likewise. Lip ser-
course only be a rational course of action, if oth- vice was paid to reforms but this amounted to lit-
er countries did not behave in a similar fashion). tle by way of concrete action. Indeed, even in the
Moreover, large fiscal deficits can tempt politi- aftermath of the euro crisis, such reforms were
cians to place pressure on monetary authorities, very much delayed by these states. Italy needed
even supposedly independent monetary authori- to adapt to the pressure of low cost imports from
ties, to keep interest rates low – a strategy which the 2004 accession states, and more latterly, from
would ultimately threaten the price stability goal China, and the conventional weapon of persis-
of monetary union. tent exchange rate devaluation was no longer
On one level the SGP is uncontroversial but allowed. Under these conditions, reform became
its practice was far from trouble-free. Many saw ever more pressing and obvious.
it as too inflexible from the beginning in terms
of the fiscal constraints imposed. Given it is the Political pressures made reform difficult and
sole macro-economic weapon left to states, many these pressures did not subside during the first
felt the strictness of the SCP limited the efficacy decade. These pressures were to some degree
of automatic stabilisers meaning that downturns militated by higher rates of growth as the euro
would mean sustained austerity despite an intuitive ushered in lower interest rates and easier cred-
need to act counter-cyclically. While such prob- it. While this was an opportunity to undertake
lems could be countered by a stronger central fiscal reform, this opportunity was missed, leaving long
and redistributive policy, this was something which standing issues (such as those linked to an ageing
member states would clearly not countenance. population) unaddressed, with any reform (such
Such issues quickly came to light as state deficits as those undertaken in 2004 and 2005) proving
exceeded set limits (notably in France and Ger- very piecemeal and incidental to the problems
many). The result was that the SGP was effectively faced. Reform is possible as demonstrated by
suspended in November 2003 undermining the Germany. However, the delay to reform was fully
general credibility of and creating tension within exposed by the euro crisis which was made worse
EMU, especially between large and small states. by the rigidities in the eurozone.
In 2005, the SGP was revised allowing more flex- The launch of the euro formalised what was
ibility within the system. It is debatable over the already implicit, namely a multi-speed Europe as
extent to which such an agreement rendered the Denmark, Sweden and the UK did not participate
SGP meaningless. However such debates were ren- in the launch of the single currency. While Den-
dered meaningless with the onset of the euro crisis. mark and the UK have a legal opt-out, Sweden has
no such right but was excluded on the technical
2 The unwillingness of some member states to take the grounds that it was not a member of the ERM.This
necessary micro-economic reform was politically expedient as the Swedish govern-
Adoption of the euro implied that states reformed ment felt its population was not ready for EMU.
to ensure they could compensate for the loss In September 2000, Denmark held a referendum
of national monetary policy. In practice, many in which 53 per cent voted against adopting the
161
euro. In September 2003, 56 per cent of the votes debt crisis. As the degree of exposure to the sub-
in a Swedish referendum on the single currency prime mortgage problems in the US and the toxic
were against membership. Consequently, euro debt that it left on their balance sheets dawned on
membership is off the agenda in both countries for European banks, so it also dawned on EU mem-
some time: a position reinforced by the euro cri- bers that they could not stand aside from these
sis. Each country has its own reasons for not join- events; that they would have to intervene and
ing but, in general, public debate about the euro that a serious financial crisis would turn into a
in these three countries has expressed concerns full-blown economic crisis with a consequent
about loss of sovereignty, especially in relation to impact on economic activity. States had to inter-
the loss of monetary policy as a major econom- vene to save banks and to issue debt to cover the
ic policy instrument; loss of identity and doubts liquidity crisis within their national banking sys-
about whether it is possible for one interest rate to tems. This extra debt was on top of – for some
suit so many countries. On the other side, in addi- states – already relatively high levels of public
tion to the usual general pro-euro arguments, the debt. This high and rising level of public debt fore-
outsider countries also have to consider whether shadowed a slowdown in activity as both public
their continuing standing aside from the final stage and private sectors worked to repair their balance
of EMU will ultimately lead to their increasing sheets. These downturns called into question the
marginalisation from core EU business. In practice capability of these states to generate sustainable
these countries appear not to have suffered from debt repayment.These problems were compound-
by their opt-out. Indeed, the economic record of ed by downturns that cyclically increased the debt
these states exceeds those of the euro members. burden upon states as tax revenues fell and welfare
In general, the newer states have a more posi- payments rose.
tive attitude to the euro with Cyprus, Malta, In 2009, 14 eurozone states breached the rules
Slovakia and Slovenia joining the zone within the of the SGP. This was set against a background of
first decade of its launch. Others (see Box 8.1) a Europe-wide rise in unemployment. In some
have joined since. This reflects a commitment by states, notably Italy and Greece, public debt
the new members to participate in the third stage reached historic levels. The reaction of states to
of EMU with a derogation regarding adoption of the rising debt was to introduce tough austerity
the single currency. Unlike the older members, measures. These further suppressed activity and
the newer member states remaining outside the tax revenue flows, leading to greater uncertainty
eurozone have a greater acceptance of the process as these economic measures were accompanied by
and coordinate economic policy with the euro political unrest. The catalyst was the Greek debt
states while keeping an open-ended commitment crisis which was – in part – a legacy of the politi-
to participate in the system. However, their time- cal decision to allow Greece to join the eurozone
frames for entry have been undermined by the despite its failure to meet the necessary conver-
turmoil in the system from 2009. gence criteria, especially regarding the level of
public deficits and debt. Consequently, it can be
argued – in hindsight – the EU was merely storing
The euro crisis 2009–present up difficulties within the system due to its politi-
cal expediency.
The source of the euro crisis was the metamor- The catalyst of the crisis in Greece was that it
phosis of the 2007 banking crisis into a sovereign had not undertaken the reforms it had promised
162
Timeline of the euro crisis
Box 8.2
Oct. 2009 Greece reveals black hole in its finances
Nov. 2009 Greece debt is downgraded
Dec. 2009 Greek austerity begins
Jan. 2010 Civil unrest in Greece in response to austerity
Feb. 2010 Euro falls as failure to agree Greek rescue plan
Mar. 2010 New deeper cuts in Greek budget
Mar. 2010 Greek rescue package agreed
Apr. 2010 Greece formally asks for EU/IMF support and shockwaves felt in rest of EU
May 2010 EU leader agree €500 bn fund to protect the euro
May 2010 Resistance in Germany to financial support for Greece
May 2010 Spain’s credit rating cut
Jun./Jul. 2010 Fear of contagion spreads across the EU
Jul. 2010 Ireland’s debt downgraded
Oct. 2010 Rising political backlash to austerity across Europe
Nov. 2010 Ireland bailed out by IMF
Jan. 2011 Fears rise in Spain and Portugal as Ireland has to nationalise more of its banks
Mar. 2011 ECB says it may have to raise interest rates – an act that would bankrupt a number
of states
Mar. 2011 New bailout for Ireland
Apr. 2011 Portugal asks for bailout
Jun. 2011 Greece granted €120 bn bailout
Aug. 2011 ECB starts buying Spanish and Portuguese bonds
Sept. 2011 Central Banks agree to pump money into system
Sept. 2011 Italy downgraded
Oct. 2011 EU rescue fund extended to €2 trillion
Feb. 2012 Greece approves new austerity programme to meet conditions for loans
Mar. 2012 Spain introduces austerity measures
EU agrees another €500 bn to rescue fund to limit threat of contagion
Apr. 2012
May 2012 Fears of Greek exit from eurozone grow
Jun. 2012 Spain given EU funds to rescue banking sector
Jul. 2012 Portugal offered IMF bailout funds
Jul. 2012 Cyprus under threat
Jul. 2012 Mario Draghi (President of the ECB) says it will do ‘whatever it takes’ to protect
the eurozone
Aug. 2012 France and Germany resist request from Greece for loosening of loan terms
Nov. 2012 Cyprus becomes fourth state to receive bailout
163
Jul. 2013 IMF finds new €11 bn hole in Greek budget

Dec. 2013 Ireland leaves EU bailout programme
Jan. 2015 Anti-austerity party (Syriza) wins Greek election – concerns that euro crisis will be
re-ignited
Feb. 2015 Greece secures four month extension to its finance deal
Mar. 2015 President of ECB formally declares end of the euro crisis
Case Study 8.1

The UK and the euro crisis
The UK (among other states) decided to opt out of the euro when it was conceived. This reflected the
UK’s historical scepticism towards the ‘ever deepening processes of European integration’. However
non-membership does not preclude the fact that events in the eurozone have an impact on the UK.
While the general economic conditions across the eurozone influence trade relations, the euro crisis
highlighted vulnerabilities of the UK resulting from the salience of its financial sector to its economy.
Not least among these concerns was a fear that the possibility of deeper financial integration as a solu-
tion to the euro crisis would have profound implications for the centrality of the City of London to the
European and global financial system.
Paradoxically, the UK has been supportive of the moves towards deeper integration as a solution
to the crisis, arguing that it was the inevitability of such actions that partly explained its reluctance to
become involved in the eurozone. To the UK, such actions would contravene its fiscal sovereignty and
limit its economic discretion. However if other states wished to take such actions, then it was not an
issue for the UK. The UK also had to recognise that ever tighter monetary union could work to exclude
states that were peripheral to the core group. The consequence is that key policies areas could be re-
shaped to focus on the needs of the core group to the potential detriment of the peripheral states. As
such, in seeking to agree such moves the UK was at the forefront of ensuring that any such actions
would not contravene UK interests. This is reflected in the UK’s attitude that deeper integration can be
condoned but only if such actions were concurrent with a widespread process of economic reform to
drive competitiveness and a process of ensuring that violation of eurozone rules on debt were met with
effective sanctions.
In reflection of such themes, the UK insists that any changes to the EU’s treaties to militate against
further crises must not be at the expense of the rules of the single market, especially in terms of finan-
cial services. At the December 2011 European Council, the UK refused to consider any change to the
treaties, fearing that those being proposed were to the detriment of the single market. The UK sought
safeguards on key issues which other states refused to consider. The UK government was reluctant to
164
identify publicly the exact nature of the safeguards it was seeking. It was felt that such safeguards
would be related to the protection of the single market in financial services and to ensure that new
barriers to the free movement of capital do not emerge as part of the solution to the crisis. Moreover,
the UK wanted reassurances that any new institution supervising the EU bank would not undermine
the European Banking Authority (which is based in London) and that any financial tax proposal (i.e.
a tax on cross-border transactions) would be subject to unanimity and did not close off the EU to the
other major global financial markets. It was also claimed that the UK wanted specific exemptions from
emerging financial protocol; something the other states found unacceptable.
As the crisis evolved – and the ECB grew in significance – so the Bank of England was drawn fur-
ther in, initially as a source of expertise on the European Systemic Risk Board. Part of the solution in
militating against the euro crisis being transmitted to the UK was these close working relationships.
However there were divergent approaches as the ECB preferred a rules-based approach whereas the
Bank of England preferred a more judgement-based approach. However, such differences appeared to
have had minimal impact on the working relationship.
Case questions
1 To what extent does the euro crisis justify the decision of the UK to stand apart from the eurozone?
2 While the UK is outside the eurozone, it cannot help but be affected by developments within it.
Do you agree?
3 Will the UK become more marginalised within Europe if it continues to remain outside the
eurozone? Why might this happen and what would be the implications?
as part of the decision to allow it to join the euro. making a bad situation worse. The Greek govern-
Furthermore there was a growing suspicion that ment responded by introducing a further series of
Greece was – in the period leading up to 2009 – austerity measures but this did not stop the debt
doctoring its official statistics to cover its poor and attaining junk status in April 2010. Greece faced a
deteriorating financial position. As the crisis hit, stark choice: it could default on its debt; it could
so the ‘black hole’ in Greek state finances became arrange a bailout (i.e. be given money to cover its
apparent. In 2010, its public debt rose to over 125 debt), or it could return to the drachma. The first
per cent of GDP (€300 bn) – the highest anywhere and third options were ruled out as there was no
in the EU – and its budget deficit to be nearly 13 ‘get out’ clause in the eurozone for both political
per cent of GDP (over four times the level allowed and economic reasons. This left bailout as the only
under the SGP). Indeed the Greek state had to viable option.
borrow €50 bn just to service its debt, a figure In 2010, an initial €30 bn was offered to Greece
that made many lenders (banks and other interna- but it quickly became obvious that Greece would
tional institutions) question whether its debt load need more money. In May 2010, a new fund
was sustainable. Such suspicions led to the down- for €110 bn was created – the ‘Stabilisation
grading of Greek debt which meant that Greece Mechanism’ – which had much lower interest
had to pay higher interest on its debt, thereby rates than those available in the market place.
165
The Greek bailout out was controversial as it was Of the 91 banks tested by national regulators, only
not allowed under the EU treaties due to a desire seven failed (five from Spain and one each from
to add credibility to the SGP. This was over-ruled Germany and Greece).This was aided by the Basel
due to an exceptional occurrences clause.The bail- III agreement which was introduced by the Bank
out had other repercussions as the electorates in for International Settlements to ensure that banks
many northern states resented funds being offered held a greater quantity of their assets in a more
to the profligate southern states. The motivation liquid form through higher reserve asset ratios.
behind the fund was not merely to support Greece As the timeline of the crisis in Box 8.2 shows,
but also to prevent a process of contagion across attempts to limit contagion proved fruitless as
other states with rising debt levels. In practice, it the smaller, indebted states were rapidly drawn
proved impossible to isolate the problem. into the crisis (see Figure 8.1). For example,
As the euro crisis unfolded, the 16 eurozone Ireland was left exposed by the extra public
states set up a fund to limit the risk of conta- debt accrued as a direct result of the need to
gion. The European Financial Stability Facility cover the bad debts emerging from the burst-
(EFSF) was established in May 2010 with a pool of ing of its property bubble. The crisis continued
€690 bn to cushion states from the effects of con- past 2010, creating a complex series of crises
tagion. This, combined with other funds, gave the which had a different set of causes. Throughout
eurozone member access to over €3/4 trillion 2011–2, Greece continued to generate uncer-
support. These funds were raised by the EFSF sell- tainty by revealing more of its debt and by
ing bonds guaranteed by eurozone member states. deciding to put austerity to the vote (a decision
In addition – and in response to the crisis – the EU which, because of external political pressure,
again emphasised the need for economic reform was later dropped). Ireland became vulner-
through the launch of the Europe 2020 strategy (see able once it had offered a blanket guarantee to
Chapter 1) and undertook renewed stress tests for depositors caught out by the collapse of the Irish
European banks to assess their exposure to risk. property bubble. In November 2010, Ireland
5.0
0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
−5.0
−10.0 Ireland
Greece
−15.0
Spain
−20.0 Portugal
−25.0
−30.0
−35.0
Figure 8.1 Budget deficit as percentage of GDP in Ireland, Greece, Spain and Portugal (2004–13)
Source: Eurostat.
166
The Fiscal Compact Treaty
Box 8.3
The Fiscal Compact Treaty (FCT) was part of a series of steps designed to restore the stability of the
eurozone. The agreement was made in 2011 in response to German concerns that measures already
agreed needed to be supported by longer term measures to ensure greater fiscal discipline. This reflected
that – in the midst of the euro crisis – states with high levels of debt were finding it increasingly difficult
to sell fresh public debt at affordable interest rates. This affordability issue was compounded by the in-
ability of the EFSF to offer sufficient funds to support states; the lack of fiscal rules in existing treaties
and the prevention of the ECB from acting as the lender of last resort by Article 123 of the TEU. All
members (as of 2011), bar the UK and the Czech Republic, signed the FCT.
The rules agreed within the FCT are:
■■ National debt brakes/golden rules: member states agreed to a budget that is either in balance
or surplus and to pass a national law that limits the ‘structural deficit’ to 0.5 per cent of GDP.
Deviation from this rule can only be allowed in ‘exceptional circumstances’ or deep recessions. The
rule is subject to an ill-defined transition period but there is greater flexibility for states with a
debt to GDP ratio of less than 60 per cent.
■■ European Court of Justice: if one member state feels that another member state has failed to live
up to the above obligations, then they can be brought before the ECJ which has the right to impose
a fine up to 0.1 per cent of GDP.
■■ The 1/20 rule: for those states with a debt/GDP ratio of above 60 per cent that do not reduce their
debt quickly enough, an excessive deficit procedure can be opened. The rule is applied over a three
year timeframe with a three year grace period offered if their deficit is below 3 per cent. After this
period the rule comes into effect.
■■ Reverse qualified majority voting: the treaty allows for reverse qualified majority voting in
excessive deficit procedure.
The FCT has been very controversial with many seeing it as the epitome of the austerity fetish within
the EU. As the economic downturn persisted, many began to question the appropriateness of the FCT
on the basis that it was making a bad situation worse. In short, chronic demand deficiency as the root of
Europe’s problems was being ‘solved’ by further reductions in demand. To the FCT’s architects, this was
necessary to allow private sector investment to flourish and to prevent industry being crowded out by
excessive public sector spending. This counter-intuitive framework is based on German ordo-liberalism.
This ordo-liberalism is based on Germany’s experience of the 1930s and a belief that markets are in-
herently unstable and that governments need to set and enforce rules rather than to simply intervene
to correct market failures. Thus, the core focus is on stability and one of the core features of stability
within the German ordo-liberal system is a balanced budget. With the formation of the eurozone, and
later within the FCT, there was an exporting of these ordo-liberal principles to other European states
where their appropriateness is open to question.
The FCT builds on the SGP. However, the application of the rules within it seems fairly open-ended.
While Germany passed its own ‘debt brake’ in 2009, there has been little appetite by other states to
167
follow suit. In truth, much of the austerity within the EU comes more from the SGP than the FCT. The
former committed states to balance their budgets in the medium term; and to maintain debt to GDP
ratios below 60 per cent and public deficits below 3 per cent of GDP. These rules were tightened by
the so-called ‘six pack’ agreed in 2010 which included many of the facets of the FCT. This raises the
question that, if the rules were already agreed, what does the FCT do? The answer lies in the battle to
generate better compliance of member states with existing rules – a process that is not helped by the
absence of effective sanctions for non-compliance.
The greater controversy is the extent to which the FCT and its predecessors are making the prob-
lems of the eurozone worse. To the ordo-liberals such pain is the precursor of the growth Europe so
desires. However, there is a view that the FCT by further subduing growth, especially within Germany,
is making Europe’s problems worse. The desire for a balanced budget in Germany – the EU’s dominant
economic power – is limiting its growth which by implication is limiting the capability for other EU
states to grow via exports to the German economy. In the eurozone, given the constraints on interest
and exchange rates, fiscal policy (aside from reform) is the main policy tool and this is being limited
by the fiscal framework.
However simply scrapping the FCT is problematic, especially if its causes capital flight through
increased risk. Moreover, Germany would be very resistant to any such change. It has been suggested
by Mario Draghi, President of the ECB, that the FCT should be complemented by a growth compact
which would focus on using EU funds to promote growth and to cushion the effects of reform. Perhaps
more realistic and effective would be measures that would allow for a longer adjustment period to the
rules of the Treaty; that would stimulate public infrastructure and/or that would lower the interest rates
charged on highly indebted states.
had to be bailed out to the tune of €85 bn. In To the extent that the size of these sovereign
May 2011, this assistance was also extended to premiums hamper the functioning of the mon-
Portugal which was bailed out to the tune of etary policy transmission channel, they come
€78 bn. At this time, however, the bigger con- within our mandate…. Within our mandate,
cern was Spain – the EU’s fourth biggest econ- the ECB is ready to do whatever it takes to pre-
omy. As the Spanish property market crashed, serve the euro… believe me, it will be enough.
the bad debt of the Spanish banking system led
the EU to offer support to its banking sector. This was a strong statement that said that the
This support direct to banks was made to avoid ECB was not prepared to let the eurozone fail and
the so-called ‘doom loop’ where state support that it would defend it with all the weapons within
for banks worsens public debt making a wider its arsenal. The immediate effect of this statement
rescue increasingly likely. was subsidence of the existential crisis. This was
According to many observers, the key turn- merely one stage of the crisis as in the real econo-
ing point in the euro crisis and which began to my the process was still being played out through
alter market sentiment was the result of com- high rates of unemployment and public and private
ments made by Mario Draghi in July 2012 when debt. By 2014, there were a number of indicators
he said: suggesting that the worse had passed as:
168
■■ Ireland exited the bailout programme; ■■ there is no substantive internal fiscal transfer
■■ Latvia joined the eurozone; mechanism;
■■ growth had resumed in Cyprus, Spain and ■■ business cycles are not fully synchronised
Greece. across the eurozone;
■■ economic structures across the EU are still
This should not understate the work that needs divergent.
to be done as the fundamental causes of the cri-
sis had yet to be ameliorated as the eurozone still This does suggest that the EU was not ready
faces problems of competitiveness, limited bank for the introduction of a single currency but oth-
lending and the emerging threat of deflation. To ers may argue that the EU was not sub-optimum
many, these issues can only be resolved through but was merely poorly designed. Nonetheless, the
deeper integration. euro retains popular legitimacy in the crisis states
While it is still too soon to argue that the euro (see Figure 8.2).
crisis is over as there are still issues to be faced, It can be argued that this sub-optimal structure
there is a case to suggest that it has entered anoth- of the eurozone will always leave it subject to cri-
er phase. However, it is worthwhile reflecting sis due to the lack of political integration which
whether the crisis within the system was inevi- inhibits central control in the system. This coor-
table. In part, the answer to this lies within the dination problem leads to states following their
framework of Optimum Currency Areas noted own self-interests in areas such as:
above. On criteria within this framework, the EU
does not score highly as: ■■ excessive borrowing;
■■ conflict over responsibility for bailouts;
■■ labour mobility is low within the EU; ■■ divergent macro-economic policies;
■■ there is a home bias in capital markets; ■■ divergent economic growth patterns;
■■ wage and prices are inflexible downwards; ■■ the implications of trade imbalances.
80
70
60
50
40 2012
30 2013
20
10
0
Italy Spain Germany Greece France
Figure 8.2 Percentage of the population in key states who wish to keep the euro
Source: Eurostat.
169
These structural problems within the euro- However, these economic issues are being
zone were compounded by a number of errors increasingly superseded by political considera-
that could have been avoided but which undoubt- tions. It is becoming increasingly evident that
edly added to the crisis. These were the failure to ‘austerity fatigue’ is setting in across Europe.
properly enforce the SGP; the implicit encourag- The legitimacy of austerity was driven by, first,
ing by the ECB of excessive borrowing by under- its universalism and, second, by its short-term
writing debt; the inadequacies of the prevailing nature. However given high profile tax evasion and
financial regulation exposed by the global finan- avoidance by wealthy Europeans and the failure
cial crisis; and the heavy borrowing of individual of current austerity measures to deliver expected
states. impacts, which means they will be longer lasting,
At the time of writing, the future of the many segments of the electorate are questioning
eurozone seems uncertain. While – as mentioned the sustainability of the policy, especially when the
– the existential threat seems to have been pain in terms of unemployment and living stand-
removed, serious political and economic reforms ards is both extreme and prolonged. The rise of
are undoubtedly needed to return the area back populist parties of both the left and right indicates
to a sustainable trajectory. One of the key – and disenchantment with EU-imposed austerity and
most controversial debates – is that economic the election of the anti-austerity Syriza Party in
union needs to be accompanied by more fully Greece in 2015 and the rise of Podemos in Spain
evolved political union. This means that the suggest that the euro crisis has yet to play itself out.
eurozone will only ever truly work if states forgo
their financial sovereignty and pool resources
through a common fiscal policy. Others suggest a Conclusion
less drastic approach, arguing that the EU needs
more effective rules and sanctions which states Over the past two decades the process of Euro-
adhere to. Thus, states could be subject to fines pean monetary integration has been chequered.
or stricter borrowing conditions should they fall Indeed since its inception the process of mon-
out of alignment with the objectives of the group. etary integration has oscillated between periods
However political/institutional reform does not of stability and turmoil. There can be little doubt
address the fundamental competitiveness ques- that the latest crisis is the most serious yet. In ear-
tion which lies at the heart of the problem. If lier, looser forms of monetary integration, states
devaluation is no longer an option, then compet- always had the option to adjust their position. In
itiveness can only be restored though enhanced EMU, the only option for states is to cut costs
productivity or lower costs and the EU system through reform due to the asymmetric nature of
as it is currently configured does not allow this the shocks that created the turmoil within the sys-
as states have embedded rigidity within their tem. It therefore seems impossible to escape the
economic systems and in several cases have been conclusion that EMU on the scale that it currently
reluctant to reform. operates was nothing other than premature.
170
Case Study 8.2

Eurobonds: a solution to the euro crisis?
A European Bond (or Eurobond) is suggested as a potential long-term solution to the euro crisis. These
are bonds denominated in euros issued by eurozone states, enabling heavily indebted states to borrow
on the conditions that are available to less indebted states. In practice, this proposal means that one
country’s debt would be guaranteed by all the others states within the eurozone. This approach is ra-
tionalised by the belief that the aggregate level of debt across the EU is not that high – especially when
compared to the US – but is just uneven in its distribution.
Under a proposal for Eurobonds advanced by Delpla and Weizsäcker (2011), these devices would
be issued alongside national bonds while at the same time guaranteeing fiscal sustainability as states
would pool up to 60 per cent of their national debt as a percentage of GDP as senior sovereign debt
and – as a result – reduce the cost of borrowing for that segment of the debt. Any national debt beyond
this 60 per cent would be issued as ‘junior’ debt under normal conditions. In addition, states must es-
tablish an Independent Stability Council voted on by member state legislatures to propose an annual
allocation for the Eurobond and to ensure system sustainability. This approach was further advanced
by a proposal from the European Commission in 2011. The Commission’s proposal was for the more
measured approach of gradually increasing the term length of bonds. Delpla and Weizsäcker list three
broad approaches to the issue of Eurobonds:
1 Full Eurobonds with joint liability, involving full replacement of national bonds by Eurobonds and
with member states liable for the entire issue. This may create a moral hazard dilemma among
states.
2 Partial bonds with joint liability: this would only pool a percentage of the debt but with a joint
guarantee. There is no set figure within the option regarding the share of relative financing needs
covered by national and Eurobonds respectively.
3 Partial Eurobonds without joint guarantees: this is similar to the proposal advanced above where
the Eurobonds would only cover part of the debt with no collective responsibility for the debt.
Naturally, the response towards such initiatives varies across the states. It was estimated in 2012
that the annual cost of issuances under a system of joint liability of full Eurobonds (option 1 above) for
Germany would rise by 2.3 per cent (an annual cost of €49 bn, about 2 per cent of GDP) and France
would pay an extra 0.8 per cent of GDP (€16 bn). Similar effects were seen in the ‘austere’ northern
states where the Netherlands, Austria and Finland would all face additional costs of around 1 per cent
of GDP per year. On the reverse side, states such as Portugal and Cyprus would save over 8 per cent
of GDP per annum; Ireland nearly 4 per cent of GDP per annum and Italy 2.4 per cent. Such effects
would have a significant impact on annual budget deficits. Option 2 would have less impact. The same
set of losers and winners would emerge but in this case Germany would only lose 0.6 per cent of GDP
and Portugal gain around 4 per cent of GDP.
171
Whatever proposal was made was bound to be controversial. Naturally the frugal states have been
resistant to the plan. There are also ambiguities in any Eurobond scheme such as which debts should be
included and which excluded. One idea is that any scheme should only include new or maturing public
debt above the 60 per cent of GDP threshold. There are also other challenges such as preventing the
free rider problem where states issue new debt on the back of the hard-won credibility of other states.
Clearly, many of the more cautious states do not see the logic of helping a group of states who borrowed
excessively and who circumvented EU rules for many years. Meanwhile the southern states see the
proposals as ‘the master solution’ to the debt crisis. Germany legitimately points out that it was cheap
debt that sits at the root of the euro crisis and it is naïve to believe that cheaper debt would solve it.
Case question
Critically evaluate the case for and against the Eurobonds as a solution to the euro crisis.
Key points
■■ Monetary integration has been a long held ambition of the European project.
■■ From a business perspective, EMU facilitates trade and investment and generally reinforces the
market integration theme of earlier integration initiatives.
■■ The first decade of the EMU was a mixed success but was broadly successful in promoting
integration.
■■ The euro crisis exposed the absence of convergence within the system.
Activities
1 Organise a debate in which one side puts forward the case for UK adoption of the euro and the other
puts the case against.
2 Choose one of Ireland, Greece, Portugal and Spain, and – as a group – assess its core economic
strengths and weaknesses.
3 Research a European company and consider how the existence of the euro might have influenced its
strategy and operations. Companies ranging from global multinationals to small- and medium-sized
enterprises based either inside or outside the eurozone are suitable for this exercise. In a classroom
context, individual students or groups of students can be allocated a different company and asked to
172
present their findings to the class. Their findings can then be compared and contrasted to pull out the
similarities and differences. Note: issues to look at include location in or out of the eurozone; location
of suppliers and markets; characteristics of the sector; relative share of activities in the eurozone. For
non-eurozone companies, to what extent do they utilise the euro?
1 ‘EMU is as much a political as an economic project.’ Do you agree? Explain your answer.
2 To what extent can the EU be called an ‘Optimum Currency Area’?
3 What can be learned from the first years of EMU?
4 Was the euro crisis – on reflection – inevitable?
Bibliography
Brown, B. (2004) ‘Exiting EMU’ 18 (2)The International Europe: The Emperor, the Kings, and the Genies, Oxford:
Economy, pp. 57–60. Oxford University Press.
Buti, M. and Sapir, A. (eds) (2002) EMU and Economic Schmidt, V. (2010) ‘European Union’s eurozone crisis and
Policy in Europe, Cheltenham: Edward Elgar. what (not) to do about it’, The Brown Journal of World
Crawford, M. (1996) One Money for Europe?: The Econom- Affairs, 17 (1), pp. 199–213.
ics and Politics of EMU, London: Macmillan. Schwartz, A. (2004) ‘Risks to the long-term stability of the
euro’, Atlantic Economic Journal, 32 (1), pp. 1–10.
De Grauwe, P. (2010) Crisis in the Eurozone and How to
Deal with it, Centre for European Policy Studies: CEPS Tanzi, V. (2004) ‘The Stability and Growth Pact: its role and
Policy Brief – 15 February 2010. future’, Cato Journal, 24 (1/2), pp. 57–69.
De Grauwe, P. (2014) The Economics of Monetary Union, Wihlborg, C., Willett, T. and Zhang, N. (2010) ‘The Euro
10th edn, Oxford: Oxford University Press. Crisis: it isn’t just fiscal’, World Economics, 11 (4),
pp. 51–77.
Delpla, J., and Von Weizsäcker, J. (2011) Eurobonds: The
Blue Bond Concept and Its Implications (No. 2011/02).
Bruegel Policy Contribution.

Eichengreen, B. (2010) The breakup of the euro area. In
Europe and the Euro (pp. 11–51), Chicago: University
Websites
of Chicago Press. There are many sites on EMU – the following is merely a
selection.
Heise, M. (2013) Emerging from the Euro Debt Crisis: Mak-
ing the Single Currency Work, Berlin-Heidelberg: Springer. The Commission’s EMU website: http://europa.eu.int/
comm/economy_finance/index_en.htm
Hodson, D. (2011) Governing the Euro Area in Good Times
and Bad, Oxford: Oxford University Press. The ECB’s website: www.ecb.int
Padoa-Schioppa, T. (2000) The Road to Monetary Union in
173
Chapter 9
The European citizen

and consumer
Consumption is the sole end and purpose of production; and the interest of the producer ought
to be attended to only so far as it may be necessary for promoting that of the consumer.
Adam Smith (1723–90) in Wealth of Nations, published in 1776
■■ understand what it means to be a European citizen and the rights that citizenship confers;
■■ appreciate the importance of consumers to the European economy;
■■ understand how and in what ways the process of European integration can work to the benefit of
consumers;
■■ appreciate the actual impact of the process of integration upon consumers;
■■ identify key policy frameworks and legal measures to support consumer involvement in the
integration process.
There are around 507 million citizens in the EU the EU and the integration process in general have
who are by necessity also consumers. Consumer an impact on consumers. For many Europeans,
expenditure amounted to 56 per cent of GDP in the impact of the process of economic integra-
the EU in 2013, which justifies the priority vested tion upon them as consumers is a major determi-
in consumer policy by EU institutions. Consumer nant of their level of satisfaction with the process.
policy is linked to two broad objectives of the EU: Thus, while consumer policy focuses upon the
namely, improving the quality of life of its citizens interaction of consumers and suppliers, its politi-
and modernising the economy. This reflects the cal importance must not be ignored. The devel-
fact that many areas central to the development of opment of a Europe that works for the consumer
174
The European citizen and consumer
means a broader commitment to liberalisation, or not citizens are economically active: cur-
an open Europe and an awareness of how broader rently around 13 million EU citizens live in
global trends empower consumers. a different member state to the state of their
This chapter starts with a short discussion of what original nationality and more than one billion
the European citizen is and the rights that this con- trips are taken by citizens each year to differ-
cept affords them. It then examines the evolution of ent member states for business or pleasure;
consumer policy within the EU. Initially, this focuses ■■ freedom from discrimination on the grounds
on the importance of consumers to the integration of nationality, with the same rights to educa-
process which rests on understanding how their tion, social security and access to work as
transactions and interactions with non-domestic those given to locals;
suppliers can influence the intensity of the process. ■■ the right to stand as candidates and to vote in
Thereafter, the chapter examines actions undertaken European and municipal elections;
by the European Commission to generate confi- ■■ the right to consular assistance from any mem-
dence in cross-border trade. The final section of the ber state in a state outside the EU if there is no
chapter examines specific measures in more detail. consular representation by the state of which
the person is a national;
■■ the right to petition the EP and of access to
The European citizen European Union complaints procedures such
as the European Ombudsman;
As well as being citizens of the member state of ■■ the right to join with others in putting a Citizens’
their nationality, nationals of the 28 member states Initiative to the European Commission calling
of the European Union are also European citizens for new European legislation – a right granted
under Article 18–25 of the Treaty on the Func- under the Lisbon Treaty (see Chapter 4);
tioning of the European Union. From the outset ■■ the right to correspond with the institutions of
of the EEC, the Treaty of Rome provided for free the EU in any of the 24 official languages.
movement of workers. This was later extended to
include the economically inactive with resources Recent follow-up by the EU shows that EU
and social insurance. The concept of the European citizens and young people in particular are keen
citizen, however, was not introduced until the to use their freedom of movement to work or
Maastricht Treaty in 1992. The Schengen agree- study in another EU state, but various barri-
ment, dating from 1985, was later incorporated ers persist, including uneven rules about access
into EU law, creating a large borderless area in the to and quality of traineeships, different kinds
EU, with the addition of Iceland, Norway, Swit- of identity cards and lack of knowledge on the
zerland and Liechtenstein (with the UK and the part of both EU citizens and local administra-
Republic of Ireland choosing to remain outside), tions about the rights of citizens of other mem-
easing the practical problems of crossing borders. ber states. Other problems reported related to
Under the current treaty rules, European citi- access to disability rights in other member states
zens have the following rights, with some limited and to the lack of a vehicle information platform
restrictions: so that authorities in other members states could
access and review roadworthiness certificates
■■ freedom of movement across all the member from other member states. In the 2013 Citizen-
states, to live and work and for leisure, whether ship Report, many of these issues were identified
175
as commitments to be dealt with by the EU to benefit of the economy, consumers have to be suf-
improve citizens’ lives. ficiently informed to make the best choices for
themselves. If this information is lacking, there
is a justifiable regulatory role to fill this gap to
The place of consumers ensure a broad awareness is generated.
in European policy To fully support the development of the SEM,
consumers have to play their role to the full.
Notwithstanding the importance of consumers There must be confidence in the operation of
to the economy of the EU, consumers’ concerns the SEM and an understanding that it is relevant
were given relatively little attention during the and beneficial to them. Inevitably, realising this
formative years of economic integration. Histori- objective means overcoming a natural reticence
cally, the majority of decisions affecting consum- about purchasing goods from overseas: a prob-
ers’ interests took place at the national level. By lem heightened when cross-border shopping over
focusing upon businesses, European integration the internet is considered. Thus, as much as busi-
has been underpinned by an assumption that con- nesses have driven the process of economic inte-
sumers benefit only indirectly from the process gration forward, consumers have been important
through the by-products of more intense com- in sustaining the process. Consumers, via their
petition such as wider choice, product innova- expressions of choice, have the potential to
tion, lower prices, better quality, etc. However spread and intensify economic interaction across
there is no guarantee that economic integration borders. The increased mobility of the individual
(and the intensified competition that results) will and the spread of the internet and electronic com-
deliver these benefits. As a consequence, there is merce are just two ways that consumers contrib-
a need to ensure that consumers’ rights are not ute to the process of economic integration. As
compromised by an enlarged and more consoli- consumer awareness grows and empowerment
dated market place. A lack of confidence in con- rises, so consumers will start to become aware of
sumer transactions across political borders has the full potential of cross-border interactions as
the potential to derail the process of economic a means of enhancing their welfare and the value
integration. they derive from transactions. This power is being
Effective consumer protection is important increased by the price transparency created by
to the functioning of the modern economy. The the euro (see Chapter 8) and by the mobility fos-
everyday expression of choice by individual con- tered by transport liberalisation (see Chapter 10).
sumers about what they buy creates strong com- This underlines the close links between consum-
petitive pressure within the economy. The more er empowerment and the achievement of broad
confident consumers are, the better it will be for quality of life objectives.
European business: for example, a demanding However, the ability of consumers to act as
set of customers can compel businesses to offer agents of change within Europe has to be based
products that (through adding value to custom- upon their ability to exercise informed choice
ers) can deliver a tangible advantage on a broader about the goods and services they purchase. As
stage. Thus, those businesses that offer the great- markets become more complex, so consumers
est bundle of customer benefits will progress fur- need to be given the necessary information to
ther under market-based rules. Those that fail to enable them to make purchases and consump-
do so will suffer. For these forces to work to the tion decisions from non-traditional locations in
176
the most effective manner. If the consumer does appears to be the difficulty of satisfactorily com-
not have faith in the single market to deliver and plying with different consumer protection rules
meet their expectations, it will be seen as a major in different member states if things go wrong.
failure. It is evident in a number of areas, such as
automobiles, that cross-border consumption can
have an effect upon trade. However the ability to The emergence of EU
exploit this for the consumers’ benefit is curtailed consumer policy
by a generic lack of knowledge regarding rights in
cross-border transactions. Originally the Treaty of Rome did not contain any
Research done by the European Commission provisions on consumer protection. The develop-
in 2012 shows substantial growth in online sales, ment of consumer policy was a natural spillover
which tripled to 15 per cent between 2006 and from the development of the SEM. If the SEM was
2012. But while 59 per cent of consumers in the going to stimulate transactions across states and
European Union felt confident about buying from allow consumers to act as a proactive force in the
an online seller in their own country, only 36 per process of economic integration, consumers had
cent felt confident in making an online purchase to be assigned a number of fundamental rights.
from a supplier in another member state and 49 These were necessary to ensure the free mobility
per cent are not confident about doing so, show- of goods and services through facilitating the abil-
ing much work remains to be done to reassure ity of users to buy a good wherever they wanted
consumers. and be certain of their rights when they did so.
In contrast to similar questions about online This implicitly recognises that consumers are no
purchasing from sellers in the consumers’ own longer confined to their own state and that con-
home state, where generally high levels of consumption has an increased transnational element.
fidence were demonstrated by consumers (for Thus, consumers can:
example, 75 per cent in the UK), Figure 9.1
shows a general lack of confidence in making ■■ purchase products overseas when travelling;
cross-border purchases, with consumers in dif- ■■ purchase products from a firm established in
ferent states demonstrating very different levels another state;
of confidence, from 25 per cent in Hungary to ■■ order and purchase products from another state
66 per cent in the Irish Republic. In eight member online or through other distance selling methods;
states, an absolute majority of those questioned ■■ transfer money between states to make
are not confident about making cross-border pur- investments.
chases of goods or services.

Another piece of research undertaken for the Consumer protection revolves around three
European Commission in 2013 indicates that only issues. The first is a proper framework of rules
one-quarter of those questioned were interested that reflects the broad concerns of consumers and
in making cross-border purchases, and that only protect their interests. The second is an effective
one-quarter of sellers sold across borders, with mechanism for applying these rules in a manner
no upward or downward movement in the previ- that is both fair and understood. The third is the
ous six years. The research shows that consumer empowerment of consumers themselves. Tradi-
trust that their rights are being respected actu- tionally, consumer protection has taken place at
ally fell from 2011–12. A key barrier for sellers the nation state level. In many states, this policy
177
10% 7% 5% 15% 10%10% 15% 17%13% 7% 5% 17% 12% 6% 14%15% 4% 11% 22% 4% 18%19%26% 34%28% 29% 15% 14% 31% 28%
29% 32% 20%

19% 30%
10% 16%
6% 11%23%
19% 8%
26% 11% 21%
22% 19% 38%
23%
25% 22%
26% 18%
18% 29% 16%
45%
31% 11%
22% 36% 41% 23% 7%
38% 26%
26%
13%
29%
22% 22% 26%
26% 28% 28% 16%
10% 26% 29% 30%
45% 20% 21% 36%
16%
22%
22%
38% 43% 24% 21%
23%
18% 40%
41% 16%
34% 34%
32%
30%32%
25%26%29%
30% 32%
29% 30%33% 31%
31% 23% 29%
28%
26%
22%20% 21%
23%
29% 19%
21%
16%
15% 14%
11% 11%
10% 10% 11% 11% 11%
9% 8% 9%
7% 7% 6% 7%
5% 5% 4% 5% 5% 5% 6% 6% 6%
3% 3%
IE DK LU MT UK FI AT BG SE SK ES CY SI BE LV EU27 FR NL CZ PT EL RO LT PL IT EE DE HU HR IS
Strongly Agree Agree Disagree Strongly disagree Don’t know
Figure 9.1 H
ow strongly do you agree or disagree with the statement that ‘you feel confident purchasing
goods or services via the internet from retailers/providers in another EU country’?
Source: Eurobarometer 358, 2013.
overlaps with a broadly defined competition law. also differences as to the scope of policy which
The different methods used across states reflect in some cases (such as agriculture) favours trade
different legal systems, social-cultural traditions distortions over the supply of products.
as well as the broader political setting. As a result, When it began to emerge in the 1970s, supra-
the approach to ensuring consumer protection national consumer policy action was low key.
across states has varied between self-regulation At this time, actions were based on health and
and direct intervention from the state. There are safety, protection of economic interests, damages,
178
information and education and representation. to be taken into account whenever any new EU
One early directive in this period was on food policy or activity was under discussion. This sta-
price labelling in 1979, with its legal basis com- tus as a policy area allowed for action in finan-
ing from Article 235 of the EC Treaty, which was cial services, access to justice, food law, etc. In
a fallback provision that could be used to achieve this period, the Commission sought to develop
one of the objectives of the EEC in the absence a consumer policy that was compatible with the
of other powers. While there were a number of broader policy and strategic priorities of the EU,
actions linked into generic EC policy such as agri- notably in areas such as environmental protec-
culture in this period, there was no real concerted tion. These efforts were given fresh impetus with
action until the development of the SEM which the Treaty of Amsterdam, which under Article
introduced the notion of the consumer into the 129a specified the need to protect the health,
treaties through the Single European Act (SEA) safety and economic interests of consumers. The
in the mid-1980s. This inclusion sought to afford article sought to give consumers rights to infor-
consumers a ‘high level of protection’. Moreover mation and education to safeguard their inter-
Article 100a of the SEA operated as the founda- ests. In addition, all other policies – where there
tion for the development of a consumer policy, was overlap – needed to consider the consumer
by laying out the legal basis for harmonisation of angle. Following amendments made in the Lisbon
laws to establish the internal market. The Article Treaty, the current treaty provision on consumer
provides that the baseline had to be a high level of protection is found in Article 169 of the Treaty on
protection in the areas of consumer protection, the Functioning of the European Union 2008.
as well as in health, safety, and environmental In this treaty consumer protection becomes a title
protection. The SEA also aided the development in the treaty in its own right (Title XV).
of consumer policy by relaxing the need for una- What underpins all this is the free movement
nimity in areas related to consumer protection of goods and services as well as consumers.Where
where qualified majority voting would be used. the Commission acts, the ECJ has underlined that
Thus consumer protection became integral to the it has to demonstrate a clear cross-border dimen-
completion of the SEM, although it was not at this sion. To this end, consumer policy in the EU is
point a policy area in its own right. Initially con- based less on mutual recognition and more on
cerns were related to areas such as: harmonisation. There is, to the Commission, little
benefit to the customer from such divergences.
■■ consumer protection; In initially developing an action plan for the EU,
information; consumer policy was based upon three areas:
■■
■■ product safety;
■■ transactions. 1 Offering consumers a more powerful voice: to
this end, the EC offered financial and logistical
High profile areas in which the SEM worked support for meetings.
to protect consumer interests included toy safety, 2 Offering a high level of health and safety: this
cross-border payments, distance selling and time priority was directly stimulated by food safety
shares. These actions arising from the SEA were concerns.
supported by provisions in the Maastricht Treaty 3 Full respect for the economic interests of con-
in 1993, when consumer protection became a sumers. The needs of consumers needed to be
specific policy area under Article 153 and had reflected across all of the EU’s actions.
179
In response to these concerns, EU consumer for this has to be support from public authorities
policy is based on the following: to establish the credibility of these bodies in the
minds of consumers as well as providing these
groups with access to the required expertise.
A proper framework for The Commission has offered financial support
consumer protection rules to consumer associations and has made active
involvement by consumers in the development of
Many measures to support consumer protection are policy a key priority. The Commission also pro-
based on the acquis and cover a wide range of issues. vides clear online information for consumers on
These present the fundamental basis for consumer their rights, and plays a major part in promot-
protection but are only one part of the emerging ing consumer education about their rights. This
body of rules. Most notable are those related to ser- is linked to the broader EU objective of better
vices of general interest (telecoms, energy, etc.) and decision-making.
the emerging body of rules in financial services and
competition. The EU has sought to move towards a
harmonised level of protection as a direct reflection The strategy for consumers
of the increased interdependence between different
national markets.This marks a break with the tradi- Between 2002 and 2006, a new consumer strat-
tional strategy of seeking to base rules upon a mini- egy, based around creating a rule-based system,
mum level with states free to increase protection as was implemented. The system needed to ensure
they desire. In the early years of the EU consumer that not only were rules developed but that they
policy, the aim was to provide a generic framework were implemented, enforced and supported by
for consumer protection, but more recently there enhanced awareness. This highlights a key focus
has been a move towards full harmonisation of rules of consumer policy: that consumers have a natu-
to provide uniformity of protection, as will be seen ral disadvantage with regard to business. There
later in this chapter. are more consumers than businesses and they
are much more difficult to organise. Consumers
Proper application and respect for rules have fewer resources to create an effective organ-
isational framework to put forward their con-
This means that there has to be some method for cerns. Consumers encounter information gaps
coordination between policies as well as a method regarding matters of complaint and redress. How-
ever the EU, when pursuing these objectives for
for effective monitoring. In addition, any measures

have to be credible through an effective system of consumer protection, had to do so while balanc-
deterrence and resources to employ corrective ing potentially conflicting needs of business and
sanctions. This relies upon the interaction of public the consumer. In short, the view in this period
bodies and consumers to create such a framework. was that the commitment to consumer protection
should not be so onerous that it undermined the
commercial viability of businesses.
Consumer empowerment The policy, therefore, did no more than give
consumers rights without necessarily being active
This involves a direct input into the policy pro- in promoting these rights. This meant not only
cess by consumer representatives. An initial basis direct policy measures with regard to consumers
180
but also broader measures where the consumer market for consumer goods and services, cou-
is an indirect beneficiary. Thus, there was a key pled with a growing realisation of the potential
focus on knowledge creation among all parties of cross-border e-commerce. The strategy at this
to ensure there was an awareness of the role and time was also to work to improve the quality of
importance of consumer protection. This was the life of consumers and to ensure protection of con-
period immediately following the introduction of sumers from serious risks that might arise from
the euro and when the EU was also undergoing a unsafe products. With further enlargement of
period of enlargement. the EU taking place, there was a greater need to
There was a realisation at this time that frag- ensure that EU consumer policy was connected
mentation of the consumer protection system had with national policies in member states. In this
created uncertainty for all stakeholders. The EU period, as a consequence both of enlargement and
therefore proposed a supporting framework around of efforts to promote the growth of cross-border
which all actions related to consumer protection e-commerce, there was a move from minimum
would be set. All directives would stem from an harmonisation to full harmonisation measures
easily understood framework and would allow all where appropriate to ensure a common level of
to participate. The development of consumer pol- protection across member states. The need was
icy needed to be supported by effective enforce- also recognised for the interests of consumers to
ment but also had to ensure that the concerns of be considered when policies were being devised
consumers were not isolated from broader policy that were not specifically directed at consumers,
developments, such as enlargement, the euro etc. such as policies on financial services, to ensure
However the benefits of this simplified frame- that the consumer voice was being heard. For
work to consumers met with complaints from example, difficulties in switching bank accounts
retailers, especially where there was a marked were identified as a problem for many consum-
increase in the level of consumer protection. For ers. There was also a realisation that, with globali-
example, the Directive on the right to refund or sation, dangers to consumers could come from
replacement of goods 1999 met with dismay from products made anywhere in the world, and coop-
UK retailers who felt that such a radical departure eration agreements were made with government
from UK practice would lead to increased prices safety departments in China and the US, with
as the right to a full refund or replacement within plans to roll this out to more countries.
one year and free repairs if the item goes wrong The consumer programme for 2014–20 seeks
within two years would – within the context of to place consumers at the heart of the internal
a highly competitive environment – increase market, to promote their health and safety and
costs. This would especially hurt those retailers their legal and economic interests, and to make
who earn high profits from extended warranties. sure they receive adequate information on which
Under UK law, the burden of proof of lack of to base their decisions. As demonstrated by its
conformity is normally on the consumer. The EU increasing use in recent years, and in the light
law reversed this in relation to faults emerging in of increasing cross-border consumer activity,
the first six months after purchase. At the time the directly applicable regulation is likely to be
retailers estimated that the directive would add as employed more in future to ensure a uniformity
much as 2 per cent to costs. of approach across member states in a way that
From 2007–13, the priority was to ensure a directive cannot. The programme has four
that the consumer could play a proper role in the specific objectives:
181
■■ to consolidate and enhance product safety by dispute resolution schemes outside the courts
EU-wide market surveillance; which would be free or cheap for the consumer
■■ to improve consumer education and knowl- to use in member states and to create an online
edge of their rights and to support consumer ODR scheme for disputes about online sales or
organisations; service contracts which would provide an out-
■■ to improve consumer rights and means of con- come in 30 days.
sumer redress, including accessible means of Efforts to educate consumers about their rights
cross-border redress such as online alternative and means of obtaining redress have continued,
dispute resolution; but the Consumer Scoreboards and Eurobarom-
■■ to strengthen cross-border collaboration eter continue to show that much work remains to
between national enforcement bodies. be done to make consumers confident that they
know their rights and that they will get a remedy
Over the last ten years, there have been sig- in the event of a dispute.
nificant achievements in the consumer strategy. In Structurally, consumer protection was inte-
order to make sure that it is properly informed grated with health in the Commission from 2005,
about the markets in the member states, the reflecting synergies between the two areas. Both
Commission carries out market research in the of these areas under Article 152 and 153 of the
form of Consumer Scoreboards; market studies in EC Treaty (now articles 168 and 169 TFEU) rely
specific areas such as the retail electricity market; on the same type of action, such as consultation,
and has recently started to do behavioural studies information etc. In both areas, the aim of EU pol-
of consumers. Work has been done in the area of icy was to protect citizens from risks and threats
consumer redress: there can be significant prob- beyond the control of individuals and that cannot
lems in achieving a satisfactory outcome to a dis- effectively be controlled by member states, and
pute if the trader is in one member state and the to increase the ability of citizens to make better
consumer in another – in such cases, many con- decisions as a result of the provision of informa-
sumers end up cutting their losses and abandon- tion. From 2014, following changes in the Euro-
ing their claims. The Commission also checks the pean Commission, consumer protection has been
legal compliance of traders’ websites (sweeps). integrated with justice. Clear links remain with
A network of European Consumer Centres has health, which continues to be linked with food
been in operation throughout the EU and the EEA safety in the Commission structure.
since 2005 to assist consumers obtain redress for
problems with a product or a service supplied by
a trader in a different state. In order to assist the Consumers and the euro
consumer further to obtain redress, a simplified
European small claims procedure was introduced Since the introduction of the euro in 2002, a
in 2009 for obtaining a remedy through the courts growing number of member states (19 from Janu-
across borders, and a directive on consumer alter- ary 2015) have adopted it as their currency. Over
native dispute resolution (ADR) and a regulation 300 million European citizens live in countries
on consumer online dispute resolution (ODR) that use the euro. In theory, the introduction of
were adopted in 2013. The ADR scheme was to the euro was meant to make things easier for the
be operational by 2015 and the ODR scheme by European consumer by reducing the transaction
2016. These measures aim to provide for quality costs of undertaking purchases in another state
182
and by improving cross-border price transpar- as there was little they could do other than to
ency. However, the introduction of the euro was, increase transparency. Despite the fact that they
initially at least, controversial among Europe’s were told the introduction of the euro was going
consumers because of price increases as well as to work to the consumers’ benefit, there was
more practical problems. little immediate evidence that it did. Inevitably,
With the introduction of the euro, national over time as the euro became embedded, the
consumers lost their national currency reference number of complaints declined. However many
which they used to assess the prices of goods and complaints overstated the extent to which prices
services. The result was that they had to create a had actually increased as price reductions were
new personal scale of value related to the euro. less newsworthy. In part, these fears were driven
Initially, consumers found it difficult to adjust, by the lack of the anticipated price convergence.
despite attempts by national and supranational However, despite initial problems of adjustment,
bodies to create a familiarity with the euro pri- from the consumer point of view having the euro
or to its launch. As it initially existed as merely makes travelling and cross-border e-commerce
a book currency, there was little opportunity for within the eurozone easier, as the consumer has
users to get used to the currency before it was in the knowledge of what a euro will buy in his own
their pockets. In addition, the display of dual pric- state. However, this is to some extent negated by
es was only voluntary and did not help consumers lack of price convergence across the states that
gain a proper sense of the value of the euro. Con- use the euro. On a positive note, steps have been
sumer organisations lobbied for dual pricing to be taken to make it easier for consumers to use their
mandatory but this did not happen. euro bank accounts across borders: a single euro
However the major controversy surrounding payments area (SEPA) has been created from
the introduction of the euro was the allegation 2012 within which debit cards can be used across
that it allowed firms to covertly increase prices. borders. Within SEPA, consumers can live and
The problem for retailers was that the national work in different member states and just have one
currency did not convert neatly into a euro equiv- bank account, and cross-border money transfers
alent. In some ways, retailers were in a lose-lose in euros are quick and cheap.
situation. If they rounded prices up, consumers
would complain; if they rounded them down, it
would leave them out of pocket. Evidence from The European Food
consumer groups suggested that retailers often Safety Authority
used the introduction of the euro to hide unjus-
tified price increases. A survey found that dry Driven by the strategic importance of the EU’s
cleaning in Germany increased by 25 per cent and agro-chemical sector as well as by the protection
a cup of coffee in Greece increased, in some cases of the health of the consumer, the EU published a
by 46 per cent, immediately after the introduc- White Paper on Food Safety in 2000. In the after-
tion of the euro. These figures fail to highlight the math of the BSE crisis in the 1980s and 1990s,
fall in the price of some goods. when the use of cattle feed containing infected
In some states, there were consumer boycotts bone meal caused disease in cattle and conse-
and consumer complaints soared against what quently a new variant of Creutzfeldt-Jakob disease
many saw as rampant profiteering by retailers. (vCJD) in humans, and the genetically modified
Little direct action was taken by the authorities (GM) food scare (see Box 9.1), the EU saw the
183
Case Study 9.1

Mobile roaming charges
When people move around the European Union, they want to make calls and access the internet wher-
ever they are. However, consumers are often unaware of the fact that when they are away from their
home state, they are receiving their telecommunications and internet services from a different supplier
in another state, and often at a substantially greater cost. Moreover, consumers do not even need to be
physically in other states, as roaming charges can arise where consumers are on ferries between states
or simply near borders. These roaming charges often come as an unpleasant surprise when the con-
sumer returns home and discovers a hefty bill. Because of this, well-travelled consumers will switch off
their smartphones when abroad: a recent survey of 28,000 people in the EU showed that 47 per cent
of consumers would not use mobile internet when abroad. The Commission estimates that 300 million
potential customers are lost to telecommunications companies because of roaming charges. The EU’s
response has been to cap roaming charges in a progressive way, so that the cap will gradually reduce
until it is completely eliminated. Capping started with a regulation in 2007. Since then, there have been
two further regulations, the latest in 2012. As well as capping charges, this regulation offers consumers
the opportunity to take roaming services from cheaper competitors from 2014. The EP voted to end
roaming charges by December 2015. However, progress has slowed because of changes to the European
Commission in 2014. Politically, there is no consensus in the Council of Ministers as to when roaming
charges should finally end. This is an area where there is a tension between the needs of consumers and
those of the telecoms businesses which feel they need the income from roaming charges to provide the
finance to upgrade their networks.
Case questions
1 Why would the EU want to get rid of roaming charges?
2 Why might a telecoms company see both positives and negatives in roaming charges?
need to restore consumer confidence in the safety there was a need to ensure that consumers were
of food while ensuring that no damage was done not only confident in these new methods but were
to strategically important industries. The BSE and also sure that the increasingly diverse sources of
GM problems demonstrated that weaknesses in food production were safe.
the supply chain have had a deep-seated effect The European Commission White Paper on
upon food production and upon consumer con- Food Safety sought to develop an integrated
fidence in it. The EU’s food and drink industry approach to this issue. In practice, this meant
is highly important, employing 4.2 million peo- that all aspects of the food value chain need to be
ple in addition to the 10.4 million employed in involved in the regulation of food safety in what
agriculture. However as the food sector moved the EU calls a ‘farm-to-table’ policy in which all
towards greater efficiency, a higher technological partners take responsibility for their respective
component and more intensive farming methods, portion of the value chain in ensuring that food
184
standards are addressed. In addition, there has of communication to the public when such crises
to be traceability for food and ingredients. Core emerge.
to this is effective monitoring and surveillance, The aim was that this new food safety infra-
rapid alert systems and effective research and sci- structure should be robust enough to meet the
entific cooperation. Often these aspects of food challenges posed by past and future crises for both
safety occur in an ad hoc manner. To overcome industry and consumer. However, a new challenge
such challenges, the EU proposed the creation of emerged with the horsemeat scandal in 2013
a food safety authority. when meat labelled as ‘beef’(which was really
To the Commission, the creation of a Europe- horsemeat), was used in manufactured products
an Food Safety Authority (EFSA) was a necessary such as lasagne. Horsemeat, though it might be fit
and appropriate response to the emerging chal- for human consumption, and is routinely eaten in
lenges. The authority was trusted with a number some EU countries, is cheaper than beef, resulting
of roles including: in fraud when it was presented as beef. In many
EU member states, there is no tradition of eating
■■ independent scientific advice; horsemeat, and consumers in those states do not
■■ assessment of all risks to the food chain; want to do so. Wrongly labelled meat was found
■■ operation of rapid alert systems; by inspection of products in the UK, France and
■■ networking with national agencies. elsewhere in the EU. In this particular food chain,
meat from one member state was processed by
The authority provides the European Com- a company in a second state for another compa-
mission with expert advice. The setting up of this ny located in a third state. In reality this scandal
body has been accompanied by a wider range of turned out to be a question of food fraud rather
measures to bring coherence to the many pieces than of food safety, though minute traces of the
of legislation covering all aspects of food prod- drug phenylbutazone (bute), which is banned in
ucts and production. These include measures on horses bred for the food market, were found in
animal feed, additives, flavourings, and nutri- some samples.
tion and health claims. These measures have to be One outcome of the horsemeat scandal was the
developed alongside actions to improve customer creation of the EU Food Fraud Network, made up
information and international action to ensure of food fraud contact points in each member state,
that other suppliers from outside the EU do not plus Norway, Iceland and Switzerland, plus the
subvert quality requirements. European Commission. The horsemeat scandal
The EFSA was formally established in January revealed that the financial penalties for food fraud
2002 as a separate legal entity funded from the are too lenient, and they are to be increased to
EU budget but operating independently of other ensure they are higher than the gains of the fraud.
EU institutions. The advice given must be based After the BSE crisis, EU law required mandatory
on independent scientific research. Its role is to labelling of the country of origin and of slaugh-
ensure that risk assessment is carried out on the ter of beef products. a regulation providing for
safety of food. Its remit covers all aspect of the better food labelling and extending mandatory
food value chain and all issues that both direct- food labelling of unprocessed meats to pig, sheep,
ly and indirectly affect food quality and safety. goat and poultry meat is being applied from the
Its aim is not only to prevent the emergence of end of 2014, and the European Commission has
new crises but also to create effective channels studied the impact of extending mandatory food
185
labelling to processed meat, a proposal which about by the aftermath of the financial crisis are
has recently been endorsed by the EP. EU rules likely to reduce the ability of member states to
requiring ‘horse passports’ are to be tightened test for food fraud efficiently.
to provide more information about the horse’s Within the EU, the Rapid Alert System for
health throughout the animal’s life. After the Food and Feed (RASFF) has been in operation
horsemeat scandal member states were made to for more than 30 years, whereby alerts relat-
report on their enforcement of horse passports. ing to food and feed safety can be communi-
By 2014, the first prosecutions were initiated in cated quickly around the EU member states
the UK and the Netherlands, though the numbers and Norway, Liechtenstein, Iceland and Swit-
involved were low. There is concern that cuts to zerland, to allow for rapid action before harm
government food testing laboratories brought occurs.
The EU and GM Foods

Box 9.1
Over the last 30 or so years, there has been a rapid advance in agricultural technology, most notably
in the creation of GM foods. These foods rely on genetic modification which is based on a technique
whereby the genes from one organism are transferred to another. The aim is to use this mixture of genes
to improve disease resistance, nutritional value, tolerance to herbicides/extreme weather and boost
yields. The US has been the leader in this field of biotechnology and, by 2014, GM accounted for 94 per
cent of soya bean and 93 per cent of corn production there. Worldwide, GM crops are planted on about
12 per cent of farm land.
However from the late 1990s emerging health and safety fears led the EU to start restricting access
to these foods. There were concerns about the seeds of GM crops escaping and contaminating nearby
conventional crops as well as concerns about health, though scientific proof about dangers to heath was
lacking. In 1998, an unofficial moratorium was established, according to which the EU did not allow
the growth of new GM crops after October 1998. In addition, the EU restricted field trials of GM crops
which fell by 90 per cent between 1998 and 2002 as a consequence. However, in 2003, such bans were
challenged by the US, Argentina and Canada claiming that there was little scientific basis for these
draconian actions. As a result, the blanket ban was lifted in 2004 but a series of GM crops remained
banned by individual states. Under EU law, GM food products cannot replace conventional foods, GM
foods need to be authorised, and adequately labelled as such, and there needs to be traceability so that
the fact that some ingredients have been genetically modified is flagged up to consumers.
In early 2006, the WTO ruled against the EU position but the EU has sought to limit the ban’s
effectiveness. The WTO decision was important as it reinforced the notion that such products are both
safe and enable farmers to increase their productivity. In its defence, the EU has said that the decision
referred to old rules and not to the current regime. However suspicions remain. Indeed six states retain
restrictions on these foods. European business supported the WTO decision arguing that there was no
scientific basis to restrict their research into GM foods. The EU is currently working on a plan that
would allow individual member states to ban GM foods on limited grounds, even where the products
have been approved by the EU. Where consumers in different member states have different views on
186
this issue, as appears to be the case with GM crops, this flexibility might allow a greater amount of
democracy for consumers.
Currently, the only GM crop that is in cultivation in the EU is a type of maize that is resistant to
insects, though a starch potato has been approved and was in cultivation until 2011. Many authorisa-
tions of other proposed GM crops have been blocked during the approval process. There are many more
GM crops and foods that have been authorised for import.
Ultimately the choice of GM foods is down to consumers. In many cases, the dispute between the EU
and the US is not about food safety but about technological competition in biotechnology. However, the
decision has a number of far reaching implications. The first is that wider access to new technologies is
important in building trust in the global trading system. Second, there needs to be greater harmony in
regulatory practices. In GM foods, the risks were probably perceived as opposed to real. As a result, it
was largely a political not a scientific issue. This also places pressure upon business to improve public
knowledge about such technologies.
EU consumer protection ■■ the right of the consumer to be aware of and

legislation stop unsolicited advertising e-mails (E-Commerce
Directive and Directive on Privacy and Elec-
There are a number of EU directives on consumer tronic Communications);
rights which apply no matter where consumers ■■ all products should be safe, with criminal pen-
shop within the EU. The rights are that: alties to enforce this (General Product Safety
Directive – there is a current proposal to
■■ when a company makes contact with a con- replace this with a directly applicable regula-
sumer, it must identify itself, state its location tion, to ensure a consistent approach across
and what it does and inform the consumer EU member states);
that it is trying to sell something (Directive on ■■ consumers should be compensated where nec-
Consumer Rights / E-commerce Directive); essary (Product Liability Directive);
■■ the selling price and/or price per unit must ■■ the consumer has a minimum of two years to
be clear and the total cost must be provided identify faults that were present when a prod-
before purchase in distance contracts (Direc- uct was purchased. In these cases, if faults
tive on Consumer Rights / Directive on Price are proved, suitable compensation should
Indications); be arranged (Directive on Sale of Consumer

■■ the consumer must be told how and where to Goods and Associated Guarantees);
cancel an order as well as be offered a 14-day ■■ personal details can only be used if agreed to
‘cooling-off period’ in distance sales (Direc- by the consumer, including the use of tracking
tive on Consumer Rights; Consumer Credit ‘cookies’ to track consumers’ use of the inter-
Directive); net (Data Protection Directive and Directive
■■ the consumer can appeal against unfair terms on Privacy and Electronic Communications,
in a contract and/or advertising (Unfair Con- which was amended in 2009 – currently the
tract Terms Directive / Directive on Unfair Commission is working on a new regulation
Commercial Practices); and directive on data protection, which have
187
been approved by the EP but, at the time of be dangerous is available in all member states. In
writing, have not completed the legislative 2011 there were 1,803 notifications to RAPEX,
process); compared with 139 in 2003 (OECD data).
■■ some unfair commercial practices have been In the year following the introduction of the
banned and others severely controlled to the 2001 revised directive which had to be fully
benefit of consumers (Directive on Unfair enacted into national laws by January 2004,
Commercial Practices) such as pre-ticked box- product recalls increased by 126 per cent. It is
es on online order forms and firms no longer estimated that the advertising costs of a product
being allowed to operate premium rate phone- recall can be as much as £10,000 with the final
lines for complaints and enquiries (Consumer figure, including compensation etc., running into
Rights Directive). millions. In 2012, a total of 2,278 measures were
taken in relation to unsafe products, a 26 per cent
Two noteworthy directives referred to above increase on 2011. Of these, 1,300 resulted in
are the General Product Safety Directive and the bans, most by order of the regulator rather than
Product Liability Directive. by voluntary actions of firms.
The European Commission proposed a new
regulation on Consumer Product Safety in 2013,
General Product Safety Directive to replace this Directive. It relates to non-food
products and aims to improve product traceabil-
This directive was first introduced in 1992 and ity and is accompanied by a Regulation on market
covered all products not included in single or sec- surveillance. The use of regulations in this area is
tor specific regulations, offering a safety net to to promote a uniform approach across the EU.
ensure all products sold in the SEM can be con-
sidered safe. Foodstuffs are excluded from the
directive as these are included in other directives. Liability for defective products
A revised directive was created in 2001: this rep-
resented an updated system based on changes in The Product Liability Directive seeks to ensure
the socio-economic environment and was driven that manufacturers are responsible for products
by new technology products as well as the need that harm. The directive deals with redress for the
to remove existing legal uncertainties. The 2001 consequences of the deficiencies in the product.
directive increased consumer rights in areas such Though this directive deals with the product itself,
as better information, focus on information for the notion of ‘defective’ is based on an expecta-
special groups of consumers, the recall of dan- tion of the safety of a product. It is manufacturers
gerous products, etc. In addition, the directive not retailers that are responsible for safety. Again,
places an emphasis upon consumers to use the the emphasis is upon the consumer to ensure that
products in a normal way and for the purposes he or she was using it for the proper purpose
for which they were designed. The directive also in the first place and following any instructions
set up RAPEX, the system for rapid notification for use. However, litigation for injuries resulting
of products that may pose a danger to consum- from defective products is aided by the fact that
ers across the EU and Norway, Iceland, Liechten- there is no need to prove negligence on the part
stein and Switzerland. This system ensures that of the manufacturer but the manufacturer does
the knowledge that a product on the market may have a number of defences to liability.
188
Case Study 9.2

The cost of a flight ticket
The advent of the budget airline has provided consumers with access to cheap foreign travel within
Europe and beyond. However, this positive development has brought a less desirable one in its wake –
nasty surprises are often sprung on the online purchaser late on in the transaction in the form of airport
taxes, air passenger duty and hefty charges for handling credit and debit cards. In some cases, the only
card that was free to use was the airline’s own charge card. A consumer might have been enticed by a
headline low fare in an advertisement, but by the end of the booking of a return flight for four people,
(including a multiple for the cost of using a credit card on each leg of the journey, times the number of
people in the party), the total cost might not look like a bargain any longer. ‘Drip pricing’ means that
extras are added to the price during the booking process. Pre-ticked boxes might entice the unwary
consumer into contracting for unwanted services, such as pre-selected seats or travel insurance.
Various overlapping EU legal measures have been introduced to combat this, the latest being the
Consumer Rights Directive. The current position is that the total price of a flight, including all charges
and taxes, must be displayed in a clear and prominent manner from the outset of the booking. The
Consumer Rights Directive provides that fees for the use of a particular means of payment, such as a
credit card, must not exceed the cost to the trader of the consumer using them. All optional extras on
the booking, such as pre-selected seats and travel insurance, must be selected by opting in rather than
opting out, and pre-ticked boxes are banned. It is to be hoped that these measures will lead to greater
transparency for the travelling public, who should be able to compare prices across different airlines
more efficiently.
Case question
As with many consumer protection measures that have a cost to the trader, will the consumer end
up paying for these measures in some other way?
The internet and the integration process. In many cases, the lack
consumer protection of confidence in e-commerce is symptomatic of
broader trends whereby consumers mistrust trad-

As discussed at the start of this chapter, evidence ers due to a feeling of inadequate protection when
shows that while consumers are growing in con- they engage in international transactions.
fidence in e-commerce, they still lack confidence The emphasis is therefore upon commercial
in making cross-border purchases. To the Euro- operators demonstrating to users that they can have
pean Commission, if the SEM is going to prove its confidence in the use of the internet for the purposes
value to the average European, then e-commerce of transactions. The EU can help by putting in place
has to mature. It is through this medium that con- the necessary supporting regulatory structures.
sumers will be able to access the wider choice, This is supported by coordination between national
lower prices and better quality associated with bodies to track and prosecute rogue online traders.
189
In addition, there are issues related to confi- and security. These disputes have also occurred
dence in payment systems. This is pivotal, for between member states.
while many surf the net, many ditch their ‘virtual This area underlines links between consumer
basket’ before they reach the check-out. Although policy and the information society initiative as
good security technology exists, its benefits are well as the internal market programme. In sup-
not feeding through into increased transactions by port of this measure, the EU has launched a legal
customers. It only takes one fraud to dent con- framework for e-business that brings together all
sumer confidence substantially. Again, there is a elements affecting the development of e-com-
need for some degree of self-regulation to help merce under a single framework – the digital
solve this problem and to overcome this confi- agenda.The data protection directive from 1995 is
dence gap. The Commission’s e-confidence strat- currently being reworked to provide better cross-
egy aims to identify third parties that consumers border protection for the private data of consumers.
can trust, especially when problems emerge, and Consumers are increasingly concerned about
to increase confidence in cross-border trans- their privacy online and are unhappy about the
actions. To support this, the Commission has online tracking of their preferences, although by
launched a series of initiatives to prevent prob- law they must now give explicit consent to the use
lems arising by encouraging best practice (use of tracker cookies as mentioned above. The data
of codes of conduct, trustmarks and credit card protection directive is to be replaced by a new,
chargebacks), by seeking remedies other than directly applicable regulation and a new directive.
redress to legal action and by enabling legal action The regulation is intended to ensure stronger data
where necessary. In 2014, the regulation on elec- protection through a uniform approach across the
tronic identification and trust services for elec- European Union and that only one data protec-
tronic transactions in the internal market was tion authority oversees cases where a business
adopted and will apply from 2016, replacing the operates across EU borders, generating cross-
electronic signatures directive. It will provide for border transmission of personal data. At the time
seamless electronic transactions across borders of writing, these instruments had been approved
through reliable electronic signatures. As men- by the EP, but were still to be approved by the
tioned above, a simplified European small claims Council of Ministers so further work may yet be
procedure is now in force, and legal measures for done on these measures.
simple forms of ADR and ODR for cross-border
disputes were adopted in 2013. These measures,
once they come into application, should assist the Financial services
consumer to obtain redress where problems arise

with a cross-border purchase. Financial services are an area in which there is
However since the emergence of the internet asymmetric information between providers and
as an economic force for integration in the mid- consumers with the result that it can be difficult
1990s, the Commission has struggled to under- for the latter to make confident, well-informed
stand the best way to approach the development decisions. This is due to the:
of e-commerce. This is especially true given dif-
ferences between Europe and the US over key ■■ complexity and intangible nature of the prod-
aspects of the development of the global informa- ucts offered;
tion economy, especially in areas such as privacy ■■ fact that these purchases are made very rarely;
190
■■ fact that the effect of the product may not be transactions and a ban on surcharges. Credit card
felt for many years. chargeback is now available throughout the Euro-
pean Union, covering unauthorised use of the
In spite of this uncertainty, financial products card, breach of contract and the bankruptcy of
have the potential to have a highly significant effect the seller or supplier.
upon consumers’ lives through, for example, the Nevertheless, while the Commission has made
level of disposable income spent on outstanding consumer protection a high priority within finan-
consumer credit. cial services, there is a view that consumers still
As a result of Article 169 TFEU (and before it, feel powerless with regard to financial bodies.
Article 153 of the Treaty establishing the Europe- This is especially true in relation to cross-border
an Community), which establishes the requirement trade where information asymmetries are espe-
for a high degree of protection of the economic cially acute. Evidence from the European Com-
interests of consumers, there are a number of mission suggests that not only have EU citizens
specific directives relating to financial services. failed to source financial services overseas but
Many of these focus on regulating the competence they will also be reluctant to purchase any in the
and financial strength of the providers. In other future. This is directly caused by lack of informa-
areas, policy is designed to enable consumers to tion and language barriers which prohibit confi-
make more informed choices about the purchase dent buying of financial products across borders.
of financial products. However, the EU market However, evidence shows that inertia and lack of
for financial services remains fragmented. The a perceived need to buy these products from sup-
Commission attempted to remove this anomaly pliers across borders play a part too.
through its Financial Services Action Plan but Consumers themselves are also growing
consumers have still found it difficult to enforce increasingly active. With the increasing move-
their rights, especially within the context of a ment of people across borders (especially within
patchwork of different bodies to whom they can expatriate communities), the potential for cross-
turn for redress. border selling of financial products has increased.
Following the global financial crisis, the EU Such a trend led to complaints by UK expatriates
has had a root and branch review of financial ser- in Spain against mis-selling by UK-based compa-
vices law. Much of this reform directly benefits nies. In these cases, expatriates found the differ-
consumers, such as the higher solvency require- ences in rules have reduced their protection. For
ments for banks, and the setting of a uniform level example, by moving from the UK to Spain, con-
for deposit guarantee schemes at €100,000 for all sumers found they moved to a regime which was
banks in all member states, and a requirement historically much less stringent.
to provide access to basic bank accounts and to The Commission tried to overcome uncer-
make switching banks easier. Greater consumer tainty generated by different regimes by creat-
protection has also been achieved in consumer ing FinNet in 2001. This promoted cross-border
credit, including a 14-day cooling-off period and complaints through a network of official arbitra-
a new right to repay a loan early. Banks and other tion bodies and ombudsmen. However in prac-
lenders must learn more about their customers’ tice, the process was hindered by the different
financial needs before offering them financial forms of product selling and financial advice that
products and must also offer them debt advice. occur across the EU. While FinNet is meant to
Caps are being introduced on fees for card-based stop disputes going to court, consumers still have
191
the capability to take issues further. It is to be by the EU in the area of consumer policy has to
hoped that the new EU laws adopted following be geared, not merely to getting across the mes-
the financial crisis will redress this by providing a sage of the opportunities created by the process
more standardised level of protection. of economic integration, but also to extend the
necessary protection. Without awareness and
security, users will lack confidence in the process
Conclusion of integration to the extent that the transactions
that drive the process may be undermined.
Consumer policy is a recent development in EU This is a difficult balancing act for the policy
policy. Its neglect had been a glaring oversight as makers who have to protect consumers, but not
consumers were expected to be major beneficiar- to the extent of driving those who sell to them
ies of the process of economic integration. Action out of the market.
Key points
■■ Consumers are major beneficiaries of the process of economic integration within the EU.
■■ EU consumer policy is a direct spillover from the creation of the Single European Market.
■■ The EU has launched a consumer strategy to support consumer confidence in the integration
process.
■■ EU consumer policy is intertwined with related policies such as health, financial services and the
digital agenda.
Activities
1 Discuss how consumer confidence in electronic commerce can best be achieved.
2 Divide into groups and assess the relative merits of allowing continued research into GM foods.
3 Assess the relative merits of extensive versus intensive food production.
1 How does the concept of the European citizen relate to that of the European consumer?
2 How and in what ways have consumers benefited from the process of European integration?
192
3 To what extent is the development of EU policy towards consumers justified?
4 Why is consumer confidence in the single market important for its development?
Bibliography
European Commission (2012) A European Consumer Howells, G. and Twigg-Flesner, C. (2005) ‘What sort of
Agenda: Boosting Confidence and Growth, COM europe do consumers want?’ Consumer Policy Review,
(2012) 225. 15 (5), pp. 169–74.
Goyens, M. (2011) ‘Will the European single market finally Micklitz, H., Reich, N. and Rott, P. (2014) European Consumer
become a reality for EU consumers?’ Intereconomics, Law, 2nd edn, Cambridge: Intersentia.
46 (2), pp. 69–74. Ramsay, I. (2012) Consumer Law and Policy: Text and
Harbour, M. (2012) ‘Rebooting the single market: the top pri- Materials on Regulating Consumer Markets, 3rd edn,
ority for EU growth’, European View, 11 (1), pp. 39–45. Oxford: Hart Publishing.
193
Chapter 10
Transport
Towards efficient and effective mobility
Quiet incest flourished when roads were bad.

From Cider with Rosie, a 1959 novel by Laurie Lee
■■ identify major European transport trends and how they affect the business environment and feed
through into transport policy;
■■ understand the link between market integration and an efficient transport system;
■■ demonstrate how the Single European Market has influenced Europe’s transport system and the
users of this system;
■■ assess the challenges faced in developing a single European transport area;
■■ analyse the impact of Europe’s transport policy on business.
Efficient transportation systems are essential way in which transport has evolved throughout
for the competitiveness of European business Europe.

and for the process of economic integration. The first section explores the contribu-
The Community’s founders signalled the tion of Europe’s transport sector to Europe’s
importance of transport by according it its own corporate and economic well-being and is fol-
title within the Treaty of Rome, the only sector lowed by a summary of long-term European
apart from agriculture to be treated in this way. transport trends. The following section traces
Why does transport merit such special treat- the evolution of the EU’s generic transport
ment? The answers are various and relate to policy, drawing out some of its key features
the characteristics of the sector itself, its role and its interaction with market developments.
in fostering European integration and to the The final three sections deal with the evolution
197
Inputs and factors of production
of policy in three key transport sectors – road for competitiveness. In particular, transport and
haulage, air and rail. related costs form a high share of the costs of high
volume, low value-added goods such as construc-
tion materials and liquid products, and initiatives
The importance of transport to control their transportation costs effectively
to European business extends the market of such sectors. Transport
and logistics costs of around 10 per cent of total
Transport is an important sector in its own right. revenue are commonplace in many sectors. Such
In 2011, the gross value added (GVA) of the costs include not only transportation but also
EU-28’s transport and storage activities, includ- warehousing, administration and the carrying of
ing postal, courier and removal services, amount- inventories, all of which are affected by the effi-
ed to €548 bn or 4.8 per cent of total GVA. This ciency of the transport system. Efficient transport
figure only includes GVA generated by those services also reduce the time taken for supplies
companies whose main activity lies in transport and components to reach manufacturers, thereby
and transport services: own account transport enhancing the viability of just-in-time manage-
services – that is, companies who own and oper- ment, and the time needed for a product to reach
ate their own fleet of vehicles to transport the its market – an important factor in time-sensitive
output of their factories – are not included. This sectors, such as the food industry. In short, not
4.8 per cent of GVA was generated by an esti- only is an efficient and competitive transport sec-
mated 1.14 million enterprises, ranging from tor an important element in cost control and the
owner–driver haulage companies to integrated development of competitiveness but it also pro-
logistics companies and international airlines, vides a general stimulus to growth and brings
and also includes transport ancillary services such more firms into direct competition with each
as travel agencies, tour operators, cargo handling other with secondary effects for competitiveness.
and storage. Transport also plays an important role within
Also in 2011, the EU-28’s transport sector the context of European integration. By facilitat-
employed over 10.5 million people, equivalent ing and encouraging trade, an efficient transport
to around 5 per cent of the labour force. The sector and integrated transport network enables
biggest employer was road freight (3 million European business to take maximum advantage of
employees), followed by warehousing and sup- the Single European Market (SEM). Indeed, the
port activities (2.5 million) and road passenger absence of an efficient European-wide transport
transport (almost 2 million). Transport services system jeopardises the achievement of a genu-
also accounted for 32 per cent of EU energy con- ine SEM by limiting cross-border trade within
sumption in 2012 and about 40 per cent of public Europe. The continuing expansion of the EU has
investment throughout the EU. Regardless of any accentuated the need for a genuinely pan-Euro-
other considerations, of which there are many, the pean transport policy and system. The countries
well-being of such a major sector must be of con- of Central and Eastern Europe, in particular, are
cern to policy makers. striving to overcome the dual legacy of a gener-
An efficient transport system supports and ally poor standard of physical infrastructure and
promotes all other economic activities. Transport the eastward facing configuration of much of
is an important cost factor for many sectors and their transnational infrastructure. In short, the
efforts to control these costs have major spillovers full realisation of SEM benefits for both older and
198
Transport
newer members depends upon the liberalisation of European integration and from the dynamics of
of Europe’s transport sectors and upon the con- long-term transport trends.According to the Euro-
struction of genuine trans-European transport pean Commission’s 2001 Transport White Paper,
networks (see Case Study 10.1). personal mobility more than doubled from 17 km
The state of European transport services has a day in 1970 to 38 km in the late 1990s, since
great significance for other policies, particularly when it has more or less stabilised. This increase in
for energy consumption and the environment. personal mobility has come from the most flexible
Transport also has implications for public health form of transport – the car – and road transport
and safety: increased vehicle usage pollutes the has firmly established itself as the dominant mode,
atmosphere, with adverse consequences for res- both in passenger and freight transport. A few fig-
piratory disease. Despite increasing mobility ures illustrate this point. Private car ownership in
around Europe, however, the EU’s road safety the EU-15 increased from 232 per thousand in
record has improved significantly: in 2013, there 1975 to 469 per thousand in 2000. By 2012, car
were an estimated 26,000 road traffic fatali- ownership rates in the EU-28 had reached 484
ties on the roads of the EU-28, less than half per thousand. This slowing growth rate arose from
the 54,900 fatalities that occurred in 2001 and enlargement to the east which brought countries
about one-third the 76,230 fatalities of 1990. into the EU with much lower car ownership rates
The numbers injured on the EU’s roads fell from than existing member states. However, it is in these
1.5 million in 1990 to just over 1 million in 2013. newer members where car ownership is grow-
The promotion of social and economic cohesion ing the fastest and where infrastructure is least
through regional development is also a primary equipped to cope with this growth. The aggregate
Community objective in which transport plays a EU figure also hides great divergence in car own-
key role. The Maastricht Treaty gave the Union ership rates, which in 2012 ranged from 224 per
the power to develop trans-European transport thousand in Romania to 621 in Italy. Interestingly,
networks to satisfy the ‘need to link island, land- car ownership has dropped slightly in Germany
locked and peripheral regions with the central and the UK, possibly as a result of ageing popu-
regions of the Community’ – a reflection of the lations and a larger percentage of the population
view that there is a direct correlation between living in large cities where public transport fulfils
the level of economic development and the quan- many transport needs.
tity and quality of infrastructure. Transport poli- Passenger cars are dominant in passenger
cy also has implications for external commercial transport in the EU-28 as Figure 10.1 shows: they
policy, for example in the negotiation of transit had a 73 per cent share of total passenger traffic in
rights and in the Commission’s negotiations of 2012 – a share which has been relatively constant
airline agreements with third parties to protect for many years. This dominance of passenger cars,
the integrity of the SEM. the attraction of which arises from their door-to-
door flexibility, has resulted in a transport crisis
in terms of both efficiency and the environment.
Long-term European Efficiency problems arise from bottlenecks,
transport trends growing congestion and delays. Consequently, a
major thrust of European transport policy (and
Pressures for a more positive EU approach the closely linked TENs policy) is to bring about
towards transport policy emerged from the logic a modal shift from road towards rail, an objective
199
which will be immensely difficult to achieve. Pol- 1%

icy makers will have to overcome a wide range 1%
9%
of vested interests, change basic attitudes towards
mobility and establish an environment in which 7%
investment in the rail sector is forthcoming.
Figure 10.2 shows the size and growth of 8%
passenger traffic since 1995. This reinforces the
dominance of passenger cars. Growth in this traf-
74%
fic was strong until 2005 but then appeared to
flatten off and has been relatively flat since the
beginning of the financial crisis.
The cyclical fall in the level of freight trans-
port has been more pronounced (see Figure
10.3). There was a notable fall in overall freight
transport, and particularly in the two dominant Car
modes – road and sea – in the two years from
Bus, coach, trolleybus
2007 with only a relatively muted upturn in 2010
Rail
and slightly lower traffic since.
Figure 10.4 demonstrates that road is also the Tram & metro
dominant mode in freight transport but, at 45 Waterborne

per cent in 2012, road dominance is much lower Air
than in the passenger sector. Maritime transport,
which is especially suitable for high volume con- Figure 10.1 E
U-28 passenger transport by mode,
signments, accounted for 37 per cent of freight 2012 (percentage bn passenger km)
traffic in the EU-28 in 2012. Increased mari- Notes: Air and sea refers to domestic and intra-EU journeys
only.
time transport will require more seamless link-
Source: Eurostat, EU Transport in Figures: Statistical
ages between the ports and other modes that can Pocketbook 2014.
take cargoes to and from the port. Geography
also plays a part in determining the potential for
maritime transport which will never play a part in historical reasons, its share is more significant in
moving goods in the centre of the European land- Northern Europe. There is potential, with some
mass. Nevertheless, European transport policy is investment to remove bottlenecks in the inland
seeking to promote seaborne freight transport by waterway system, to increase the usage of this
introducing measures to ease customs formalities transport mode heading eastwards. In 2013,
for ships to reduce red tape and to cut delays in the European Commission adopted a package
ports. EU maritime policy also has a safety and an of measures designed to boost inland waterway
environmental dimension (see Case Study 12.1). traffic by improving infrastructure, encouraging
Waterborne freight is also carried on inland innovation and by integrating it into the multi-
waterways, accounting for 4 per cent of freight modal logistics chain.
transport within the EU in 2012 (see Figure Despite the declared policy objective of
10.4). The overall role of inland waterways may increasing rail’s share in freight transport, its 11
be relatively minor but, for geographical and per cent share in 2012 was almost one-third of
200
6000
5000
bn kilometres 4000
3000
2000
1000
0
95
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
Passenger cars P2W Bus & coach Rail Tram & metro Air Sea
Figure 10.2 Passenger transport performance by mode, 1995–2012

Notes: Air and sea refers to domestic and intra-EU journeys only; P2W = powered two wheelers.
Source: Eurostat, EU Transport in Figures: Statistical Pocketbook 2014.
2500
2000
bn tonne kilometres
1500
1000
500
0
1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Road Rail Inland waterways Pipeline Air Sea
Figure 10.3 Freight transport performance by mode, 1995–2012

Notes: Air transport refers to domestic and intra-EU flights only; Road – national and international road haulage by vehi-
cles registered in the EU.
37% 45%
11%
3% 4%
Road Rail Inland waterway Oil pipeline Sea
Figure 10.4 EU-28 freight transport by mode, 2012 (percentage bn tonne km)
Note: Sea refers to domestic and intra-EU only.
its share in 1970. Rail’s share of European freight 1 common rules applicable to international
transport has been more stable in the last two transport to or from the territory of a member
decades, a factor which has been helped, in part, state or passing across the territory of one or
by the more prominent role played by rail freight more member states;
in several Central and Eastern European accession 2 the conditions under which non-resident car-
states, particularly, but not only, in the Baltic. riers may operate transport services within a
member state;
3 any other appropriate provisions.
Evolution of the Common
Transport Policy Certain derogations were allowed under
specified circumstances for the protection of liv-
Although its translation into practical measures ing standards and employment. State aids were
was limited for many years, the legal basis for also sanctioned ‘when they meet the needs of
the Common Transport Policy (CTP) has been in coordination of transport or if they represent
existence since 1958. The guidance given by the reimbursement for the discharge of certain obli-
Treaty to the Council of Ministers on the develop- gations inherent in the concept of public service’
ment of the CTP was relatively vague and applied (Article 73).
only to rail, road and inland waterways.The inclu- In 1961, the European Commission published
sion of air and sea transport was only confirmed the Schaus Memorandum – the first attempt to
later following a decision by the European Court establish comprehensive and specific objectives
of Justice (ECJ). More specifically, Article 71 of and principles to enable the Commission to
the Treaty of Rome empowered the Council of operationalise the CTP. The main thrust of the
Ministers to formulate: Memorandum lay in the need to introduce more
202
Transport
competition in the Community’s transport mar- technical and social standards but progress was
kets, but it does presage the later TENs initiative slow. Forging the CTP was made more difficult
by alluding to the need for coordination of invest- by the high and varying levels of state intervention
ments and the integration of transport systems. and regulation in all transport sectors. In the road
The Memorandum identified the following three haulage sector, for example, cabotage restrictions
key principles for the CTP which are entirely and bilateral trade quotas were in operation; pric-
consistent with the subsequent evolution of the es were regulated via compulsory tariffs; entry
CTP and the TENs programme from the 1980s to the road haulage sector was strictly controlled
and beyond: by licensing systems; and the range of taxation
systems meant that competition was far from a
1 The elimination of difficulties in the general imple- level playing field. Controls on price, quantity
mentation of the common market arising from and market entry were also endemic in other
national transport regulations: this principle transport sectors. State ownership, particularly in
underpins later attempts to liberalise individ- the rail and airline sectors, also resulted in high
ual transport sectors as part of the SEM initia- levels of state aid. In short, for a variety of rea-
tive (discussed more fully below in relation to sons, member states had seen fit for many years
road haulage, airlines and rail). to protect their transport industries and to isolate
2 The integration of transport throughout the Com- them from the forces of competition – a situation
munity: the originators of the CTP intended to which was clearly at odds with the principles of
establish common rules for transport between the Schaus Memorandum and the SEM.
member states and to admit non-resident EU Further complicating factors in the develop-
carriers to the markets of fellow member ment of the CTP were the diversity of transport
states. In later years, this integration increas- structures, national policies and modal preferenc-
ingly referred to physical integration of trans- es within the member states themselves. France,
port systems through the TENs programme as for example, followed a long-term policy of
much as to the creation of common rules, the developing the rail sector and maritime transport
impact of which would be jeopardised without was not as important for the EC-6 as it was for
physical integration. later entrants such as the UK and Greece. Mem-
3 The organisation of the transport system: this was ber states have also often invested their transport
initially interpreted to mean the introduction policy with a significant regional policy role and
of a more competitive transport system. It have imposed tight public service obligations on
also came to imply organisation of transport different transport modes. The need to serve its
according to European rather than national island communities, for example, made Greece
requirements, both via regulations and by the resistant to the lifting of cabotage restrictions in
development of a trans-European transport short sea shipping.
network. The emergence of a more concerted attempt
at developing the CTP received further impetus
Despite this early flurry of activity, implemen- from the EP which, concerned at the apparent
tation of these CTP principles was limited for stagnation in transport policy, took the Council
some time. For nearly 30 years, the transport proof Ministers to the ECJ in 1982 for failing to fulfil
visions of the Treaty of Rome were interpreted to its Treaty obligations. In May 1985, the ECJ sup-
mean harmonisation of conditions, particularly of ported the EP’s position and required the Council
203
Milestones in the Common Transport Policy

Box 10.1
1957 Common Transport Policy accorded its own section within the Treaty of Rome
1961 Schaus Memorandum establishes comprehensive principles and objectives for the CTP
1982 European Parliament takes the Council of Ministers to the ECJ for failure to introduce the
CTP in line with its Treaty obligations
1985 The ECJ supports the European Parliament and requires the Council to liberalise transport
services
1985 Single Market White Paper contains transport liberalisation measures
1987 Agreement on first airline package
1989 Transition agreement on the lifting of road haulage cabotage restrictions
1990 Agreement on second airline package
1991 Directive 91/440 – the first attempt to open the rail sector
1992 Agreement on third airline package – in force by 1997
1993 Removal of most short sea coastal cabotage restrictions
1993 Maastricht Treaty gives the EU the legal base to develop trans-European networks
1997 All airline cabotage restrictions lifted
1998 Cabotage restrictions lifted in road haulage
2002 ECJ confirms EU powers to develop and negotiate an external aviation policy, thereby ending
the proliferation of bilateral agreements between individual member states and third countries
2003 First rail package in force
2003 Negotiations between the EU and the US on a Joint Aviation Agreement (known as ‘Open
Skies’) begin
2004 Second rail package in force
2004 Launch of the Single European Sky
2005 Legislation on air passengers’ rights in force – ECJ decision later rejects a legal challenge to
the legislation by airlines
2007 Final agreement reached on third rail package
2008 First stage Open Skies Agreement between the EU and US in force
2009 Single European Sky II brought forward
2010 Second stage EU-US Open Skies Agreement reached

2010 International rail passenger market opened
2011 White Paper Roadmap to a Single European Transport Area – Towards a competitive and
resource efficient transport system
2013 Single European Sky II+ brought forward
2013 Fourth railway package tabled – focus on domestic passenger markets and on strengthening
existing legislation
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Key transport terms
Box 10.2
Cabotage: the transportation of goods or passengers wholly within the territory of one country by lor-
ries, vessels or aircraft owned by nationals of another country. Restrictions on cabotage were operative
in the road haulage, short sea shipping, inland waterway and aviation sectors until the SEM campaign
succeeded in lifting such restrictions. A limited agreement on reducing road haulage cabotage restric-
tions was reached in 1989 and established the principle of ending cabotage constraints. This agreement
paved the way for full cabotage liberalisation, not only in road haulage but also in other sectors – a
central factor in the opening of transport markets to competition.
Fifth freedom: the right of an airline from one country to land in another country, to pick up passen-
gers there and carry them to a third country. For example, with fifth freedom rights, British Airways has
the right to fly from London to Rome, to pick up passengers in Rome and carry them on to Athens. The
EU’s three airline liberalisation packages have granted authorised EU airlines full fifth freedom rights.
to bring forward measures to liberalise transport from the dynamics of the SEM were expected to
services ‘within a reasonable time’. create higher demand for transport services and
The ECJ judgment preceded wider develop- would be jeopardised by the fragmentation and
ments which were to result in important break- inadequacy of Europe’s transport systems.
throughs in European transport policy.The British These factors resulted in a two-pronged attack
peer, Lord Bethell, had been lobbying for a num- on Europe’s transport problems:
ber of years for the opening of Europe’s airline
markets. His campaign was helped by the spread ■■ programmes to liberalise systematically all
of economic liberalism and supply-side econom- traffic modes within Europe;
ics which emphasise the benefits of competition, ■■ a campaign to develop trans-European trans-
deregulation and liberalisation. The 1985 White port infrastructure (see Case Study 10.1).
Paper Completing the Internal Market was essentially
about removing non-tariff barriers to trade (bar- Current EU transport policy represents con-
riers which, as shown above, were rife in trans- tinuity with the past, encompassing a number of
port) and is an example of the growing reliance overarching themes which have been expressed in
on the market as the guardian of competitiveness. a series of White Papers, the latest of which was
The SEM was the key to the substantial chang- published in 2011, and which set the context and
es which have taken place in the transport sector framework for initiatives relating to individual
since the mid-1980s and which, as shown below, transport modes.
have resulted in significant corporate restructur- The 2011 White Paper sets out the chief chal-
ing, particularly of production and distribution lenges for Europe’s transport system as seen by
networks. In 1988, the Cecchini Report estimated the European Commission and refers to a range of
that failure to liberalise Community transport sys- specific initiatives that will be introduced to tack-
tems would result in costs to business which were 2 le these challenges. The overall aims of the White
per cent higher than they would otherwise be. The Paper are to develop transport systems which are
additional trade flows and prosperity anticipated environmentally sustainable (see Box 10.3); to
205
Sustainability goals of the 2011 Transport White Paper

Box 10.3
The overarching sustainability goal is to reduce carbon emissions by 60 per cent by 2050 compared
to 1990 levels (and, in the process, significantly reduce dependence on imported oil). Specific targets
contributing to the achievement of this goal are:
■■ a 50 per cent reduction in the use of conventionally fuelled cars in urban transport by 2030;
■■ 40 per cent of aviation fuel to be low carbon and shipping emissions to be reduced by at least 40
per cent by 2050;
■■ the majority of medium distance inter-city passengers to travel by rail in 2050;
■■ 50 per cent of freight journeys over 300 km to shift from road to other transport modes by 2050.
These targets are to be achieved by greater efficiency, technological innovation and modal shift
rather than by discouraging freight and passenger transport, given the White Paper’s claim that
‘curbing mobility is not an option’.
remove barriers to achieving an integrated trans- through new engines, materials and design;
port network; and to stimulate employment and by the introduction of newer and cleaner fuels
competitiveness within the European economy. and by better use of networks and information
The strategy for achieving these, and other and communication systems. The latter will
transport policy goals, such as easing congestion, involve the development of smart mobility
safety improvements and a greater focus on the systems such as air and rail traffic management
security of transport systems, revolves around the systems.
following dimensions:
3 Modern infrastructure
The need for an integrated and connected
1 The completion of a genuine Single European Trans-
transport system across Europe has been
port Area
acknowledged for some time (see Case Study
In practice, the regulatory framework for a
10.1) but its realisation lags behind traffic
single market in transport is mostly complete,
growth. The 2011 White Paper reiterates this
with the exception of rail where the single
need, speaking of a ‘core network of corridors,
market can still be taken further. However,

carrying large and consolidated volumes of
the concept of integrated transport markets
freight and passenger traffic’. The White Paper
can be refined further in terms of removing
urges the development of efficient multimod-
residual regulating barriers; promoting inter-
al links and the completion of missing links,
modality and greater convergence of social,
particularly at borders and transport bottle-
safety, security, minimum service standards;
necks. It also emphasises the need to improve
users’ rights and environmental rules.
east–west connections and resolve some of the
2 Innovation major financing challenges facing transport.
Innovation will help all aspects of the trans- In 2013, the European Commission
port strategy by improving vehicle efficiency put forward proposals for a new transport
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Transport
infrastructure policy which contains a time- stems from its suitability for door-to-door deliv-
table for the establishment of a core network ery. As a result, improved intermodal links are an
by 2030; this will constitute nine multimodal important component of European transport pol-
transport corridors: two running from north– icy in general and for road haulage in particular.
south, three from east–west corridors and However, the more negative impact on the envi-
four diagonal corridors. By streamlining and ronment of road haulage than rail and waterborne
making Europe’s transport system more effi- transport has made the switching of freight from road
cient, the core network should also contribute to these other transport modes a priority for both
to the Union’s sustainability objectives and by policy makers and for firms (see Case Study 12.2).
2030 should: Nevertheless, road haulage is the dominant
form of inland transport in the EU, accounting
■■ connect 94 European sea ports with rail
for over 70 per cent of freight traffic in 2012
and road links;
(see Figure 10.4). Levels of road freight peaked
■■ connect 38 key airports with rail connec-
in 2007 (see Figure 10.3) before falling sharply,
tions into major cities;
along with other freight modes, as a result of
■■ upgrade 15,000 km of rail into high speed
the economic crisis. After an initial recovery,
networks;
road freight has fallen back again and in 2012
■■ reduce bottlenecks at 35 cross-border
was at 88 per cent of its 2007 levels. Other fac-
projects.
tors affecting freight traffic are the increased
4 The external dimension use of freight forwarders and third party logis-
Given the importance of transport to inter- tics companies to consolidate and rationalise
national trade, the White Paper recognises freight activities.
the particular need to take an international From the perspective of the users of road haul-
perspective on this sector. As such, the White age and the industry itself, the SEM, enlargement,
Paper commits the Commission to extend environmental concerns and policy, TEN-T and
transport and infrastructure policy to the the performance of the European economy have
EU’s near neighbours; to promote the EU’s all had a significant impact on road haulage opera-
approach to opening up transport markets to tions in recent years. The EU introduced a wide
free and undistorted competition in all appro- range of single market measures which directly
priate international negotiations and to work affected the road haulage industry, and has peri-
within international transport organisations odically reviewed their impact with a view to fine
such as the International Maritime Organi- tuning them, most latterly in 2014. The original
sation and the International Civil Aviation measures were broadly divided into liberalisa-
Organisation. tion and harmonisation measures. The former
increased market access and were intended to
increase competition throughout the EU mar-
Developing the CTP: the ket. Harmonisation measures were intended to
case of road haulage ensure that increased competition between road
hauliers from different member states was fair.
Road haulage is an important component of the Safety and technical measures, for example, were
transport chain, demonstrating greater flexibility designed to prevent road hauliers gaining a com-
than rail, inland waterways and air transport. This petitive advantage from compliance with lower
207
Case Study 10.1

Trans-European Transport Networks (TEN-T)
The origins of TEN-T lie in the 1960s when the Council of Ministers called for an examination of the need
for infrastructure investment to support the realisation of the CTP. The resulting consultation achieved
little and, in 1979, these themes were reiterated when the Commission again stressed infrastructure as
a necessary flanking policy to the CTP. However limited financing stymied any meaningful action and it
was not until 1992 that any concerted action occurred when EC transport ministers agreed – as part of
the SEM programme – to create an Action Programme to support the development of TEN-T.
However, the powers granted under the founding treaties were limited in terms of TEN-T: a position
reinforced by the 1992 European Transport White Paper. Consequently, Article 129b of the Maastricht
Treaty granted the EU competence in the field of transport TENs on the basis that they were neces-
sary flanking policies for both the SEM and economic and social cohesion. This mandate stimulated
the Commission to identify projects of European interest and to assist in funding these projects where
possible. However, the cost of both national and cross-border infrastructure continued to fall mainly on
national governments and the private sector. The 1993 Growth, Competitiveness, Employment White
Paper adopted TEN-T as a core plank of its strategy stressing that:
■■ the private sector must lead the development of TENs;

■■ there was a need to create new and innovative forms of public–private partnerships to secure their
development;
■■ TEN-T were closely linked to the existence of open and competitive market in transport services;
■■ there were big impediments within the planning and bureaucracy surrounding TEN-T.
Despite a consensus among states on the importance of TEN-T, the 2001 Transport White Paper
raised doubts about the programme, especially regarding the rhetoric of TENs; the reality of the limited
finance available; and the slow process in removing bureaucratic barriers to these systems. In order to
overcome the financing problems, the Commission offered finance to support the development of TEN-
T through the transport budget, the Cohesion Fund, the Regional Development Fund, loans from the
European Investment Bank and, in limited cases, EU research funds. In 1995, the Commission offered
€2.3 bn to fund TEN-T – though such funding is largely incidental to the projects – with a new strategy
to focus efforts on a more limited number (14) of priority projects which were given the majority of the
funding. However this funding did little to remove the core financing problems of TEN-T.
By 2003, it was estimated that TEN-T needed €350 bn by 2010 but only 25 per cent of this
had actually been committed. Moreover only 3 of the 14 priority projects were completed within the
timeframe specified. This problem was compounded by the fact that investment by member states in
infrastructure had fallen below long-term trends. Historically, member states had invested 1.5 per cent
of GDP per annum in infrastructure but by 2003 this had fallen to less than 1 per cent a year. This was
compounded by commitments made by states to the Stability and Growth Pact (see Chapter 8) which
required them to show restraint on public spending. As a result, the Commission sought to increase its
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Transport
own support to these projects but several member states resisted an extension of its capabilities, argu-
ing that the problem was not a lack of finance per se but a result of poor planning, design and manage-
ment. However the Commission still managed to gain a 68 per cent increase in its funding for TEN-T
between 2007 and 2013.
The 2009 assessment of TEN-T led to a proposal to reform Community guidelines on the support
of key projects. The aim was to move from guidelines to a regulation which would define a long-term
strategy up to 2050 and – importantly – would mandate action to compel member states to develop
a core network by 2030 and a comprehensive network by 2050. This shift towards compulsion within
TEN-T was controversial, especially regarding the financial commitments upon member states: the
UK estimated that meeting these objectives would cost it £14 bn for rail and £50–123 bn for the road
network. In 2011, the Commission proposed a Connecting Europe Facility (CEF) as a new integrated
instrument for investment in TEN-T. For 2014–20, it proposed that €32 bn be offered within this budg-
etary line. This was not well received against the prevailing background of public sector austerity and
this funding was cut to €26 bn in the final budgetary agreement for 2014–20. This was, nevertheless,
a significant increase on the €8 bn for 2007–13 but still modest compared to the 2011 White Paper
estimate of €550 bn needed by 2020 if completion of the TEN-T project was to remain on schedule,
implying major contributions from member states and the private sector.
Overall, during the past two decades TEN-T has had limited success, with many of its ambitious
objectives unachieved, but there has been some progress. Some individual projects have been completed
and the Commission has lauded improved interconnections between Western and Eastern Europe, for
example, as a major achievement of the initiative but is also aware, as indicated in the 2011 Transport
White Paper, that there is scope for further improvement to east–west interconnectedness.
Case questions
1 Identify and explain the rationale for transport TENs.
2 What are the main obstacles to achieving transport TENs?
3 What should be the role of the EU and of member states in developing infrastructure?
4 What characteristics should a connected and efficient European infrastructure have?

5 What would be the impact of such infrastructure on logistics in Europe?
national standards – a requirement which could ■■ market access measures, such as establishing
place undesirable downward pressure on safety criteria for admission to the profession of road
standards throughout the EU in an open market. haulier; the mutual recognition of qualifica-
In practice, rather than adopt common stand- tions; the removal of quotas on the carriage of
ards, which represent absolute harmonisation, goods by road between member states; and the
the Union has frequently opted for minimum lifting of restrictionon cabotage;
standards. ■■ tax measures, including actions on vehicle
The main single market measures included: taxes, excise duties on fuel and user charges
209
for infrastructure. Infrastructure charging ■■ over two-thirds of cabotage movements are

potentially requires users to pay the full costs carried out in the large, centrally located mar-
of their activities and further development of kets of France and Germany.
these ideas is undergoing a lot of scrutiny as a
way of bringing about intermodal shift – that is The above and related trends prompted the
the encouragement of rail transport to reduce Commission in its 2014 review of the road haul-
the congestion and other pollution effects of age market to identify priorities for future regula-
road transport; tory changes, most of which relate to enforcing
■■ safety and social measures regarding driving and making existing regulations work better rath-
hours and the transport of dangerous goods, er than embarking on major new policy directions
for example; and is in line with the need to ensure that single
■■ customs controls and regulation, including the market legislation is constantly updated to take
abolition of frontier checks and the reduction sectoral changes into account.
of formalities and documentary requirements Two single market-related priorities for the
at borders; next steps in European road haulage policy have
■■ environmental regulations concerning noise been identified in the 2014 road haulage review.
and other emissions from commercial vehicles; The first relates to strengthening Regulation
■■ technical harmonisation in relation to the (EC) No 1071/2009 which was introduced
dimensions, weights and technical character- in 2009 to improve access to the occupation
istics of commercial vehicles. of road transport operator by simplifying and
improving the enforcement of existing legis-
The 2014 review of the road haulage market lation and by introducing new requirements
revealed the following trends: which increase the degree of harmonisation
within the sector. Regulation 1071/2009
■■ about two-thirds of road haulage activity sought to improve cooperation between mem-
occurred within national domestic markets; ber states to ensure that the road transport
■■ cross-border trade within Europe accounted undertakings comply with the rules in force.
for 32 per cent of road freight traffic in 2012 This was to be achieved, in part, by establish-
and was the most rapidly growing segment of ing an electronic, linked-up database of road
the market. Eighty per cent of this trade was transport companies called the European Reg-
carried out by vehicles registered in either ister of Road Transport Users (ERRU) which
the member state of loading or of unloading became operational at the beginning of 2013.
with the remainder (also termed ‘cross trade’) The 2014 review proposes moving towards
being carried out by vehicles registered in full implementation of ERRU. The review also
third countries; posts an intention to act against so-called ‘let-
■■ national road haulage journeys by foreign terbox companies’ – that is companies regis-
operators (i.e. cabotage) represented 1 per tered for tax purposes in a member state that is
cent of road haulage movements. Although this different to their administrative base and where
represents a significant increase in such move- they carry out their commercial activities. The
ments, the growth has been from an extremely continuing existence of these companies is con-
low base and the extent of cabotage remains trary to Regulation 1071/2009 and potentially
relatively low; undermines the operation of ERRU.
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Transport
The second single market priority in the 2014 individual consignments, thereby increasing the
review relates to Regulation (EC) no 1072/2009 number of journeys and placing a greater pre-
which was intended to clarify the conditions mium on reliability. Transport companies which
governing cabotage. However, the 2014 review can supply a range of integrated logistical services
identified differences in the interpretation and on a cross-border, or even a worldwide, basis are
implementation of certain provisions of the 2009 well placed to serve these shippers and, accord-
Regulation which threaten to undermine the ingly, have grown rapidly.
internal market, especially in relation to the mar- In view of these changes, shippers have cor-
ket for cross-border transport. In short, although respondingly rationalised their carriers and are
the principle of lifting cabotage restrictions was basing their transport and logistics strategies on
agreed as far back as 1998, the market remains Europe as a whole or on significant sub-regions
more restricted than this implies because of these of it rather than on individual national markets.
differences in member states. The review there- This has made business both harder to come by
fore recommends the gradual removal of these for carriers and has extended the distance over
differential practices: this would reduce the which goods are transported. The greatest ben-
administrative burden arising from the complex eficiaries of these trends are the larger hauliers
patchwork of different rules and facilitate bet- with a strong regional and/or logistics speciality
ter matching of supply and demand for trans- and which have the financial clout to invest in the
port which would help reduce the number of necessary equipment and information technology
empty runs and increase both economic and fuel (crucial for tracking and tracing shipments) and
efficiency. to develop distribution centres. These companies
The combined effect of more integrated trans- are also increasingly contracting out the physical
port markets and of market integration generally transport side of their logistics business to smaller
has shifted the geographical footprint of many companies – an attractive option given that it is
firms, especially those striving to serve several the sub-contractor who has to bear the cost of
European markets. For many larger companies, compliance with national and EU regulations. The
production is focused on fewer sites, enabling contractor simply has to choose the most com-
them to take advantage of scale economies and petitive bid.
of better physical access to markets elsewhere in The SEM and enlargement have encouraged
Europe in terms of their distribution. The emer- the clients of the shippers (i.e. the manufactur-
gence of logistics as a distinct business function in ers) to search for the holy grail of a pan-European
recent decades is both a response to these changes distribution strategy, using a single hub as their
in the external business environment (such as basis for the whole of Europe. The increased geo-
internationalisation and the emergence of inte- graphical extent of the single market has made it
grated trading blocs) and a cause of the changes more practical for companies to set up one, two
themselves. The holistic approach of logistics or three main distributions centres to serve sub-
to the management of product movement and regions of the SEM, sometimes with satellite cen-
broader changes in manufacturing have helped tres performing the final distribution. The main
alter the nature of transport demand. Just-in-time motivation behind the creation of these European
management techniques and shorter product distribution centres is to centralise stocks, to
life cycles, for example, have increased demand enable companies to reduce their total invento-
for transport and reduced the average size of ries while increasing the availability of parts and
211
offering shorter lead times. In the process, com- sector for new entrants was virtually impossible.
panies should be able to reduce their storage and Not surprisingly, the lack of competition reduced
transport costs. the incentive to become more efficient and in
In the longer term, these changes could have the 1980s, the majority of Europe’s airlines were
a substantial transformational effect in the spa- operating at a loss.
tial distribution of economic activity throughout The first and major steps in opening Europe’s
Europe, particularly if the result is a clustering airline sector were the three airline packages,
and concentration of major production and dis- introduced between 1987 and 1992, which grad-
tribution sites around key nodes and along main ually chipped away at the most blatant obstacles to
trans-European transport corridors (see Case competition (see Box 10.4). These reforms gave
Study 10.1). The logistics networks which are European airlines, both in the public and the pri-
being developed, such as the physical infrastruc- vate sectors, the freedom to set their own fares
ture itself, are based on the control of distance and granted them access to all intra-EU routes
through time (achieved by organisation and physi- (although, as seen below, congestion and limited
cal networks), accessibility and optimal network slot availability at airports have placed physical
management – all of which are features which the limits on these legal freedoms). Without the three
CTP is intended to facilitate and enhance. airline packages, however, the emergence of the
low cost carriers (LCCs), which have had such
a major impact on the structure, operation and
Developing the CTP: competition within the European civil aviation
the case of airlines sector, would not have been possible. In other
words, LCCs would not have had access to the
The European airline sector has been transformed market.
since the early 1990s. Although European liber- The three packages provided the central part
alisation cannot take all the credit for this, the of the liberalisation of Europe’s airline industry
restructuring, the fine tuning of which continues, but several other changes were needed to ensure
would not have been possible without the lifting that access and competition in the sector was free
of the barriers to intra-EU airline activity. Indeed, and non-discriminatory. Since the three packages
prior to the implementation of the three airline were introduced, these outstanding issues have
packages in the late 1980s and early 1990s, the been tackled with varying degrees of success.
airline sector was one of Europe’s most heavily
regulated sectors. At the beginning of the liber- State aids were widespread in the airline sec-
■■
alisation process, most airlines were large, state tor for many years. Member states concerned
monopolies; fares were subject to state approval; about the survival of their national flag car-
access to routes and airport slots was tightly con- riers had long defied the European Commis-
trolled for the benefit of incumbents and cabotage sion’s attempts to eradicate this assistance.
restrictions and other constraints on routeing State aids seriously undermined the integ-
effectively prevented airlines flying in and out of rity of the single aviation market, allowing
any state apart from their own. In short, airlines, recipient airlines to distort trade and escape
even if they wanted to (and most incumbents were commercial pressures, thereby significantly
happy with the status quo), were inhibited from reducing incentives to improve efficiency
operating on a commercial basis and access to the and putting non-recipient competitors at a
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Transport
The three airline packages
Box 10.4
1 The First Package (1987) reformed capacity sharing practices so that member states were no
longer able to insist that 50 per cent of traffic on a particular route be reserved for the national
airline; introduced more flexible procedures for fare approval; and removed single designation
provisions.
2 The Second Package (1990) built on the liberalisation measures in the First Package, increasing
the flexibility to set fares and granted third and fourth freedom rights to all Community carriers
(that is, the right for European carriers to carry passengers to and from their home countries to
other EU members). This package also included fuller fifth freedom rights (see Box 10.2). The
above provisions initially related to passenger traffic only but were extended to freight in 1990.
3 The Third Package (1992) completed the process. It included the common licensing of carriers.
Holders of a community licence were allowed to serve any international route within Europe.
From April 1997, full cabotage rights were granted to licensed EU operators – that is, an airline
from one member state was given the right to operate a route wholly within another member state
(see Box 10.2). Domestic markets were fully open by 1997 and member states are required to
grant charter services access on the same basis as scheduled services. In short, European airlines
were granted access to all inter-European routes and, as a result of another part of the third
package, became free to charge almost whatever fares they wished.
serious disadvantage. In 1994, the Commis- airports; and air traffic management systems
sion established guidelines for the evalua- which fail to keep pace with the demand. Fur-
tion of state aids in the airline sector which ther congestion is anticipated as a result of cur-
operated on the market economy investor rent trends in air traffic growth and additional
principle. In essence, if the Commission’s growth resulting from airline liberalisation.
investigations into public assistance conclude Congestion at airports and in the skies will pre-
that no private investor would have invested a vent the full exploitation of market opportuni-
similar amount into an airline, this assistance ties offered by the airline liberalisation packages
is considered to be state aid. Direct state aid and acts as a market entry barrier. Solutions to
to airlines has ceased to be a major concern in congestion in which the EU has a role include:
the airline industry but the market economy

investor principle was invoked in the case of ■■ Physical infrastructure: improvement of air-
Ryanair flights into Charleroi Airport in Bel- port infrastructure falls within the remit of
gium when it was alleged that this secondary the TENs initiative (see Case Study 10.1)
airport had effectively extended state aid to but airports have not loomed large on the
entice the airline to use its services. list of priority projects. In short, although
■■ Congestion results from a variety of sources, there is a growing crisis in the provision of
including too few landing and take-off slots; key airport infrastructure, the solution will
shortage of terminal and runway capacity and not, in the short term at least, come from
aircraft stands; inadequate surface access to the EU.
213
■■ Single European Sky (SES). The Single Euro- review body to monitor and assess how the
pean Sky initiative is the current most high system was working; the creation of func-
profile initiative addressing the gaps in the tional regional airspace blocks, representing
single aviation market. Its overarching pur- integration of air traffic management systems
pose is to defragment the European air- and strengthening of the network management
space which is covered by 37 different air function.
navigation service providers, leading to 2 A single safety framework: the Commission pro-
costs that are significantly above those of poses extending the competence of the Euro-
more unified systems such as that of the pean Aviation Safety Agency to new areas of
US. The European Commission has esti- aerodromes, air traffic management and air
mated that the fragmentation of airspace navigation services.
costs Europe’s civil aviation sector €4 bn 3 New technology: in recognition of the fragmen-
a year. The SES is intended to reduce these tation and growing obsolescence of existing
costs and increase the efficiency of civil avi- ATM technology, the Commission advocated
ation in Europe: the objective is not only to acceleration of the development of SESAR
deal with the existing problems but also to (Single European Sky Air Traffic Management
prevent the escalation of future costs that Research) which is intended to harmonise and
would occur in the absence of any action develop ATM systems throughout Europe.
given the rapid rise forecast for air traffic in 4 Managing capacity on the ground: the Commis-
the future. As well as reducing fragmenta- sion stresses the need to ensure that airport
tion and costs, a successful SES would also capacity remains in line with ATM capacity and
reduce delays, and increase safety and flight reiterated the importance of existing measures
efficiency which would have beneficial ram- in this area.
ifications for the environment.
In 2013, dissatisfied with the rate of change,
For a long time member states were reluc- the European Commission brought forward Sin-
tant to tackle these issues and to create a single gle European Sky II+, which contains further
European air traffic management (ATM) system. initiatives which are not groundbreaking but are
However, in 2004 the Single European Sky was intended to make existing policy work better and
launched with the EU gaining competence in the thus contribute to the over-riding objectives of
field of air traffic management. The 2004 package SES in terms of defragmentation and improved
consisted of four regulations covering the provi- efficiency and performance.
sion of air navigation services; the organisation

and use of airspace; and the interoperability of ■■ Slot allocation: given the infrastructure and
the European air traffic management network. capacity problems faced by many European
In 2009, the Commission brought forward a new airports, the allocation of take-off and landing
package of measures (known as SES II) to advance slots has become an acute problem. The provi-
the SES objectives further. SES II was built on four sion of additional capacity or the improvement
pillars: of operating conditions is the best way to deal
with the problem of slot allocation but this will
1 Regulating performance: the measures included not occur in the short term. Meanwhile, the
the creation of an independent performance Commission has proposed amendments to the
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Transport
1993 Regulation on slot allocation to establish Following a successful legal challenge to the
transparent trading of slots and to ensure higher status quo at the ECJ in 2002, the European Com-
utilisation of slot allocations. mission eventually gained the right to negotiate
international airline deals on behalf of the EU as a
whole. The Commission quickly utilised its newly
Airlines: the global marketplace confirmed powers and began negotiations with a
number of partners. In 2008, a landmark agree-
Airlines account for by far the biggest share of pas- ment with the US on aviation matters came into
senger traffic between the EU and third countries. force. For the first time, any EU airline could fly
The indivisibility of the global and European mar- free of restriction from any point in the EU to any
kets resulted in a fierce battle between the Com- point in the US. This first stage agreement was
mission and member states over who should have followed by a second stage agreement signed in
the responsibility for conducting airline diplo- 2010 which moved the first agreement forward.
macy with third countries. The European Com- However, restrictions on foreign ownership of
mission frequently restated its claim to exercise US airlines and on the freedom of EU airlines to
exclusive competency in the negotiation of airline undertake flights wholly within the US (cabotage)
agreements with third countries, thereby ending have proven difficult to remove. The EU has also
the practice of bilateral negotiations between indi- negotiated, or is in the process of negotiating air-
vidual member states and third countries, but for line agreements with key strategic partners such
many years member states resisted the European as Canada, Brazil, Australia and New Zealand. In
Union’s attempt to gain competence in this area. 2012, the Council adopted an external civil avia-
The case for EU competence in this area was tion policy. The objective was to conclude agree-
strong. Bilateral agreements undermine the prin- ments with all neighbouring countries by 2015
ciples of the single aviation market. The Commis- (agreements had been reached with Morocco,
sion argued that anti-competitive practices on West Balkan countries, Georgia, Jordan and Mol-
non-EU routes also allowed carriers potentially dova even before the 2012 policy was launched);
to cross-subsidise unprofitable intra-EU routes. to start a dialogue on aviation matters with Gulf
Furthermore, bilateral talks tipped the balance countries and to develop an agreement with Rus-
of the negotiations in favour of the US. Negotia- sia (a development which has not been helped by
tions conducted on the basis of two large internal the Ukraine crisis).
markets would result in more parity between the
negotiating partners and a greater likelihood of
opening the US market to European airlines on Changes in Europe’s airline sector

equal terms. However, a fixed determination to
guard national negotiating rights within the EU As a result of the single market in air transport,
for a long time placed European airlines at a European carriers gained almost total freedom
competitive disadvantage compared to their US to choose their routes, schedules, capacities and
counterparts and fragmented the internal mar- fares without the intervention of governments.
ket. Moreover, ownership restrictions on non- Access to the European market was open to
US nationals are much stricter in the US than for all who qualified for a Community licence. In
US carriers in Europe and cabotage is a concept short, commercial rather than political factors
which is not entertained by the US authorities. became the key determinants of fares, routeing
215
and capacity. However, market opening occurred services to connect passengers with more prof-
at a time when most European airlines, particu- itable long haul services.
larly national flag carriers, were making losses 2 Merger with other national airlines: one response
or minimal profits. This made it doubly difficult to increased competition is to merge with or
for them, but essential, to meet the new chal- acquire one or more companies in the sector.
lenges of competition. The pre-liberalisation This brings economies of scale in many aspects
constraints on competition had removed incen- of the business and gives a certain critical mass
tives for the constant efficiency gains sought by to enable a company to compete successfully
firms in competitive markets and so there were (with the proviso that size by itself is far from
many opportunities in the new liberalised world sufficient to deal with competitive challenges).
for those airlines that could exploit them. Indeed, The first notable example of this was the merger
the single aviation market created a whole new between Air France and the Dutch national
industry sub-sector – the ‘low cost’ or ‘budget flag carrier, KLM, which was finalised in 2004.
airlines’ which quickly recognised and moved to These entities are part of a single company but
take advantage of the new opportunities open to continue to fly under their own brand identity.
them (see Case Study 10.2). Since then, other significant mergers have tak-
Important as the regulatory framework is, en place. In 2010, for example, British Airways
the airline industry is also affected by political, and Air Iberia merged, coming together under
economic and other events. The long-term trend the umbrella of the International Airlines Group
of steady upward passenger growth stuttered in but continuing to operate as separate brands.
the early 2000s under the combined effects of Lufthansa has been particularly busy in this
the terrorist attack on the World Trade Centre in respect: in 2007, it bought Swiss International
New York in 2001, the subsequent wars in Iraq Airlines, the successor company to Swissair,
and Afghanistan and the continuing problems in Switzerland’s national carrier which went
the Middle East and North Africa. These events bankrupt in 2002; it purchased Brussels Air-
have had long-term impacts on the operation lines, which had effectively become the flag car-
of airlines because of the need to boost secu- rier of Belgium after the demise of Sabena and
rity precautions. More short-term disruption Austria’s flag carrier, Austrian Airlines, in 2009.
has occurred from events such as the 2002–3 This restructuring has been subject to scrutiny
outbreak of SARS (severe acute respiratory syn- by the Commission’s competition authorities.
drome) in Asia and the eruption of the Icelan- 3 Change the business model: some blurring of the
dic volcano Eyjafjallajökull in April 2010 which, boundaries between low cost carriers and
because of the resulting ash cloud, brought wide- full-service scheduled airlines has occurred as
spread disruption to the airspace of Northern the latter adopt some aspects of the low cost
and Western Europe. business model (see Case Study 10.2) Aer
The scheduled airlines have developed a range Lingus, the Irish national flag carrier, was one
of strategies to improve their ability to compete of the first to go down this path as it fought to
in the changing business environment and indus- protect its business from the aggressive strategy
trial structure, including: of low cost carrier Ryanair on its main routes.
Lufthansa has taken things a stage further.
1 The purchase of small airlines in other European In 2009, low cost carrier Germanwings (origi-
countries: these airlines are then used as feeder nally founded as Eurowings in 1997) became
216
Transport
a wholly owned subsidiary of Lufthansa. In ■■ Skyteam Alliance: 20 members including Aero-

2013, Lufthansa began to transfer all its short flot, Air France, China Airlines, China Eastern,
haul operations outside its two main hubs China Southern, CSA Czech Airlines, Delta,
of Frankfurt and Munich to Germanwings. Garuda, KLM, Korean Air, Saudia.
This process was completed by the end of
2014 and by the end of 2015, these services Overall, the new regulatory framework for
will have reverted to the Eurowings brand. airlines in Europe has transformed the industry
Given the intense short haul competition from in many ways and has overturned conventional
low cost carriers in Europe, some anticipate ways of thinking about the industry. For example,
that other scheduled airlines will adopt a simi- in 2001 the Belgian flag carrier, Sabena, went into
lar strategy. liquidation as a result of recession and of large
4 membership of a strategic alliance: these alliances, debts owed to it by Swissair which itself had gone
which became commonplace in the 1990s, are out of business shortly beforehand. Their succes-
an international rather than a European phe- sor companies, together with Austrian Airlines,
nomenon but they enhance the capability of have been taken over by Lufthansa. Air France and
members (scheduled airlines) to compete on KLM and British Airways and Iberia have merged.
European flights as much as on long haul flights. Hungary’s national flag carrier went out of busi-
Initially starting as code sharing agreements ness in 2012. These developments would have
which gave passengers access to all routes with- been inconceivable a few years previously as the
in the alliance, other cost savings and benefits existence of a national flag carrier was regarded
quickly became apparent. These include the as essential to a nation for prestige and strategic
sharing of the costs of sales offices, mainte- reasons. In a more liberal market place, it is likely
nance facilities and operational facilities such as that further restructuring of the industry will
catering. Lower costs also help reduce fares and take place and that a few large European airlines
give passengers greater choice and optimised will emerge and compete on a global stage with
transfers between flights and carriers. Potential a number of smaller airlines focusing on niche
problems occur if alliances eliminate competi- or regional routes. The development of a wider
tion on particular routes. Given the frequently network of Open Skies agreements opens up the
shifting membership of key alliances and gen- possibility of intensified competition on long haul
eral routeing changes, the competition implica- routes, perhaps from low cost carriers. However,
tions of such alliances can quickly change. their business model is not so suited to long haul
flights because planes undertake fewer flights in
The three main alliances are: this business segment, meaning that there are
fewer opportunities for LCCs to benefit from
■■ the Star Alliance: 27 members including Air faster turnaround times.
Canada, Air China, Air India, Air New Zea-
land, LOT, Lufthansa, SAS, Singapore Airlines,
South African Airways, TAP, Thai Airlines, Developing the CTP:
United Airlines; The case of rail
■■ oneworld: 15 members including American Air-
lines, British Airways, Cathay Pacific, Finnair, Commission policy documents have consistently
Iberia, Japan Airlines, Qantas; aspired to a central and enhanced role for rail in
217
Case Study 10.2

Low cost airlines: the main beneficiaries of the single
airline market
Prior to the three airline liberalisation packages, Europe’s airline industry was dominated by na-
tional, largely state-owned flag carriers which were shielded from the forces of competition by
restrictions on market access, fares, and other regulations alluded to above. Liberalisation changed
all that. European carriers were granted the freedom to choose their routes, schedules and fare
with only minimal government interference (usually on public service grounds). Commercial consid-
erations became the primary motive for new routes and for changes to fares and to capacity. As a
result of the new opportunities, a whole new segment of the European airline sector – the low cost
or budget airlines – was born, a segment that could not have possibly existed under the previously
highly regulated system.
Following deregulation of the US airline sector, the low cost model was pioneered in the late 1970s
by Southwest Airlines, the original low cost airline which transformed itself from a regional into a low
cost carrier operating from a secondary airport in Dallas, Texas. The airline has subsequently become
the biggest domestic carrier in the US, operating over 3,400 flights per day. Southwest developed many
aspects of the low cost model adopted by Europe’s low cost operators, several of whom have publicly
acknowledged how Southwest inspired them.
The low cost airline business model is based on driving each aspect of an airline’s costs down as
far as possible (see Table 10.1). This enables the successful low cost operator to lower its fares, at-
tract more passengers and ultimately increase revenues and profits. Low cost airlines typically offer
direct flights on short haul routes from secondary and regional airports located near major population
centres (or, in many cases, not so near, incurring criticism for misleading promotion of their flights).
They do not operate a hub-and-spoke service like some of the conventional scheduled airlines. Although
hub-and-spoke can offer more destinations, point-to-point flying avoids the costs of through services,
including baggage transfer and passenger assistance costs. Secondary and regional airports are also
less congested than major international airports, thereby offering greater punctuality, faster aircraft
turnaround times (enabling carriers to utilise their assets more intensively), and do not have the slot
restrictions that can limit services from other airports. General airport fees and other related costs tend
to be lower at secondary and regional airports.

From the first contact with the customer, the emphasis of the low budget airline is on cost reduc-
tion. For many LCCs, tickets sales are carried out entirely online, thereby removing the need for call
centres and the payment of agency fees. Similarly, check-in has moved online to reduce check-in costs
for airlines. Services are eliminated or kept as simple as possible to keep costs down. Hence, low cost
airlines do not offer free in-flight meals (passengers are charged if they want a meal, for example) and
seats are not pre-assigned.
Fares are structured to fill the aircraft and vary significantly on the same flight, although even the
most expensive seats tend to compare favourably with those on traditional scheduled services. Low
218
Transport
Table 10.1 Comparison of airline business models
Low cost airlines Traditional scheduled airlines

Online ticket sales and online check-in – avoids Multiple sales channels including travel agents.
costs of call centres, agents and check-in staff Online check-in possible not compulsory
No business or first class Economy, business and first class available
‘No frills’ – charges for all extras (e.g. catering, Full service – entertainment, catering, business
reserved seating and baggage, etc.). Reduces and first class, lounges, etc. included in fare
staff numbers and costs.
Higher plane utilisation because of quick More time spent on ground – slower turnaround
turnaround times – helped by simpler boarding time
procedures
Use of regional and secondary airports – lower Use of international airports – higher airport fees
airport fees and quicker turnaround and slower turnaround time
Standardised fleet – reduces costs of mainte- Wide range of aircraft types – increases mainte-
nance and training and bulk purchase of aircraft nance costs
Higher seating density Lower seating density
Direct flights, short haul, no transfers – no need Long and short haul with transfers. Greater
to manage transfers or pay compensation for complexity
mixed flights
Staff incentives (higher percentage of variable High basic wage costs with few staff incentives
wage costs) – keeps unit wage costs down
fares are intended to stimulate demand, especially from leisure and cost-conscious business travellers
who may not travel or will perhaps use alternatives such as the train without the promise of lower fares.
Fares are set according to demand for a particular flight and with reference to the period remaining to
departure. Higher fares are charged on flights with higher levels of demand for bookings made nearer
departure.
The greater competition created by liberalisation in general and by the low cost airlines in particular
has forced all airlines to pay more attention to efficiency, especially the national flag carriers which,
in pre-liberalisation days, were immune from normal commercial pressures. Many flag carriers have
changed key practices as a result of the low cost airlines. For example, in view of the greater flexibility
offered by LCCs, scheduled airlines dropped their convention of only selling return tickets, requiring a
minimum period of stay and/or staying over a Saturday night for their cheaper flights. Previously, single
tickets had frequently cost more than a return ticket and it had proved expensive and complicated to
follow an itinerary which involved returning to the original departure point via stops at multiple des-
tinations. Aer Lingus, subject to intense pressure from Irish low cost carrier, Ryanair, adopted a low
cost strategy on its short haul flights from 2002. The competition continued and Aer Lingus has been
the subject of several takeover bids from its chief rival – bids which have not been welcomed by the
European Commission, among others, on the grounds that it would give Ryanair too much control over
routes out of Ireland.
219
In more general terms, the emergence of low cost airlines has met the objectives of the EU liber-
alisation package and supported the creation of the SEM by facilitating free movement around the
European Union, offering greater consumer choice, stimulating restructuring of the sector and gener-
ally simplifying travel. The LCCs have also had a positive effect on regions, creating jobs at regional
airports and in related aviation activities. The boost to regional airports stimulates inward investment
and tourism, boosting the local economy and creating jobs beyond the aviation sector. In terms of the
environment, low cost airlines claim that their high levels of capacity utilisation and greater density of
seats per plane reduces the amount of pollution per passenger. On the other hand, the total of flights is
higher because of the low cost sector, with all the attendant environmental implications.
Case questions
1 Explain why liberalisation of the airline markets was necessary in order for the low cost budget
airlines to develop and prosper.
2 What have been the main impacts of the phenomenal growth of budget airlines in Europe since
the implementation of the EU’s three airline packages?
3 Changes in airline regulation have led to both entries and exits into and out of the low cost sec-
tor. Investigate why some companies have left.
4 How sustainable is the low cost model in the long term? What factors might make it difficult to
sustain?
5 Choose a low cost carrier and explain how it has established it market position.
Europe’s transport area, envisaging a modal shift Part of the problems in creating a seamless,
towards rail and bestowing a prominent role to integrated pan-European rail network stems from
rail projects in the TEN-T initiative. Rail offers the historical development of networks within
a less environmentally damaging alternative to national boundaries and, although Sweden, the
road transport and over medium to long distance UK, Germany, Austria, Italy, the Czech Repub-
journeys offers the prospect of taking both freight lic and the Netherlands have opened up their rail
and passengers off the road, thereby reducing markets, either fully or partially, to competition,
Europe’s congestion problems. The reality, how- the rail sector of the majority of member states
ever, has been somewhat disappointing. Despite remains in the hands of national monopolies
the implementation of three rail packages, the and is closed to new entrants. In short, rail has
share of rail in passenger transport has remained the farthest to go in fulfilling the requirements
unchanged at 6.5 per cent since 1995 (see Figure of a single transport area as it continues to be
10.2) and rail’s share of freight traffic fell from constrained by national boundaries while the
20.3 per cent in 1995 to 17.2 per cent in 2012 market for its services has become increasingly
(see Figure 10.3) transnational.
220
Transport
The EU’s first attempts to open the rail mar- This is the end of the physical and technical
kets in 1991 seemed significant at the time but barriers in European freight railway transport:
in retrospect did little to change the status quo. this new context will change radically the pic-
By requiring the separation of accounts for infra- ture for rail transport and will really boost
structure and via provisions regarding autonomy, it. It will also contribute to the fight against
Directive 91/440 did at least set the foundations road congestion. This is a revolution which
for later initiatives to open international markets. represents a genuine European rail transport
The next attempt to do this occurred in 1995 but integration.
got nowhere because of lack of support in the (Commission Press Release, 22 April 2004)
Council.
Matters were helped by the Treaty of Amster- In 2004, the Commission took things a stage
dam which made transport subject to co-decision, further when it tabled proposals for its third rail
thereby conferring a greater role in transport package. The resulting agreement reached in
policy to the EP, an institution anxious to push 2007 led to:
European transport policy further. In 1998, the
Commission tabled three proposals on rail infra- ■■ the opening of all international passenger ser-
structure (commonly referred to as the ‘first rail vices, including cabotage, by January 2010;
package’). Following a long and controversial ■■ the introduction of a European driving licence
debate, the three directives eventually came into which allows train drivers to work across the
force on 15 March 2003, resulting in the opening whole network subject to certain educational,
of international freight to competition on a sig- health and training requirements;
nificant part of the Union’s network. This market ■■ the strengthening of passenger rights.
opening had to overcome the power of the incum-
bent operators which the directives sought to do In 2013, the Commission adopted the Fourth
by separating out ‘essential functions’ to ensure Railway Package in response to the need to open up
transparent and non-discriminatory access to the domestic rail markets to competition and to review
infrastructure, including, most importantly, sepa- existing legislation which revealed areas where
ration of control over the track and the services improvements could be made. The package encom-
that operate over the track. passes several proposals, the main ones of which are:
In 2002, the Commission brought forward
its second rail package which contained five 1 EU-wide approvals: the ERA promotes interop-
proposals designed to improve safety, interoper- erability and harmonised European standards
ability and the extension of market opening to but thousands of national standards remain,
domestic rail freight, including the introduction leading to complexities and costs for rail
of cabotage. Moreover, the package proposed the operators, particularly those seeking to take
establishment of a European Rail Agency (ERA), advantage of the freedoms offered to them by
subsequently set up in Valenciennes in France, to successive EU rail packages. The Fourth rail
direct work on safety and interoperability. The package proposed that ERA becomes a ‘one-
second package came into force in April 2004, stop shop’ for EU-wide vehicle authorisations
causing the then Transport Commissioner Loyola (or ‘vehicle passports’) and EU-wide safety
de Palacio to declare: certificates for operators.
221
2 A structure that works: in order to ensure non- services to competition and, in the process,
discriminatory access to the rail network, the encourage innovation and efficiency. This
Fourth Package introduces further measures will be done either by companies offering
to keep the functions of managing the track competing domestic services or through a
and running the trains separate. Without this competitive tendering process as is already
separation, the power of incumbents in some the case in the UK and in some German
member states is such that they could block länder. Under the proposals, competitive
access to the network for new entrants and tendering will only apply to contracts above
thus thwart the competition ambitions of the certain thresholds.
single rail area. This aspiration has parallels
in the liberalisation of the energy network In early 2015, final agreement on the Fourth
industries (see Chapter 11). The process of rail package had not been reached. It is intended
separation began in 1991 and was continued to be the final piece of the jigsaw that it is the
in 2001 but in practice, these rules have not single European rail area. Even assuming that the
been fully implemented in some member proposals agreed are in line with the Commis-
states; the separations of functions required sion’s intentions, it remains to be seen to what
is not complete and national monopolies can extent the member states fully implement the
still exert significant control over access to programme.
infrastructure. The Fourth Package includes
proposals to ensure that the infrastructure
manager controls all the key network func- Conclusion: the
tions such as investment planning, operations, future of the CTP
maintenance and timetabling. The proposal
considers institutional separation between The CTP has passed through several distinct
infrastructure managers and train opera- phases. It experienced almost three decades of
tors as the best way to achieve independ- inactivity which only ended after the Council was
ence but vertically integrated structures will successfully taken to the ECJ for failure to meet
be allowed if rigorously enforced ‘Chinese its Treaty obligations to develop a Common Trans-
walls’ are put in place to ensure the necessary port Policy. The court case coincided with a phase
independence. Where institutional separation from the mid-1980s in which major strides were
operates, rail operators will have access to made in the liberalisation of road haulage and
domestic passenger markets by 2019. Howev- airline transport as part of the SEM programme.
er, rail undertakings in a vertically integrated Liberalisation of these sectors was regarded as an
set up could be prevented from operating in important development in its own right but also
other member states if the Commission is not increasingly as a necessary support to underpin
satisfied that all the necessary provisions are in the increased interdependence and trade between
place to ensure the single rail market operates member states. In other words, along with trans-
fairly. port TENs, the CTP has assumed considerable
3 Opening domestic passenger markets: over 94 importance as a way of ensuring, among other
per cent of the EU rail passenger market things, the efficient functioning of the SEM.
comprises domestic passenger services. The Following the market opening progress in
Fourth Package proposes to open up these the road haulage and aviation sectors, the EU’s
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Transport
attention has turned to other sectors, notably and interoperability measures being taken by
short sea shipping and railways. The opening of the EU in relation to rail transport are certainly
these markets came much later and much rests necessary but also not sufficient by themselves
on their success, including an easing of conges- to bring about this shift. TENs-T will also help
tion and a reduction in environmental degrada- but the realisation of the projects will require
tion resulting from a modal shift from road to a level of investment from member states and
rail – a shift which so far, if anything, has been the private sector which, hitherto, has not been
in the opposite direction. The market access forthcoming.
Key points
■■ Efficient and effective transport services underpin all forms of economic activity and enable
European business to maximise their benefits from the SEM.
■■ Development of the CTP has been slow but the main principles and legal framework of a single
transport area are now largely in place. The one exception is passenger rail, proposals for the
opening up of which are on the agenda. Other single market transport initiatives are concerned
with fine tuning and refining how the markets work.
■■ Reversal of the decline in the rail sector to ease congestion on the roads and for environmental
reasons has been a key theme of European transport policy but, so far, the attainment of this
objective has proved elusive.
■■ The SEM has encouraged the reconfiguration of business activity across boundaries, requiring
and receiving an appropriate response from individual transport sectors.
■■ Transport liberalisation has transformed transport supply and related sectors: for example, it has
facilitated the growth of low cost airlines and helped transform logistics practices within the EU.
■■ TEN-T, sustainability, safety and external developments are high on the current European
transport agenda.
Activities
1 Identify the main transport priorities of individual member states. How do these priorities vary (fac-
tors behind this variation could include geography, history, etc.)? How might differences within mem-
ber states affect the policy formation at European level?
2 Collect examples of manufacturing firms that have centralised their distribution centres and/or ration-
alised them around a limited number of regional hubs in Europe. Applying what you have learned from
this and other chapters in this volume, explain why firms might have done this.
223
3 Explain why and how external aviation policy fits into the overall philosophy of Europe’s transport
policy. What are the potential opportunities and threats for European airlines arising from this
policy?
1 How realistic are the European Commission’s aspirations to engineer a modal shift towards rail?
2 Can the tension between demand for mobility in Europe and increasing congestion and pollution be
reconciled?
3 How and why have logistics strategies evolved in Europe?
4 How does an effective transport policy contribute to other EU objectives?
Bibliography
Barrett, S. (2011) Deregulation and the Airline Business in competitive and resource efficient transport system,
Europe, London: Routledge. COM (2011) 144 Final.
Dyrhauge, H. (2013) EU Railway Policy Making: On Track?, European Commission (2011a) Commission Staff Working
Basingstoke: Palgrave Macmillan. Document Accompanying the White Paper: Roadmap to a
Single European Transport Area – Towards a competitive
European Commission (1992) White Paper: The Future
and resource efficient transport system, SEC (2011) 391.
Development of the Common Transport Policy – a
Global Approach to the Construction of a Commu- European Commission (2014) Report from the Commission
nity Framework for Sustainable Mobility, COM (92) to the European Parliament and the Council on the State
494. of the Union Road Transport Market, COM(2014) 222.
European Commission (2001) White Paper: European Trans- Finger, M. (2013) Regulating Transport in Europe, Chelten-
port Policy for 2010: Time to decide, COM (2001) 370. ham: Edward Elgar.
European Commission (2011b) White Paper: Roadmap Humphreys, M. (2012) Sustainability in European Trans-
to a Single European Transport Area – Towards a port Policy, London: Routledge.
224
Chapter 11
Energy policy
The quest for competitive, clean
and secure energy supplies
The history of man is dominated by, and reflects, the amount of available energy.
Frederick Soddy (1877–1956), English radio chemist
■■ appreciate the links between energy and other policy areas at European level;
■■ understand the three pillars of European energy policy – sustainability, competition and security of
supply – and how they interact with each other;
■■ assess the difficulties of achieving an internal energy market and its potential impact on the main
stakeholders;
■■ assess the challenges and options facing Europe from a deteriorating security of supply situation;
■■ understand the importance of energy for the well-being of European business.
Modern economies cannot function without between Russia and Ukraine threatened to spill
energy and the quest to secure reliable energy over and disrupt gas supplies to the European
supplies at an affordable price is crucial for Euro- Union. This incident was replayed in March 2008
pean business. In crisis-free times, the wider and again in January 2009, when at least 18 Euro-
business and policy-making community tends to pean countries reported severe reductions or
demonstrate complacency about energy markets. even a complete break in their gas supplies from
However, it takes only the threat of disruption for Russia transported through Ukraine. In 2010, gas
energy to move up the policy agenda. This was supplies from Russia through Belarus fell for a
apparent in January 2006 when a dispute over short period in a dispute over transit fees, threat-
the cost of transit and the price of gas supplies ening gas supplies to the Baltic states, Germany
225
and Poland. However, the most precarious crisis ■■ competition and the integration of markets;
of all occurred in 2014 following Russia’s annexa- ■■ sustainability;
tion of Crimea from Ukraine and the as yet unre- ■■ security of energy supply.
solved situation in eastern Ukraine is set against
wider concerns about Russian intentions towards The chapter opens with a brief outline of
its near neighbours (see Chapter 18). current trends in Europe’s energy supply and
Such events placed energy in the spotlight demand. It then discusses the general evolution of
once more. Keeping it there is the increasing the EU’s energy policy before entering into more
demand on world energy markets from emerging detail about each of the three pillars of energy
economies such as China and India who are keen policy in turn.
to maintain their high levels of economic growth
and long-term environmental concerns, especial-
ly in relation to climate change. The dynamics of Current trends in Europe’s
global markets have shifted, however, as a result of energy supply and demand
the surge in US production of shale gas which has
reduced US energy imports and freed up US coal EU energy trends result from the aggregation of
production for export. This trend, which began in supply and demand and market structures in indi-
the 2000s and continues to gather pace, demon- vidual member states. However, given national
strates the fine balance within energy markets and differences in resource endowment and the his-
how rapidly this balance can shift. torical evolution of energy structures, the energy
In reality, energy is always important. Euro- position and priorities of any one individual state
pean oil, gas and electricity companies account may diverge, in some cases significantly, from the
for a significant part of EU value-added and are overall picture for the EU. Thus, although mem-
important economic actors in their own right. ber states generally support the three pillars of
Moreover, without their output, the rest of the EU energy policy – competitiveness, sustainabil-
economy could not function – mobility and pro- ity and security of supply – the interpretation of
duction would grind to a halt and the modern way and significance attached to each pillar can vary
of life would be untenable. Commercial energy from state to state.
consumers also require energy at a price that EU energy consumption generally has been
enables them to remain competitive against their relatively stable since 1990. Variations have
main rivals: this is especially important for the occurred as a result of both cyclical and structural
more energy-intensive sectors. reasons. In 2009, for example, there was a 5–6
The centrality of energy to Europe’s well- per cent fall in gross inland energy consumption
being was recognised by the fact that two out of following the financial and economic crash of
the three founding treaties of the European Com- 2007–8. However, more significant in the longer
munity – the Treaty of Paris and the Euratom term is the breaking of the link between growth
Treaty – were organised around energy. Despite and energy consumption – that is, the tendency
this, energy has not always been a major preoc- for growth in energy consumption to match the
cupation of European institutions but when it has growth in economic activity. This translates into
featured strongly, it has done so around one of the falling energy intensity – that is, the amount
following three main themes, or pillars, of energy of energy required to produce a unit of GDP.
policy: Figure 11.1 demonstrates the extent to which
226
Energy policy
1k 2001 2006 2012 1k

900 900
800 800
kg toe/1,000€ GDP
700 700
600 600
500 500
400 400
300 300
200 200
100 100
0 0
Austria
Ireland
Denmark
United Kingdom
Italy
Luxembourg
Germany
Spain
Netherlands
France
Portugal
Greece
Sweden
Malta
Cyprus
Belgium
Finland
Croatia
Slovenia
Hungary
Poland
Latvia
Lithuania
Czech Republic
Slovakia
Romania
Estonia
Bulgaria
Figure 11.1 Energy intensity in EU member states, 2001, 2006 and 2012 (kg toe/1,000€ GDP)
Source: Eurostat database.
energy intensity has declined in Europe since the market economy, especially the need to be com-
beginning of the century. This decline reflects petitive within the context of the SEM, and higher
the ongoing shift in Europe from an industrial energy prices. This led to industrial and economic
to service-based economy and a shift within the restructuring, in particular a move away from
industrial sector to less energy-intensive produc- heavy industry and towards services. Neverthe-
tion in terms of what is being produced. It also less, as Figure 11.1 shows, the countries of Cen-
incorporates greater production efficiency and tral and Eastern Europe still have a long way to go
the development of more energy efficient house- before they reach the much lower levels of energy
hold appliances and transportation. intensity of more long standing member states.
Figure 11.1 also shows marked difference in Although Europe’s total energy consumption
energy intensity among member states. In all has been relatively stable since 1990, Figure 11.2
member states, though, energy intensity is lower shows the contrasting evolution of the consump-
in 2012 than it was in 2001. The biggest falls have tion of different fuels within the EU’s overall
been in those states that acceded to the EU from energy mix. Both gas and renewables have dem-
2004 onwards and formerly fell within the sphere onstrated strong demand growth between 1990
of influence of the former Soviet Union (FSU). and 2012. Despite falling towards the end of the
This trend stems from two adjustment pressures period, gas consumption was nevertheless much
facing these countries. The first is the ending of higher in 2012 than in 1990 as a result of its rela-
the heavily subsidised energy supplies from the tive price advantage and fewer greenhouse gas
FSU which had left them with highly inefficient emissions compared to other fossil fuels whereas
production and heating systems, a predisposition renewables growth accelerated throughout the
to heavy industry and no incentives to improve period because of their contribution to the sus-
efficiency. The second was the transition to a tainability agenda. Solid fuels, mostly coal, have
227
800
700
600
500
million toe
400
300
200
100
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Solid fuels Gas Total petroleum products Nuclear Renewables
Figure 11.2 EU-28 gross inland enery consumption by fuel, 1990–2012

experienced the biggest demand downturn since Figure 11.3 shows the widely differing energy
1990 as member states sought to reduce their consumption profiles of member states. For exam-
reliance on this heaviest emitter of greenhouse ple, Malta and Cyprus, small isolated island states,
gasses. Nuclear energy consumption grew slightly rely almost entirely on oil for their energy needs.
during the period but its prospects remain uncer- Others such as the Czech Republic, Estonia and
tain. The 2011 accident at the Fukushima nuclear Poland depend more heavily on solid fuel, notably
power plant in Japan led the German government coal, than the EU average. Indeed, EU reliance on
to pledge to phase out all Germany’s remaining coal fell from almost 30 per cent of energy con-
nuclear power plants by 2022 and referenda on sumption at the beginning of the 1990s to 17 per
the nuclear issue in Italy and Belgium have resulted cent in 2012. This implies that a different approach
in large anti-nuclear majorities. Consumption of to environmental matters, particularly to climate

petroleum and petroleum products has also fallen change, is appropriate for these coal-consuming
but, given that the majority of these resources countries compared to those with a lesser reliance
are now consumed by the transportation sector on carbon-emitting fuels. Nuclear power makes
in uses for which there are as yet no large-scale a contribution to the energy consumption of less
viable commercial substitutes, petroleum is likely than half of member states but its contribution is
to continue to be Europe’s major energy source significant in France, Finland, Sweden, Slovakia and
for some time to come, particularly as most of Bulgaria and is likely to remain so for some time.
the potential substitutions for petroleum in non- On the supply front, nuclear power and
transportation uses have already been made. renewables are the only energy sources that have
228
Energy policy
100
90
80
70
60
50
40
30
20
10
0
EU-28
Belgium
Bulgaria
Czech Republic
Denmark
Germany
Estonia
Ireland
Greece
Spain
France
Italy
Cyprus
Latvia
Lithuania
Luxembourg
Hungary
Malta
Netherlands
Austria
Poland
Portugal
Romania
Slovenia
Slovakia
Finland
Sweden
Croatia
UK
Solid fuels Oil Natural gas Nuclear Renewables Other
Figure 11.3 Gross inland energy consumption by fuel and member state, 2012, per cent
Source: Eurostat, Energy Trends, February 2014.
increased production between 1990 and 2012 and as a response to competitive issues surround-
(see Figure 11.4). The future of nuclear producing Europe’s coal production, which tradition-
tion is in doubt, however, and depends on the bal- ally relied heavily on public subsidies. Significantly,
ance of developments between the shutting down the decline in Europe’s coal production has been
of nuclear capacity and decisions not to proceed greater than that of Europe’s coal consumption as
with new capacity resulting from the Fukushima cheaper coal imports have replaced some of the lost
accident, and the decision to persist with and even domestic coal production. European oil and gas
develop nuclear power as a transition fuel until production has also fallen over this period, albeit
there are sufficient other alternatives to replace not as steeply as coal production. This particular
carbon-emitting fuels. The future of renewables decline stemmed from depletion of indigenous
is brighter given the commitment of many coun- resources, a phenomenon which resulted in trans-
tries to their development but the pace of this forming the UK, for example, from a net energy
development depends on a variety of technical, exporter into a net energy importer by 2004.
economic and political factors.
The most marked production development has
been the fall in the output of coal, once the main- A perspective on overarching
stay of Europe’s energy economy, to less than half EU energy policy
its 1990 levels by 2012. Falling coal production
has occurred in all Europe’s major coal produc- Europe’s energy sector encompasses some of
ing regions as a result of environmental concerns Europe’s largest corporations and poses a wide
229
16000
14000
12000
10000
Thousands TJ
8000
6000
4000
2000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Solid fuels Total petroleum products Gas
Nuclear heat Renewable energies Non-renewable wastes
Figure 11.4 EU-28 primary energy production by fuel, 1990–2012

Source: Eurostat, Energy Trends, February, 2014.
range of significant policy challenges which dem- R&D aimed at making renewable resources more
onstrate several recurring themes in relation to competitive with conventional resources and
the EU’s interactions with business and which boosting overall energy efficiency. Promoting
overlap with other areas of policy making (see Europe as a ‘centre of excellence’ for energy effi-
Figure 11.5), including liberalisation and deregu- ciency technologies potentially yields competi-
lation, tax harmonisation, public service obliga- tive advantages globally as countries outside the
tions, environmental issues, enlargement and the EU become increasingly committed to improving
development of constructive relationships with their own energy-efficiency and environmental
third countries and regions – a process which protection. Export of energy-efficient technol-
takes on an additional dimension for energy in ogy and know-how represents a potentially huge
view of the demands of security of supply. Not export market for European business, albeit one
only are these themes and linkages central to the which is likely to become extremely crowded
development of strategy in Europe’s energy pro- over time.
ducers but they are also significant for Europe’s Second, the TENs initiative is a prime example
commercial and industrial energy consumers for of a policy which has a strong energy dimension
whom energy can be a major cost component. and interacts with all three energy policy pil-
Two examples demonstrate the importance of lars. Energy TENs is concerned with strengthen-
linkages with other policies for Europe’s strategy ing existing energy infrastructure links between
towards policy. First, the Union’s R&D policy, EU member states and developing new links.
the latest manifestation of which is Horizon 2020 This enhances the internal energy market (IEM).
which runs from 2014–2020, has long supported The IEM removes legal barriers to energy trade
230
Energy policy
Single
European
Market
Consumer
Transport
policy
Environment TENs
Energy
Research &
Competition
development
External
Taxation
relations
Figure 11.5 Integrated aspects of energy policy
whereas energy TENs removes physical barri- in global energy markets. For example, following
ers to energy trade. Without the physical means the energy price hikes of 1973 and 1979, secu-
to take advantage of the IEM, the benefits of rity of supply became the dominant energy policy
increased competition, greater efficiency, lower concern. However, by the mid-1980s, the fall of
costs, greater competitiveness and economies of real energy prices to below pre-crisis levels, the
scale will remain theoretical and elusive. Energy re-emergence of oil surpluses and the single mar-
TENs also serve security of supply by improving ket campaign pushed security of supply issues into
the efficiency and reliability of existing supplies the background and thrust competition to the
and by diversifying supply sources and routes. forefront of energy policy priorities. There was
The environmental pillar benefits from increased also the additional complication that environmen-
access to natural gas supplies which emit lower tal protection issues were becoming increasingly
levels of carbon dioxide than other fossil fuels. prominent. The competition and environmental
The primary framework of Europe’s energy pillars continued to exercise strong influences
policy has remained constant with the three pil- over EU energy policy throughout the 1990s.
lars of energy policy – competition, sustainability However, security of supply issues slowly began
and security of supply – providing the main policy to move back up the agenda as indigenous energy
objectives. However, the relative importance of supplies started to decline and international ener-
each pillar has varied over time in line with changes gy markets tightened.
231
Milestones in EU energy policy

Box 11.1
1951 Treaty of Paris establishes the European Coal and Steel Community (ECSC)
1958 European Atomic Energy Community (Euratom) comes into existence
1968 Guidelines for Community energy policy give priority to competition and consumer interests
1973 Yom Kippur War – oil prices quadrupled
1974 International Energy Agency (IEA) established to coordinate the OECD response to crisis.
France declines to join
1979 Iranian revolution – further oil price hike
1988 Commission publishes inventory of energy trade barriers – The Internal Energy Market
1990 Electricity Transit Directive adopted
1991 Gas Transit Directive adopted
1991 Gas and Electricity Price Transparency Directives in force
1994 Hydrocarbon Licensing Directive in force
1996 First Electricity Directive adopted – 33 per cent of the EU electricity market to be open
by 2003
1998 Adoption of a directive to open a minimum of one-third of the EU’s gas markets within
ten years
2003 Second Electricity Directive requires 100 per cent opening of the market by 2007
2006 Commission starts legal proceedings against 17 member states for failure to open up their
gas and electricity markets as required
2009 Third Energy Market package to continue freeing up of gas and electricity markets in force
2010 Article 194 of the Lisbon Treaty introduces a specific legal base for EU energy policy as a
shared competence with member states
2010 Beginning of ten year period during which the 20:20:20 objectives are to be achieved
2011 Deadline for transposition of Third Energy Market Package and 2014 deadline set for com-
pletion of IEM
2012 Energy Efficiency Directive in force
2014 Commission publishes its proposals for overall energy policy objectives for 2030
The current challenge for EU energy policy However, competition measures which lower
is to ensure these three pillars of energy policy energy costs to consumers may weaken incentives
work in concert and not in conflict with each to enhance energy efficiency and increase demand
other. These pillars are not independent and fre- and therefore could have negative security of sup-
quently interact with each other, sometimes in a ply and environmental effects. On the other hand,
supportive and sometimes in a conflicting way. competition and open markets end the isolation
The promotion of energy efficiency, for exam- of individual markets and enhance their security.
ple, improves both environmental protection Latterly, following consultation with stake-
and energy supply security by reducing ener- holders, the EU has established key long-term
gy demand and the need for energy imports. targets for its energy markets. The first set of
232
Energy policy
headline targets were set for 2020 (see Box 11.2) and hence improve energy security and strength-
and involve a 20 per cent reduction in green- en competition.
house gas emissions; a 20 per cent improvement In December 2011, the Commission took its
in energy efficiency and a 20 per cent share of long-term planning a stage further by adopting
renewables in EU energy consumption. On the the Energy Roadmap 2050 which explores, through
face of it, the 2020 objectives all seem to focus analysis of a range of scenarios, the options for
on the sustainable pillar of EU energy policy but action facing the EU in achieving the goal of
increases in energy efficiency and the share of reducing greenhouse gas emissions to 80–95 per
renewable energy will also reduce energy imports cent below 1990 levels by 2050. The scenario
Energy 2020 – a ten year strategy (2010–20)
Box 11.2
The 20:20:20 energy objectives for 2020 are:
■■ 20 per cent reduction in EU greenhouse gas emissions;

■■ 20 per cent of EU energy consumption to come from renewables;
■■ 20 per cent increase in EU energy efficiency;
In order to achieve the 20:20:20 objectives, the Commission has identified five priorities and
associated measures:
1. Energy savings (especially buildings and transport):
■■ investment incentives and new financial instruments to finance renovation and energy saving
measures;
■■ the public sector to take energy efficiency into account when buying works, services or products;
■■ transport policy to include measures to improve transport sustainability.
2. Ensuring the free movement of energy:
■■ to set a target date for completion of the internal energy market;

■■ to establish a blueprint for European energy infrastructure, including measures to simplify the
planning process and to improve the financial framework.
3. One voice on energy in the world:

■■ the EU to coordinate its policy with third countries, including extension and deepening of the
Energy Community.
4. European leadership in energy technology and innovation:
■■ The launch of key projects – new technologies for intelligent networks and electricity storage,
research into second generation biofuels and measures to promote energy savings in urban areas.
5. Safe, secure and affordable energy through active consumers:
■■ proposals on price comparison, switching suppliers and clear and transparent billing.
233
analysis is to be used as the foundation for plan- The 1973 and 1979 oil price hikes substituted
ning and developing the long-term European pol- security of supply for competition as the pre-
icy framework and measures. eminent theme of EU energy policy for a while.
Accordingly, in early 2014, the Commission However, the re-emergence of oil surpluses and
published its proposed framework for climate and the return of low real oil prices resulted in the
energy up to 2030. These proposals are based on return of competition to the top of the energy
the assumption that the 20:20:20 objectives are policy agenda by the mid-1980s. The re-emer-
implemented and act as a staging post on the 2050 gence of competition was also encouraged by the
Roadmap. The proposed 2030 objectives are: growing popularity of supply-side policies, both
at member state level, led by the UK, and at Com-
■■ a 40 per cent reduction in greenhouse gas munity level following the 1985 White Paper.
emissions compared to 1990 levels – regarded
as an important step towards the target of at
least an 80 per cent cut by 2050; Completing the single market
■■ a minimum 27 per cent share of renewables in
energy consumption; The application of SEM philosophy to the energy
■■ an increase in energy efficiency of at least 27 markets required a fundamental transformation of
per cent – a target to be reviewed in 2020 with nationally based energy markets, with their large
a view to raising it to 30 per cent if sufficient degree of administrative price setting and central
progress has been made. planning into a European-wide market with signif-
icant cross-border trade and prices that are respon-
A fleshing out of how these targets are to be sive to market forces. In other words, the aim was
met and the relative roles of the EU and mem- to forge isolated or semi-isolated national markets
ber states constitute the next stage in working out into a functioning, integrated ‘whole’ operating
how to reach these longer term objectives. on market-based, cost-driven pricing principles
via the provision of a ‘level playing field’ in which
energy companies from one member state could
The competition pillar compete equally with those from another.
Or at least, that was the plan. At one level, the
The competition pillar has been a constant, introduction of competition into energy markets
often dominant, theme in EU energy policy merely represented the application of economic
since the 1950s. During the 1960s, the empha- liberalism to the energy sector in the same way
sis was on determining the broad principles as it was being applied to other sectors. How-
of energy policy and on trying to coordinate a ever, certain perceived characteristics of energy
common approach to energy policy among the made the process more problematic. Energy lib-
ECSC, Euratom and the EEC. Specific actions eralisation began from a situation in which most
were limited but policy statements consistently European gas and electricity utilities were struc-
emphasised the gradual creation of a market tured as either national monopolies (for exam-
with the lowest possible prices, the widest pos- ple, France, Italy and pre-privatisation UK) or as
sible consumer choice and the free movement regional monopolies (for example, Germany).
of goods in line with the principles of the Trea- The common perception of energy was that it was
ty of Rome. a strategic good and a natural monopoly which
234
Energy policy
made it unsuitable for the type of transformation competition by 2003. In 2003, a second Electric-
undertaken elsewhere in the SEM. Unsurprising- ity Directive was adopted, committing member
ly, therefore, the 1985 Single Market White Paper states to a 100 per cent opening of their electric-
contained no explicit reference to the creation ity markets by 2007. Negotiations on gas market
of an internal energy market but general Treaty access proved more difficult but the directive
provisions, such as those relating to competition opening the gas markets, paralleling action in the
and free movement, applied to energy in the same electricity sector, was formally adopted in 1998.
way as to other sectors. The Electricity Directives continued the work
However, treaty provisions were insufficient in of the Price Transparency and the Electricity
themselves to address the many energy-specific Transit Directives adopted in 1990. Prior to the
barriers within Europe. In preparation for remov- transparency directive, gas and electricity prices
ing these considerable obstacles, in May 1988 the for large industrial consumers were unpublished
European Commission published an inventory and subject to negotiation and wide variations.
of barriers in the form of a working paper, The The Price Transparency Directives required mem-
Internal Energy Market. This formed the base of ber states to inform the Commission of the prices
subsequent proposals to free up Europe’s energy and terms of sale of gas and electricity to industrial
markets – a process which has been more drawn end users. It contributed to the IEM by increasing
out and difficult than originally envisaged. the market information available to consumers,
Given the international integration of oil mar- thereby enabling them to make more informed
kets; the large number of players (multinationals, choices about the sourcing of energy supplies.
state companies and smaller independents); oil The directives on electricity and gas transit mir-
price transparency and the existence of alterna- ror each other almost exactly and require member
tives to line-bound transportation, the oil sector states to take the necessary measures to facilitate
has long been considerably more open to competi- the transit of electricity between high voltage grids
tion than other energy industries and has thus not and of natural gas between high-pressure transmis-
figured much in the creation of the IEM.That is not sion grids. Although an important milestone in the
to say that the oil sector has been entirely without prising open of the Community’s gas and electric-
trade barriers. Widespread barriers persist in the ity markets, the Transparency and Transit Direc-
upstream activities of exploration and production tives were merely appetisers to the main course of
where many oil-producing states reserve some or energy liberalisation – the opening of the markets
all exploration and production rights to national of member states to competition, both domesti-
companies. This resulted in the Hydrocarbon cally and from other member states. Nevertheless
Licensing Directive which brought these activi- liberalisation progress was slow because of:
ties into line with single market principles through
ensuring non-discriminatory access to exploration ■■ the reluctance of some member states, par-
and production – at least within Europe. ticularly those lacking indigenous energy
Gas and electricity were another matter, resources, to relinquish control of their energy
however. Initially, it was anticipated that gas and utilities to market forces;
electricity markets would be fully open by 1996. ■■ the perceived need to control ‘naturally
However by 1996, it had only proved possible monopolistic’ enterprises such as gas and elec-
to attain agreement that member states would tricity utilities via national, regional or munici-
open up one-third of their electricity markets to pal government;
235
■■ fears of incumbents about the erosion of their ■■ transmission: long distance transportation of
market control and level of protection; electricity and gas through high voltage grids
■■ fears of incumbents that they would be left and high-pressure pipelines respectively;
holding their public service obligations (PSOs) ■■ distribution: the physical transportation of
while new market entrants would be able to energy from the grid to the end user through
‘cherry pick’ the most lucrative parts of the low voltage grids and low-pressure pipelines;
business, unburdened by PSOs; ■■ supply: a trading rather than a physical function
■■ expectations that greater competition would which includes sales and metering and invoic-
spell the end of long-term contracts without ing and which has both wholesale and retail
which major infrastructure investments were elements.
regarded as too risky.
While transmission is still considered as ‘natu-
The traditional view of Europe’s gas and elec- rally monopolistic’, other functions such as gen-
tricity utilities as naturally monopolistic implied eration, wholesale and retail sales, metering and
that effective competition could not be developed billing are now regarded as suitable for compe-
for line-bound utilities, thereby creating potential tition. Devices such as open access regimes and
for abuse of market power in the form of artifi- Third Party Access (TPA) led to the view that,
cially high prices and ‘monopoly profits’. Given provided producers and consumers could gain
the central and sensitive economic role of these access to the services provided over the transmis-
utilities, they had long been controlled by pub- sion system in a fair and transparent way, compe-
lic institutions at central, regional or local gov- tition could operate strongly in gas and electricity
ernment level to ensure social obligations were markets. The result of this more relaxed view
observed and wide energy planning objectives (for towards the electricity and gas sectors was the
example, priority for the consumption of domes- compromise leading to the 1996 Electricity
tically produced coal) were taken into account. Directive, the main features of which were:
The bundling of social obligations (for example,
universal service, uniform pricing, social pricing, ■■ Competition in generation: member states were
etc.) onto monopolistic publicly-owned gas and free to adopt authorisation or tendering proce-
electricity utilities in return for protection from dures for new generation capacity. The author-
competition is often referred to as the ‘regulatory isation procedure allows generators to build
bargain’. and operate new plants subject to certain tech-
Starting in a limited way in the 1980s and build- nical criteria (such as safety standards, energy
ing up momentum in the 1990s, there has been a efficiency standards, etc.). This procedure is
marked change in the perception of electricity and largely driven by commercial considerations
gas industries as ‘natural monopolies’ – a change rather than by centralised energy planning.
which is the result of the disaggregation of the activ- Under the tendering procedure, planning for
ities of utilities and of the realisation that all but one new plant capacity was in the hands of a central
of these activities – transmission – are individually planning authority. Under the 2003 Directive,
amenable to competition. These activities cover: the authorisation procedure was made the sole
option.
■■ generation: that is, the actual production of ■■ Transmission and distribution: under the 1996
energy; Electricity Directive, member states were
236
Energy policy
able to choose between Third Party Access deal. However, in another sense its achievements
(TPA – negotiated or regulated) and the Single were less remarkable, considering that it required
Buyer Model (SBM). Under negotiated TPA, the opening of only one-third of the market.
grid owners on the one hand and competitive Certainly, the Directive was rather modest com-
suppliers or customers on the other negotiate pared to the original proposals which urged full
conditions of access to the grid. Under regu- liberalisation by 1996. This was, in part, due to
lated TPA, grid access charges must be non- diversity within the EU’s electricity sectors which
discriminatory and published. Under the SBM, required agreements that satisfied member states
a ‘Single Buyer’ is appointed by the government possessing a multiplicity of resources, policies
and functions as the sole purchaser of electric- and historical legacies. The Directive neverthe-
ity. Regulated TPA is the most competition less represented a major shift in policy and was
friendly way to increase market access and was responsible for a spate of reforms and changes in
made the only permitted market access regime member states as they prepared for the impact of
in the 2003 Electricity Directive. power market opening in the EU.
■■ Electricity directives: the 1996 Electricity Direc- Whatever its shortcomings, the 1996 Elec-
tive guaranteed open access only to consumers tricity Directive established the principle of
requiring over 100 GWh/per year and 33 per electricity market liberalisation and the 2003
cent of the market had to be opened by 2003. Electricity Directive provided for the complete
The 2003 Electricity Directive took things fur- opening of electricity markets and restricted the
ther and required 100 per cent market open- options available to member states when opening
ing in stages by 2007. their markets. In each case the option chosen –
authorisation, regulated TPA, legal unbundling –
In line with the principle of subsidiarity, the was the one most akin to the liberalisation spirit
1996 Electricity Directive set the broad param- (see Table 11.1).
eters and principles of electricity liberalisation In 2004, the European Commission set out its
but left the details of implementation to mem- vision for Europe’s electricity supply industry in
ber states. For example, irrespective of whether which it spoke of:
a member state chose TPA or SBM, the Electric-
ity Directive clearly defined the level of market seeking to create a competitive market for
opening required to ensure comparable degrees electricity for an enlarged European Union,
of competition. The Electricity Directive also did not only where customers have choice of sup-
not establish exhaustive technical specifications plier, but also where all unnecessary impedi-
for operation of the EU’s post-liberalisation elec- ments to cross-border exchanges are removed.
tricity supply industry (ESI).The only proviso was Electricity should, as far as possible, flow
that any technical arrangements made must con- between member States as easily as it flows
form to competitive principles and not create dis- within Member States.
criminatory barriers to market entrants nor ‘tilt
the level playing field in favour of the home team’. In theory, by 2004 the legislative building
Given the time that it took to reach agreement blocks were in place to make the above vision
on the 1996 Electricity Directive, it was under- a reality but, in practice, this remained a dis-
standable that the parties to the negotiations felt a tant prospect. The liberalisation programme
sense of relief and achievement in concluding the had been designed to foster competition and
237
Table 11.1 Evolution of rules governing Europe’s electricity markets
Prior to 1996 1996 Directive 2003 Directive

Generation Monopoly (public/private Authorisation Authorisation*
and/or regional/national) Tendering
Transmission Monopoly Regulated TPA Regulated TPA
and distribution Negotiated TPA
Single buyer model
Unbundling Not required Accounts Legal
Customers No choice of supplier Choice for eligible Choice of supplier for: all commercial
customers (33%) customers (2004); all customers
(2007)
Regulation National ministries Not specified Independent regulatory authority to
in directive be established by each member state
*
Tendering still possible if there is insufficient capacity to ensure supply security or to promote new technology in the
cause of environmental protection.
increase market access but by the mid-2000s, for European utilities to take advantage of the
market concentration remained high, signifying greater market access given to them in law. Some
limited competition, with the three largest gen- progress had been made in developing energy
erators accounting for 75 per cent or more of TENs, but problems had arisen in the electricity
the market in the majority of member states and sector from the diversity of Europe’s authorisa-
reaching 95 per cent or more in France, Greece, tion procedures and from environmental protests
Latvia and Slovenia. Other potential indicators of about the construction of high voltage lines. Not
increased market access and competition include only was the physical construction of these links a
the amount of cross-border trade and the level concern but so was the management of the traffic
of import capacity as a percentage of installed across network borders – a factor which required
capacity. Although there were some exceptions, greater coordination and harmonisation.
particularly among the 2004 accession states from Vertical integration has been widespread in
Central and Eastern Europe, the level of cross- Europe’s power and gas sectors and involves the
border electricity trade in the mid-2000s was control by one firm of all stages of the utility supply
insufficient to provide any significant competition chain from generation/production, through trans-
to dominant generators in most member states mission, distribution and eventual supply to the
and the power grids of the small island states of consumer. From the perspective of individual utili-
Malta and Cyprus were completely isolated. ties, vertical integration offers synergistic possibili-
One cause of the low level of cross-border ties resulting from collaboration between different
electricity trade was the limited cross-border segments of the value chain. However, vertical
high voltage links and the reservation of capac- integration creates conflicts of interest in rela-
ity on the existing links stemming from pre- tion to market access and also makes many types
liberalisation agreements. The energy TENs of anti-competitive behaviour possible, including
initiative was intended to promote and help pro- cross-subsidy of activities or making access to net-
vide physical infrastructure links between mem- works for new entrants difficult or even impossible.
ber states, the absence of which makes it difficult Unbundling (namely, the separation of production
238
Energy policy
and supply from transmission and distribution) and to an independent company. The Independent
regulation to ensure the transmission grid is open Transmission System Operator model allows a
to all in a non-discriminatory way can help prevent supply company to own and operate the net-
this and was introduced in a limited fashion in the work but management of the network must be
1996 and 2003 Electricity Directives. However, carried out by a subsidiary which takes all deci-
this unbundling did not lead to the desired results sions independently of the parent company. A
and the Commission raised the possibility of exer- supervisory body looks after the financial inter-
cising the option of full structural unbundling – that ests of the parent company but is not involved
is, the separation of the supply and retail businesses in the running of the company. The 2014 Pro-
from monopoly infrastructures. gress Report on the IEM confirmed that 96 out
It was these and other technical shortcomings of 100 eligible transmission system operators
that in 2009 prompted the European Commission complied with the unbundling requirements of
to bring forward a third package of measures to the third package. Monitoring will be required
open Europe’s gas and electricity markets. The to ensure that the three models work as intend-
provisions of this third package were largely a ed and competition policy rules in general are
response to the shortcomings and disappointing respected.
results of the first two packages and comprised 2 Increased transparency in retail markets and
five components: strengthening of consumer protection. The
third package aims to improve the lot of Euro-
1 Further unbundling to ensure the separation of pean consumers by improving the operation of
the transmission networks from supply and gen- the IEM and by improving price transparency
eration to prevent network operators favouring and making it quicker and easier for consum-
their own energy production and supply opera- ers to switch suppliers: relatively few Europe-
tions, thereby avoiding potential conflicts of an consumers have switched so far despite the
interest. The package provides for three differ- potential financial benefits of doing so.
ent models of unbundling – Ownership Unbun- 3 More efficient, stronger and independ-
dling; the Independent System Operator or the ent national regulation. The third package
Independent Transmission System Operator. required national regulators to be legally and
Ownership unbundling requires all integrated functionally separate from both private and
energy companies to sell off their gas and elec- public organisations – that is, they must not
tricity grids. No supply or production company be part of a ministry. Such regulators should
would be allowed to own a majority share in a have separate and adequate budgets and staff-
transmission system operator or exercise voting ing and have the power to fix or approve trans-
rights. Some large European utility companies mission and distribution tariffs; to enforce
have gone down this path: E.On and Vattenfall consumer protection provisions and to issue
have both sold their high voltage grids in Ger- binding decisions on electricity utilities with
many and Endesa has sold its electricity and gas the power to impose appropriate penalties if
transmission assets in Spain. The Independent these undertakings infringed their obligations.
Systems Operator model allows a producer This requirement of the third package sought
or supply to own the transmission system but to avoid the problem of regulatory capture
the operation of, maintenance and investment referred to above and to avoid a conflict of
in the system must be handed over completely interest between regulator and the regulated.
239
4 Effective cooperation between national regu- neighbouring networks joining together to build
lators, especially in relation to cross-border up their software and hardware (that is, the rules
issues, through establishment of the Agency governing the networks and the physical infra-
for the Cooperation of Energy Regulators structure) and trading arrangements, gradually
(ACER) which brings together nine members extending these networks into a network of net-
elected by the EP, Council and Commission works – a process that is already underway.
and a representative of each national regulator. More specifically, the Report cites increased
ACER is an organisation independent of the competition on wholesale markets as responsi-
European Commission, national governments ble for a 35–45 per cent reduction in wholesale
and the energy companies and is charged with prices in electricity markets between 2008 and
devising guidelines for the operation of cross- 2012 and stability in gas prices. Progress is noted
border gas pipelines and power grids; with in the completion of cross-border links such as
reviewing the implementation of ten year EU electricity cables between Finland and Estonia and
network plans and national network devel- the UK and Ireland and ongoing work on projects
opment plans; with deciding on a range of such as the construction of Liquefied Natural Gas
cross-border issues, especially when national (LNG) terminals in Poland and Lithuania and the
regulators cannot agree, and with monitoring connecting of the power networks of Sweden and
the functioning of the internal energy market. Lithuania and the gas networks of Hungary and
5 Improved cross-border collaboration and invest- Slovakia. Completion of further gas and electricity
ment to be achieved by a new European Network interconnections is seen as a priority, both in rein-
of Transmission System Operators (ENTSO) forcing existing links and in ending the isolation of
which brings together European gas and elec- the Baltic states and diversifying supplies in Cen-
tricity network operators to work on common tral and Eastern Europe and in the member states
issues, such as developing network development of south-eastern Europe. Further development of
plans, promoting regional cooperation and com- energy TENs is therefore seen as a priority.
mon technical and commercial network codes.
These network codes are to be built on the
framework guidelines developed by ACER. The environment pillar
In October, 2014, the European Commis- The link between the environment and energy
sion published a Progress Report on the IEM. Its has become a key consideration in the formation
findings were noteworthy for a number of rea- of energy policy. This has not always been the
sons. First, although the Report acknowledged case. The prime objectives of EU energy policy
that creating the IEM is a work in progress and during its first 25 to 30 years, when environ-
much remains to be done, it is more optimistic mental awareness was rudimentary, fluctuated
about progress than previous reports. Second, between common market and security of sup-
the report was published following the escalation ply issues. This only began to change in the 1980s
of the Ukraine crisis and highlights the connec- with the emergence of concerns in Scandinavia
tions between the single market/integrated mar- and Germany about acid rain. By the end of the
ket pillar and the energy security of supply pillar. decade, global warming had moved into the polit-
Third, it highlights the desirability of encouraging ical mainstream, further strengthening the link
regional cooperation as a way forward, envisaging between environmental and energy issues. Policy
240
Energy policy
initiatives aimed at tackling climate change prob- sector bodies; provides incentives for SMEs to
lems were bound to have an impact on the energy carry out energy audits; requires larger com-
sector which is subject to the general tenets and panies to undertake audits of their energy
principles of EU environment policy. consumption to help them identify potential
Not only are environmental issues important energy savings; promotes the use of more accu-
in their own right, but they also make a positive rate meters to help consumers manage their
contribution to other energy policy objectives. consumption better and introduces measures
For example, an essential part of the environment for greater efficiency in power generation.
pillar is to reduce consumption through strategies ■■ Increased use of renewable energy sources: (see Case
to increase efficiency. Initiatives that reduce ener- Study 11.1).
gy consumption also serve the goal of enhancing ■■ Carbon capture and storage: this technology
security by reducing the need for energy imports. involves the capture of carbon dioxide from
Examples of initiatives to improve the environ- power generation and its storage under-
mental performance of Europe’s energy sector ground. This technology is recognised as hav-
include: ing great potential to mitigate climate change,
especially where high fossil fuel reserves and
■■ The Emissions Trading Scheme: launched in 2005, consumption exist. In the European context, it
this scheme encourages the adoption of more could help offset the negative climate effects of
climate-friendly energy production technol- power generation from fossil fuels. This tech-
ogy and also promotes Europe’s technological nique is costly, however, and its widespread
leadership in an increasingly important area. deployment in support of the 2030 goals for
It covers about 45 per cent of Europe’s green- the reduction of greenhouse gas emissions and
house gas emissions and limits these emis- the targets in the 2050 Roadmap will require
sions from over 11,000 power stations and increased R&D and related support.
energy-intensive manufacturing plants and ■■ Innovation: the development of new energy
from aviation activities within Europe. technologies across a range of applications are
■■ The promotion of energy efficiency: the EU is aim- seen as important to sustainability, security of
ing for 20 per cent energy savings between supply and industrial competitiveness. Hori-
2010 and 2020 and further savings beyond that. zon 2020 is the latest of the EU’s overarching
In addition to contributing to environmental R&D programmes, of which energy is a major
objectives, such consumption reductions would component. The energy dimension of Hori-
reduce business and household costs; encour- zon 2020 has seven objectives: the reduction
age technological innovations; reduce Europe’s of energy consumption and Europe’s carbon
spending on imports and make a major con- footprint; low cost, low-carbon electricity
tribution to improved energy security. Amid supply; the development of alternative fuels
concerns that the Union was in danger of miss- and mobile energy sources; a single, smart
ing its efficiency targets, the Energy Efficiency European electricity grid; new knowledge and
Directive came into force in 2012 (see Chap- technologies; robust decision making and pub-
ter 12). The Directive requires member states lic engagement; the market uptake of energy
to establish energy savings schemes for energy and ICT innovation. A €5.9 bn budget has been
distributors and retail energy supply compa- allocated to non-nuclear energy research for
nies; places energy saving obligations on public the period of Horizon 2020.
241
Case Study 11.1

Renewable energy: a solution to Europe’s energy problems?
Renewable energy sources cover a variety of technologies, including wind, solar power, hydroelectricity,
biomass, energy from landfill, biogas and sewage treatment gas, geothermal energy and wave and tidal
energy. Some of these technologies are already exploited to near maximum potential (large-scale hydro-
electricity); the exploitation of others has grown rapidly from the 1990s onwards (wind power) whereas
others remain largely unexploited (wave energy) and/or are too expensive to compete with other energy
sources in most circumstances. Moreover, although most renewables do not contribute to greenhouse gas
emissions, they are not neutral in their environmental impact: the construction of dams for hydroelectric
power generation, for example, clearly has significant effects on the landscape as can wind farms. Propos-
als to develop the latter frequently result in strong opposition to their construction from local communities.
Nevertheless, renewable energy sources can help limit the emission of greenhouse gasses and, in the
process, displace imports, thereby helping to improve energy security. Accordingly, ambitious renewable
energy targets have been set for member states – that is, an increase in the share of renewable energy
to 20 per cent of Europe’s gross inland energy consumption by 2020 and 27 per cent by 2030.
Figure 11.6 shows the variation in 2012 among member states in terms of their renewable consump-
tion and their targets for 2020. In 2012, 14 per cent of the EU primary energy consumption was made
up of renewables, representing an impressive increase from around 6 per cent in the early 2000s – a share
that had remained virtually static for many years. Disaggregation of the EU total reveals a diverse picture
across member states as a result of differences in physical resource endowments and in the historical
60
2012 2020 target
50
40
% 30
20
10
0
Malta
Luxembourg
Belgium
Netherlands
Cyprus
Ireland
Hungary
Czech Republic
Slovakia
Poland
France
Italy
Greece
Germany
EU-28
Bulgaria
Spain
Croatia
Slovenia
Lithuania
Romania
Denmark
Portugal
Estonia
Austria
Finland
Latvia
Sweden
UK
Figure 11.6 2012 renewable energy as a share of gross inland energy consumption by member state
242
Energy policy
structure of national energy consumption. In Malta, Luxembourg, the UK and the Netherlands, renewable
energy consumption was less than 5 per cent of total energy consumption in 2012 compared to over 20
per cent in the three Baltic states, Romania, Denmark, Portugal, Austria and Finland and over 50 per cent
in Sweden. This latter group of countries tend to benefit from the significant role of hydropower in their
generating portfolio – the exploitation of which is approaching its maximum potential in some countries
and which is an option that is not so readily available throughout Europe. Further development of renewa-
bles to meet the targets, therefore, is more likely to come from wind and solar power.
In recognition of the different starting points and potential of member states, the 20 per cent renew-
able target for 2020 is made up of separate targets for individual states, also shown on Figure 11.6.
If the UK, for example, is to reach its 2020 target, the share of renewables in its energy portfolio will
still be far below the renewable share of the majority of member states in 2012 and less than one-third
that of Sweden. However, attainment of the target by the UK would still represent a threefold increase
in its renewables share. Most countries already exceeding the 20 per cent target are also expected to
push their share of renewables even higher.
Malta
Luxembourg 2012 2004
Cyprus
Hungary
Netherlands
Poland
UK
Lithuania
Belgium
Czech Republic
Estonia
Greece
France
Bulgaria
Ireland
Slovakia
EU-28
Germany
Italy
Finland
Slovenia
Spain
Romania
Croatia
Denmark
Latvia
Portugal
Sweden
Austria
0 10 20 30 40 50 60 70
Figure 11.7 Share of electricity generated from renewable sources (%)

243
In the power sector between 1997 and 2004, the contribution of renewables to power generation
increased marginally from 12.8 to 14 per cent in the EU-25 but over the following eight years the share
of renewables grews to over 23 per cent (see Figure 11.7). Some countries perform relatively better in
the power sector than they do overall. The UK, for example, is more successful at generating power from
renewables than it is at encouraging the utilisation of renewables in the rest of the economy, in part as
a result of growth in the use of wind power in the UK. Countries that utilise nuclear power also tend to
perform relatively better in the power sector. In 2012, for example, Germany’s share of renewables in
overall energy consumption was less than 14 per cent but the share of renewables in electricity genera-
tion was 23.6 per cent – a level that Germany will find difficult to maintain, let alone increase, if it
keeps to its pledge of shutting all its nuclear reactors by 2022.
Overall, the example of renewables demonstrates that there is not one simple magic solution for
Europe’s environmental and security problems in the energy field. Ambitious targets have been set for
the contribution of renewables to Europe’s energy economy. Even, if these targets are met, renewables
would still only account for 20 per cent of Europe’s energy consumption, meaning that there would be a
further 80 per cent that needs to be met by non-renewable sources whose environmental impact needs
to be minimised. This does not negate the utility of renewables but it does imply that renewables alone
are not a panacea for all Europe’s environmental and supply security problems.
Case questions
1 What are the challenges facing the greater contribution of renewables to Europe’s energy mix?
2 What role does business have to play in the development of renewables and what potential
benefits does the use of various renewable resources bring to businesses as both producers and
consumers of energy?
3 To what extent can renewables fill the potential gap in Europe’s energy supply?
4 Renewables alone cannot provide the solutions to all Europe’s energy concerns. Nuclear power
and fracking (see Case Study 11.2) are also needed to fill the potential energy supply gap.
Examine the arguments for and against.
The security of the supply pillar energy-intensive industries such as construction

materials, iron and steel etc., it also implies com-
Energy security is a multi-dimensional concept petitive prices. Since the emergence of fracked
but at its heart is the ability to access reliable gas in the US, for example, cheaper gas has been
supplies of energy at reasonable prices without available to energy-intensive sectors in the US,
supply interruptions. For households, secure placing European business at a competitive disad-
energy means confidence that pressing the light vantage. For energy producers, security implies
switch will result in the light going on and the the ability to access new resources in conjunction
ability to heat homes. For business consum- with security of investment and infrastructure.
ers, energy security implies reliability and, for For political leaders, interruptions to supplies
244
Energy policy
and infrastructure can indicate severe geopo- seen in Figure 11.4. As it is, as demonstrated by
litical and economic disruption and, in extreme Figure 11.8, the EU’s energy import dependency
cases, lead to political problems at home. (that is, the percentage of energy consumption
Lack of supply security can flow from a num- that is imported) has been steadily increasing and
ber of causes. In the short term, it can arise from reached 53 per cent overall by 2014. Unless cur-
natural, technical or political disruptions to sup- rent trends are reversed, Europe’s total import
ply such as droughts in regions dependent on dependency could rise to over two-thirds by
hydroelectricity; or blackouts resulting from sys- 2030. The region has, for many years, been
tem failures or political events which temporarily dependent on imports for the vast majority of its
cut off supplies. In the longer term, energy sup- oil and petroleum product needs but by 2012 this
ply security can be impaired by factors such as the dependency had risen to over 86 per cent. Con-
depletion of finite resources or the intensification cerns about vulnerability to imports are no longer
of competition for resources as demand for ener- primarily just about oil: import dependency has
gy increases across the globe. been increasing for the other major fuels – gas
It is the gap between energy consumption and and coal – and is expected to continue to rise.
production that determines the amount of energy Particularly noticeable are the widely vary-
a country needs to import. If European energy ing levels of import dependency facing individ-
consumption had not been relatively stable since ual member states. As a result of declining North
1990, the region’s energy import dependency Sea oil and gas production, by 2012 Denmark
would be even greater given the steep declines was the only member state that remained a net
in most forms of European energy production energy exporter (see Figure 11.9). At the other
100
1995 2000 2005 2010 2012
90
80
70
60
% 50
40
30
20
10
0
Solid fuels Petroleum and Gas Total
products
Figure 11.8 EU energy import dependency by fuel: 1995, 2000, 2005, 2010 and 2012
Source: Eurostat.
245
120
100
80
60
%
40
20
0
−20
Denmark
Estonia
Romania
Czech Republic
Sweden
Netherlands
Poland
Bulgaria
Finland
France
Slovenia
Hungary
EU-28
Croatia
Latvia
Slovakia
Germany
Austria
Greece
Spain
Belgium
Portugal
Lithuania
Italy
Ireland
Cyprus
Luxrmbourg
Malta
UK
Figure 11.9 EU-28 energy import dependency by member state, 2012

extreme, small energy-isolated islands, Malta and came from Russia. Other significant gas suppliers
Cyprus, were effectively dependent on imports were Algeria and Norway. Oil imports are domi-
for 100 per cent of their energy needs compared nated by Russia and Middle Eastern countries
to an EU average of almost 54 per cent. Coun- (Figure 11.10). The concentration of reserves of
tries with below average import dependency both fuels in relatively few locations, locations
include gas and oil producers such as the UK and which, in several cases are in politically vola-
the Netherlands; coal producers Poland and the tile or sensitive areas raises concerns about the
Czech Republic; nuclear power producers Bul- long-term reliability of these supplies. This sup-
garia, France, Hungary, Sweden, Finland and Slo- ply problem is potentially compounded by the
venia; and countries with significant hydropower increasing energy consumption in rapidly grow-
resources such as Finland and Sweden. Several of ing emerging markets which is making interna-
the countries with a higher than average level of tional energy markets more competitive.
import dependency produce significant quanti- In view of the above situation, what can the EU
ties of nuclear power (Germany, Spain) or hydro- and its member states do to improve the energy
power (Portugal) but this is offset by large import security situation? In May 2014, the European
needs of other fuels: in Portugal’s case by oil and Commission published proposals for an energy
petroleum products. This wide variation in the security strategy. The strategy covers the follow-
situation of individual member states potentially ing, often overlapping, areas – areas which also
gives rise to varying priorities and strategies when interact with the other two pillars of energy policy:
it comes to addressing supply vulnerabilities.
It is not only Europe’s increasing share of 1 Short-term measures to improve capacity to overcome
imports in its energy needs that is causing con- supply disruptions and to strengthen emergency and
cern but also the limited number of suppliers on solidarity measures
which it relies. In 2013, 39 per cent of the EU’s The Commission wants to reduce short-term
gas imports and 27 per cent of its gas consumption risks to energy supplies resulting from sudden
246
Energy policy
1. Natural gas member states to disruptions and regulations for

gas storage and stockholding are being tightened.
13% The physical protection of critical infrastructure,
Russia
5% 30% such as gas and electricity transmission systems,
Norway
is seen as a particular priority and the Commis-
Algeria
11% sion wants to launch a debate on the control of
Qatar
strategic infrastructure by non-EU entities, par-
Nigeria
13%
ticularly state-owned companies, national banks
Other
28% and sovereign funds from key suppliers who may
have a vested interest in inhibiting diversification
of European energy supplies or simply in domi-
2. Crude oil nating the European market. Although concerns
about non-EU control over critical energy infra-
Russia
structure could potentially apply to nationals of
Norway
22% several countries, it is Russia, although not spe-
35% Saudi Arabia
cifically named in the strategy document, and
Iran
5% Gazprom in particular, which, given the 2014
Kazakhstan events in Ukraine and unease about future devel-
6%
Nigeria opments on Russia’s borders, have prompted the
6% 12% Azerbaijan most immediate security concerns.
6%
8% Other
2 Measures to improve the functioning and integration
3. Hard coal of the internal energy market, including coordina-
tion of existing energy policies
10%
Russia
Completion of the internal market in energy is
5%
26% Colombia
seen as a priority not only for improving Europe’s
8%
US
competitiveness but also for enhancing Europe’s
Australia
energy security. The intention was to complete the
9%
South Africa
internal energy market by the end of 2014 and the
24% Indonesia
Progress Report of October 2014 demonstrated
18% Other
greater optimism about the achievement of this
objective than hitherto. In particular, the Progress
Report and the Security Strategy both note the

Figure 11.10 E
xtra-EU energy imports by source, development of more integrated regional markets
2012 within Europe via greater cooperation between
Source: EU Energy in Figures: Statistical Pocketbook regulators and between transmission system oper-
2013, European Commission and Eurostat.
ators. However, it is recognised that this coopera-
tion is in its early stages and further development
disruptions, perhaps as a result of bad weather, of gas and electricity network codes will enhance
infrastructure problems or breaks in supplies both open and transparent access to transmission
as occurred in 2006 and 2009. Stress tests have systems and security of supply by ensuring these
been undertaken to assess the vulnerability of products can flow freely and flexibly across the EU.
247
A genuinely integrated gas and electricity sys- proposes to review the EED with a view to deter-
tem relies not only on common rules but also on mining how energy efficiency can contribute to
the creation of sufficient energy transport infra- the 2030 energy objectives; to engage with key
structure, especially across borders, to enable sectors (namely housing, transport and industry);
utilities to take advantage of these rules. Accord- to determine how further efficiency gains can be
ingly, the Security Strategy emphasises the need made in the medium term and to review the ener-
to push forward implementation of the Projects gy Labelling and Ecodesign Directives.Advances
of Common Interest, part of the energy TENs ini- in energy technology can help energy security by
tiative, and to promote related measures to enable furthering energy efficiency; to improve energy
member states to meet the target of interconnec- infrastructure; and by optimising network man-
tion of gas and electricity networks for at least agement. This requires support from the EU and
10 per cent of their installed capacity by 2020 and member states for energy research and innovation
15 per cent by 2030. in all aspects of the energy supply chain, in the
In addition, the Commission proposes vigor- process ensuring that Europe does not become
ous enforcement of competition rules in the ener- over-dependent on foreign technologies. Accord-
gy sector to ensure that energy supply security is ingly, the Commission proposes to mainstream
not jeopardised by anti-competitive behaviour or energy security in its Horizon 2020 programme
by the vertical integration of energy companies. for Research and Innovation and to try to align
In relation to crude oil and refined petroleum the Energy Security and R&D initiatives.
products, the Commission notes the heavy reli-
ance of EU refineries on supplies of Russian oil 4 Boost energy production within the EU
and the increased Russian ownership of oil refin- As seen above, domestic energy production has
eries within the EU. The Commission wishes to declined in Europe within recent decades, a major
open a debate with member states on how to factor in the deterioration of Europe’s energy
diversify crude oil supplies to EU refineries to security. However, the Security Strategy suggests
reduce dependency on Russia. that this trend can at least be decelerated by fur-
ther increases in the production and consump-
3 Measures to moderate energy demand and further tion of renewable energy (see Case Study 11.1);
develop energy technologies greater use of nuclear power, a development
Constraining energy demand is one of the most which would have to overcome the negative
effective ways of reining back demand for imports publicity arising from the 2011 Fukushima disas-
and thus enhancing supply security and demon- ter in Japan; and the competitive production of
strates the integrated nature of the 20:20:20 ini- fossil fuels where appropriate. The latter could
tiative referred to above. The Security Strategy cover exploration and production of oil and gas
maintains that attainment of the 20 per cent ener- in traditional producing areas such as the North
gy efficiency improvement target would result in Sea and new producing areas such as the Eastern
energy savings of 371 mtoe: achievement of this Mediterranean and the Black Sea as well as oil
target relies on rigorous and immediate imple- and gas production from unconventional sources,
mentation of key directives, particularly the especially shale gas, if and when such production
ambitious Energy Efficiency Directive (EED) and satisfies environmental impact concerns and over-
the Energy Performance of Buildings Directive. comes public disquiet (see Case Study 11.2). The
As part of the Security Strategy, the Commission Commission also proposes further development
248
Energy policy
of carbon capture and storage technology to make of euros and require appropriate political condi-
coal and lignite more environmentally acceptable. tions. If these conditions do exist, there is poten-
tial to develop an integrated pipeline network
5 Diversify external suppliers and related infrastructure that includes Iran and gas-rich Middle Eastern
and the development of a unified approach to external countries whose gas exporting potential is as yet
energy policy far from being realised.
Europe’s gas imports are dominated by Russian, In conjunction with efforts to diversify supplies
Norwegian and North African supplies. The pri- through facilitating the construction of the sup-
ority of the Security Strategy is to diversify its porting physical infrastructure, the Commission
sources of natural gas imports by consolidating proposes to use all available foreign policy instru-
volumes from reliable suppliers. In order to do ments to raise energy matters in international
this, significant investment in related infrastruc- arenas and in talks with individual countries. The
ture is imperative. This includes further develop- matters raised will not only involve direct supply
ment of LNG which requires the construction considerations but also the promotion of sustain-
of gas liquefaction and gasification plants at the able technology, particularly in emerging mar-
points of exit from exporting countries and entry kets, which will help restrain energy demand and
into import destinations and of specialised and thus help supply security. Energy dialogues with
expensive gas carrying ships. Further develop- neighbouring countries are also important in the
ment of LNG will bring a new element of flex- energy security context.
ibility to gas trade: at present, the majority of gas
is transported by pipeline, an efficient form of
transportation but one which ties both supplier Conclusion
and customer into a long-term relationship with
each other. With the appropriate LNG infrastruc- Energy is crucial to Europe’s future and the three
ture in place, the possibility of sourcing gas from main pillars of European energy policy –competi-
a much broader range of suppliers becomes a pos- tiveness, sustainability and energy security– run
sibility for Europe. through all aspects of EU energy activity. Each pil-
lar is itself made up of many individual initiatives
LNG development is not, however, a replace- to contribute to achieving overall energy policy
ment for pipeline development. An important objectives and it is clear that the pillars are close-
strategic initiative for Europe, for example, is the ly integrated and, ideally, work in concert with
development of the Southern Gas Corridor – a each other. As the above section on energy secu-
network of pipelines which by-pass Russia and rity demonstrates, energy security depends on
connect European gas consumers with suppliers a variety of actions, including reducing demand
from Central Asia and the Caspian Sea, including through increased energy efficiency and through
Azerbaijan and Turkmenistan. Full implementa- greater use of renewables, which also serves the
tion of this project will take many years, billions environmental pillar.
249
Case Study 11.2

Shale gas: to frack or not to frack?
The potential commercial exploitation of shale gas has set off an intense debate throughout Europe,
the outcome of which will have major repercussions for the three pillars of Europe’s energy policy –
sustainability, competitiveness and security of supply.
Shale gas is natural gas trapped in shale: fine-grained sedimentary rocks, deep underground. Gas
is extracted by hydraulic fracturing, commonly referred to as ‘fracking’, which involves drilling long
horizontal wells into the shale and pumping large quantities of water, sand and chemicals into the well
at high pressure. This creates fissures in the shale which are held open by the sand, allowing the gas to
escape to the ground for collection.
Opposition to fracking in Europe, where, unlike in the US, shale gas has yet to be commercially
exploited on any large scale, is growing and has resulted in moratoriums and even outright bans on
fracking in a number of countries (see Table 11.2).
Table 11.2 The status of fracking in Europe, 2014

Austria Exploration underway (e.g. OMV in basin near Vienna) but some calls for laws to
ban drilling on environmental grounds
Bulgaria 2012 – nationwide protests lead to suspension of Chevron’s exploratory shale gas
licence. National Assembly passes law banning all forms of fracking
Czech Republic Moratorium on fracking from 2012 to allow time to pass laws to take into account
the environmental impact of fracking
Denmark Government views fracking as part of strategy to ease reliance on fossil fuels.
Total’s Danish affiliate and state-owned Nordsøfonden have two licences for
onshore drilling which started in 2013
France Europe’s second largest shale gas reserves but fracking is banned. In October
2013, French Constitutional Council upholds fracking ban following petition by
Schuepbach Energy for restoration of exploration permits revoked following
imposition of the ban
Germany February 2013 – draft proposals allowing fracking which uses same technology
as in US but new coalition government and widespread opposition put fracking on
hold for the foreseeable future. July 2014, government proposes seven year ban on
fracking at depths shallower than 3,000 metres
Hungary 2009 – Exxon Mobil drill first shale gas wells
Ireland 2011 – options and licences awarded to Energi Oil, Tamboran Resources and
Lough Allen Natural Gas Company. 2012 – Energy Minister says no fracking to
take place in Ireland pending further scientific evidence and advice
Italy Bomba, small southern Italian city, refuses a drilling project
Luxembourg 2012 – drilling for shale gas suspended and moratorium imposed
(Continued)
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Energy policy
Table 11.2 The status of fracking in Europe, 2014 (Continued)

Netherlands Several operators hold licences for exploratory shale gas drilling but government is
investigating the environmental impact of shale gas exploration. Meanwhile south-
ern city of Boxtel stops plans for exploratory drilling
Poland Europe’s largest reserves of shale gas and much drilling underway. Shale gas
promises the possibility of reducing Poland’s high level of dependency on coal and
on Russian gas
Romania Reputedly Europe’s third largest shale gas reserves. Despite nationwide protests, a
moratorium on drilling for shale gas lifted in 2013. Government supports fracking
on grounds of energy independence and lower prices but anti-fracking demonstra-
tions continue
Spain 2013 – northern region of Cantabria bans fracking on environmental grounds –
goes against national government’s aspiration for jobs in a region rich in shale gas
Sweden Exploratory drilling underway
UK Some drilling but no commercial production underway.
2011 – Cuadrilla suspends drilling near Blackpool after two small earthquakes
reported
2012 – drilling restarted subject to stricter monitoring
2012 – Northern Ireland Assembly calls for moratorium on fracking pending
environmental assessment but moratorium not enacted by the minister
The main objections to fracking are based on claims about potential environmental damage. Several
of these claims are contested but, inevitably, given the relative newness of large-scale fracking, the exact
environmental impact is unclear, leading some European countries to impose a moratorium on frack-
ing until its environmental implications are more firmly established. The main environmental concerns
surrounding fracking are:
■■ water pollution from contamination with methane or drilling chemicals. This threat has been
confirmed by the US Environmental Protection Agency and a UK Select Committee which also
maintains that this pollution is no greater than that from conventional gas extraction techniques
and can be mitigated by best practice;
■■ accidental release of hydraulic fracturing fluid (possibly containing hazardous chemicals) resulting
from spills, leaks and faulty well construction;
■■ the amount of contaminants in wastewater;
■■ the huge amounts of water and chemicals needed which may disrupt water supplies for other uses;
■■ potential damage to wildlife habitats;
■■ the possible emission of climate-warming and explosive methane;
■■ tremors;
■■ a continuing reliance on fossils fuels contrary to climate change objectives;
■■ a diversion of effort away from the development of renewable and less carbon-intensive resources.
251
On a more positive note, supporters of fracking argue that it reduces the need for consumption
of coal, the most carbon emitting of all fossil fuels and will facilitate the transition to a less carbon-
intensive environment. In the process, the development of this new energy source will help keep energy
prices down and improve Europe’s energy security situation by reducing the need for imported gas.
Although not without its opponents and with fracking bans in place in several locations, commercial
exploitation of shale gas in the US is the most advanced in the world. Since 2005, when US gas produc-
tion was at a long-term low, total US gas production has increased by over one-third and the US has
overtaken Russia as the world’s largest gas producer (Russia’s proven gas reserves, however, are over
three times greater than those of the US). This boost to US gas output has transformed the US energy
supply situation by massively reducing its reliance on gas imports, freeing up coal for export and reduc-
ing energy prices. In 2013 helped by an increase in renewable energy production as well as by gas shale,
US dependence on primary energy imports had fallen to 13 per cent in 2013 from 30 per cent in 2005
whereas EU energy import dependency reached 53 per cent in 2013.
This improvement in US energy independence and related fall in US energy prices has been a mixed
blessing for European business. On the one hand, reduced US participation on world energy markets
contributed to the fall in energy prices in 2014. The US consumes most of its gas production but, if cur-
rent trends continue, it may start to export more gas. At the very least, increased domestic gas produc-
tion has freed up more US coal for export, particularly to the Netherlands, Italy and Germany. In turn
this has reduced the relative price of coal in Europe with negative impacts on carbon dioxide emissions.
On the other hand, the surge of US shale gas output and related fall in US energy prices has raised
questions about EU industrial competitiveness. According to statistics from the International Energy
Agency, between 2005 and 2012, gas prices to industry increased by 35 per cent in the EU compared
to a fall of 66 per cent in the US. Industrial electricity prices were also affected, rising 38 per cent in
Europe and falling 4 per cent in the US over the same period. The impact of these differential price
changes clearly has the greatest impact on Europe’s most energy-intensive sectors but they have result-
ed in calls for less strict carbon policies in Europe and strengthened the position of the shale gas lobby.
Assuming the environmental concerns about shale gas production are overcome in Europe (a devel-
opment which is far from assured), it is still too early to forecast the full potential impact of large-scale
commercial production as estimates of total, recoverable shale gas reserves not only in Europe but also
in the US and elsewhere in the world are highly contested and constantly revised. However, even the
most conservative estimates imply significant increases to natural gas reserves in Europe, albeit at a
much lower level than in the US. Moreover, European shale gas reserves are more dispersed than in
the US where over one-third of its reserves are in the huge Marcellus Basin with the rest in other large
fields. European reserves are more scattered with the greatest concentration in France and Poland,
indicating potentially lower economies of scale in their exploitation.
The ultimate fate of fracking in Europe will depend on the decisions of individual member states
as decisions about energy mix are outside the competence of the European Union – a factor which
undermined Gazprom’s lobbying for a Europe-wide ban on fracking. However, the EU can influence
national decisions through the environmental objectives it sets. Overall, the jury remains out on the
252
Energy policy
desirability of gas fracking in Europe from an environmental point of view, notwithstanding the poten-
tial for fracking to improve Europe’s supply security. Whatever the merits of the case for and against
fracking, there is a wider consensus that scientific evidence is not yet sufficiently robust to support the
case of either side.
Case questions
1 What is the potential impact of the development of shale gas production in Europe on the three
pillars of European energy policy?
2 What is the potential impact of shale gas production on European business in the following
scenarios (in both cases, consider the impact both on energy producers and on energy business
consumers): if the US and the rest of the world develop shale gas and Europe does not; if the EU
develops shale gas?
3 How does the shale gas controversy fit in with the principles of EU environmental policy outlined
in Chapter 12?
Key points
■■ The three pillars of energy policy can and do conflict. The challenge for energy policy is to
balance the three objectives.
■■ Re-evaluation of the concept of ‘natural monopoly’ finally made agreement on the liberalisation
of Europe’s electricity and gas sectors possible.
■■ Much progress has been made in the creation of the IEM – greater physical infrastructure
links and more cooperation among national regulators and transmission system operators will
enhance the efficacy of the IEM.
■■ Energy markets are a powerful influence on the well-being of European business, both as energy
producers and energy consumers, and energy policy has an important impact on these markets.
■■ Energy security has, once more, become a major source of concern. The combination of declining
indigenous production and tighter international markets has heightened these concerns.
Increased energy efficiency and, possibly, increased use of shale gas, nuclear power and
renewables could help alleviate these concerns.
■■ There is no single solution to the environmental problems facing Europe arising from energy
consumption. Europe must develop a range of policies to deal with these issues.
253
Activities
1 Analyse how the five priorities of Energy 2020 (see Box 11.2) relate to the three pillars of European
energy policy, paying particular attention to whether each priority relates to more than one pillar and
whether there is conflict or complementarity between the pillars.
2 Analyse Figure 11.5 and find examples of how energy interacts with each of the policy areas in the
Figure. Draw up a similar diagram for another sector (for example, transport or telecommunications)
and explain how your chosen sector interacts with other policy areas.
3 Chose a major European utility (e.g. Vattenfall, RWE, E.On, EdF) and research how the scale and
scope of its activities have changed since the launch of the IEM. To what extent can any changes be
attributed to IEM? Don’t forget to consider activities taking place outside the EU.
1 ‘A truly competitive single European electricity and gas market would bring down prices, improve
security of supply and boost competitiveness. It would also help the environment, as companies react
to competition by closing energy inefficient plant’ (European Commission [2006] Green Paper: a Eu-
ropean strategy for sustainable, competitive and secure energy). Explain the above statement. To what
extent do you believe the above claims are justified?
2 What obstacles stand in the way of the Commission’s vision of a single gas and electricity market?
What role can regional markets play in the creation of an IEM?
3 Given the energy imperatives set out in this chapter, discuss the main challenges and opportunities
facing European businesses, both as consumers or producers (or in related activities) of energy.
4 Assess the main threats to Europe’s energy supply security.
5 Examine the claim that current energy security concerns differ from those of the past in that they
cover a wider range of fuels and are demand-side as well as supply-side driven.
Bibliography
Braun, J. (2011) EU Energy Policy under the Treaty of European Commission (2010) Energy 2020: A Strategy
Lisbon Rules: Between a new policy and business as for Competitive, Sustainable and Secure Energy, COM
usual, EPIN Working Paper, No. 31. (2010) 639 Final of 10 November 2010.
254
Energy policy
European Commission (2011) Energy Roadmap 2050, European Commission (2014d) Progress Towards Complet-
COM (2011) 885 Final of 15 December 2011. ing the Internal Energy Market, COM (2014) 634 Final
of 13 October 2014.
European Commission (2014a) A Policy Framework for
Climate and Energy in the Period from 2020 to 2030, European Commission (2014e) Trends and developments
COM (2014) 15 Final of 22 January 2014. in European Energy Markets, SWD (2014) 310 Final
of 13 October 2014.
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Strategy, COM (2014) 330 Final of 28 May 2014.
255
Chapter 12
EU environment policy
A green light for competitiveness?
What’s the use of a fine house if you haven’t got a tolerable planet to put it on?
Henry David Thoreau (1817–62), American author,
poet and philosopher
■■ trace the evolution of EU environment policy and identify the main influences on it;
■■ distinguish between different types of environment policy and demonstrate how they can affect
corporate behaviour;
■■ explain the concept of ecological modernisation and its relevance to business;
■■ identify and evaluate examples of how an organisation’s obligations rising from environmental
legislation can impact on corporate performance;
■■ explain why European business is subject to national, European and international environment policies.
In the early years of European integration, envi- from national, European and international lev-
ronmental issues barely appeared on the corporate els. Sustainable development has become a core
or public policy agenda. In the early twenty-first objective of EU policy and several hundred direc-
century, the situation is completely different. tives, regulations and other initiatives are in place
European business is under constant pressure not to support this objective. Moreover, many nation-
only to improve, but to be seen to improve, its al environmental laws should be set in the context
environmental performance. This pressure stems of EU policy and aspects of this policy, such as cli-
from customers and from the need to comply with mate change, are increasingly driven by or linked
environmental regulations and policy originating to international environmental imperatives.
256
Environment policy
The EU justifies its increasingly dominant envi- to the general principle of environmental regu-
ronmental policy role by arguing that pollution is lation has become pointless – although much
not bound by frontiers. Moreover, the persistence debate remains about the detail of environmental
of substantially different environmental policies policy. The real challenge for business is to secure
throughout Europe would create the potential policies that meet environmental objectives in a
to refragment the single market or for firms to flexible manner. Environmental planning there-
relocate to member states where standards, and fore has become an important part of corporate
hence costs, are lower thereby creating pressure strategy. Most major corporations now produce
on states with high standards to lower them. regular environmental reports and action plans to
Whatever the justification for EU environ- demonstrate their commitment to the principle
mental policy, businesses located in Europe have of corporate environmental responsibility, to help
to take into account and comply with European them deal with the changing regulatory frame-
environmental requirements. Given the range work and to meet environmental objectives and
and scope of EU environmental initiatives, this obligations in a way that maximises benefits for
is a complex and crucial undertaking. The chap- the organisation (see Case Study 12.2).
ter commences by highlighting the importance European business has to comply with EU
of EU environmental policy to European busi- regulations that attempt to restrict pollution in
ness with particular reference to the debate on a range of media. For example, several direc-
the link between environmental policy and com- tives protect the environmental quality of water,
petitiveness. This debate has been transformed including surface and underground water, and
by the emergence since the 1980s of ecological bathing and drinking water. Other directives
modernisation ideas, ideas that have increasingly limit air-borne emissions from large combustion
permeated EU environmental policy and cor- plants, especially power stations, and from motor
porate thinking. The following section traces the vehicles. Action has been taken to combat noise
evolution of EU environment policy, looking in pollution. Several directives focus on the collec-
particular at the widening range of policy instru- tion, disposal, recycling and processing of vari-
ments used by the EU. The chapter then briefly ous categories of waste and are constantly being
considers the interaction between European and added to and tightened up. Initiatives, such as
international environmental issues. measures on environmental liability or environ-
mental impact assessment, cut across individual
sectors and others are voluntary including the
European business and Eco-Management and Audit System (EMAS) and
the environment eco-labelling. It is beyond the scope of this chap-

ter to analyse all EU environmental initiatives and
For many years, companies complained about their impact on business. There are simply too
the cost and other burdens placed upon them by many of them. However, examples of different
the growth of environmental regulation. These types of EU initiative are discussed below.
burdens, it was alleged, reduced their competi- The impact of European environmental policy
tiveness, resulting in loss of jobs and investment. varies, given the widely different propensities
However, the movement of environmental meas- of sectors to pollute and the targeting of some
ures into the policy mainstream, both at member policies towards specific sectors. Moreover, some
state and at EU level, has meant that resistance environmental issues have no European dimension
257
at all: planning, for example, is typically deter- The emergence of the concept of ecological
mined at a sub-European level. However, much modernisation underpins this shift to a large extent.
national environmental legislation represents Ecological modernisation originated from Dutch
the implementation of EU directives. Directives and German social scientists in the early 1980s. It
allow member states to meet EU objectives in a implies that environmental protection need not be
manner that is best suited to their own specific a burden to business but can be a source of com-
environmental conditions. Conversely, interna- petitiveness and growth and is implicit in much
tional initiatives, particularly, but not only, those contemporary debate about the environment.
relating to climate change are also increasingly The theoretical debate rapidly influenced
shaping European environmental policy. Case policy. In a 1995 speech, for example, the then
Study 12.1 identifies a European environmental EU Environment Commissioner Ritt Bjerregaard
policy affecting Europe’s shipping industry. Case gave a ringing endorsement of ecological mod-
studies of other industries would uncover differ- ernisation ideas, urging ‘respect for the environ-
ent environmental concerns and priorities. ment must not be seen as a burden for industry,
but as an opportunity to stimulate innovation and
to reduce inefficiencies’. This thinking has contin-
The rise of ecological modernisation ued to influence EU thinking on the environment.
The key implications of ecological modernisa-
Since the early 1970s, when environmental issues tion for business can be summarised as follows:
made their first tentative steps into the political
mainstream, conceptualisation of the relationship ■■ The reconciliation of environmental and economic
between economic growth and environmental pro- objectives: in other words, economic growth
tection has changed radically. Initially, there was and environmental protection can be mutu-
a general assumption of incompatibility between ally beneficial. However, growth will be
continuing economic growth and environmen- qualitatively different from the past given the
tal protection. This was symbolised in the title incorporation of environmental features into
of the Club of Rome’s influential 1972 report technology. This integration of growth and
‘Limits to Growth’ which warned that mankind environmental objectives results in a ‘win-
could not afford to exploit the earth’s resources win-win’ situation for the environment, the
indefinitely without dire consequences. Such an economy and business.
underlying philosophy resulted in inflexible com- ■■ Technocentricism: that is, the emphasis on inno-
mand-and-control policies that sought to regulate vation and technology (modernism) to deliver
and constrain the activities of business. Increasing both growth and environmental benefits. This
knowledge about the environment and the growing is reflected in the so-called ‘Porter hypothesis’
complexity of the environmental debate challenged that states that not only are growth and envi-
this conventional wisdom and caused reassessment ronmentalism compatible but also that com-
of the link between economic growth and the envi- petitiveness depends on this link. Accordingly,
ronment. This change has given rise to a broader stricter environmental regulations and policies
range of environmental policy instruments and to act not as a cost burden for industry but as an
a more complex and positive attitude on the part incentive to innovate and compete.
of policy makers and business to environmental ■■ The primacy of the market: (albeit a market modi-
protection. fied by state intervention to correct for market
258
Environment policy
Case Study 12.1

Reducing sulphur dioxide emissions from shipping
Sulphur dioxide (SO2) is a pollutant that is toxic to the health of humans, animals and plants and is the
main source of acid rain. Traditionally, the majority of SO2 emissions have come from the burning of
fossil fuels in power stations and manufacturing plants. However, the combined effect of legislation and
a switch away from coal to gas has significantly reduced the quantity of SO2 in the atmosphere from
these sources: in the UK, for example, SO2 emissions have fallen by 93.8 per cent between 1970 and
2013 according to the UK’s Department of the Environment, Food and Rural Affairs.
Consequently, following cuts in shore-based SO2 emissions, shipping has become the main source of
SO2 in the atmosphere. Globally, pollution from shipping is regulated by the International Maritime Or-
ganisation (IMO) through Annex VI of its International Convention for the Prevention of Pollution from
Ships (MARPOL). The IMO has steadily been tightening the requirements of MARPOL Annexe VI and
the EU has aligned its own legislation with IMO requirements. On January 1 2015, Directive 2012/33/
EU came into force: this sets a limit on sulphur content in fuel of no more than 0.1 per cent, down from
1 per cent, in the most ecologically vulnerable marine areas, also known as Sulphur Emission Control
Areas (SECAs), which in the EU means the Baltic and the North Sea, including the English Channel.
In less fragile ecological areas, the maximum sulphur content will be cut from 3.5 per cent to 0.5 per
cent by 2020. This compares to a 0.001 per cent limit on the sulphur content of fuel for lorries and cars.
Shipping companies have three ways in which they can comply with the 0.1 per cent sulphur content
limit, each of which increases costs:
■■ Option one is to switch to Marine Gas Oil (MGO), a fuel which satisfies the new limits, from Heavy
Fuel Oil (HFO) which satisfies the previous 1 per cent for SECA areas. However, MGO can be up
to 50–60 per cent more expensive than HFO. Given that, as a rule of thumb, fuel costs account
for about one-third of the operating costs of ferries and short sea shipping, this could result in
fare and tariff increases of approximately 15 per cent being passed onto freight and passenger
customers. Moreover, switching to MGO would increase demand and could push up its price even
more. In the longer term, if refineries adapt to produce more MGO, supplies of other fuels such as
diesel could fall, resulting in higher prices for these fuels.
Option two involves the use of alternative fuels such as LNG or methanol. However, this is only
■■
suitable for new ships as retrofitting existing ships is too expensive. Furthermore, this option
requires a more complete LNG infrastructure than currently exists.
■■ Option three is to fit abatement technology, notably scrubbers, which will enable ships to continue
to use HFO by cleaning exhaust emissions so that they comply with the 0.1 per cent limit. This
technology is expensive and takes up a great deal of space: it has to be adapted individually
to each ship and is not suitable for all vessels. The cost of fitting such scrubbers ranges from
€4–12m, depending on the size of the ship. Danish operator, DFDS, has adopted this technology
for many of its ships and is spending €100m to retrofit up to 21 of its vessels. DFDS has also
received funding from the EU to partially offset some of this additional cost.
259
The actual consequences of the 0.1 per cent sulphur limit are unknown at the time of the entry into
force of the legislation but the following possibilities have been raised, largely by the shipping industry
itself. Whatever method of compliance is chosen, operating costs of shipping companies will increase
and these increases will be passed onto freight and passenger customers. Maersk Line, the world’s
largest container shipping group, has estimated fuel switching would cost it an extra €200m per year
and P&O Ferries claims it will cost it an additional £30m a year, extra costs which will fall dispropor-
tionately on longer routes. On the other hand, UK-based Red Funnel Ferries claims to have been using
low sulphur fuel for many years but to have remained competitive through efficiency improvements.
Given the low margins and highly competitive nature of the industry, some routes may be withdrawn
altogether or the frequency of services on some freight and passenger services may decrease. P&O Ferries
have warned that some of its longer distance North Sea routes may be vulnerable. In September 2014,
DFDS closed the freight passenger service between Esbjerg in Denmark and Harwich in the UK, blam-
ing the new sulphur emission regulations as the final straw. The route had been struggling for some time
with low freight volumes and competition from low-cost airlines. Initiatives such as slow steaming to save
fuel and combining freight and passenger services had already been introduced, but additional savings to
compensate for the estimated £2m increase in the fuel bill on this route were deemed impractical.
The regulations will make road transport relatively cheaper and, in certain circumstances and loca-
tions, could result in a shift away from shipping to road, perhaps by-passing sea transport altogether
when geography allows or encouraging customers to travel further to and from embarkation and dis-
embarkation points to offset some of the additional costs of maritime transport. Any such modal shift
will increase congestion on Europe’s roads and air pollution from road transport.
The implementation of the directive, and hence its impact, remains unclear at the time of its entry
into force. There is some confusion over its enforcement: each member state, for example, is responsible
for deciding how to determine compliance with the directive, its enforcement and the penalties for non-
compliance, even leading to some speculation that some shipping lines may find it cheaper to pay fines
for non-compliance than to make the necessary adjustments to meet the 0.1 per cent target.
Case questions
1 Changes to the limits on the sulphur content of fuel for maritime purposes in the EU stemmed
from MARPOL Annex VI – the main anti-pollution policy of the IMO. What does this tell us
about the nature of environmental problems and their governance?
2 Who are the main beneficiaries of Directive 2012/33/EU?
3 At the time of writing, Directive 2012/33/EU had only just come into force and analysis of its
consequences is purely speculative. Have these consequences come to pass? What have been the
main consequences for Europe’s shipping industry? What other consequences have there been?
4 Does Directive 2012/33/EU fulfil the main principles of EU environmental policy (see Box
12.2)? If so, how? If not, why not?
5 How does Directive 2012/33/EU fit into the debate about ecological modernisation?
260
Environment policy
failures). This is marked by a movement away this generate marketing advantages in relation to
from the command-and-control regulations increasingly environmentally sophisticated con-
and standards used to regulate and constrain sumers (although the extent to which consumers
business activities in the early days of envi- will pay extra for less environmentally damaging
ronmental policy activism. Such instruments products is probably limited), the constant effort
proved to be inflexible and relatively ineffec- to gain an environmental edge encourages innova-
tive. Instead, EU policy makers have increas- tion and can help companies build up important
ingly sought to use policy instruments that tap technological leads in increasingly competitive
into market dynamics such as eco-labelling and markets. In this respect, ecological modernisation
emission trading schemes. is more appropriate to higher value-added sectors
with a high technological content. Its application
As the legal obligations on business to oper- is likely to be less relevant to resource-intensive
ate in a more environmentally responsible way and commodity-based activities. In addition, the
have increased and the potential business benefits negative competitive impact of environmental
of environmental sustainability have increasingly regulations can be offset in part by the promotion
been recognised, so a wide range of eco-industries of incentives for R&D, support for infrastruc-
have developed to service the environmental ture and a generally more favourable business
needs of organisations. According to the OECD, environment.
eco-industries engage in: Although ecological modernisation is an
important factor in changing the nature of con-
activities which produce goods and services to temporary environmental debate, resistance to
measure, prevent, limit, minimise or correct environmental legislation on the grounds that it
environmental damage to water, air and soil, increases costs and therefore decreases competi-
as well as problems related to waste, noise and tiveness retains strong resonance. The challenge
eco-systems. This includes cleaner technolo- to the EU and to other environmental policy
gies, products and services that reduce envi- makers is to formulate policy in such a way that it
ronmental risk and minimise pollution and meets environmental goals without damaging the
resource use. EU’s competitiveness at a time when unemploy-
ment is a major issue. In other words, there is a
By the end of the first decade of the twenty- need to operationalise the principles of ecologi-
first century, Eurostat estimated that over four cal modernisation. This can, for example involve,
million jobs in the EU were linked to the produc- the use of a wider range of policy instruments
tion of environmental goods and services. The and coordination of policy at international level,
main driver for the increase in these jobs since both of which the EU is trying to do with varying
2000 is the growing importance of activities in degrees of success.
the management of energy resources, especially
renewables in the form of production of wind and
solar power facilities and equipment. Evolution of EU
In short, it is increasingly accepted that pos- environmental policy
session of the proven technical and production
capability to produce low polluting goods acts as The Treaty of Rome contains no direct refer-
a significant competitive advantage. Not only does ence to environmental issues. Indeed, given the
261
Case Study 12.2

BMW makes the case for environmental sustainability
In developing its environmental strategy, the BMW Group has long embraced the philosophy of eco-
logical modernisation. In 2003, Dr Helmut Panke, the then Chairman of the Board of Management,
said ‘the experience of the BMW Group shows that economic efficiency and sustainability can be com-
patible with one another.’1 Also in 2003, Board member, Dr-Ing Burkhard Göschel, commented that
‘innovations create success and safeguard the future viability of companies. They are also essential for
sustainable development.’1 Ten years later, the company’s 2013 Sustainable Value Report stated that:
sustainability is seen as making a positive contribution to the business success of the company…
sustainability measures have led to cost savings or generated revenue – thus validating the business
case for sustainability.
At the end of 2013, the BMW Group operated 28 automobile production and assembly facilities in
13 countries worldwide and produced almost two million vehicles. The company aims to imbue an inte-
grated strategy across all its operations, wherever they are in the world, transferring and implementing
best practice developed in one location to all plants and demanding high sustainability standards from
all suppliers throughout its supply chain.
The company has a policy of flexible capacity management in an integrated production network. For
example, changes to a particular model can be made almost simultaneously throughout the world and
production can be balanced across the Group by changing the output of individual production lines to
different models, thereby enabling the Group to react swiftly, flexibly and efficiently to market require-
ments. This has become extremely important in view of the seemingly constantly shortening production
cycles, greater technical complexity of the product and continuing internationalisation.
All existing and future BMW production facilities and central planning units are required to operate
an environmental management system (EMS). In 2013, all plants had ISO14001 certification – the
Manaus motorcycle plant in Brazil was the exception but this plant is expected to acquire the neces-
sary certification in 2015. Moreover, all German and Austrian sites have undergone external audits and
meet EMAS standards.
An increasingly common practice among vehicle and other manufacturing MNCs is to consider the quality
and management systems in the selection of suppliers. In order to ensure sustainability throughout the supply
chain, BMW has been doing this for some time. Suppliers must meet the same environmental standards as
BMW facilities and, as part of their contractual arrangements with BMW, they must implement an EMS.This
applies not only to first-tier suppliers but also to sub-suppliers. If a supplier is considered to be at high risk
of breaking BMW sustainability principles or is suspected of non-compliance, that supplier can be required
to undergo an independent audit into its sustainability performance. A finding of non-compliance will initially
lead to the joint development of a plan to remedy the problem. Non-cooperation or severe breaches of sus-
tainability requirements can ultimately lead to a termination of the contract between BMW and its supplier.
262
Environment policy
Sustainability is wholly integrated into product development and all activities within the BMW
Group which produced its first overarching environmental plan in 1993. The current strategy is geared
to meeting the objectives set out in Table 12.1.
Table 12.1 BMW’s key environmental sustainability outcomes and targets
Activity Performance Target
Reduction of resource Reductions per By 2020

consumption and emissions vehicle 2006–13 (%)
Energy consumption -31.0 Reduce consumption of resource
Water consumption -33.1 per vehicle by 45% compared to
2006
Process wastewater -42.7
Non-recyclable waste -69.7
Solvent emissions -36.7
CO2 emissions -35.2
The following, far from exhaustive, examples demonstrate how BMW is working to achieve these
targets.
■■ Electromobility: BMW has developed its ‘i’ brand as a separate brand: in 2013, it introduced its
first fully electric premium vehicle, the BMWi3, into the European market and it was launched
into the markets of the Americas and Asia in 2014. The BMWi3 is designed to generate at least
50 per cent fewer greenhouse gas emissions over its full life cycle than conventional internal
combustion engines and is suitable for urban driving. The ‘i’ range is to be developed further and
the hybrid sports car, BMWi8, began production in 2014. The company is also expanding its range
of electric motorcycles.
■■ Efficient dynamics and driver management: the company’s Efficient Dynamics strategy has
resulted in a number of technological advances that help increase fuel efficiency and reduce
emissions. More specifically, these innovations include intelligent energy management, lightweight
construction, optimal aerodynamics, forward-looking drive control, air flap control, etc. The results
of the Efficient Dynamics Strategy have been incorporated into all new vehicles since 2007.
The company sees potential for further significant reductions in fuel consumption by combining
Efficient Dynamics with ConnectedDrive, a package of intelligent technologies that, through
interacting with the driver, help him/her make more environmentally positive decisions during the
course of a journey and adjust driving styles accordingly. Active Coasting, brought to the market
in 2012, is but one example of such technologies: by releasing pressure on the accelerator, the
driver automatically disconnects the engine from the gearbox and the vehicle slows down via air
resistance and the rolling resistance of the tyres alone. Operated in conjunction with the Proactive
Driving Assistant, which uses data about road conditions and accumulated knowledge about an
263
individual’s driving style to give the driver tips on how to drive in the most fuel efficient way, this
can be particularly effective.
■■ Logistics: the rapid growth of its business in North America and China and the need to transport
raw materials and components to its production facilities and to transport finished vehicles
to the customer means that BMW itself has a large demand for transport. Wherever possible,
BMW utilises the more carbon efficient rail system over road transport. Where road transport is
unavoidable, BMW requires carriers to use the most energy efficient vehicles available.
■■ Energy consumption at production facilities: all BMW sites are required to use the most
sustainable energy resource available to it. By 2013, 48 per cent of electricity consumed by BMW
(up from 28 per cent in 2011) was from renewable electricity. This was achieved by production
facilities generating their own power or by using local sources. For example, combined heat and
power is utilised at eight locations – not only does this utilise the electricity generated but also
the waste heat from the process. In 2013, four wind turbines were commissioned at the Leipzig
production plant to feed into the production of the BMWi3. Also since 2013, about 30 per cent of
the heat required by the Steyr engine plant has been supplied by a neighbouring biomass thermal
power plant fuelled by timber waste from the region. Two bonuses flow from this strategy: first,
auto generation and drawing energy from locally produced renewable sources increases the Group’s
energy security and the risk of production losses arising from any disruptions in the broader
energy supply network. Second, the utilisation of more sustainable energy and improvements in
energy efficiency is, according to BMKW’s 2013 Sustainable Value Report,2 ‘a significant business
opportunity’. This arises from the expected evolution of the EU’s Emissions Trading System (ETS),
which is expected to reduce the emissions allocation allowance year on year. Therefore, every unit of
energy saved or emission avoided pays off in terms of fewer allowances that need to be purchased.
Case questions
1 ‘For us, sustainable operations constitute a long-term business case: sustainability means making
a lasting positive contribution to the company’s economic success.’2 Using the information from
Table 12.1, from the rest of the case and any further information you can uncover about BMW,
consider why BMW makes this claim.
2 What challenges might BMW encounter in extending its sustainability strategy to its first-tier
suppliers and sub-suppliers?
3 This case study only touches upon a few of the many sustainability initiatives undertaken by the
BMW Group. What other possibilities can you identify (through brainstorming and/or further
researching the company and/or industry)?
4 The case study explicitly refers to two European initiatives – EMAS and ETS – which have a direct
impact on BMW. Research other areas where EU environmental policy impacts on BMW’s operations.
1
BMW Group Sustainable Value Report, 2003–4.
2
BMW Group Sustainable Value Report, 2013, p. 12.
264
Environment policy
rudimentary environmental awareness in the Summit of EC Heads of State and Government in

1950s, it would have been remarkable if the envi- October 1972 continued the work of the Stock-
ronment had been incorporated into the trea- holm Conference and instructed the European
ties. The preamble did speak of ‘the constant Commission to draw up a Community environ-
improvement of living and working conditions’, mental policy. The result was the First Environ-
sometimes interpreted not only as a commit- mental Action Programme (EAP), the first of
ment to increase prosperity but also to improve seven EAPs to date.
the quality of life. Article 2 refers to ‘harmonious The rationale for EU environmental policy
development of economic activities’, also occa- grew during the 1980s as the campaign to develop
sionally interpreted to include environmental the single market gathered pace and the potential
issues. However, there is little evidence that this for differences in national environmental regu-
was the intention of the drafters of the Treaty. lation to perpetuate market fragmentation was
By the late 1960s, there was an upsurge in recognised. Article 100 of the Treaty of Rome
environmental debate, culminating in the influ- empowered the Council to pass directives to
ential United Nations Conference on the Human approximate laws that ‘directly affect the estab-
Environment in Stockholm in 1972. The Paris lishment or functioning of the common market’,
Milestones in EU environment policy
Box 12.1
1957 Treaty of Rome signed without explicit environmental reference
1972 United Nations Conference on the Human Environment, Stockholm
1972 Paris Summit instructs the European Commission to develop an environmental policy
1973–6 First Environmental Action Programme
1977–81 Second Environmental Action Programme
1982–6 Third Environmental Action Programme
1987 Single European Act explicitly incorporates the environment into the Treaties
1987–92 Fourth Environmental Action Programme
1992 Rio Earth Summit commits industrial countries to return CO2 emissions to 1990 levels
by 2000
1993 Maastricht Treaty extends qualified majority voting to most aspects of environmental
policy
1993–2000 Fifth Environmental Action Programme
1997 Amsterdam Treaty consolidates environmental gains of Maastricht
1997 Kyoto Summit agrees an average 5.2 per cent reduction by 2010 in six greenhouse
gasses compared to 1990 levels in the major industrialised countries
2004 The Russian Parliament votes to ratify Kyoto, giving sufficient votes to enable the
agreement to come into force in 2005
2001–10 Sixth Environmental Action Programme
2013 Seventh Environmental Action Programme to 2020 approved
265
thereby providing some justification for early as pollution is no respecter of borders. The ongo-
environmental policy. Moreover, Article 235 ena- ing discharge of waste into river systems and
bled the Council to take actions that prove nec- incidents such as the 1986 Chernobyl nuclear
essary to meet Community objectives where the accident demonstrate the transnational, transcon-
‘Treaty has not provided the necessary powers’, tinental and, in the case of global warming, the
a useful catch-all article. It was also feared that global nature of many environmental problems.
in a more open market, different environmental This same Article also acknowledges the compe-
standards would result in downward pressure tence of the Community to cooperate with third
on standards as higher standard countries strove countries and international organisations in cer-
to prevent migration of investment to member tain environmental matters while acknowledging
states with lower standards. However, given the the continuing scope for member state action.
relatively small percentage of environmental Importantly for northern member states,
compliance costs in total costs in most sectors, particularly Denmark, Germany and the Neth-
this ‘race to the bottom’ argument is contested. erlands, which have been the leaders in many
The Single European Act removed the need aspects of European environmental policy, the
for reliance on general treaty articles to justify SEA allows member states to take stronger envi-
environmental policy and gave the Community ronmental measures than those advocated at
explicit powers in the environmental field for Community level, provided they are compatible
the first time. It established that Community with other aspects of the Treaty, such as the SEM
environmental policies should preserve, protect and competition rules. These safeguards exist to
and improve environmental quality; contribute inhibit fragmentation of the market arising from
towards human health; and ensure a prudent and differential environmental standards.
rational use of natural resources. Four principles The Maastricht Treaty took Community policy
were to guide Community environmental action: further. It confirmed the ‘preventive’, ‘polluter
pays’ and ‘rectification at source’ principles and
■■ prevention; added another – the ‘precautionary principle’ (see
■■ the rectification of environmental damage at Box 12.2). The Treaty also made the promotion of
source; ‘measures at international level to deal with regional
■■ policy integration; or worldwide environmental problems’ an explicit
■■ ‘polluter pays’. Community objective and committed the Com-
munity to aim for a ‘high level of protection’. How-
It was in relation to the environment that the ever, the potentially most important change was the
principle of subsidiarity was introduced into the extension of qualified majority voting to all environ-
treaties for the first time (a principle granted mental matters, with the exception of measures:
much wider application in the Maastricht Treaty).
Article 130r of the SEA authorises the Commu- ■■ ‘primarily of a fiscal nature’ – i.e. environ-
nity to take environmental action when its envi- mental taxes;
ronmental objectives ‘can be attained better at ■■ relating to town and country planning, land
Community level than at the level of the individ- use and water resource management;
ual Member States’. In practice, it can be argued ■■ affecting the choice between energy resources
that many environmental problems may be more for member states and the general structure of
appropriately dealt with at a supranational level their energy supply.
266
Environment policy
Key environment policy principles embedded in the Treaties
Box 12.2
The following policy principles are embedded in the EU treaties as a guide for the development of envi-
ronmental policy. These principles also often find themselves alluded to in the consideration of national
and international environmental initiatives.
The ‘polluter pays’ principle (PPP) stipulates that polluters should pay the full cost of the environ-
mental damage they cause. Environmental costs are often referred to as ‘externalities’ (for example,
damage to health, rivers, the air, etc. arising from economic activity) that are not incorporated into the
costs of a product but are borne by society as a whole. By making the polluter pay the full cost of its ac-
tivities, including externalities, the PPP provides an incentive to make products less polluting and/or to
reduce the consumption of polluting goods. This internalisation of external costs can be met through the
use of market-based policy instruments such as taxes or emission permits. The Environmental Liability
Directive is a prime example of this principle in action.
The prevention principle involves changes to products and processes to prevent environmental dam-
age occurring rather than relying on remedial action to repair damage after it has taken place – damage
that can sometimes be irreversible, or at least not fully repairable, or can be more expensive to correct
than preventing it in the first place. This implies the development of ‘clean technologies’; minimal use of
natural resources; minimal releases into the atmosphere, water and soil; and maximisation of the recy-
clability and lifespan of products. Environmental Impact Assessments foster preventive action, EMAS
and the Environmental Liability Directive are examples of policies driven by the preventive principle.
Rectification at source is closely linked to the prevention principle. Where environmental damage
cannot be prevented, technology should be used to reduce the damage rather than to clean it up after it
has occurred. This implies, for example, the use of more fuel-efficient cars rather than relying solely on
catalytic converters to reduce emissions.
Policy integration was first alluded to in the Single European Act, the principle that the environmen-
tal dimension should be considered and, where applicable, incorporated into all EU policies has been
strengthened in subsequent treaties and increasingly been put into practice, notably, but not only, in the
fields of energy policy (see Chapter 11) and the Common Agricultural Policy.
The precautionary principle acknowledges that our understanding of ecology and environmental
processes is, at best, incomplete and constantly evolving. Policy is therefore formulated against a back-
ground of uncertainty. However, lack of scientific knowledge should not be used to justify failure to
introduce environmental policy. Indeed, even without conclusive scientific evidence about outcomes,
precautionary action should be taken if the potential consequences of inaction are particularly serious
or if the cost of action is not high. Any such measures should be non-discriminatory, proportionate and
reviewed when more scientific evidence becomes available. EU policy restricting the use of genetically
modified foodstuffs is an example of the precautionary principle in action.
267
The Amsterdam Treaty consolidated the envi- Programmes (EAPs). As knowledge about the
ronmental gains of the Maastricht Treaty by giving environment and commitment to environmental
them greater prominence and status. The commit- objectives increased, the EAPs have progressively
ment to sustainable development became a core become more complex. Contrary to what their
EU objective and was incorporated into the pre- names suggest, the EAPs do not themselves com-
amble and Article 2 of the Treaty. The integration prise a list of proposed initiatives but rather estab-
of environmental policy into all aspects of Com- lish general objectives that provide a platform and
munity policy was moved from the environmental framework for subsequent specific proposals. For
title to Article 3c. The Commission also attached a example, the general objective in the Sixth EAP of
declaration to the Treaty committing it to incorpo- an 8 per cent reduction in greenhouse gas emis-
rate environmental impact assessments into all pro- sions by 2008–12 compared to 1990 resulted in
posals with significant environmental implications. the 2003 directive on emissions trading.
The Amsterdam Treaty also extended the Each EAP has built upon its predecessor,
co-decision procedure (since the Lisbon Treaty, responding to its shortcomings and building
known as the ‘ordinary legislative procedure’) to upon its successes. In practice, the principles laid
all environmental measures, thereby increasing the down in the various EAPS have often been ahead
role of the EP, the Community institution that has of actual achievements. The First EAP, for exam-
shown the greatest appetite for enhancing the EU’s ple, acknowledged the ‘polluter pays principle’, a
environmental role. However, proposals to extend principle which is still to be fully implemented,
qualified majority voting to all aspects of environ- and highlighted the concept that decisions should
mental policy (proposals strongly supported by be taken at the most appropriate geographical
Denmark, the Commission and environmental level – the subsidiarity requirement that was only
NGOs) were not accepted in the negotiations on formalised in the Single European Act and that
the Amsterdam and the Nice Treaties. still invites controversy about exactly where envi-
Given that major substantive environmental ronmental policy responsibility should lie.
elements were already contained in the treaties, By the time the Fifth EAP came into force in
the Lisbon Treaty changed little in this domain. 1992, the Community’s approach towards the
The definition of sustainability, already established environment had become more integrated, pro-
as a Union objective in the Amsterdam Treaty was grammatic and long-term. The Fifth EAP differed
broadened and strengthened somewhat and the from its predecessors by covering eight years
EU was given a much clearer role in participating instead of five – recognition of the long-term
in international environmental initiatives, partic- nature of many environmental problems and
ularly climate change. their solutions. The Sixth EAP had an even longer,
ten year term (1 January 2001 to 31 December
2010). Continuity between the Fifth and Sixth
The expanding EAPs was also apparent through the envisaged use
range of European of a wider range of environmental policy instru-
environmental policy ments; greater integration of environmental pol-
icy with other policy domains to ensure they are
Since 1973, the broad parameters, principles and not at odds with environmental policy objectives
ambitions of European environmental policy have and greater cooperation with third countries.
been set out in a series of Environmental Action These themes and others have been incorporated
268
Environment policy
into and built on in the Seventh EAP which was in Europe, both at a national and a supranational
approved by the Council and the EP in 2013 and level, can seem bewildering from the corporate
came into force by the beginning of 2014 (see perspective, businesses can benefit from much
Box 12.3). greater flexibility in how they achieve these
The longer duration of EAPs necessitates, and objectives. Policy initiative fall into two distinct
also facilitates, a more fundamental appraisal of categories – voluntary and compulsory.
long-term economic and environmental trends
that need to be taken into account in drawing up
the programmes, including: Voluntary schemes
■■ economic globalisation and the increasingly Voluntary schemes themselves take a number of
global nature of environmental issues; forms. In general, they offer greater flexibility,
■■ the emergence of the e-economy which cre- and hence potentially greater cost-effectiveness,
ates new business models; in meeting environmental objectives. Voluntary
■■ the rise of modern communication technolo- initiatives currently operating in Europe, include:
gies, especially social media, which facilitate
dialogue between policy makers and stake-
Own initiative schemes
holders and also enhance the organisational
capabilities of environmental NGOs, thereby One of the most well-known is Responsible Care, a
transforming the political context in which voluntary worldwide initiative on health, safety and
environmental policy is formulated; the environment launched in 1985 by the Canadi-
■■ continuing EU enlargement: the extension and an Chemical Producers Association and adopted in
implementation of the environmental acquis to 1989 by CEFIC, the European Chemical Industry
states that have suffered severe environmen- Council. Currently, 60 national chemical associa-
tal degradation and lack financial resources to tions, whose combined membership accounts for
rectify this damage poses a major challenge; nearly 90 per cent of the world’s chemical produc-
■■ improving the competitiveness of European tion, have signed up to Responsible Care.
business. The scheme operates through national and
regional trade associations and involves:
The range of options and obligations facing
European businesses when trying to manage their ■■ formal corporate commitment to a set of guid-
response to environmental challenges has broad- ing principles;
ened considerably and become significantly more ■■ a series of codes, guidance notes and checklists
complex. For many years, business faced legisla- to help companies fulfil their commitments;
tion that not only set minimum environmental ■■ the development of indicators to help assess
standards but also distorted innovation by, usually improved performance;
inadvertently, favouring one strand of technologi- ■■ a continuing process of communication on
cal development over another. In recent years, health, safety and environmental matters with
although minimum environment standards are stakeholders inside and outside the industry;
still used, a much broader range of policy instru- ■■ forums in which companies can learn from
ments are utilised in Europe. Therefore, although the experiences of others in implementing the
the diversity of environmental initiatives in use commitment;
269
Key features of the Seventh Environmental Action

Box 12.3
Programme to 2020
The Seventh EAP demonstrates continuity with its predecessor and aims to provide an overarching and
consistent context for pursuit of its many environmental goals. The nine broad objectives of the Seventh
EAP are divided into three groups – thematic objectives; the enabling framework; and local, regional and
global challenges. The thematic objectives are concerned with the main substantive elements of environ-
mental policy, including the many policies needed to preserve national resources; to improve resource effi-
ciency; and to improve the quality of life. As such, the numerous individual policies falling under one of these
headings are intended to form part of a comprehensive whole, interact with each other and are integrated
with other dimensions of EU policy, including, among others, energy, transport and agricultural policy.
Environmental policies have not always been fully implemented by member states, a factor which
is borne out by the number of cases brought by the Commission against individual member states. The
objectives of the enabling framework are thus intended to ensure that the EU’s environmental policy is
implemented as consistently and as thoroughly as possible; that environmental policy sits on a stronger
knowledge base; that resources are available for environment protection where appropriate; and that,
in order to leverage the maximum environmental benefits from European policy, environmental policy
is fully integrated and consistent with other EU policies.
The local, regional and global objectives reflect the fact that environmental impacts occur at several
levels – some impacts will be constrained within a limited area whereas others cross borders worldwide
and the only actions that will be successful in controlling such impact will be those that are taken at an
international or global level.
Thematic objectives
1 The protection, conservation and enhancement of the EU’s natural capital: the Seventh EAP regards
the EU’s ‘natural capital’ (which refers to the EU’s eco-system in terms of biodiversity, fertile land,
forests, water and air) as underpinning the EU’s economic prosperity and the well-being of its
citizens. It noted that a range of directives (the Water Framework Directive, the Air Quality and
related directives and the Habitats Directive among others) were already in place and addressing
this objective. However, the EU’s biodiversity remains threatened and the Seventh EAP sets out
specific actions to address these issues, including:
■■ stepping up implementation of the EU Biodiversity Strategy;

■■ full implementation of the Blueprint to Safeguard Europe’s Water Resources, paying due
regard to the individual characteristics of member states;
■■ urgent action to ensure healthy fish stocks;
■■ agreeing and implementing the EU’s strategy on climate change, including the mainstreaming
of climate change initiatives into other main policy initiatives in line with the principle of policy
integration introduced in the Amsterdam Treaty (see Box 12.2);
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Environment policy
■■ greater efforts for compliance with air quality legislation and the definition of strategy and
targets beyond 2020;
■■ greater efforts to reduce soil erosion; to rectify soil contamination; and improved planning
coordination across all levels and policies;
■■ further efforts to reduce emissions of nitrogen and phosphorus;
■■ development and implementation of a new Union Forest Strategy;
■■ enhanced public information, awareness and education on Union environment policy.
2 The transformation of the EU into a resource-efficient, green, competitive, low-carbon economy:

a major vehicle for achieving this is the 20:20:20 package for energy and climate change (see
Chapter 11). Agreement on further objectives for 2030 (a 40 per cent reduction in greenhouse
gas emissions compared to 1990 levels; a minimum 27 per cent share of renewables in energy
consumption and an increase in energy efficiency of at least 27 per cent) was reached in early
2014, shortly after the approval of the Seventh EAP. Further improvements in the environmental
performance of products and greater emphasis on transforming waste into resources and more
prevention, re-use and recycling is envisaged. The Seventh EAP highlights existing European success
in this area, citing the growth of Europe’s eco-industries with its positive impact on job creation and
competitiveness.
3 The protection of EU citizens from environment-related pressures and risks to health and well-
being: these risks include noise, air and water pollution and toxic chemicals. Despite progress in
reducing some of these risks, the Seventh EAP cites a World Health Organisation Report that
15–20 per cent of all deaths in 53 European countries are attributable to environmental stresses.
Accordingly, the Seventh EAP proposes to update policies in these risk areas and establish a strong
commitment to their implementation.
The enabling framework

4 Improvement in the implementation of the EU’s environmental legislation: efforts will be made on all
fronts to improve the implementation of the environmental acquis, including improved surveillance
and inspections and encouraging non-judicial resolution to disputes. More consistent and thorough
implementation of environmental legislation will enhance the single market and foster the growth of
eco-businesses.
5 An increase in knowledge about the environment and the provision of greater evidence for policy: in
order to improve the effectiveness of EU environment policy, not only does the scientific knowledge
used to formulate the policy need to be improved but the knowledge itself needs to be disseminated
more widely to assist in the policy-making process. The Seventh EAP contains measures to improve
the collection, management and use of environment data and promises investment in research to
bridge the knowledge gaps. The EAP reinforces the importance of the precautionary principle (see
Box 12.2) in relation to risk.
271
6 To secure investment for environmental policy: the EAP recognises that investment and innovation
in research, products and process are needed if its objectives are to be met. This requires the proper
recognition of all environmental impacts and that market signals reflect the true cost of economic
activities on the environment. In other words, the polluter pays principle (see Box 12.2) must
be properly applied. This involves the phasing out of environmentally damaging subsidies; a shift
towards taxation of pollution and an expansion of the market for green goods and services. Specific
measures proposed include developing and facilitating access to new funds for eco-innovation;
ensuring efficient use of EU funding for the environment, including devoting 20 per cent of the
budget to climate change mitigation through the mainstreaming of climate action; incentivising
businesses to measure the environmental cost of their business and benefits to be gained from using
environmental services.
7 Greater integration of environmental measures into other policy areas: policy integration (see
Box 12.2) has been a treaty requirement since the 1997 Treaty of Amsterdam but the EAP states
that further progress needs to be made in this area if its objectives are to be met. In many cases, this
will require management of the environmental trade-off at an early stage in policy formulation. The
most significant potential environmental gains are to be made in agriculture, fisheries, transport,
energy and regional policy but most areas can benefit from policy integration.
Meeting local, regional and global challenges

8 More sustainable EU cities: in recognition of the densely populated nature of the EU and the fact
that 80 per cent of the EU population are likely to be living in urban areas by 2020, the EAP aims
to ensure that by 2020, most EU cities are incorporating sustainability into their urban planning
and design and making use of the EU funds available for the purpose. This will require agreement on
criteria to assess the environmental impact of cities; to ensure cities have better information about
and access to financing regarding improved urban sustainability; the sharing of best practice in this
area and integrating urban planning with other environmental objectives.
9 More effective approach to international environmental and climate initiatives: achievement of

many of the objectives of the EAP requires cooperation with partner countries or an overarching
global approach through international organisations. The EAP proposes priority should be given to
the Black Sea and Arctic regions; active engagement in international forums for climate change and
biodiversity; proactive involvement in international agreements on new and emerging issues; and
the promotion of environmentally responsible business practices, including ‘global green standards,
free trade in environmental goods and services, the further deployment of environment and climate-
friendly technologies, protection of investment and intellectual property rights and the international
exchange of best practice.
272
Environment policy
■■ systematic procedures to verify the implemen- In recent years, the number of eco-labelling
tation of the measurable elements of Responsi- schemes has proliferated, giving rise to poten-
ble Care by corporate members. tial confusion about what each scheme means to
consumers.
As the process has evolved, Responsible Care has Eco-labelling schemes can be run by a variety
extended its brief throughout the whole supply of organisations, including industry associations,
chain. In 2002 CEFIC and the European Chemical NGOs and governmental bodies, with or with-
Distributors Association (FECC) jointly produced out the assistance of external bodies. Well-known
guidance on handling, storage, transport, product examples of such labels includes those of the For-
and packaging disposal, packaging, classifica- estry Stewardship Council, established in 1994 to
tion and labelling. In 2006, the Responsible Care promote environmentally appropriate manage-
Global Charter was launched, paying particular ment of the world’s forests and their products
attention to the safe use and handling of products and the Marine Stewardship Council, founded in
along the value chain in all locations. 1999, to perform a similar function for the fisher-
A potential advantage of such initiatives is ies industry.
that, if the industry is seen to be behaving respon- Several European countries operate their
sibly, it can forestall more stringent, compulsory own eco-labelling schemes. The first, not only
regulation, thereby giving companies greater in Europe but in the world, was Germany’s ‘Der
flexibility in how they conduct themselves. Such Blaue Engel’ or ‘Blue Angel’ scheme which was
initiatives, however, do not remove the need for established in 1978. Other countries have fol-
legislation altogether, especially in an industry lowed suit: including the ‘Nordic Swan’ in Fin-
with such an intense relationship with the envi- land, Sweden, Denmark and Norway and the
ronment as the chemical industry. It must, for ‘Milieukeur’ in the Netherlands. The reach of
example, comply with EU environmental legis- these schemes is not limited to the national ter-
lation that applies to all industries and with poli- ritory of the authorising body: in the case of the
cies specifically aimed at the chemical industry, Blue Angel, for example, products have been
the most significant of which is REACH (Regis- awarded the label not only elsewhere in Europe
tration, Evaluation and Authorisation of Chemi- but also as far away as Australia, South Korea and
cals), a system of chemical management which South Africa.
entered into force in 2007 and is being phased in In 1992, an EU eco-label scheme – ‘the
over 11 years. Flower’ (so-called because the label that is dis-
played on a qualifying product takes the form of a
flower) – came into existence. The scheme was

Eco-labelling
intended to promote products with a reduced envi-
Eco-labelling is the practice of marking prod- ronmental impact compared to similar products
ucts with a distinctive, recognisable label so that and to provide consumers with accurate informa-
consumers can be confident that their purchases tion about the environmental impact of products.
conform to certain environmental standards. In All products and services in the EEA, except for
order for environmental claims to be credible, food, drinks, pharmaceutical products and medi-
some form of external confirmation is required cal devices, are eligible for the scheme and many
and consumers need to be able to trust the products, including textiles, detergents, soaps and
claims that are made on behalf of the product. shampoos, paper towels, laptops, clothing and
273
tourist accommodation have already received the and the UK (see Figure 12.2) – countries where
EU eco-label. there is a degree of consumer environmental con-
Criteria for eligibility for an EU eco-label are cern but where national schemes are not so well-
determined by scientists, industry experts and developed. Conversely, Germany, the home of the
NGOs which are then confirmed by a European original eco-labelling and a country normally at
Commission decision. Each member states des- the forefront of environmental initiatives, is rela-
ignates its own independent competent body tively under-represented in the EU programme.
to implement the scheme at national level. The This is almost certainly a result of the success of
competent bodies assess applications to join the the Blue Angel scheme which was already well-
scheme and award the EU eco-label to products recognised and established when the EU scheme
that meet the criteria. was launched. The EU scheme is yet to make sig-
The success of eco-labelling schemes depends nificant inroads into Central and Eastern Europe.
on public recognition of and trust in the logo, The Flower scheme is voluntary but the EU has
which takes time to develop. The EU scheme, also introduced a compulsory labelling scheme to
which was competing with some well-established denote the energy efficiency of many products
national schemes when it came into existence, was sold in the EU and to contribute to its climate
slow to get off the ground. By 2011, however, the change strategy. The original legislation took the
EU scheme, after a first decade of limited take- form of a framework directive: delegated legisla-
up, had started to take off (see Figure 12.1) with tion was introduced by the European Commission
over 1,300 licences in existence and the Flower setting out the energy efficiency criteria for indi-
appearing on over 17,000 products. vidual products. Introduced in 1995, the energy
The geographical take-up of the scheme var- efficiency label must be attached to most white
ied. It has proved most popular in Italy, France goods, light bulb packaging and cars. All products
1400
1200
1000
800
600
400
200
0
1992 1994 1996 1998 2000 2003 2005 2007 2009 2011
Figure 12.1 Number of EU eco-label licences, 1992–2011

Source: DG Environment.
274
Environment policy
10000
8000
6000
4000
2000
0
Italy France UK Netherlands Spain Sweden Germany Other
Figure 12.2 Number of EU eco-label licences per country (as at Jan. 2012)
Source: DG Environment.
falling within the scope of the legislation must 2014, over 4,500 organisations and 8,150 sites
display their energy efficiency in terms of classes, were EMAS-registered worldwide. EMAS regis-
since 2010 ranging from A+++ to G. The legisla- tration requires a company to:
tion has been under constant review and amended
to take changes in technology into account and to ■■ carry out an environmental review covering all
introduce new products into the scheme environmental aspects of its activities, prod-
ucts and services, including existing environ-
mental management and procedures;
Environmental management schemes
■■ adopt environment policies that comply with
Environment management system (EMS) provide all environmental legislation and that create
organisations with tools and methods to manage continuous improvement in environmental
their activities, products and services in a system- performance. This should include specific tar-
atic way that helps them achieve their environ- gets and objectives;
mental obligations and goals. Since 1993, the EU establish an effective environmental manage-
■■
has operated its own voluntary EMS – the Eco- ment system, based upon the above review and
Management and Audit Scheme (EMAS) – which policies, to achieve the goals of the organisation’s
requires organisations to undertake a review of environmental policy. The resulting EMS must
their environmental impact and to use this as a establish responsibilities, objectives, means,
base to set goals to improve their environmental operational procedures, training requirements
performance. and monitoring and communication systems;
Initially, registration under EMAS was avail- ■■ conduct an environmental audit which assesses
able only to industrial sector companies but since the EMS and its compliance with the organisa-
2001 EMAS has been open to all economic section’s own policy and all relevant environmen-
tors, including public and private services. By tal legislative obligations;
275
■■ provide a statement of its environmental per- regulatory authorities as a result of measures tak-
formance in relation to its policy objectives en to reduce environmental risks which has led to
and outline action to be taken to improve the fewer environmental inspections.
organisation’s performance further. In contrast, Audi Hungaria employs several
thousand people and its Györ plant is Hungary’s
The review, audit and statement must all be biggest exporter. It supplies engines for the Audi
approved by an accredited and independent EMAS and VW Group and gained EMAS registration in
verifier, thereby giving the scheme the transpar- 2005, the first Hungarian company to do so. In
ency and accountability needed for the scheme to the first three years of its EMAS membership, the
have credibility. Effective EMAS schemes enable company reported recycling rates reaching 97 per
companies to demonstrate their commitment cent; a reduction in energy consumption of 0.25
to sustainability and to enhance their efficiency per cent and a 0.29 per cent decrease in air pol-
and profitability. These benefits can come from lution despite a 140 per cent increase in produc-
greater energy efficiency, waste reduction, a safer tion. Other initiatives had included a switch from
working environment and generally improved road to rail in the transport of engines from Györ
management of operations and demonstration of to the parent company in Bavaria for environmen-
the benefits of ecological innovation. EMAS also tal reasons.
help firms reduce their liability for environmental
damage given that an effective EMS helps reduce
the exposure of organisations to environmental Compulsory initiatives
risk. This is particularly helpful in view of the
2007 Environmental Liability Directive. European business remains subject to the old
The types of benefits reported by EMAS par- command-and-control legislation on minimum
ticipants clearly vary depending on the nature of standards and licensing but policy at EU and
the organisation’s activities but, whether large national level has increasingly switched to reliance
or small, the scheme has the potential to make a on market-based or economic instruments such as
significant difference to a firm’s financial perfor- environmental taxes, charges, tradable permits,
mance, in line with the principles of ecological deposit refunds and subsidies. These instruments
modernisation. Dublin Products, for example, is use market forces and the price mechanism as an
an Irish SME which processes animal by-products incentive to consumers and producers to change
to produce meat and bone meal and tallow. It has their polluting behaviour and to reduce the deple-
participated in EMAS since 2001 during which tion of resources: an energy tax, for example,
time it has reduced its fuel oil usage by 99 per encourages greater investment in energy effi-
cent through recycling and burning tallow oil ciency technology; restrains energy consump-
to run its facilities; eliminated the use of pro- tion; and promotes fuel switching. Producers
pane gas; reduced electricity consumption by and consumers can determine the response they
almost one-third as a result of improved produc- make to these incentives in relation to their own
tion efficiency; and reduced the amount of waste circumstances and needs whereas more regula-
going to landfill by three-quarters through better tory approaches tend to be more inflexible and
waste management and recycling programmes. impose the same solution on all parties. Moreo-
The company works in a heavily regulated indus- ver, the newer policy instruments tend to reflect
try and has reported increased trust among the the polluter pays and precautionary principles set
276
Environment policy
out in the treaties (see Box 12.2). The following of damage: soil, for example, can frequently be
examples demonstrate how some of these policy decontaminated whereas damage to water or to
instruments work in practice: biodiversity can be more complex. In the lat-
ter case, the competent authorities have some
scope in which to decide what measures need
Environmental liability
to be taken. For example, if a damaged site can-
The 2004 Environmental Liability Directive is not be restored, the authorities can demand that
intended to operationalise the ‘polluter pays another nearby site of equivalent environmental
principle’, a key principle of EU environmental value has to be enhanced. Where damage affects
policy (see Box 12.2). In short, the directive’s or is likely to affect more than one member state,
basic objective is to ensure that those opera- those member states are expected to exchange
tors whose activities have caused environmental information and cooperate to ensure that preven-
damage are held financially liable for remedy- tive action and remedial action is taken where
ing this damage rather than society as a whole. necessary.
The prospect of being held liable is intended as The directive has been designed to comple-
an incentive to companies to take greater care in ment rather than duplicate existing civil liability
preventing damage occurring in the first place, legislation in member states and international
thereby satisfying two other key principles of EU liability legislation. Therefore, traditional damage
environmental policy – precaution and rectifica- to people and property continues to be dealt with
tion at source. by national civil liability legislation. The directive
Many member states have their own civil does not cover damage included in international
liability schemes but they tend to cover damage liability schemes, namely maritime oil spillages
to persons and property rather than to the wid- and nuclear accidents, on the grounds that their
er environment. Only a few member states, for scope is much greater and legally binding on
example Sweden and Denmark, have a more gen- many more countries than those in the EU and/
eral regime calling for compensation for damage or their regime provides for additional guarantees
to the environment. The damage covered by the such as compensation funds.
Directive falls into three categories: The objectives of the Liability Directive are
clear: its effectiveness was initially assessed in
1 damage to biodiversity – that is, damage 2010, at which point the transposition of the
to protected species and natural habitats as Directive into the laws of all member states was
defined by the 1979 Wild Birds Directive 09 only just complete. In late 2014/early 2015, the
and the 1992 Habitats Directive; Commission is due to evaluate and review the
2 damage to water resources – that is, any Directive once more, based on reports submitted
damage that has a significant adverse effect by member states and is likely to result in amend-
on the waters covered in the 2000 Water ments to enable it to achieve its objectives more
Framework Directive; effectively.
3 land and soil contamination that carries a risk
to human health.
Emissions trading
The remedial measures that can be demanded Preventing climate change and creating a low-
under the directive vary depending on the type carbon economy is a key strategic objective for
277
the EU. Various initiatives have been undertaken EU scheme but whose airlines fly in and out of the
to achieve the greenhouse gas emission targets set EU. Following an agreement by the International
out in Table 12.2 including the 20:20:20 policy Civil Aviation Organisation to develop a global
for energy and the 2050 Energy Roadmap (see market mechanism to tackle international avia-
Chapter 11) with their measures to improve ener- tion emissions to be applied by 2020, the EU has
gy efficiency and encourage the use of renewa- agreed to limit the scope of its scheme to flights
bles; binding targets to reduce CO2 emissions within Europe until 2016.
from new motor vehicles; promoting innovation The implementation of the ETS has been
in energy-efficient technology and supporting problematic. It requires identification of all
the development of carbon capture and storage. installations covered by the scheme and alloca-
At the heart of the EU’s greenhouse gas (GHG) tion of allowances to each installation. Allocation
emission reduction strategy is its emissions trad- requires accurate figures on current emissions and
ing scheme (ETS), introduced in 2005. the determination of appropriate principles by
The ETS places a limit, which is reduced which to allocate the trading allowances. Initially,
annually, on the total emissions that are permit- the responsibility for doing this lay with member
ted from high emitting sectors. Companies can states but in the latest phase, which runs from
buy and sell emission allowances within the cap, 2013–20, a single, EU-wide emissions cap has
enabling them to reduce their emissions in the replaced separate, individual national caps. Other
most cost-effective manner. Box 12.4 outlines technical adjustments have been made to make
the basic principles of how an emission trading the scheme more fit-for-purpose and further
scheme works – the technical details can vary. adjustments can be expected to avoid repetition
The EU’s ETS covers around 45 per cent of the of the rapid fall in the price of carbon permits,
EU’s emissions of GHGs, which include carbon which reduced the incentive to cut emissions, and
dioxide, nitrous oxide and perfluorocarbons, has created a threat of surplus allowances.
from over 11,000 power stations and manufac-
turing installations in the EU-28 and the EEA for
Taxation
whom participation in the scheme is obligatory.
Since 2012, civil aviation has been included in the The ETS is a market-based policy instrument –
scheme – a development which was far from pop- that is, it uses economic incentives to try to change
ular with countries that do not participate in the behaviour. Environmental taxes are the most
Table 12.2 Progressive targets for EU greenhouse gas (GHG) emissions to 2050
Target date Greenhouse gas emission target

2008–12 EU-15 – 8% below 1990 levels – agreed at Kyoto in 1997 by the then EU of 15 member
states. Most member states joining since 2004 have Kyoto targets of 5–8%
2020 EU-28 – GHG emissions to 20% below 1990 levels. EU offered to increase target to 30%
below 1990 levels if other major emitting countries in both the developed and developing
world followed suit
2030 Commission proposes a target of GHG emissions 40% below 1990 levels
2050 European leaders have endorsed proposed reduction of GHG emissions by 80–90%
compared to 1990 levels as part of a strategy by developed countries
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Environment policy
How does emissions trading work?
Box 12.4
Emissions trading enables emission targets to be reached at the lowest possible economic cost. Its
success in achieving this depends on getting the details right, particularly the design, allocation of emis-
sion permits and monitoring of the scheme.
Emissions trading schemes operate according to the following principles:
Assuming two companies emit 100,000 tonnes of CO2 per year and each is given an emission allow-
ance of 95,000 tonnes per year, neither is fully covered for their total emissions. They can either cover
their shortfall by reducing their emissions by 5,000 tonnes or by buying allowances to cover the 5,000
tonne shortfall. Their choice of option will depend on the market price of the allowances relative to the
cost of reducing their emissions by 5,000 tonnes.
If, for example, the market price of an allowance is €100 per tonne of CO2 and Company A’s cost
of reducing its emissions is €50 per tonne whereas the emission reduction costs of Company B are
€150 per tonne, then it is in Company A’s interests to remain within its emission allowance by reducing
its total emissions. It may even decide to reduce its emissions further (say, by 5,000 tonnes) and sell
its unused emissions. However, it would be cheaper for Company B to buy additional allowances to the
tune of 5,000 tonnes at the market price of €100 per tonne rather than physically reduce its emissions.
In the above scenario, Company A reduces its emissions by a total 10,000 tonnes at a cost of
€500,000. However, it is able to completely offset its emission reduction costs by selling 5,000 tonnes
of allowances at the market price of €100 which brings in revenue of €500,000. Without trading of
emission allowances, a 5,000 tonne reduction in CO2 would have cost Company A €250,000 (5,000
tonnes × €50 per tonne reduction cost). Company B meets its commitments under this emission trading
scheme by buying 5,000 tonnes of allowances at a total cost of €500,000. Without the possibility of
emissions trading, it would only have reached its emissions target of 95,000 tonnes by carrying out the
physical reduction at a total cost of €750,000.
Under an appropriately designed emissions trading scheme, it is clear from this example that the
cheapest reductions in emissions are made first, making this particular instrument one of the most
cost-effective ways of meeting a given target.
explicit example of market-based instruments and for unanimity on fiscal measures, an unchang-
the EU consistently recommends the substitution ing requirement through all treaty reforms, has
of environmental taxes for taxes on labour in an condemned efforts to introduce EU-wide taxes
attempt to improve environmental standards and to failure as member states jealously protect their
to reduce unemployment. tax raising prerogatives.
Efforts to introduce environmental taxes at However, environmental taxes are used wide-
EU level, however, have proved singularly unsuc- ly by individual member states but, despite the
cessful. A 1991 proposal for an EU-wide ‘car- growing awareness of environmental issues, the
bon/energy tax’ and a 1997 proposal to extend share of environmental taxes in total taxes has
excise duties to natural gas, electricity and solid declined somewhat during the first decade of this
fuels both fell by the wayside. The requirement century. In 2000, environmental taxes accounted
279
for 6.7 per cent of total tax revenue of the EU-27, differences, such as environmental policy. This
falling to 6.1 per cent by 2012. The share of envi- focus on the environment stems from concern
ronmental taxes in total tax revenue in individual over the implications of the potential competi-
member states in 2012 ranged from 4.1 per cent tive disadvantage, particularly in relation to high
in France (down from 4.9 per cent in 2000) to 8 compliance costs, experienced by firms located in
per cent in Denmark (9.6 per cent in 2000). countries which aim for higher levels of environ-
It would appear, therefore, that resistance to mental protection.
environmental taxes is not simply a matter of This concern manifests itself in a number of
opposition to the EU encroaching on the sov- ways. A common fear is that the existence of coun-
ereignty of member states in terms of taxation. tries with lower process standards will act as ‘pol-
Other arguments must also be slowing down the lution havens’ – that is, in order to avoid the costs
spread of environmental taxation. Such argu- of complying with these standards in their current
ments tend to focus on the alleged negative location, firms will relocate to countries where
impact on competitiveness if key competitors they do not incur such costs with consequent
are not subject to similar charges. Indeed some loss of jobs and investment in the country with
critics argue that environmental taxes result in higher standards. These higher standards would
loss of jobs in the taxing country by encourag- then, ironically, lead to greater environmental
ing environmentally damaging activity to move damage as firms are free from constraints in their
elsewhere. The counter-argument has its roots in new location. These developments will also lead
ecological modernisation and maintains that tax- to pressure to lower standards to prevent such
ation gives incentives to improve efficiency and migration occurring. Although these arguments
innovate, thereby improving competitiveness and have a certain logic, reality is more complex. The
possibly giving rise to ‘first mover’ advantages pull of pollution havens depends to a large extent
if other countries and regions eventually adopt on the overall share of environmental compliance
similar policies. costs in total costs. In general, such costs tend to
be no more than 1 to 2 per cent of total costs
The international dimension and as such are only a relatively minor factor in
of environmental issues a whole host of other locational factors. That is
not to say that in certain cases the additional costs
Environmental issues have increasingly taken on incurred as a result of environmental regulation
an international perspective and feature promi- will not be a determining factor in relocation or
casting around more widely for location for new
nently on the agendum of international organisa-

tions such as the United Nations, the World Trade investment. The environmental cost factor will
Organisation and the OECD. This is both because become more influential when profit margins
of growing awareness of the transboundary and are tight and the economic environment is gen-
even global nature of much pollution and because erally unfavourable. Nevertheless, although there
of trade liberalisation and the greater interde- are examples of the pollution haven hypothesis in
pendence of the world economy which increases action, there is scant evidence to support it in any
the relative importance of remaining regulatory systematic way.
280
Environment policy
Key points
■■ EU environmental policies and European business are increasingly reflecting an ‘ecological
modernisation’ approach. Nevertheless, conflict persists between those who view environmental
policy as increasing cost and red tape burdens on industry and those who see environmental
policy as providing opportunities to promote competitiveness.
■■ Over the years, the scope of EU environmental policies has expanded greatly and encompasses
both voluntary and compulsory initiatives, many of which comprise market-based economic
instruments.
■■ Much pollution is not contained within national or European borders and many environmental
issues have an international dimension.
■■ In recent years, most major companies have developed their own environmental strategies. These
developments and efforts to encourage greater industrial participation in policy formation will intensify.
■■ The Seventh Environmental Action Programme, which runs until 2020, provides continuity with
previous EAPs.
Activities
1 Research a European business sector and develop your own case study of the environmental challenges
it faces. What obligations does EU policy place on it and how has the sector responded to the environ-
mental challenges in general? Note: the challenges vary considerably from sector to sector.
2 Case Study 12.2 outlines the BMW Group’s response to the many environmental challenges facing it as
a European-based multinational. Research another European-based company (it may be active in one or
more member states or on a global scale) and identify how it has responded to these challenges. Note: com-
panies’ strategies vary according to the sector and the reach of their production and marketing networks.
Consider whether your company takes a national, European or international approach to environmental
issues or does it use a combination of all three? What factors might have caused it to adopt its approach?
3 This chapter describes examples of different types of European environmental policy – it cannot
describe all of them. Choose one of the following European environmental initiatives and research it
further with a view to identifying its implications for business:
■■ The REACH programme for the chemical industry;
■■ EU policies towards recycling and waste management;
■■ Integrated Product Policy (hint: life cycle analysis, ‘cradle to grave’ – raw materials → design →
manufacture → use → disposal).
In each case, discuss the link with the principles of EU environmental policy.
281
4 Transport has a major impact on the environment. What is the nature of the links between transport
and the environment. Identify how the EU has so far integrated policy in these areas. Is there scope
for further integration?
1 European businesses have to take national, EU and international environmental policies into account
(see the Seventh EAP). Consider the rationale for the introduction of policy at all three levels and the
potential impact of one level of policy on another (for example, EU member states are allowed to enact
national environmental legislation that is stricter than EU policy – but only under certain conditions).
2 ‘The Union’s environment policy has stimulated innovation and investment in environmental goods and
services, generating jobs and export opportunities.’ Do you agree – wholly, partially or not at all? Give
reasons for your answer.
3 Discuss the implications of ecological modernisation for business and for policy formulation.
4 Does European environmental policy stimulate or damage competitiveness? Where possible, provide
examples and evidence to support your argument.
5 Assess the relative benefits of voluntary compared to compulsory environmental schemes.
6 What are the implications of the ‘polluter pays principle’? Identify examples of EU policies that
implement this principle and how they affect stakeholders.
Bibliography
Adelle, C. and Jordan, A. (2013) Environmental policy in Hanley, N. and Shogren, J. (2013) Introduction to Envi-
the EU: Actors, institutions and processes, 3rd edn, ronmental Economics, Oxford: Oxford University Press.
London: Routledge. Porter, M. and Van der Linde, C. (1995) ‘Green and
Benson, D. and Jordan, A. (2010) ‘European Union environ- competitive – ending the stalemate’, Harvard Business
mental policy after the Lisbon Treaty: plus ça change, Review, 73 (5), pp. 120–34.
plus c’est la meme chose?’, Environmental Politics, 19 Selin, H. and VanDeever, S. (2015) European Union and
(3), pp. 468–74. Environmental Governance, London: Routledge.
Boasson, E. and Weltestad, J. (2013) EU Climate Policy, Weale, A. (1992) ‘Chapter 3: The Politics of Ecological
Aldershot: Ashgate. Modernisation’. In The New Politics of Pollution, Man-
European Commission (2014) General Union Environment chester: Manchester University Press.
Action Programme to 2020: Living well, within the lim- Wurzel, R., Zito, A. and Jordan, A. (2014) Environmen-
its of our planet, Luxembourg: Publications Office. Also tal Governance in Europe: a Comparative Analysis of
see European Commission webpage, available at http:// New Environmental Policy Instruments, Cheltenham:
ec.europa.eu/environment/newprg/index.htm, accessed Edward Elgar.
April 2015.
282
Chapter 13
A Digital Agenda for Europe

Creating the inclusive
information economy
Getting information off the internet is like taking a drink from a fire hydrant.
Mitchell Kapor, founder of Lotus Corporation and developer of Lotus 1-2-3
■■ appreciate the importance of information and communication technologies for business;

■■ understand the link between information, knowledge and international competitiveness;
■■ identify how and where ICTs have become increasingly prominent across the EU economy;
■■ recognise the form and nature of the EU’s policy towards the creation of the information society;
■■ identify the major policy challenges faced by the EU in creating a socially inclusive information
society.
Many of the actions designed to secure Europe’s value-added created in the European environ-
long-term competitive positioning within the ment has to change. This solution increasingly lies
global economy are linked to the development in enhancing the mental capabilities of the work-
of the information economy. The development force to generate, understand and utilise informa-
of the information economy itself is linked to tion. Furthermore while information represents
the wider use of information and communication the raw material of the economy, longer term
technologies (ICTs) to create value and stimu- competitive strength lies in the ability to turn
late the emergence of new industries and skills. this resource into value-creating knowledge. This
As manufacturing employment shifts towards chapter first discusses the form and nature of
locations where labour inputs are cheaper, so the the information economy, before examining the
283
progress made towards its attainment within the emergence of new business models and strate-
EU as shaped by the Digital Agenda for Europe gies based on new value chains/networks created
and the core pillars prioritised within this policy by increasing information and knowledge flows
framework. across borders. Thus, ICTs have the potential
to raise the competitiveness of a generic range
of industries through raising productivity in all
The information revolution industries and influencing the design, production
and international and distribution of a large number of products and
competitiveness services. It will also facilitate new organisational
forms such as outsourcing and increasingly tight
The trend towards globalisation has increased the linkages between industry and services. Thus, the
salience among developed economies of under- effects of ICTs can offer competitive improve-
taking the wide-scale economic transformation ments across a broad range of industries as the
associated with the development and emergence result of the development of the information
of the information economy. If Europe is to cre- economy as an interface between managerial and
ate a competitive niche in a more intensely com- organisational techniques, a skilled labour force
petitive global economy, then a new competitive and the underpinning technology. The dynamic
paradigm needs to be developed around the nature of the technology, places an imperative
management and utilisation of stocks and flows upon states to constantly upgrade their skills base
of information within and between businesses. and stresses the importance of lifelong learning.
This paradigm creates new demands, new indus- Linked into the development of the information
tries, new opportunities and new challenges. It economy is the need to raise spending on R&D
requires, first, the ability to create a competitive which contributes up to 40 per cent of increases
base in those industries that facilitate such flows in labour productivity.
(such as telecommunications). Second, it needs to Thus, not only are ICTs ubiquitous but they
enable users to handle, process and assimilate this also mirror a deeper source of change that ren-
information into useful knowledge. Third, it must ders information increasingly commercially
offer the opportunity to renew the industrial base salient. Moreover, the falling communication
through stimulating information-intensive and costs associated with the spread of ICTs are
knowledge-rich industries, such as biotechnol- also increasing the commercial impact of glo-
ogy, pharmaceuticals, ICT, etc. Finally, the new balisation. The shift towards more information-
paradigm offers opportunities for ‘old economy’ intensive activity in developed states reflects
industries to create new sources of competitive the fact that these states have limited labour and
advantage based on the increasing knowledge capital and need to seek new ways of increas-
intensity of their products. In Europe’s case, the ing the value of their output. Thus the impact
paradigm needs to be shaped to take advantage of of ICTS is felt not only in all sectors but also
its competitive strengths of a developed education across all functions. This has been compounded
system and of a mature knowledge infrastructure by a sharp decline in the cost of processing of
to generate economic renewal and to create new information.
forms of competitive advantage. Generally, the impact of information upon
The emergence of information intensity with- competitiveness depends upon four ‘permanent’
in ‘older’ and ‘newer’ industries will facilitate the factors, namely:
284
■■ how ICTs reinforce an enterprise’s strategic ■■ eliminating barriers of distance;

vision and assist in effective and efficient deci- ■■ reducing the communication and transaction
sion making; costs in trade.
■■ how the utilisation of ICTs aids the rationalisa-
tion and optimisation of production; A key building block in the development of the
■■ how the application of ICTs promotes increased information society is accessibility to the infor-
reactivity and flexibility of organisations; mation/telecommunication network. By offering
■■ how the use of ICTs stimulates further devel- universal access, these networks enable the antici-
opment of new technology and innovation. pated economic effects to be reached. The basis
of the network is a series of information infra-
The realisation of such competitive benefits structures which have the physical capability to
is driven largely on an enterprise-by-enterprise offer services and applications associated with the
basis in accordance with the desire to master information society across the socio-economic
uncertainty; to substitute a functional-based spectrum. As the network economy develops, so
approach for a product-based approach; to devel- these factors are likely to breed a virtuous cycle
op complementary human resource systems and of integration in both European and global market
to bring forth new and better technologies. places, a process fostered by more mature inter-
Consequently, the information society implies and intra-firm networks.
an increasing interdependency between the pro- Figure 13.1 defines the broad framework
ductivity and flexibility of an economy and the for the development of the information econ-
quality and quantity of the information and com- omy and establishes the context of the market-
munications environment. This trend is linked based actions of policy makers. The key aspects
intensively into the process of globalisation. In are:
general, ICTs facilitate globalisation by:
■■ users: the people and organisations that access
■■ making skills and know-how portable; content via dedicated infrastructures;
■■ facilitating a more rapid response to competi- ■■ infrastructures: the technical medium through
tive pressures; which the user accesses content;
Users Infrastructure Contents

Citizens Intangible
Companies Tangible
Public Terminals Networks Services Services
Administrations Infomediation
Environment
(Economy, legislation, culture, training, promotion, attitudes)
Figure 13.1 The framework for the development of the information economy
285
■■ environment: the industry and policy factors Generally, only around 10 per cent of invest-
that drive the development of the information ment in ICTs is in the actual technology itself.
economy. The vast majority of investment is made up of
new products, new marketing and training. Thus,
This framework highlights the interdepend- if businesses can mitigate some of these costs
ent nature of the development of the informa- through having a ready trained workforce able to
tion economy. That is, the interaction of users and adapt to new technologies, the burden on invest-
industry with policy makers that facilitate this ment is reduced. This may stimulate new invest-
market-led development provides a framework ment by existing firms and from FDI. In addition,
with which to analyse the development of the the widespread use of this technology by many
information economy. enterprises can reduce costs by placing increased
In the EU-27 in 2013, the ICT sector included pressure upon customers to undertake some of
nearly 800,000 businesses employing nearly six mil- the processes themselves. However, there is said
lion and generating over half a billion euros of value- to be a productivity paradox within the devel-
added. Although this only comprised 4.3 per cent of opment of the information economy: that is,
the workforce, it constituted 8.2 per cent of value- despite the claims made by its advocates, there
added, indicating relatively high relative produc- is limited evidence of ICTs offering any tangible
tivity in the EU’s ICT sector. Within these sectors, improvement to the commercial performance of
telecommunications and computer activities gener- business.
ated over three-quarters of this value-added, with
the latter being the biggest contributor in terms of
employment. The states who were the most spe- The state of the European
cialised in ICTs were Sweden, Finland, the UK and digital economy
Luxembourg with each having more than 6 per cent
of its non-financial sector employed in this area.The The basis for the development of the European
highest share of ICT value-added was in the UK. digital economy has been change within the tele
Despite these figures, the EU lags behind its communications sector. The progressive liberali-
main competitors in this aspect of the modern sation of the sector has stimulated a large degree
global economy, especially given that many of of innovation. As technology and competition
the leaders in ICT sectors are American, Japa- have evolved, so value creation has shifted from
nese and, increasingly, Chinese companies. Of the the core backbone system to the edge of the net-
world’s top 15 ICT companies, 8 are American, work towards the increased variety of services
4 are Japanese and 2 are Korean. The EU has two catered for by the massive expansion in capacity.
software companies – Germany’s Social Action In short, the core backbone has been commod-
Programme (SAP) (see Case Study 13.1) and itised with the result that competition between
Spain’s Amadeus – in the global top ten software providers is mainly through price. In terms of tel-
companies – a list dominated by US companies. ecommunications services, despite predictions to
The leading internet companies are dominated by the contrary, the main driver of traffic is still voice
US companies which occupy seven of the top ten services which comprise 58 per cent of the total
positions. These sectors are not only important traffic. However, the main operators are strug-
as barometers of structural shift in the European gling to reverse the trend of falling revenue per
economy but also as core drivers of R&D. user as prices fall and competition increases.
286
A major trend within the EU communications favour of mobile. Nonetheless, mobile opera-
sector has been the rise in mobile internet access tors have been squeezed as value shifts away from
which doubled in the two years to 2013. This is basic services towards more advanced services as
expected to rise tenfold over the five years to 2015, smartphone penetration continues.
reflecting a global trend towards the increased With regards to internet skills and usage, it is
intensity of usage of this service. This should not estimated that 70 per cent of Europeans access
mask the fact that the EU still lags behind other the internet at least once a week with daily usage
states in broadband access and penetration. In standing at almost two-thirds of the population.
part, this has been driven by the sharp downturn in However the increase in daily usage has slowed
the EU economy. Overall, the EU represents less down over the past few years. Moreover, regular
than a one-fifth of global mobile traffic – this is internet access by those deemed ‘disadvantaged’
dwarfed by North American and Asian-Pacific traf- is merely 54 per cent. These trends also reflect
fic. Competition has also intensified for operators a broad north–south split between EU states
as convergence between broadcasting, content and although a process of catch up is underway. There
telecommunications continues. The response to are evident barriers to this process arising from
this by the main operators has been to push aggres- lack of skills; a feeling that the internet is not
sively for investment in broadband. needed; and costs and non-domestic accessibility.
A core benchmark of the onset of the European An estimated 67 per cent of EU citizens have some
digital economy is the spread of broadband.While level of computer skills with 26 per cent having
basic broadband is nearly universal, access to the high level skills, 26 per cent medium skills and 16
next generation of service is available to just over per cent low skills. This implies that nearly half of
half of EU homes. Fixed broadband has reached Europe’s population have few or no internet skills.
just over a quarter of households with another It is evident that value from the internet is directly
quarter having no access to the internet at all. related to the skills available. This will be a key
Moreover, ultra-fast broadband technologies cur- driver behind the spread of more advanced servic-
rently cover only about 2 per cent of EU homes. es, most notably the spread of e-government and
With regards to mobile fast internet access, the e-commerce.The use of e-government services by
penetration rate is also near ubiquity with fourth the EU population stood at around 40 per cent in
generation mobile technology having a penetra- 2012 and e-commerce at 45 per cent.
tion rate of just over a quarter. There does seem
to be a north–south split in these trends with the
penetration rate in the former heavily outstrip- A Digital Agenda for
ping its reach in the latter. Europe (DAE)

An area where there has been success in the
European information economy is in the spread The development of the information economy is
of mobile phones. By 2012, mobile penetration a key priority of the Europe 2020 agenda: that is,
was 130 per cent with all member states demon- the increased usage of ICTs throughout the socio-
strating universal penetration. Voice remains the economic spectrum is targeted as a key driver of
killer application for mobiles and a watershed was economic growth. The EU is looking to emulate
reached in 2008 when voice on mobile surpassed the experience of the US which saw growth closely
that on fixed line for the first time: the relative linked to the rapid evolution of the information
traffic currently has a 56/44 per cent split in economy. This underlines the need to judge the
287
Case Study 13.1

SAP: a European information economy champion
European information economy champions are a rare breed. However, SAP, a German software com-
pany, has made a global impact. Formed in 1972 out of IBM’s German operations, SAP has formed a
niche and has become a global leader in enterprise application software. It employs 42,000 people in
50 countries and serves over 260,000 customers in 190 countries. Over 80 per cent of these custom-
ers are SMEs even though SAP serves 86 per cent of the Forbes Global Fortune 500. By 2014, SAP
had become the world’s third biggest software company behind Microsoft and Oracle, a process aided
by an aggressive acquisition strategy through which, since 1991, it has acquired nearly 60 different
companies. However, compared to rivals such as Oracle, the majority of its growth has been organic.
Since 2007, the company has been trying to put distance between itself and its German heritage,
positioning itself as a multi-cultural global player – an evolution in strategy that seeks to position the
company ever closer to its core SME market. This implies a radical re-invention of the company from
technology, distribution channels, marketing through to consulting. In short, its entire business model
is undergoing a radical overhaul to cope with a market that does not want solutions but reliable, easy-
to-use, inexpensive products. Thus, in practice, SAP is adjusting to a world of mass customisation and
is moving towards an adjustable, uniform platform that allows users to develop their own programs.
This change in strategy represents a big shift for the company. Conventionally, its revenue engine
was the supply of corporate software packages sold under licence and which were modified by SAP.
However, such adaptations could be very protracted. Increasingly the company is changing this revenue
model into one based on on-demand leasing, not purchasing, where the software is managed and con-
trolled online. The aim is to move away from developing excessively complex products towards mass
market solutions. The result is an aggressive growth strategy according to which SAP is striving to
increase its customer base. In 2007, its customer base was 40,000. In the seven years since the launch
of the new strategy, this figure has grown more than sixfold. As part of the change process, SAP relo-
cated programming to India, away from its German base. Moreover, it has devolved other activities to
locations where the greatest competency is found such as the US, Israel and China. In short, SAP has
evolved into a meta-national with a spatially dispersed process of value creation.
Case question
What do you understand by the term ‘meta-national’? What does it indicate about the nature of
value creation?
development of the information economy in both the latest in the long line of initiatives from the EU
absolute and relative terms. The majority of this to promote structural change within the EU via the
section addresses the development of the EU infor- promotion of the information economy.
mation economy in absolute terms, addressing its As a means of providing focus to the latest
relative performance where necessary. The DAE is initiatives, the DAE set out key performance
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indicators as a means of judging progress towards ■■ telecommunication services: these need to be use-
the completion of the goals. These targets refer to able and accessible while possessing uniform
ensuring universal access to high speed telecom- functionality and availability across space;
munication infrastructure by 2020, with more EU ■■ applications: where relevant, these should
consumers (a target of 50 per cent) buying online exhibit standard format and functionality and
by 2020 and 20 per cent of customers engaging in be readily transferable;
cross-border online commerce by 2015. In addi- ■■ users: similar levels of awareness and familiarity
tion, the DAE targets SMEs to ensure that a third with technology.
are undertaking online transactions by 2015. The
DAE also seeks to continue progress towards The European model of the information soci-
eradicating inconsistencies in cross-border pric- ety is based on a strong ethos of social solidar-
ing and to continue with the promotion of social ity. The key preoccupation of this model is the
and economic inclusion through achieving wide- creation of a socially inclusive information society
spread usage among all groups. This is to be partly which avoids cultural and economic isolationism.
driven by the promotion of particular technol- In this context, the EU’s approach is to foster the
ogy applications, most notably e-government and creation of a knowledge-based society by focus-
other public services particularly where there is ing on market failures in the development of
a clutch of low density users or where there is the emerging information economy. This means
a strong cross-border element in delivery. Along- creating conditions for supply and, where neces-
side these aims are cross-cutting themes such as sary, stimulating demand to meet broadly defined
the goal of doubling R&D spending by 2020 and socio-economic objectives. Policy towards the
of reducing energy use through the usage of ICTs. development of the information society within
A core building block of the information econ- the EU is demand-led to enable it to focus on job
omy is the establishment of a common informa- creation and to close existing disparities in digi-
tion area. This has its parallel in the SEM. In this tal usage across the EU. The attainment of these
case, free mobility is about information rather objectives is set within a market-driven frame-
than goods, services and the traditional factors of work. This framework is based on the transna-
production. Increasingly, information needs to be tional environment as the most effective arena in
as mobile as any other commercial resource. This which these changes can be realised because:
implies that the following are interconnected,
interoperable and thus can move easily from one ■■ national markets are of insufficient size to real-
economic/social situation to another: ise the needed investment in advanced ICTs;
■■ many technologies are aimed at niche markets

■■ information: this needs to be presented in a which are too small in any one state;
standard (that is, digital) format and be readily ■■ the speed and ability of these new services to
understood; offer multi-media could allow them to break
■■ hardware, software and components (for example through linguistic barriers.
PCs): these need to be readily transferable and
interoperable between economies; Within the context of the transnational mar-
■■ physical infrastructure: developed in line ket place, public authorities throughout the EU
with common standards that facilitate are playing a largely market-creating function,
interconnection; seeking to push the market for information
289
society services, applications and technologies This highlights the public sector’s role as a cata-
towards a ‘critical mass’ and an environment in lyst, rather than as a primary driver in efforts to
which: develop the information society. A lack of financial
power means that much public sector action seeks
■■ telecommunications and other communica- to bring together partners with a mutual interest
tions technology are affordable; in developing projects that actively contribute to
■■ user demands are adequately expressed; the development of the information society. Policy
■■ there is adequate awareness of ICTs in all parts actions are set within a framework of creating a
of the European economy; mature information market. This operates on both
■■ education and training systems readily absorb the supply and demand side as well as develop-
the implications and dynamics of ICTs; ing measures that cut across these market drivers
■■ new information products emerge that are (see Figure 13.2). The broad strategy that has been
useful, useable and affordable; adopted is reflected in the following seven pillars:
■■ supply conditions improve to the extent that
greater economies are available in the produc-
tion and supply of ICTs; Pillar I: Digital Single Market
■■ there are commercial incentives to supply all
parts of the European socio-economic body; The notion of the Digital Single Market (DSM)
■■ state involvement is largely redundant. is to enable free exchange of information across
Immature network economy

(low usage of network)
Demand side
Absence of economies of scale

Lack of incentive
keeps access price high
for others to connect
and quantity/quality
to network
of access low
Supply side remains Lower levels of demand

under-developed Market lacks critical mass
Supply side
Inadequate incentive to supply

Necessary network developments,
innovation and change remains limited
Figure 13.2 The strategic policy framework for the development of the EU information economy
290
borders by securing both the hard and soft infra- obvious manifestation in the content segment
structure necessary to have free integration and of the market which remains fragmented with a
commerce across the EU. The aim is to not only generic absence of any pan-European platform.
to promote digital markets and drive scale with- This is not simply an issue of language and prefer-
in the online sectors but also to support broader ences but also one of diverse licensing regimes.
themes within the single market by using the In other areas, there has been agreement between
freer information flows to enable labour mar- states on IPR and on harmonising prices through
ket mobility and product market interactions. In removing anomalies from international roaming
short, the logic of the DSM is in enabling infor- costs. The IPR directive aims to harmonise licens-
mation flows to support market integration. At ing of rights across the EU. The Commission has
the core of this DSM is a belief in a free market also been working on the content segment to pro-
for information and communication technolo- mote cross-border transmission and to facilitate
gies and services based on market opening and ease of access by small users to these markets. To
maturity. This is based on a series of measures to: aid consumer confidence, the EU has been devel-
oping an integrated payments system and is estab-
■■ build customer trust in online systems through lishing a basic set of rights for online activity. In
consistent enforcement to deter criminal support of this activity, the EU is pushing for the
activities; creation of EU-wide online trust marks.
■■ understand the main barriers to large-scale EU members have a large trade deficit in ICTs
transactions; and past failures in targeting ICT champions
■■ establish a minimum set of consumer rights; (notably, Bull in France and Olivetti in Italy) have
■■ enable consumers to understand where and pushed the EU into a more market-led direction.
how they are protected; Initial action towards strengthening the European
■■ develop the necessary standards; ICT industry has focused on attaining a critical
■■ harmonise taxes; mass for information society-related technolo-
■■ use the system to simplify administration; gies and services within Europe. The market for
■■ facilitate markets for digital goods. information is being developed within the context
of the convergence of the telecommunications,
The programme for the DSM consists of computing and ‘content’ (for example, the broad-
around 30 measures across a diverse array of casting and software industries) sectors as the
issues such as licensing, the protection of intel- respective markets and technology used by each
lectual property rights (IPR), data usage, content sector start to overlap. However the development
issues, consumer rights and taxation. The under- of an information industry not only requires more
lying logic of these measures is market facilita- commercial freedom but also greater autonomy
tion by removing inconsistencies across space and from other constraining factors such as state own-
by seeking to militate against risk in electronic ership and its implications for resource availability.
market spaces.
Within the EU, there is still a home bias
within electronic markets. By 2012, 41 per cent Pillar II: interoperability and standards
of EU citizens engaged in e-commerce at the
national level whereas only 11 per cent engaged While the inconsistencies that existed between
in e-commerce across borders. This has its most national infrastructure systems and their adopted
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Case Study 13.2

EU spectrum policy
Wireless technologies are increasingly ubiquitous, particularly following the morphing of the routine
mobile phone into the smartphone and the tablet computer. This trend has been compounded by in-
creased usage of Wi-Fi connections in the home and office. By 2014, it was estimated that the services
dependent upon the availability of radio spectrum were worth at least €20 bn annually within the EU.
This figure is only likely to increase as more sectors connect or automate processes across a number
of locations. It has also been estimated that global data traffic will increase by 26 per cent by the end
of 2015 with over seven billion devices connected to the internet. In addition, wireless technologies
are of increased salience in the delivery of public services and in areas such as scientific services and
satellite communications. A key challenge is to ensure that these rising demands upon the spectrum are
not constrained by space limitations and by the high cost of reallocating spectrum to new users. There
is concern that unless Europe learns to use its spectrum more efficiently and with a higher degree of
innovation, this resource will not be able to cope.
The increased importance of these technologies led – in 2012 – to the EU’s Radio Spectrum
Policy to define key objectives and principles for creating an internal market for radio spectrum.
Within the EU, members coordinate the management of their wireless spectrum for the purposes of
enabling a single market for wireless services to promote longer term innovation in this sector and for
those impacted by cross-border wireless technologies. This measure is directly aligned with the aims
and objectives of the Europe 2020 programme (see Chapter 1), especially regarding the elimination
of the socio-economic divisions created by unequal access to digital technologies. Coordination is
further rationalised to ensure the efficient use of this spectrum to allow interoperability of the in-
frastructure and services. This is done with an especial focus on the needs of the fourth generation
high speed wireless services as identified under the Europe 2020 programme but is also concurrent
with other policy areas such as the ‘Single European Sky’ (see Chapter 10) and ‘Maritime and Land
Transport’.
The EU regulatory framework seeks to govern through generic rules rather than through individual
licences which are only used exceptionally. The shared use of spectrum lies at the centre of this strategy
and refers to cases where a number of independent agents or devices are allowed access to the same
spectrum under pre-specified conditions. This is seen as a logical response to the growing demand for
spectrum as usage grows in areas such as wireless broadband, a wider range of applications and new
and innovative technologies As these advance, not only efficient usage but also re-usage are promoted.
There are four main components to the EU’s Radio Spectrum Policy:
■■ identification of needs for spectrum coordination;

■■ promotion of the harmonisation of spectrum usage;
■■ establishment of policy priorities in cases where usage conflict emerges;
■■ setting the regulatory environment for access to the radio spectrum.
292
Radio spectrums are managed by national administrations which retain primary responsibility for
them but the policy seeks a common approach to cross-border issues. This is to ensure that radio spectrum
between nations does not interfere with each other as spectrum is a resource in high demand and the de-
vices that use it easily cross borders. As such, a core aim is to modernise radio spectrum management to
ensure the EU generates substantial economic gain from this asset. To this end, the policy has three goals:
1 Harmonisation: to set equivalent network conditions across member states to facilitate

interoperability and scale efficiencies for wireless equipment.
2 Efficiency: to secure more efficient use of the spectrum through improving knowledge of its usage.
This has proved especially salient in the increased demand for wireless broadband to ensure that
what spectrum is available is used to maximum effect. This is supported by efforts in shared usage
by promising innovation in usage.
3 Availability: to provide better information regarding current usage of the spectrum and its future
evolution. At the core of this is the spectrum inventory whereby the Commission can understand
types of spectrum use on the pretext of understanding what is available and how it can be used
more efficiently.
Case question
To what extent can a common policy on wireless technology be justified in terms of the EU’s stance
on subsidiarity?
technologies have been largely overcome as sys- is manifested through the inability to get states
tems have been renewed and upgraded, there to agree on licence interoperability and on the
is nonetheless a sustained need to ensure that full interoperability of content.
new inconsistencies do not emerge and that the The list of actions within this pillar is rela-
standards process (both internal and external to tively limited, containing just seven actions.
the EU) works in the interests of promoting the Part of the strategy is to be proactive to reform
digital economy. This has had its most evident decision-making on standards to ensure it is flexi-
example in the interoperability and interconnec- ble and adaptive to the changing complexity of the
tion enabled through the spread of the internet. information system. In doing so, the rules seek to
As the internet has evolved, so the number of ensure that new standards do not reinforce pre-
devices has grown. In the emerging ‘internet of existing barriers and do not work against other
things’ there is scope for new inconsistencies to actions such as the protection of IPR and a com-
emerge within the systems as the devices con- petitive information market. This highlights that
nected to the system expand. Beyond the tech- many of the actions, especially within the adopted
nological level, there are still barriers not only ‘European Interoperability Framework’, seek to
to the free mobility of information but also to steer the development of the European informa-
the mobility of operators. In the latter case, this tion industry but not to determine its trajectory.
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Pillar III: trust and security as threats co-evolve with the capability of systems
to remedy them. The task of security and trust is
As later sections highlight, a common theme with- not only one for the EU but is also a multi-scalar
in national information infrastructure strategies issue driven by individual, corporate and national
is the issue of trust and security: as information responsibility. These themes are linked into the
infrastructures become embedded within other protection of critical infrastructure systems at the
systems and as more of the individual and corpo- level of the nation state.
rate entities switch to online systems (such as the
cloud), so there is a growing concern that users
can trust the system – a core pre-requisite of the Pillar IV: fast and ultra-
maturing of electronic commerce across the EU. fast internet access
Only 12 per cent of EU users feel safe and secure
in an online environment, especially when mak- The value of the internet as a socio-economic
ing transactions. The rise of malware and other resource is directly linked to its speed. The speed-
online issues risk undermining faith in the system. ier the system, the more the system can carry.The
Nearly 40 per cent of EU internet users have had core aim of this pillar is to address issues of mar-
to change behaviour due to threats to their cyber- ket failure in so far as broadband internet tech-
security with 60 per cent of these saying that this nology is unable to penetrate universally across
had had a significant impact on their activities. In Europe’s socio-economic structures. As such – as
addition, only around a quarter of EU businesses noted above – the EU has set ambitious targets to
have a security policy (EC, 2012). allow the spread of the internet across EU terri-
This pillar is an amalgam of 17 measures. Many tory. This necessitates strong public intervention
of these measures relate to the threats that emerge to spread these technologies beyond the densely
online from negative content, cyber-crime and wired areas in the EU’s core geographical loca-
cyber-attacks. Given the proximity between secu- tions. The theme of EU actions is to lower the
rity and national sovereignty, much of the work cost of deployment to ensure that faster roll out
concerns establishing the framework which ena- is an attractive value proposition for commercial
bles cooperation between states on these areas investment. In more remote locations, various
of mutual interest to occur. The key document methods of deployment are to be addressed (i.e.
within the action line is the EU’s cyber-security wireless as well as landline). Linked to this is the
strategy which aims to overcome fragmentation reform of the EU’s spectrum policy to allow it
in the European cyber-security system. Among to be flexible in the face of these challenges (see
other things, this compels states to develop a Case Study 13.2).

cyber-security strategy and create forums for In order to enable this process and to connect
cooperation. remote regions, in 2013 the EU agreed a Con-
The issue for security and trust has been necting Europe Facility. However the austerity
heightened by the fact that the EU is targeting context of the 2013 budget negotiations resulted
public services for key killer applications to drive in funding reductions from over €9 bn to €1 bn
the development of the information economy for 2014–20. Inevitably, such a severe reduction
throughout the EU’s socio-economic structures, undermined the efficacy of direct action by the
most notably in e-banking and e-health. This EU. As a consequence, the EU has been less strict
problem of cyber-security is only going to grow about state aid offered by governments. This pillar
294
consists of 15 actions, at the heart of which is the of excellence and integrated projects. Both of
Communication on Broadband which sets out com- these were developed to foster collaborative
mon rules to which EU and national policies are research and to tie the research priorities into
expected to adhere as a means of meeting the core the Lisbon Agenda. Thus, the need to develop
policy objectives. a competitive ICT sector was an influence over
the direction of funds within the research pro-
gramme. The objective of the research initiative is
Pillar V: research and innovation to secure Europe a lead within critical technolo-
gies that underpin the development of the infor-
Information society technologies are key planks of mation economy globally. To this end, the EU is
the EU’s R&D programme and form an important focusing on a number of key building blocks nota-
part of its strategy to raise R&D spend to an aver- bly miniaturisation, broadband communications
age of 3 per cent of GDP.This is based on a percep- infrastructures and the user friendly nature of the
tion that the EU continues to lag behind its main technology offered.
rivals in R&D and that there are few – if any – EU
companies at the forefront of the evolving infor-
mation economy. This is a concern given that the Pillar VI: enhancing digital
ICT sectors contribute a significant proportion of literacy, skills and inclusion
the value-added created within the EU. To the EU,
this failure is caused by a mixture of fragmentation, The rhetoric surrounding the evolving informa-
duplication of effort and a slow uptake of inno- tion economy in the EU is about empowerment,
vations. In 2010, the Commission presented its freedom and the need for an inclusive process of
Innovation Union programmes to drive these R&D change. By 2014, nearly 30 per cent of Europe-
capabilities. ans had never used the internet: many of these
Support for the development of ICTs has been are over 65 years of age, on low incomes, unem-
a recurrent theme within successive EU R&D ployed, and/or less educated. This entrenches
programmes. However, there has been limited the perception of a digital divide across the EU’s
success in contributing to the development of the socio-economic strata. To counteract this divide
information society, given: (or perception thereof), the EU is pushing for
multi-stakeholder partnerships to push digital
■■ the inadequate resources directed to the R&D literacy across these excluded or under-utilising
effort; groups. Central to this agenda is the promotion of
■■ Europe’s relatively poor commitment to R&D online public services to create a more ingrained
compared to its major competitors; culture of ICT usage and to create communal
■■ the poor coordination of R&D at various points of accessible ICT.
levels; Measures integral to this programme exist
■■ the inability to convert scientific and techno- alongside those implemented at the level of the
logical achievements into industrial and com- member state. The European Commission has set
mercial successes. the objective of making ‘every European digital’
by 2015. To this end, it has pushed for improved
Policy has sought to overcome fragmentation in accessibility of core public service websites
research through two new instruments – networks including standardised accessibility features. This
295
is across areas such as social services and is also transport and on the establishment of cooperation
being extended to education where it is pushing between national healthcare systems. In addition,
for IT literacy programmes in the classroom. there have also been efforts to use ICTs more effi-
ciently in cultural heritage.
The aim of these policies is to work pas-
Pillar VII: ICT-enabled sively on both demand and supply sides of the
benefits for EU society market to generate a virtuous cycle of growth
in the usage and spread of ICTs (see Figure
Beyond the issues of social exclusion noted above, 13.2). To meet this objective, all EU states
the EU seeks to promote ICT as a core facilita- drew up national broadband plans to connect
tor of social change linked to broader long-term all public administrations and to remove any
issues of change created by themes such as an age- digital divide. Demand side initiatives includ-
ing population and the consequences of climate ed financial incentives to stimulate usage in
change. The objective is to use ICTs proactively under-served segments, increased usage via the
to militate against the consequences or effects public sector and the connecting of both pub-
of these changes. As part of the commitment to lic administrations and SMEs to the internet.
reduce greenhouse gas emissions by 2020, the While progress has been made (notably in areas
Commission seeks to encourage the use of ICTs such as the deployment of government servic-
to promote activities that allow for the more effi- es, e-health and e-learning), concerns remain
cient use of resources. This can be through the over broadband deployment, especially in less
promotion of technologies such as intelligent favoured regions, and about the roadblocks
transport systems. provided by incumbents. Inevitably these con-
The aim is to build cooperative frameworks cerns are shaped by the international context in
between the ICT industry and other sectors and which they occur. While the universal informa-
public bodies to promote the roll out of ICT-based tion society is driven in part by social issues, it
solutions (such as smart meters that allow the is overwhelmingly a process of strategic change
accurate monitoring of energy usage) that allow for to help secure the competitive position of the
these broader issues to be addressed. The empha- European economy. All of the pillars within
sis will not only be on the major emitting sectors the DAE have an external angle as many of them
but also on improving energy efficiency across all can only be realised through international coop-
areas of human activity. Alongside this, the aim is eration. This has been notable not only in issues
to promote e-health systems to enable health ser- of standards and interoperability but also in
vices to cope with the demands placed on them by terms of cyber-security.

an ageing population.This will involve novel forms
of healthcare delivery and patient diagnosis.
By 2013, there had been a plethora of ini- Challenges to the
tiatives emanating from the Commission on this creation of the European
theme. The 2012 Energy Efficiency Directive has Information Society
been adopted, creating an emphasis on the public
sector to adopt more energy efficiency improve- The main focus of the DAE is the creation of a
ments. There have also been initiatives – through ubiquitous and integrated information economy
the EU’s research framework – on intelligent able to secure the free flow of information across
296
borders in a non-discriminatory manner and protection law. For these and other reasons, most
which interconnects the European system into ISPs keep these practices opaque.
the global network of networks. The creation of There are no clear rules on net neutrality at
this interoperable, seamless system is being chal- the EU level though some member states have
lenged through three channels. implemented rules at the national level. The
result is that an integrated market is limited by
the inconsistency across space. As part of the
Net neutrality proposal to further evolve the single market in
telecoms, the EU aims to rectify this problem by
A core function of internet service provid- seeking a guarantee on net neutrality. The regu-
ers (ISPs) is to engage in traffic management to latory framework adopted since 2009 requires
protect the security and integrity of their infra- operators to promote access to those services and
structure. ISPs also serve to limit the transmis- applications of choice by users. This principle sets
sions of unwanted communications to end users; the basic point of safeguarding the basic freedoms
to respond to legislative decisions; and to deliver for internet users. Moreover, the new regulations
high bandwidth, time-sensitive services to ensure will set minimum standards for national authori-
a higher quality service. In fulfilling these func- ties if there should be a problem.
tions, there is a need to balance the quality of ser-
vice issues inherent within the framework of an
open internet with the desire of ISPs to evolve The rise of the balkanisation
their business models in a manner that is discrimi- of the internet
natory in terms of traffic either by discriminat-
ing by type of user and/or bandwidth used. It is One of the attractions of the internet as a com-
estimated by the Commission that over one-fifth mercial tool is its virtual seamlessness across
of fixed internet users and 36 per cent of mobile borders. While cyber space is considered as part
internet users (some 200 million) are affected by of the global commons, it is by its nature very
restrictions. territorial as its core resources have a physical
The blocking or throttling of services (through presence within the borders of states. There have
the intended slowing down of the speed of trans- been trends by states to seek to reassert control
mission) can be motivated by a number of driv- over the parts of the network within their bor-
ers such as a desire to weaken the competition; ders as a means of controlling the flows within it.
to limit innovation; or to degrade the quality of While the EU remains a relatively open system,
the service offered. This type of traffic manage- it is impacted by the decisions of states elsewhere
ment also raises concerns about privacy as these within the global economy. The result has been a
discriminatory practices rely on the capability of gradual ‘balkanisation’ of the internet as govern-
the ISP to inspect the traffic flow and conflict with ments seek to reassert control over this network.
the principles of data minimisation (that is, mini- The fear is that such actions could turn the open
mal access to personal and identification material) communication platform that is the internet into
and proportionality (that is, that the action taken a series of tightly controlled national networks.
should not be over and above what is necessary Over the past decade or so, states have clamped
to achieve the objectives). To contravene either of down on the free mobility of information and
these two principles is to go against the EU’s data have, in other instances, been turning the open
297
system against its users to monitor flows. This the victim of online fraud and is compounded by
most notable example of this is US actions in the feeling that regulators are always reactive to
relation to the use of internet surveillance to spy criminals who are more advanced in the use of
on foreign nationals. The impact – according to these technologies than the public bodies set to
some – is that countries states will react to pro- monitor or check their actions. While not going
tect their citizens from such intrusion by ring- against the consensus that the private sector
fencing their own internet and thereby limit the should lead the development of the internet, the
free flow of information. EU has sought to define core principles of cyber-
The distrust that has resulted from this and security. These are based on:
other episodes could potentially undermine the
work by countries or states to generate confi- ■■ uniformity: that is, laws applied in offline envi-
dence in the internet in their populations. This ronments should also apply online;
cynicism is compounded by the domination of the ■■ the need for protection of basic rights and
US of the internet in terms of the technologies freedoms;
that underpin it. The US has also been the domi- ■■ access for all as a core goal;
nant force over internet governance and stand- ■■ democratic and polycentric governance;
ardisation processes. This suited US interests but ■■ shared responsibility for security.
has backfired with the monitoring of this traffic.
The EU saw this rising suspicion of the US as an Thus the notion of security – within the con-
opportunity for other states to make headway in text set by the EU – is based on balance between
the markets for key internet technologies. There an open internet and one that is secure. The
is a fear that the longer term reaction of European responsibility for this overwhelmingly lies within
states will be to limit flows of information as they the remit of individual member states but the EU
seek to reassert control over their citizens’ data, has a role in ensuring that these actions are both
especially within the context set by the EU’s data coordinated and do not run counter to an open
protection regulation. European system. To this end, the EU has stressed
five strategic priorities:
Cyber-security issues 1 Achieving cyber-resilience: this is based on public

and private bodies establishing the competenc-
An important issue that has emerged with the es to cooperate, especially where the cyber
transfer of increased activity to the internet has threat crosses domains. This requires a set of
been the issue of cyber-security. This has been actions such as establishing a minimum set of
accompanied by a fear that the response by both requirements at the national level; the sharing
states and corporate entities will be to impose of information and the enhanced readiness of
stricter barriers to the free mobility of informa- the relevant bodies.This reflects a need to raise
tion between EU states and the rest of the global awareness of the issue across socio-economic
information economy. Alleviating both actual and strata.
perceptual fears about cyber-security is central 2 Reducing cyber-crime: cyber-crime tends to be
to the creation of a single European information a high profit, low risk activity and the EU has
economy. This perception has been reinforced by sought enabling strategies to counteract cyber-
the fact that nearly 10 per cent of users have been crime activity through establishing best practice
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Case Study 13.3

The EU and Google
In November 2010, the European Commission opened an antitrust investigation into allegations that
Google was abusing its dominant position in online search in violation of EU competition rules. The
investigation was launched after complaints from service providers who claimed that the company was
actively discriminating against them by favouring its own unpaid and sponsored search results. When
undertaking a search, the Google engine provides two types of results, the first are unpaid results (so-
called natural results) and the second are third party advertisements (which are paid or sponsored
links). The concern was that Google was abusing its position by lowering the ranking of unpaid results
for competing services to bolster its own or sponsored services. The effect was to shut out competitors.
In addition, it was also alleged that Google had lowered the quality score for competing search services
thereby limiting traffic flows onto these sites and that it was imposing exclusivity obligations on adver-
tising partners, thereby preventing them from placing advertisements on their websites with the aim of
shutting out rival search sites.
The basis for the complaint was the near monopoly that Google has over the search market. Indeed,
it is arguable that Google had become more powerful than Microsoft at the point where an investiga-
tion was triggered into Microsoft’s control over the desktop. Examined within the context of the EU,
there is little doubt that Google is dominant as seen in Figure 13.3. For businesses, internet search
represents an ultra-effective form of advertising as the engine, via its embedded software, knows exactly
what is being looked for and can therefore direct users to the right place. As such, given its domination
of search, it is no surprise that Google also dominates online advertising revenue from which it earns
more than four times as much as Facebook, its nearest rival. This is also matched in mobile advertising
where – despite the fact that Facebook is growing faster – Google remains way out in front with over
2.34 1.62
2.67
Google
Bing
Yahoo
92.68 Other
Figure 13.3 European search market share, October 2014 (%)
299
50 per cent of the market compared to just over 22 per cent for Facebook as a result of Google’s
android mobile operating system controlling nearly three-quarters of Europe’s five biggest markets.
Google Chrome has nearly 50 per cent of the EU browser market share.
In February 2014, Google reached an agreement with the European Commission at the third at-
tempt. Previous resolutions had centred on the manner with which Google presented its search results.
In the two earlier examples, Google had agreed to change the presentation of results on UK, German
and French sites (but not google.com) and undertook to test how this would affect searches away from
Google. In both cases, it was found that the re-directions did not having any substantive effect. In Oc-
tober 2013, a second attempt was made with Google inserting links to three rival shopping sites below
its own – again this still favoured Google. The third attempt, which has been agreed by the Commission,
is more marked with Google presenting specialised searches with links to rivals alongside its own and
in the same format. For Google, this means that its software engineers will have to write different code
for different markets. A trustee will be appointed to oversee the agreement for five years.
This debate was ratcheted up through the decision of the EP to seek the break-up of Google. While
this decision was largely symbolic, it does reflect a resilient fear that the power of Google is not going
to diminish. The decision also reflects a desire by the EP to convince the Commission that it needs to
regulate core internet platforms to allow European firms to compete effectively with Google and other
such companies. There is a desire to make the search engine a ‘neutral platform’ as a means of safe-
guarding non-discrimination within its eco-system. However the US is becoming increasingly concerned
that Google is being targeted for political reasons and there are threats of retaliatory action should
these issues mount.
On a broader level, there is a discourse on the validity of actions to break up monopolies. While it
is undeniable that Google is dominant; whether it abuses that position is another issue. Evidently it is
not in the same class of abuse as that undertaken by Microsoft which explicitly made it its mission to
‘kill’ rivals. Indeed many of the facets which its competitors hate about Google are actually beneficial
to the consumer, especially time-saving devices such as offering maps, etc. In addition, while advertisers
have to pay, users do get the service for nothing. Moreover when looking at the internet, it is apparent
that barriers to entry are low; that there is limited lock in for consumers and that in an online environ-
ment, history tells us that dominance rarely lasts a long time. This neo-liberal argument suggests that
monopolies are not always and everywhere a bad thing as the potential for competition can exist and
there can be benefits for users, even in a near monopoly situation.
Case questions
1 To what extent can Google be accused of an abuse of a dominant position?
2 Is the break-up of Google justified?
300
for legislation and the most effective methods the spread of these principles across the global
for combating cyber-crime. In these cases, the economy through working with the range of
EU seeks to operate as a coordinator across the bodies that are seeking to define global norms
system to ensure inconsistencies do not emerge. within cyberspace.
3 Developing a cyber-defence policy: once again,
Commission actions focus on improving coop-
eration to avoid the duplication of effort, espe- Conclusion
cially in areas such as R&D and the resilience
of government structures. For over two decades, the transformation of the
4 Establishment of a technological and innovation com- European economy towards a universal infor-
petence within the realms of cyber-security: anoth- mation economy has been a key strategic prior-
er part of the strategy is to turn the need for ity. The hype surrounding the dot com bubble
security into a competence that can aid the has dissipated but core questions concerning
competitive position of the EU through both Europe’s position in the information society
market-leading technologies and the confidence remain unanswered. The market for information
that comes with the use of such technologies. A products remains underdeveloped with American
core building block in the process of creation of and Japanese businesses continuing to dominate
a single market in cyber-security products and the evolving global information economy. The
programmes is to foster R&D in these products. Digital Agenda for Europe is the latest in a long
5 Policy coherence across the EU while reinforcing line of initiatives that have attempted to kick-start
core values: the final priority is to encourage Europe’s information economy.
Key points
■■ The creation of the information society is key to the future competitive positioning of the EU.
■■ To date, progress towards the development of the information society in Europe has been mixed
as the EU lags behind the US and Japan in key segments.
■■ Policy has sought to overcome these lags through research, deployment and market development.
■■ Despite these policy actions, the EU still faces evident problems in the creation of the
information society.
Activities
1 As a group, identify the core components of business models within the information economy.
2 Identify a European information economy champion (other than those identified in the text) and assess
the major strengths, weaknesses, opportunities and threats it faces in order to sustain is position.
3 Identify the main reasons why US businesses lead the evolution of the information economy.
301
1 How do you account for Europe’s relatively poor performance in the development of the information
economy?
2 How does the advent of the information economy add to the competitiveness of the EU?
3 What are the issues of market failure apparent within a market-led development of the information
economy?
Bibliography
Castells, M. (2009) The Rise of the Network Society, the Masuda, Y. (1980) The Information Society As Post-
Information Age: Economy, Society and Culture (Vol. industrial Society, Washington D.C.: World Future
1), 2nd edn, Chichester: John Wiley & Sons. Society.
Dutta, S., Meyer, A., Jain, A. and Richter, G. (eds) (2006) Rodrigues, M. (2004) European Policies for a Knowledge
The Information Society in an Enlarged Europe, Berlin Economy, Cheltenham: Edward Elgar.
and Heidelberg: Springer-Verlag. Van Dijk, J. and Jan, A. (2005) The Deepening Divide:
European Commission (2010) Digital Agenda for Europe, Inequality in the Information Society, Thousand Oaks:
COM (2010) 0245. Sage Publications.
European Commission (2012) The Digital Agenda for Webster, F. (2014) Theories of the Information Society,
Europe – Driving European Growth Digitally, COM London: Routledge.
(2012) 784 Final.
302
Chapter 14
European labour markets

and the search for flexibility
Cessation of work is not accompanied by cessation of expenses.

Cato the Elder, Roman statesman
■■ identify and interpret key trends in European labour markets;

■■ understand the concept of labour market flexibility and its implications for Europe’s businesses;
■■ understand how European labour market policy has evolved and how it impacts on business;
■■ assess the potential role for labour market mobility and migration to address Europe’s labour
market problems.
European business needs a workforce that is labour market flexibility, the response to prob-
skilled, well-educated, flexible, plentiful, mobile lems raised by an ageing population and the chal-
and healthy. Fulfilment of these needs depends lenges and opportunities posed by migration.
on a mixture of corporate action and policy at In recent years, fears have grown throughout
national and European levels. In response to Europe that unemployment has become a struc-
these needs, the focus of European labour mar- tural phenomenon as a result of the introduction
ket policy has shifted away from workers’ rights of advanced technologies and the competi-
(which remain important but are not at the top tive consequences of globalisation, particularly
of Europe’s list of labour market priorities), the the competitive challenge posed by emerging
integrity of the SEM and the harmonisation of economies. The response to these challenges
labour market regulations – which characterised has been varied, ranging from the relocation of
the 1980s and early 1990s – towards the strug- firms overseas to national reforms, often fiercely
gle against unemployment, efforts to improve resisted, and to European initiatives.
303
The chapter opens with a discussion of recent by a combination of growth and reform which
trends in European labour markets. These trends, removed some of the more rigid labour market
together with the following discussion about the controls. In other countries, unemployment for-
significance of labour market flexibility for Euro- tunes were mixed but the overall unemployment
pean business, provide a context for later sections trend tended to be gently downwards.
on policy. The chapter then traces the evolution of The experience of the new member states from
European labour market policy, concluding with a Central and Eastern Europe was different, reflect-
discussion of labour mobility within Europe. ing the fundamental social, economic and political
transformations they had undergone in the years
prior to their accession in 2004 when double digit
Trends in European unemployment was the norm. In the run up to
labour markets accession, in anticipation of the opportunities aris-
ing from it, and in the immediate post-accession
European demographic and labour market trends years, unemployment declined significantly
are both a reflection of social and economic change throughout most of Central and Eastern Europe.
and can themselves stimulate a change of policy Unemployment in the Baltic states, for example,
or strategic direction. Consistently, one of the which ranged between 13.6 and 16.4 per cent
key drivers in labour market policy has been the in 2000, had fallen to one-third of these levels in
evolution of unemployment (see Table 14.1). In Estonia by 2007; to one-quarter in Lithuania and
the 1970s, with the exception of Ireland and Italy, to less than one-half in Latvia. Poland also saw a
unemployment was not a problem for the EU-12 staggering 8.2 percentage point fall in unemploy-
for whom unemployment of below 3 per cent was ment between 2005 and 2007, helped in large part
the norm. Such low unemployment rates equate by net migration to other parts of Europe.
to frictional unemployment: that is, individuals The financial and economic crisis of 2007
that are in the process of moving between jobs.The and 2008 ended these positive trends through-
international economic crisis in the 1970s, which out Europe, apart from in Germany whose
resulted in high inflation and high unemployment, economy emerged strongest from the problems
changed all this. Indeed, Table 14.1 demonstrates of 2007–8. Unemployment more than dou-
how by 1980, unemployment was several times bled between 2008–10 in all three Baltic states
higher in many member states than in 1970 and (although it has recovered somewhat since then)
how, by 1985, as Europe approached the end of and moved steadily upwards in several other
a deep recession, jobless levels were even higher. countries (see Table 14.1). Unemployment also
From the mid-1980s, however, the long-term moved upwards throughout the rest of Europe.
jobless trend reversed in several countries. Ire- Particularly badly hit by this unemployment
land, for example, boomed, switching from being growth were the economies at the heart of the
a country of seemingly permanent high unem- eurozone crisis, notably Portugal, Ireland, Italy,
ployment and outward migration to a country Greece and Spain (see Chapter 8). Ireland, com-
with unemployment levels well below the EU monly referred to as the ‘Celtic Tiger’ during
average, even taking into account the return of the period of prosperity referred to above, saw
Irish migrants who had previously left the country a reversion to levels of unemployment prevailing
as a result of the dearth of jobs. Spanish unem- in pre-boom times. Unemployment in Greece,
ployment halved between 1995 and 2007, helped the most notable euro crisis casualty, grew from
304
Table 14.1 Unemployment rates by member states, 1970–2013 (percentage of labour force)
1970 1980 1985 1990 1995 2000 2005 2010 2011 2012 July
20132
Austria – – 3.6 – 3.9 3.6 5.2 4.4 4.2 4.3 4.8
Belgium 2.2 9.1 14.6 6.6 9.7 6.9 8.5 8.3 7.2 7.6 8.9
Bulgaria – – – – – 16.4 10.1 10.3 11.3 12.3 12.7
Cyprus – – – – – 4.8 5.3 6.3 7.9 11.9 17.3
Czech Rep. – – 4.1 8.7 7.9 7.3 6.7 7.0 6.8
Denmark 1.0 6.7 8.7 7.2 6.7 4.3 4.8 7.5 7.6 7.5 6.7
Estonia – – – – – 13.6 7.9 16.9 12.5 10.2 7.9
Finland – – 5.1 3.2 15.4 9.8 8.4 8.4 7.8 7.7 7.9
France 1.3 6.4 10.3 8.5 11.1 9.0 9.3 9.7 9.6 10.2 11.0
Germany1 0.6 3.4 8.4 4.8 8.0 7.2 11.3 7.1 5.9 5.5 5.3
Greece – – 7.8 6.3 9.2 11.3 9.9 12.6 17.7 24.3 27.6
Hungary – – – – 10.4 6.4 7.2 11.2 10.9 10.9 10.4
Ireland 5.3 8.2 18.0 13.4 12.3 4.3 4.4 13.9 14.7 14.7 13.8
Italy 4.4 7.2 12.9 8.9 11.2 10.1 7.7 8.4 8.4 10.7 12.0
Latvia – – – – – 13.7 9.6 19.8 16.2 14.9 11.5
Lithuania – – – – – 16.4 8.0 18.0 15.3 13.3 12.1
Luxembourg 0.0 0.7 1.7 1.6 2.9 2.3 4.6 4.6 4.9 5.1 5.7
Malta – – – – – 6.7 7.2 6.9 6.5 6.4 6.0
Netherlands 1.0 6.2 13.3 5.9 6.6 2.8 5.3 4.5 4.4 5.3 7.0
Poland – – – – 13.3 16.1 17.9 9.7 9.7 10.1 10.4
Portugal 2.8 8.4 8.6 4.8 7.3 4.0 7.8 12.0 12.9 15.9 16.5
Romania – – – – – 7.3 7.2 7.3 7.4 7.0 7.5
Slovakia – – – – 13.1 18.8 16.4 14.5 13.6 14.0 14.3
Slovenia – – – – – 9.8 6.5 7.3 8.2 8.9 11.2
Spain 1.2 12.0 21.9 13.1 18.8 11.4 9.2 20.1 21.7 25.0 26.3
Sweden – – – 1.7 8.8 5.6 7.7 8.6 7.8 8.0 7.8
UK 2.5 6.0 12.0 6.9 8.5 5.4 4.8 7.8 8.0 8.9 7.7
Euro area – – – – – 8.5 9.2 10.1 10.2 11.4 12.1

EU-27 – – – – – 8.7 9.0 9.7 9.7 10.5 10.9
Japan 1.1 2.0 2.6 2.1 3.1 4.7 4.4 5.1 4.6 4.3 –
US 4.9 7.0 7.2 5.6 5.6 4.0 5.1 9.6 8.9 8.1 7.4
Notes
1 Prior to 1995, the figures for Germany refer to West Germany only. From 1995 onwards the figures refer to unified
Germany
2 July 2013 figures not available for Estonia, Greece, Luxembourg, Hungary and the UK – figures reported for these
countries are for May or June 2013
Source: Eurostat.
55 55
50 50
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
Switzerland
Germany
Japan
Norway
Austria
Netherlands
Iceland
Denmark
Malta
Turkey
United States
Luxembourg
Finland
Czech Republic
Belgium
Slovenia
Estonia
United Kingdom
Romania
EU (27 countries)
EU (28 countries)
Sweden
France
Poland
Lithuania
Cyprus
Bulgaria
Hungary
Latvia
Ireland
Slovakia
Italy
Portugal
Croatia
Spain
Greece
Figure 14.1 Unemployment among 15–24 year olds by member state, 2012 (%)
9.9 per cent in 2005 to 27.6 per cent in mid-July persists, the danger arises of lost generations with all
2013 to register the highest unemployment rate the attendant social and economic problems.
in the EU. Consequently tackling the unemploy- The level of long-term unemployment (defined
ment problem remains a major task for European as unemployment lasting one year or more) in
and national leaders. Europe in 2012 ranged from 2 per cent or less of
Aggregate unemployment figures hide worrying the labour force in Luxembourg, the Netherlands,
trends – notably, increasing youth unemployment. Austria, Finland, Sweden and Denmark to over
As Figure 14.1 shows, unemployment of those in 10 per cent in Croatia, Spain and Greece. Notably
the 15–24 age group is often twice or more the those countries with the lowest rate of long-term
unemployment rate for adults as a whole. In Greece unemployment are those that have developed their
and Spain, youth unemployment is the highest in own version of flexicurity (see Case Study 14.1)
Europe at well over 50 per cent in both cases – involving active labour market policies designed to
figures which are disturbing enough in themselves increase skill levels and get people back into work
but which hide the fact that in some poorer Spanish quickly. Once an individual becomes unemployed,
regions, for example, youth unemployment is sig- it is important that he or she returns to work as
nificantly higher than this. Unemployment in gen- swiftly as possible to prevent erosion of skills and
eral and youth unemployment in particular have led confidence.The longer an individual remains out of
to outbreaks of demonstrations and protest in both work, the more difficult it is to re-enter the labour
countries.Although the Spanish situation is extreme, market and with the large labour surpluses of the
youth unemployment was over 20 per cent in 18 first half of the second decade of the twenty-first
member states in 2012. The plight of the young in century, it is those who have more recent work
the job market is not new: in times of economic dif- experience than the long-term unemployed who
ficulty, despite the fact that the young are cheaper are likely to re-enter the workforce first. Moreover,
to employ, they often lack the skills and experience long-term unemployment represents a waste of
that are specific to their company and they tend to resources and, as with youth unemployment, brings
be the first to lose their jobs. If this unemployment with it a host of social and economic problems.
306
The structure of EU labour markets and communication technology (see Chapter 13), is
employment has undergone massive changes since also changing the skills mix required by employers
the signing of the Treaty of Rome. As a conse- and contributing to the growing trend for active
quence of the relative decline in agriculture and of labour market policies to ensure Europe’s labour
deindustrialisation, services have become the EU’s force is more responsive to the competitive pres-
dominant economic sector (see Table 14.2). This sures from globalisation. These factors require a
is reflected in shifts in the structure of the labour highly skilled and educated workforce to ensure
force. In the mid-60s, agricultural employment as commercial success. The 2004 accession states
a share of total employment in the EU-15 ranged tend to be less service-oriented than the EU-15
from 3 per cent in the United Kingdom to 47 per but their economic restructuring and transition
cent in Greece. By 2010, agriculture’s share of have rapidly pushed them in the same direction.
European employment ranged from 1.1 in Lux- The above trends have transformed Europe’s
embourg and 1.2 per cent in the UK to 30.1 per labour force: no longer is it typically com-
cent in Romania. The declining share of agricul- posed predominantly of male full-time workers
ture in total employment is common throughout employed in manufacturing but it is increasingly
Europe but is more developed in North-western made up of female, part-time and short-term
Europe than in Southern and Eastern Europe workers engaged in service sector activity.
where the process got underway much later. Although still lagging behind those of men, there
The service sector already provided most have been significant increases in female activ-
employment in many European states in the mid- ity rates in Europe in recent decades. The high-
1960s but its lead over industrial employment est rates of female employment have long been in
was marginal in most cases. By 2010, however, Northern Europe, and in the Nordic countries in
the dominance of service sector employment particular where female employment rates of over
was unambiguous. Services accounted for 35.4 70 percent are the norm. Elsewhere in the EU,
per cent in Romania to over two-thirds (the UK, female activity rates have been rising, representing
the Netherlands, Denmark and Luxembourg) a major social change and a significant shift in the
of total male employment (see Table 14.2). The structure of the labour force but they still remain
dominance of services in female employment is low compared to Northern European levels. Med-
particularly marked, ranging from 48.5 per cent iterranean Europe is a case in point: 2012 female
in Romania to over 90 per cent in Ireland, Lux- employment levels were 45.2 percent in Greece;
embourg, the Netherlands, Sweden and the UK. 47 per cent in Malta, 50 per cent in Italy and 54
Gender differences in sectoral economic activity per cent in Spain. Historical figures for the 2004
have a number of implications.The concentration of and 2007 accession states are not so readily avail-
females in a narrow range of activities reduces eco- able but their current female activity rates tend to
nomic efficiency by limiting the range of job oppor- hover between those of the Mediterranean coun-
tunities and deployment of a significant section of tries and the member states of Northern Europe.
the labour force. Although males have a greater In recent years, there has been a slow but inex-
range of employment opportunities and choices orable rise in the share of part-time jobs through-
than females, they have been disproportionately hit out Europe (see Table 14.3 and Figure 14.2) and
by the loss of jobs in industry over the last decades. of temporary contracts (see Figure 14.3). In the
The development of the service sector, in EU-15, for example, there were 35 per cent more
conjunction with the rise of information and jobs involving temporary contracts in 2005 than
307
Table 14.2 Employment and economic activity and gender, 2011
Males as percentage of total Females as percentage of total female

male employment employment
Agriculture Industry Market Non-market Agriculture Industry Market Non-market

services services services services
Austria 5.4 36.5 39.9 18.1 5.0 11.5 44.8 38.7
Belgium 1.7 34.3 40.9 23.1 0.9 10.1 34.5 54.5
Bulgaria 8.2 40.9 36.4 14.5 5.2 24.8 39.9 30.1
Cyprus 4.8 30.3 45.0 20.0 2.6 9.5 47.6 40.3
Czech Rep. 4.0 49.0 33.1 13.9 1.9 23.2 38.0 36.9
Denmark 3.9 29.2 44.3 22.7 0.8 9.3 34.1 55.8
Estonia 5.8 43.8 36.9 13.6 2.8 18.3 38.5 40.4
Finland 6.0 35.9 41.4 16.7 2.8 9.9 36.6 50.7
France 3.9 33.2 40.4 22.5 1.8 10.2 35.6 52.4
Germany 2.0 40.3 38.6 19.1 1.2 14.4 40.8 43.7
Greece 12.4 27.7 41.0 18.9 12.7 7.8 41.4 38.0
Hungary 6.4 40.3 37.0 16.3 2.3 19.6 38.4 39.7
Ireland 7.7 28.8 45.9 17.6 1.1 8.8 42.3 47.8
Italy 4.5 38.7 39.8 17.0 2.8 14.1 41.2 42.0
Latvia 12.0 34.6 39.7 13.7 5.8 14.0 41.7 38.6
Lithuania 11.5 33.6 39.2 15.7 6.8 16.5 38.0 38.7
Luxembourg 1.4 19.9 47.5 31.1 – 4.8 39.5 55.0
Malta 1.8 31.1 45.3 21.9 .– 13.0 41.6 45.1
Netherlands 4.1 27.2 45.8 22.9 1.9 6.8 37.6 53.8
Poland 13.2 41.8 31.9 13.2 12.5 16.1 35.9 35.5
Portugal 11.1 37.8 36.1 15.0 10.7 16.2 33.5 39.6
Romania 29.1 35.5 24.7 10.7 31.4 20.2 26.3 22.2
Slovakia 4.4 50.0 31.9 13.7 1.8 21.1 38.6 38.6
Slovenia 9.1 42.8 34.5 13.7 8.5 20.6 36.2 34.8
Spain 5.7 33.9 41.9 18.5 2.5 9.5 45.0 42.9

Sweden 3.2 31.0 45.9 19.9 0.9 7.7 34.7 56.7
UK 1.7 29.5 46.8 21.9 0.6 7.5 39.6 52.3
Note: Examples of market services = trade, transportation, accommodation and food services, information and financial
activities, real estate. Examples of non-market services = public administration, education, human health, arts, entertain-
ment, recreation. Data may not always add up to 100 for each category because of rounding errors
Source: Eurostat, European Union Labour Force Survey – Annual Results 2010, Statistics in Focus 30/2011.
308
Table 14.3 P
art-time work and work of limited duration in member states, 1995–2012 (percentage share in
total employment)
Part-time employment
1995 2005 2012 2012 2012
Males in Females in Employees with
part-time part-time contract of
employment employment limited duration
Austria 14.9 21.0 25.7 9.0 44.9 9.3
Belgium 13.6 20.9 25.1 9.7 43.6 8.1
Bulgaria – 2.4 2.2 2.7 4.5
Cyprus – 8.9 10.7 8.0 13.3 15.0
Czech Rep. – 4.8 5.8 2.9 9.5 8.8
Denmark 21.6 22.0 25.7 16.0 36.4 8.5
Estonia – 7.7 10.4 5.8 14.9 3.7
Finland 11.8 13.6 15.1 10.3 20.1 15.6
France 15.6 17.4 18.0 6.9 30.2 15.2
Germany 16.3 24.1 26.7 10.5 45.6 13.8
Greece 4.8 4.8 7.7 4.9 11.9 10.0
Hungary – 4.4 7.0 4.7 9.7 9.4
Ireland 12.1 12.8 24.0 14.1 35.4 10.7
Italy 6.6 12.8 17.1 7.2 31.1 13.8
Latvia – 9.6 9.4 7.1 11.6 4.7
Lithuania – 6.5 9.4 7.4 11.3 2.6
Luxembourg 7.9 17.8 19.0 5.4 36.3 7.7
Malta – 9.2 14.0 6.9 26.3 6.9
Netherlands 37.3 46.2 49.8 26.4 77.0 19.5
Poland – 10.6 7.9 5.2 11.3 26.9
Portugal – 11.5 14.3 12.1 16.8 20.7
Romania – – 10.2 9.5 11.1 1.7
Slovakia – 2.4 4.1 2.9 5.7 6.8

Slovenia – 8.9 9.8 7.0 13.1 17.1
Spain 7.4 12.8 14.7 6.6 24.5 23.6
Sweden 26.2 25.0 26.5 14.6 39.6 16.4
UK 24.1 25.7 27.2 13.3 43.2 6.3
Eurozone 14.1 19.0 21.6 9.4 36.2 15.2

EU-27 18.5 20.0 9.5 32.6 13.7
Source: Eurostat.
309
50 50
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
Bulgaria
Slovakia
Czech Republic
Former Yugoslavia
Hungary
Greece
Poland
Croatia
Latvia
Lithuania
Slovenia
Romania
Estonia
Cyprus
Turkey
Malta
Portugal
Spain
Finland
Italy
France
Luxembourg
EU (28 countries)
EU (27 countries)
Iceland
Euro area
Ireland
Belgium
Denmark
Austria
Sweden
Germany
United Kingdom
Norway
Switzerland
Netherlands
Figure 14.2 Part-time work by member state, 2012 (percentage of total employment)
Source: Eurostat.
27.5 27.5
25 25
22.5 22.5
20 20
17.5 17.5
15 15
12.5 12.5
10 10
7.5 7.5
5 5
2.5 2.5
0 0
Romania
Lithuania
Estonia
Bulgaria
Latvia
United Kingdom
Slovakia
Malta
Luxembourg
Belgium
Norway
Denmark
Czech Republic
Austria
Hungary
Greece
Ireland
Turkey
Croatia
Switzerland
Iceland
EU (28 countries)
EU (27 countries)
Italy
Germany
Former Yugoslavia
Cyprus
Euro area
France
Finland
Sweden
Slovenia
Netherlands
Portugal
Spain
Poland
Figure 14.3 Workers on temporary contracts by member state, 2012 (percentage of total employment)
Source: Eurostat.
in 1996. There is a great deal of variation in the in 2012, their share range from 2.4 per cent in
popularity of part-time work in member states. Bulgaria to 49.8 per cent in the Netherlands (see
Although part-time jobs for the EU-27 com- Case Study 14.1 and Figure 14.2). What is com-
prised 20 per cent of total employment in the EU mon throughout the EU, however, is the trend
310
for a much higher proportion of female work- EU-15. Given current demographic trends, there
ers (36.2 per cent of the females in employment would be slightly less than two people to support
in the EU) than men (9.4 per cent) employed in each over 65 year old by 2050. Each EU mem-
part-time jobs. On one hand, this offers flexibility ber state will experience an increase in its age
to female workers who frequently bear the main dependency ratio but the extent of the increase
burden of family commitments and to employers varies considerably. In the case of Luxembourg,
who can break away from traditional work organ- the ratio is anticipated to increase by only 14.5
isation. On the other hand, part-time workers points, from 21.4 to 36.1 in 2050 when there
tend to lose out on career progression. will still be almost three people of working age to
A side-effect of the demise of manufacturing and every individual over the age of 65. However, in
the rise of service industries, the feminisation of the Spain and Italy, where fertility rates in particular
workforce and changes in the organisation of work are very low, the increase in the dependency ratio
has been a general reduction in trade union mem- is around 40 points so that in both cases, there
bership throughout Europe. The decline in unioni- will only be about one and two-thirds individuals
sation has occurred across the whole of Europe to support each pensioner.
since the mid-1980s but in Central and Eastern The implications of this rapid ageing of the
Europe, where union membership was almost uni- population are significant for both Europe’s labour
versal in Soviet times, the collapse has been par- markets and more broadly for its welfare and
ticularly dramatic, falling to 10 per cent in Estonia social systems. There will be more people leav-
and Lithuania; 12 per cent in Poland and Hungary ing than entering Europe’s labour markets, giving
and 13 per cent in Latvia. In 2012, less than one- rise to the likelihood of labour shortages. More-
quarter of Europe’s labour force was unionised and over, the financial burden of supporting a more
in only six member states were over half the labour aged population will increase not only in terms
force in unions. Unionisation remains strongest in of pensions but also in terms of health and other
the Nordic countries with Finland leading the way social provision. These trends require European
with 74 per cent of the labour force in unions. The nations to reconsider their approaches to migra-
biggest member states all demonstrated low levels tion and to their welfare systems generally. This
of unionisation by historical standards – Italy 35 per process has started as demonstrated by increases
cent, the UK 26 per cent, Germany 18 per cent and in pension ages in several member states but this
France 8 per cent. debate will persist for many years to come.
The single biggest demographic and labour
market challenge facing Europe is the ageing of its
population. Without exception, the demographic Labour market flexibility

balance in EU member states is shifting towards
the higher end of the age range. The reasons for Labour market flexibility has become a key issue
this are numerous, including longer life expec- in contemporary debates about the European
tancy and reduced fertility rates. Table 14.4 sets labour markets and the business environment.
out the EU’s forecasts for the evolution of the Improved labour market flexibility, for example,
age dependency ratio for the EU and its member is widely regarded as crucial for a successful euro-
states until 2050. In 2000 between four and five zone as member states seek an alternative method
people of working age on average were needed to of adjustment to macro-economic imbalances
support one individual over the age of 65 in the following the replacement of national interest
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Table 14.4 Old age dependency ratio in EU member states
2000 2010 2020 2030 2040 2050

Austria 22.9 26.3 30.3 40.8 50.4 53.2
Belgium 25.5 26.4 32.2 41.3 47.2 48.1
Bulgaria 23.8 25.6 33.0 40.4 48.8 60.9
Cyprus 17.0 19.1 25.5 32.9 36.1 43.2
Czech Rep. 19.8 21.9 31.8 37.1 43.8 54.8
Denmark 22.2 24.8 31.2 37.1 42.1 40.0
Estonia 22.4 24.7 28.7 33.4 36.6 43.1
Finland 22.2 25.4 37.0 45.0 46.1 46.7
France 24.6 25.9 33.2 40.7 46.9 47.9
Germany 23.9 31.0 35.1 46.0 54.6 55.8
Greece 24.2 28.0 32.5 39.1 49.8 58.8
Hungary 22.0 24.3 31.2 35.1 40.3 48.3
Ireland 16.8 17.5 22.5 28.3 35.9 45.3
Italy 26.8 31.3 36.6 45.2 59.8 66.0
Latvia 22.1 25.2 28.0 33.4 37.4 44.1
Lithuania 20.8 23.4 26.0 33.4 39.3 44.9
Luxembourg 21.4 21.6 24.7 31.5 36.7 36.1
Malta 17.9 20.4 30.0 36.0 35.9 40.6
Netherlands 20.0 22.2 29.0 36.7 41.6 38.6
Poland 17.6 18.8 27.1 35.7 39.7 51.0
Portugal 23.7 26.5 31.5 39.0 48.9 58.1
Romania 19.7 21.2 25.1 29.6 39.6 51.1
Slovakia 16.6 16.9 23.5 31.7 38.1 50.6
Slovenia 19.8 23.6 30.8 40.4 47.7 55.6
Spain 24.5 25.4 30.0 38.9 54.3 67.5
Sweden 26.9 28.0 34.4 38.5 41.5 40.9
UK 23.9 25.1 30.3 37.4 43.8 45.3
EU-25 23.4 26.3 32.1 40.3 48.5 52.8
Note: The age dependency ratio is the ratio between the number of elderly economically inactive persons (normally aged
65 and over) and the number of persons of working age (from 15 to 64). A ratio of 33 implies that there are three
persons of working age for every person over 65 whereas a ratio of 50 implies there are two persons of working age for
every person over the age of 65. The higher the ratio, the fewer economically active people there will be to fund pensions,
healthcare, etc.
Source: Apart from 2000, the figures in this table are derived from Eurostat forecasts.
312
rates by a eurozone-wide rate. More generally, terms of hiring, dismissals and wages, encour-
efficient, smoothly operating labour markets are ages adversarial industrial relations and discour-
regarded as a key factor in competitiveness – but ages internal organisational flexibility based on
are an ideal against which many member states do multi-skilling, goodwill and the higher levels of
not currently match up to that well. productivity resulting from greater investment in
A major problem surrounding labour market the workforce.
flexibility has been conflict about what the key The term ‘flexible specialisation’ was coined
components of labour market flexibility should by Piore and Sabel (1984) in response to the shift
be. In broad terms, there are two schools of away from ‘Fordist’ production methods and ‘Tay-
thought about labour market flexibility.These are: lorist’ traditions of work organisation which were
too inflexible for the new demands for custom-
1 the neo-classical market forces approach in ised and high quality products (see Box 14.1).
which competitive success is based on lower The intensification of competition arising from
costs arising from minimal regulation, market globalisation also encouraged rapid changes in
clearing wages and the freedom to hire and consumer tastes and necessitated more frequent
fire; product adaptations and shorter production
2 the ‘flexible specialisation’ approach in which runs, resulting in leaner production and greater
a skilled workforce is viewed as a major emphasis on teamwork, multi-skilling, flexible
resource and competitive success relies on deployment of labour and closer links between
multi-skilling, flexible labour deployment, production and marketing. In other words, mod-
cooperative rather than adversarial industrial ern production techniques require a cooperative,
relations and employee identification with the skilled labour force which is both prepared and
goals of the organisation. able to respond to rapidly changing consumer
demands.
The neo-classical approach regards regulation This version of labour market flexibility does
as an unjustifiable interference in the operation of not necessarily view regulation as inhibiting
the market. Its most purist proponents support adjustment to changing markets but rather sees
only the most minimal forms of regulation, nota- it as a way of providing opportunities to reconcile
bly in the realm of health and safety. Regulation the legitimate claims of labour with efficiency.
is regarded as a major factor in increasing costs According to this view, labour market regulation
and therefore in hindering competitiveness. Non- exists to protect the workforce in terms of health
intervention, they argue, facilitates efficiency and safety, job security and working conditions.
and enables employers to pay a market clearing Respect for workers’ rights and welfare gener-
wage and to compete with the low cost suppli- ates greater workplace flexibility by reducing the
ers, particularly from Asia, the source of severe disillusion and alienation frequently present in
competitive pressures on European businesses. the first model and by encouraging worker iden-
Many supporters of this view also argue for the tification with the long-term well-being of the
rollback of the welfare state and social security firm and generating trust between employer and
benefits which they claim raise the ‘reservation employee. An emphasis on worker information
wage’, that is, the wage below which the unem- and consultation and ongoing workplace train-
ployed will not seek employment. This model ing also accompanies this approach. Any rigidi-
gives employers a high degree of flexibility in ties in the model, it is claimed, are outweighed
313
by long-run gains in terms of greater technical opportunities, industrial democracy, workplace

and organisational innovation. A downside of health and safety, and further development of the
this approach is its potential exclusion of the low European Social Fund (ESF). The 1970s was an
skilled, long-term unemployed. important decade in Europe for equal opportuni-
It is the tension between these two approaches ties legislation: in 1975, the equal pay directive
to labour market flexibility that has shaped the required member states to abolish pay discrimi-
debate about European labour market policy and nation and applied the principle of equal pay for
which lies at the heart of the flexicurity models work of equal value; the 1976 equal treatment
which have come to the forefront of this debate directive gave equal access for men and women
since the mid-2000s (see Case Study 14.1) to employment, promotion, vocational training
and working conditions and in 1978 a directive
on equal treatment for men and women in state
Evolution of EU labour social security systems was adopted. A substantial
market policy body of case law on workplace gender issues has
subsequently evolved. However, despite these ini-
The Treaty of Rome contained a surprisingly tiatives, the gender pay gap remains worryingly
extensive range of social policy provisions (see wide in many European countries.
Box 14.2). The recitals and preamble included The 1980s began with further progress on
broad social objectives, speaking of ‘economic health and safety issues and equal treatment for
and social progress’ and ‘an accelerated raising men and women, but measures relating to work-
of the standard of living’. Some aspects of the er information and consultation (the Fifth Com-
Treaty were ahead of their time, particularly Arti- pany Law Directive and the Vredeling Directive)
cle 119 which established the principle ‘that men and to part-time and temporary work reached
and women should receive equal pay for equal stalemate. However, fresh impetus was given to
work’ – a seemingly remarkable inclusion in the social policy via the campaign to create a Single
Treaty for the 1950s but which occurred because European Market (SEM). Although not explicitly
of French concerns about the competitiveness of included in the 1985 Single Market White Paper,
their textile industry. social policy was regarded as a ‘flanking policy’ of
The buoyant economic growth and low unem- the SEM, that is, it was intended to provide sup-
ployment of the 1960s resulted in Community port to broader SEM aims. The Commission had
social policies that focused on the correction of become increasingly concerned that the SEM was
mismatches between labour supply and demand widely perceived as a programme to benefit busi-
through enhanced labour mobility; the mutual ness but that its success required the support of
recognition of qualifications and the transfer- both employers and employees. Without a widen-
ability of social security rights for migrant working of its appeal, Commission President Jacques
ers rather than on job creation. Some health and Delors believed the SEM programme would lose
safety measures were also introduced during this support.
period. Social policy received a major boost from the
In the 1970s, social policy was given a Single European Act (SEA), particularly from
fresh impetus with the adoption of the 1974 Article 118A which required member states
Social Action Programme which launched ini- to pay particular attention to harmonisation
tiatives in the fields of employment law, equal of workplace health and safety standards while
314
Case Study 14.1

Flexicurity: the way ahead or an unrealistic pipe dream?
Since 2006, flexicurity has been a buzzword in European debates about employment and social policy
and has influenced several Commission policy initiatives. In many senses, however, flexicurity represents
continuity with Europe’s policy which has long seen efforts to steer a course between social and eco-
nomic goals. Indeed, the Social Charter is a classic example of this at the EU level. However, as the
Danish and Dutch examples below show, aspects of flexicurity have been in operation in some member
states in diverse ways for some time.
The term ‘flexicurity’ brings together the concepts of labour market flexibility and employee security.
Labour market flexibility implies ease of hiring and firing and the ability and willingness of employees to
perform different roles as and when required. Security refers to job security or, increasingly in this con-
text, to employment security – that is, employability rather than freedom from dismissal. Underpinning
the concept is the central idea that flexibility cannot be achieved without some degree of security and
that security cannot be achieved without flexibility. In short, flexicurity represents both an attempt to
balance social and economic interests in the search for consensus between two dominant social ideolo-
gies in Europe and an attempt to respond to rapid changes in technology and market conditions brought
about by globalisation. The key challenge arising from these changes is to determine how, in the bid to
maintain competitiveness in the face of increasingly fierce competition confronting European business
from around the world, to avoid declining living and social standards in Europe.
Flexicurity in Denmark
Denmark is widely regarded as a model of flexicurity in action. It has achieved one of the highest em-
ployment rates and one of the lowest unemployment rates in the EU by combining free labour markets
with a comprehensive and generous welfare system. This model is frequently referred to as a ‘golden
triangle’ made up of the following components:
1 A version of labour market flexibility in which liberal hiring and firing is the order of the day and
in which workers have little protection from dismissal. This arrangement stems from the major
role of small and medium-sized enterprises in Denmark and the high degree of openness of the
economy. Flexibility is also sought through widespread use of flexible working hours and movement
between functions.
2 An extensive social security system.
3 Active labour market policies which boost employment security by helping workers move from
one job to another. After one month without a job, the unemployed engage in mandatory activities
designed to help them find work such as interview training, counselling and the monitoring of the
job search. After six to nine months, if still unemployed, an individual must take part in training
or labour market related education with a view to upgrading skills and improving the prospects of
gaining employment. As a result, in 2011 Denmark spent 3.74 per cent of GDP on labour market
policies, the highest level in Europe.
315
As a consequence of these policies, job mobility is unusually high in Denmark (approximately one-
quarter of all employees are new to their employers every year) and long-term unemployment is also
among the lowest in the EU: in 2012, it was 2.1 per cent, less than half the EU-28 average of 4.7 per
cent. Other member states employing variants of the flexicurity model, such as the Netherlands, Austria
and Sweden, also demonstrated levels of long-term unemployment significantly below the EU average
in 2012 at 1.8 per cent, 1.1 per cent and 1.5 per cent respectively.
The origins of the Danish flexicurity system go back to the General Agreement or September Com-
promise of 1899 (revised and renamed the Basic Agreement in 1960) between the social partners and
resulted from a general strike that year. The original Agreement confirmed the freedom of association
for trade unions and established the managerial right to organise and direct work, including the right to
hire and fire the workforce whenever considered necessary. The generous unemployment benefit system
and ALMPs (active labour market policies), an essential part of the Danish flexicurity approach, par-
ticularly since the 1970s, have come under threat at times of high unemployment given that the budg-
etary and taxation burden it imposes makes Denmark one of the world’s most highly taxed countries.
However, despite modifications, the Danish system remains essentially intact.
The secret of the longevity of the system lies in the tradition of labour market intervention and
corporatism in Denmark which reflects long standing cooperation among employers, unions and the
government. Its success lies in acceptance by workers of employment security rather than job security,
implying a willingness to change jobs, and an acceptance by employers of the need to finance a generous
welfare and training system.
Flexicurity in the Netherlands

The Dutch version of flexicurity has evolved differently and emphasises labour market flexibility through
the normalisation of atypical work such as part-time, fixed term and agency work. Security for workers
is provided by strict observance of the principle of extending the same rights in the workplace and in
social security entitlements to workers on atypical contracts as to those on more traditional contracts.
Flexibility for both employees and employers is thus achieved through diversity of contractual ar-
rangements. This is borne out by statistics that indicate that half the Dutch labour force is employed on
a part-time basis compared to an EU average of 20 per cent (see Table 14.3). As is the case throughout
the rest of the EU, part-time work is more the domain of female workers with 77 per cent of the women
employed in the Netherlands working part-time (compared to an EU average of 32 per cent) and 26
per cent of male employees working part-time (compared to 9.5 per cent in the EU). Moreover, the
proportion of Dutch workers employed on short-term contracts is also among the highest in the EU at
19.5 per cent compared to an EU average of almost 14 per cent. Most tellingly, Dutch unemployment
has, for some time, been among the lowest in Europe, although some of its relative advantage appears
to have been eroded slightly in 2013.
Central to the Dutch version of flexicurity, which has been under construction in earnest since the
mid-1990s, has been the tradition of consensus-based decision making, sometimes referred to in this
context as the Polder Model, which involves tri-partite cooperation between the government, employer
316
organisations and trade unions. This characteristic is shared with Denmark and with other countries
that have been described as displaying some degree of flexicurity such as Austria.
The economic performance of the Netherlands has been stronger than that of many other European
countries, perhaps in part because of its flexicurity innovations, but certain groups of workers remain
more vulnerable to the vagaries of the labour market. Ethnic minorities, for example, have a hard time
finding work; youth unemployment remains significantly higher than the rest of the labour force where-
as older workers are less likely to receive the training that is needed to help them move into new jobs.
Transferability of the flexicurity model?

A key question for European policy makers is whether the flexicurity model can be adapted and trans-
ferred to other European countries, particularly to those with much higher levels of unemployment. In
Denmark, the Netherlands and in other European countries with their own versions of flexicurity, such
as Sweden and Austria, flexicurity has evolved out of a specific set of institutional and cultural tradi-
tions which go back many decades and which are commonly characterised by a history of consensus
rather than confrontation among government, employers and employees.
Case questions
1 What are the benefits and losses to employers and employees of operating within a flexicurity
system?
2 The case study refers to flexicurity in Denmark and the Netherlands. Research these examples
further to identify and assess specific flexicurity policies.
3 Explain the statement that ‘flexibility cannot be achieved without security and that security can-
not be achieved without flexibility’. Giving reasons, do you agree or disagree with this statement?
4 ‘A successful flexicurity policy and its details are dependent on history and the prevailing social
model, thereby making it difficult, if not impossible, to develop flexicurity in some states.’ Criti-
cally assess this statement, using countries from throughout Europe to illustrate your answer.
5 Is the Danish example proof that a generous welfare system and a well-functioning labour mar-
ket are compatible?
maintaining improvements already made. In other relocate to regions of the Community with lower
words, member states were not to use the drive standards and thus lower costs – the phenomenon
towards harmonisation of standards as an oppor- of ‘social dumping’ (see Box 14.1). In this scenar-
tunity to reduce them. At this time, differences io, such member states would be faced with the
in labour market regulations were often regarded choice of losing a significant number of jobs or
as equivalent in effect to other non-tariff barriers giving into pressure to reduce standards.
scheduled for removal under the SEM. Member Article 118A also introduced qualified major-
states with higher labour market standards were ity voting for health and safety measures. This
fearful that in a single market, companies would assumed great significance when the Commission
317
Key labour market concepts

Box 14.1
Taylorism and Fordism: Frederick Taylor was an engineer who aimed to improve the efficiency of pro-
duction by breaking each task into small, repetitive tasks. This approach was incorporated into mass
car production by Henry Ford. Taylorism, or ‘scientific management’, dominated industrial production
until the 1980s. It lent itself to long production runs but was inherently inflexible and relied heavily on
a relatively unskilled, plentiful labour force.
Passive and active labour market policies: passive labour market policies are directed towards
management of unemployment through income support to the unemployed rather than through job
creation or moving the unemployed into employment. Active labour market policies are more concerned
with increasing employability, job creation and improving labour market flexibility and emphasise the
acquisition of skills through education and vocational training programmes. The EU’s focus on employ-
ability, entrepreneurship and adaptability represents a commitment to flexible specialisation and active
labour market policies.
Social dumping: the practice of relocating to regions with lower costs as a result of disparities in
labour market regulations. In a frontier-free world, in the absence of common standards, member states
with high standards might be pressured to lower their standards in order to avoid job migration, result-
ing in a downward spiralling of the standards of social provision – frequently referred to as ‘the race
to the bottom’. It was the fear of social dumping that lay behind the negotiation of the Social Charter.
Treaty of Rome provisions relating to labour and social

Box 14.2
market policy
Article Free movement of workers – to be achieved by abolishing discrimination on nationality

48–51 grounds in relation to employment, pay and other employment conditions
52–58 Right of establishment for nationals, agencies, branches and subsidiaries of one member
state in the territory of another
59–66 Freedom to provide a service by nationals established in a member state different from
the recipient of the service
117–122 General social provisions, including:
■■ improved working conditions and living standards as a result of the common market
and other provisions in the Treaty (117);
■■ cooperation between member states on employment, labour law and working condi-
tions; training; social security; health and safety, occupational hygiene and the right of
association and collective bargaining (118);
■■ men and women to receive equal pay for equal work (119);
■■ member states to maintain existing equivalences between paid holiday schemes (120);
■■ common measures regarding social security for migrant workers (121 and linked with
Articles 48–51).
123–128 Establishment of the European Social Fund
318
Milestones in EU labour market policy
Box 14.3
1957 Treaty of Rome contains several articles relating to the labour market (see Box 14.2)
1974 Social Action Programme directed towards attainment of full employment, industrial
d emocracy, health and safety, equal opportunities and a greater role for the ESF
1987 Single European Act introduced qualified majority voting for health and safety measures and
incorporates the Social Dialogue into the treaties
1989 Social Charter signed by 11 out of 12 member states (excluding the UK)
1993 Social Protocol annexed to the TEU
1994 European Works Council directive adopted – first directive adopted under the Social Protocol
1996 Parental Leave Directive adopted – second directive adopted under the Social Protocol
1997 Following Labour election victory, the UK abandons the Social Protocol opt-out
1997 Amsterdam Treaty: the Social Protocol brought into main body of treaties and the Employ-
ment Chapter included in the treaties for the first time
2000 Charter of Fundamental Rights signed at Nice Council
2009 Lisbon Treaty in force – a reference to the Charter of Fundamental Rights incorporated into
the Treaty and becomes legally binding (with some opt-outs for the UK, Ireland, Poland and
the Czech Republic)
put forward several labour market provisions the workplace in relation to freedom of movement;
under the guise of health and safety measures employment and remuneration; improvement of
following the UK’s opt-out from the Social Pro- living and working conditions; social protection;
tocol, a tactic which was spectacularly success- freedom of association and collective bargaining;
ful for the Working Time Directive. Unanimity training; equal treatment of men and women;
was still required for other measures relating to worker participation, information and consultation;
labour market policy, including free movement workplace health and safety; protection of children
and other employment rights. Article 118B gave and adolescents, the elderly and the disabled.
the Commission responsibility for encouraging These minimum rights served both as a defence
dialogue between employers and employees at against alleged social dumping and responded to
European level which it hoped would lead to for- concerns about an over-preoccupation with the
mal agreements between both sides of industry. priorities of business. In order to implement the
The changes brought about by the SEA were, principles of the Social Charter, the Commission
however, insufficient to dispel fears of social dump- introduced a Social Action Programme containing
ing. The Commission chose to combat these fears 47 proposals for directives and regulations.
with the Community Charter of the Fundamental Although many aspects of the Social Char-
Social Rights of Workers, signed by 11 out of the ter were largely symbolic (which employer, for
then 12 member states (the exception being the example, would claim that, contrary to the Char-
UK) in December 1989. The Charter was not a ter, they unfairly remunerated their workforce?),
legally binding document but a ‘solemn declara- the Social Charter encountered fierce opposition
tion’ which established basic minimum rights in from the UK. In the early 1980s, Mrs Thatcher’s
319
government prided itself on limiting trade union The Social Charter debate spilled over into
powers and on reducing the number of restric- negotiations on the Maastricht Treaty during which
tions on business in industrial relations. Mrs the 11 Charter signatories clearly stated their
Thatcher was anxious to ensure that her govern- wish to incorporate the Charter into the treaties.
ment’s reforms were not reversed by Brussels and UK opposition made this impossible and led to a
vigorously opposed the Social Charter. This oppo- unique compromise in which the Social Charter
sition was partly a reflection of the UK’s more was essentially annexed to the Treaty in the form of
voluntarist approach to labour market regulation the Social Protocol.This enabled the Charter signa-
than prevailed elsewhere in Europe. Although the tories to act on social policy matters without Brit-
majority of employers in the UK met most, if not ain. The Social Protocol resulted in two legal bases
all, the requirements of the Social Charter, there for social policy action within the EU. The first
was no legal requirement on them to do so unlike related to social policy provisions emanating from
in other member states where many of the rights the Treaty of Rome and the SEA: these applied to
were already enshrined in law and, in some cases, the UK as much as to other member states and,
in the Constitution. In short, implementation of wherever possible, social policy initiatives were
the Social Charter implied big changes in UK law, introduced under this heading to include all mem-
although not necessarily in the practices of all UK ber states. The second related to actions under the
businesses. Moreover, given the unanimous and Social Protocol which introduced social policy in
indeed enthusiastic support of all other member line with Social Charter principles.
states, several of whom had centre-right govern- One of the first acts of the new Labour govern-
ments, it is also difficult to give credence to Mrs ment following the UK election in May 1997 was
Thatcher’s argument that the Social Charter rep- to sign the Social Charter. This move facilitated
resented ‘socialism through the back door’. the incorporation of the Social Protocol into the
The Social Charter debate cut across the key main body of the Amsterdam Treaty. In practice,
labour market debate identified above – the need only two pieces of legislation were passed under
for and the nature of labour market flexibility. the Social Protocol during the short life of the
The UK argued vehemently that the Social Char- opt-out – the 1994 Works Council Directive and
ter would inevitably increase the cost burdens on the 1996 Parental Leave Directive. The former
business with resultant losses in competitiveness. required the establishment of works councils to
Exaggerated claims were made that the Social act as a formal channel for information and con-
Charter would lead to harmonisation of social sultation of employees in companies with over
protection and to the introduction of a European- 1,000 workers or employing over 150 in two
wide minimum wage. In fact, at no time before or more member states. In practice, many large
or since has there been any suggestion that the UK companies with a presence in other member
EU would harmonise social protection schemes states chose to comply with the Directive.
(EU action on social protection has been limited The early 1990s saw recession throughout
to facilitation of the free movement of workers) Europe with a consequent increase in unemploy-
or introduce European legislation on a minimum ment and a policy shift from an emphasis on rights
wage. However, that is not to say that implemen- towards employment creation. Attempts to reduce
tation of the Social Charter’s principles were unemployment coupled with increasing recognition
costless but rather that the alleged costs were fre- of the need to reduce the budgetary burden of gen-
quently over-estimated. erous social welfare provision began to dominate
320
policy making. Moreover, Europe experienced a measures which were intended to improve
crisis of confidence arising from globalisation and workplace adaptability; to shift the burden of
the spectre of increasing low cost competition taxes away from labour; to increase the quantity
from Asia. The prospect of successfully meeting and quality of training; to develop new areas of
the low cost challenge was made even more dif- employment; to encourage the development of
ficult because not only were Europe’s direct wage self-employment and SMEs, a potentially impor-
costs higher than its low cost competitors but its tant source of new jobs, and to develop local job
indirect costs (that is, statutory social security con- creation initiatives.
tributions, collectively agreed, contractual and vol-
untary social security contributions, direct social
benefits, vocational training and other social costs) Amsterdam and beyond
were much higher in Europe than elsewhere, rep-
resenting one-quarter to one-third of total employ- The above debate culminated in the inclusion of
ment costs in several member states. an Employment Chapter and the incorporation of
In response, the European Commission pub- the Social Protocol and Social Agreement into the
lished its 1993 White Paper Growth, Competitive- Amsterdam Treaty (see Box 14.4). Although of
ness, Employment, which placed job creation at great symbolic importance, these changes, which
the top of the EU policy agenda, and Green and confirm the importance of employment and
White Papers on social policy. These documents social policy, did not confer major new powers on
were based on emerging social and labour market the European Union.They did, however, mark the
trends, and highlighted the growing demograph- beginning of the ‘Luxembourg process’ that initi-
ic, technological, fiscal, human and industrial ated the European Employment Strategy, derived
pressures which required significant adaptation from the employment aspects of the Amsterdam
of existing policies. Technological change was Treaty, and which intended to coordinate and give
causing shifts in employment patterns by creat- direction to the employment policies of member
ing demands for new skills and new work mod- states. In addition, the non-discrimination provi-
els such as teleworking. The growth of part-time sions of Amsterdam relating to age, religion and
and temporary work contracts was changing the sexual orientation were of major importance.
role of work in society. Unemployment, popula- Following the June 1997 Amsterdam Sum-
tion ageing, changes in family structure and grow- mit, a special Employment Summit was held in
ing poverty were placing the welfare state under Luxembourg in November 1997 which set about
extreme pressure and continue to do so. Issues of implementing and operationalising the employ-
social justice, equality of opportunity, the role of ment and social policy principles incorporated
education and training, changing workplace rela- into the treaties at Amsterdam. In reality, the
tionships and workers’ and women’s rights also Summit, the subsequent Employment Guidelines
figured highly in the policy deliberations. and the SAP, published in Spring 1998, contain
The outcome of this debate was a greater con- nothing startling or new but represented a codi-
centration on the issues of labour market flexibil- fying, consolidation and stronger articulation of
ity, albeit not necessarily in terms which would be themes which had been increasingly stressed since
understood by British Conservatives. The thrust the 1993 Competitiveness White Paper, the 1994
of policy moved away from a focus on workers’ Essen Summit and the Green and White Papers
rights, which have not been abandoned, towards on social policy. The SAP summarised current
321
Key social and employment initiatives in the Amsterdam Treaty

Box 14.4
Preamble Confirms the EU’s commitment to the principles of the Social Charter – made possible
by the end of the British opt-out.
6A Affirms the principle of non-discrimination and gives the Council of Ministers power
to take action against discrimination based on gender, racial or ethnic origin, religion
or belief, disability, age or sexual orientation. This Article has implications for member
states where religion, age and sexuality do not figure in domestic legal regimes.
2 and 3 Gender equality is mainstreamed by insertion of the words ‘equality between men and
women’ to the list of general principles to be promoted by the EU.
Employment Policy
B TEU This Article has been extended to include ‘a high level of employment’ in the Union’s
objectives and additions to Article 3 establish a coordinated employment strategy as a
Community objective.
109N Member states and the Community required to develop ‘a coordinated strategy for
employment and particularly for promoting a skilled, trained and adaptable workforce
and labour markets responsive to economic change’. Subsequent articles establish the
procedures to be followed in the development of these employment strategies.
Social Policy
(A. 117–9) Following the end of the UK opt-out, the Social Protocol and Social Agreement are
integrated into the Treaty (with a few amendments) in the form of a new Chapter on
Social Policy.
thinking on labour markets and took as its main continuing training; the rights of workers and
themes the need to enhance labour market flex- employers to negotiate collective agreements;
ibility and to place greater emphasis on active and of workers to take collective action to defend
labour market measures. In order to promote their interests, including strikes and the equality
these aspirations, the SAP identified four key between men and women in all areas, including
areas for EU activity: employment, work and pay. However, aspirations
to incorporate the Charter into the Nice Treaty
job, skills and mobility; were foiled.
■■
■■ the changing world of work; The most significant development in the Lisbon
■■ an inclusive society; Treaty in terms of Europe’s labour markets was the
■■ the external dimension. inclusion of a reference to the Charter of Funda-
mental Rights which made the document legally
The Nice Treaty did not fundamentally change binding, although the text itself was not included in
the parameters of European labour policy but the Treaty or its appendices. The UK government
the Nice Council in 2000 signed the non-legally obtained a written guarantee that the European
binding Charter of Fundamental Rights which, courts would not be able to use the Charter to alter
among other things, asserted the rights of EU British labour laws, or indeed any laws dealing with
citizens to education and access to vocational and social rights. Poland, the Czech Republic, Ireland
322
and the UK also obtained opt-outs from other non- language problems and can encounter difficulties
labour related aspects of the Charter. finding a job. Compared to the US where employ-
ees move job and state much more readily than in
Europe, the European labour market is relatively
Labour mobility immobile.
Why does this relative European immobility
Free movement of labour is one of the key prin- matter? First, it represents labour market inflex-
ciples of the European Union and is incorporated ibility which, as discussed above, hinders Euro-
in Article 45 TFEU. The freedom for European pean competitiveness and the smooth functioning
workers to work anywhere within the EU and the of the eurozone.
non-EU members of the EEA plus Switzerland is Second, despite ongoing unemployment prob-
a basic right of European citizens and is important lems in several member states, Europe is experi-
in the quest to increase labour market flexibility encing growing labour shortages in a number of
and, as one of the four economic freedoms, to the sectors. Indeed, the co-existence of high levels of
smooth running of the SEM and EMU. Freedom unemployment and labour shortages is, in itself,
of movement entails the abolition of any discrimi- a symptom of labour market inflexibility. Short-
nation based on nationality between workers of ages in information technology and health work-
member states in relation to employment, remu- ers are commonplace in many parts of the Union,
neration and any other working conditions. but there are also frequent reports of shortages of
Labour mobility implies that workers will move both unskilled labour and of more highly skilled,
to areas where labour is in short supply and move professional workers. Labour mobility is far from
away from regions where there is excess labour. the total solution to this problem. More and bet-
However, labour mobility in Europe is relatively ter focused education and training must play its
limited. Table 14.5 shows that in 2012, only 3.4 part and the home states of migrant workers will
per cent of the population of the EU was com- suffer if too many of their more skilled citizens
posed of individuals born in other EU member opt to work outside their home state. However,
states, ranging from 1 per cent or less in Bulgaria, labour mobility can help plug the skills gap.
Latvia, Poland, Romania and Slovenia to over 10 Third, the rising age dependency ratio has
per cent in Ireland, Cyprus and Luxembourg. Not already been noted. In other words, Europe is
all the foreign born populations are part of the heading for a situation in which there will be few-
labour force: some are children of foreign workers, er workers available to support the retired popu-
whereas others are retirees, either retiring in the lation. One response to this dilemma is to raise
place where they have spent a significant propor- activity rates generally and for specific groups of
tion of their working life or moving abroad after workers such as women and older workers, in par-
retirement, often in search of a warmer climate. ticular. Another, and complementary approach, is
By far the biggest non-national share in the EU to increase the number of migrant workers, an
labour market was from outside the EU. Mov- approach which is often politically difficult to
ing to live and work in another EU country often implement but one which European countries
requires learning a new language and acclimatisa- may have to adopt. This increased migration is
tion to different cultures, rules, regulations and likely to incorporate both greater labour flows
administrative requirements. Other members among member states and more inflows from
of the immediate family also have to overcome outside the EU.
323
Table 14.5 Foreign born population as percentage of member state population, 2012
Born in other EU-27 Born outside the Total population

member state (%) EU (%) (mn)
Austria 6.5 9.3 8.443
Belgium 7.2 8.1 11.095
Bulgaria 0.4 0.8 7.327
Cyprus 12.6 10.6 0.862
Czech Rep. 1.3 2.4 10.505
Denmark 3.0 3.0 5.581
Estonia 1.5 14.5 1.340
Finland 1.7 3.1 5.401
France 3.3 8.0 65.328
Germany 4.2 7.9 81.844
Greece 2.8 8.3 11.290
Hungary 3.2 1.5 9.958
Ireland 11.0 3.9 4.583
Italy 2.9 6.1 60.821
Latvia 1.5 13.1 3.001
Lithuania 0.6 4.3 3.008
Luxembourg 31.4 9.8 0.523
Malta – – 0.418
Netherlands 2.8 8.6 16.730
Poland 0.7 1.1 38.538
Portugal 2.0 6.1 10.542
Romania 0.4 0.5 21.356
Slovakia 2.4 0.5 5.404
Slovenia 1.0 10.2 2.056
Spain 5.1 9.1 46.196
Sweden 5.2 9.9 9.483
UK 4.1 8.0 62.990
Eurozone-17 332.877
EU-27 3.4 6.5 503.666
Source: European Social Statistics 2013, Eurostat.
324
Case Study 14.2

Enlargement and the free movement of labour
As part of the accession treaties leading to the 2004 enlargement, the EU-15 were able to impose
restrictions on the free movement of workers from the new member states for a maximum of seven
years. This was to facilitate the gradual absorption of migrants from the new member states into their
labour markets and to avoid any sudden upheavals or disruption. The restrictions were scheduled for
review after the first two years and then after a further three and two years, before full removal in
2011. Initially, Ireland, the UK and Sweden, notably all member states with unemployment at that time
below the EU average, were the only member states not to apply any restrictions on migration from the
ten new members. Spain, Portugal and Finland were the next countries to remove restrictions whereas
others continued with the transition arrangements.
The situation had changed with the accession of Bulgaria and Romania in 2007. Although a similar
seven year transition period was negotiated for these states, the willingness of existing member states to
open their borders fully at the beginning or in the early stages of the transition period was more limited.
This reluctance was in part due to the growing and continuing unemployment in the recipient states
following the 2007–8 financial and economic meltdown and to concerns about the potential number
of migrants from these two countries that would move westwards from January 2014. These concerns,
often focused around jobs and the increasing demands on social infrastructure such as health and edu-
cation, were often intensified in a number of countries by the populist press and politicians who made
exaggerated claims about the impact of this migration.
In 2014, remaining restrictions against migrants from Bulgaria and Romania expired in Austria,
Belgium, France, Germany, Luxembourg, Malta, the Netherlands, Spain and the UK. Forecasts of the
resulting population movement over the following years vary widely from a few thousand to millions. In
reality, many Bulgarians and Romanians were already working legitimately in EU countries as a result
of special schemes which allowed migration as part of specific initiatives.
Opposition to the 2014 labour market opening has not been confined to any one member state but it has
been particularly vociferous in France, Germany and the UK. In mid-2013 the relevant national statistical
authorities estimated that 141,000 Romanians and Bulgarians were resident in the UK and 330,000 Bul-
garians and Romanians were living in Germany, for example. These statistics can and have been interpreted
in one of two ways: they are either taken as evidence that the demand for post-2014 migration will be sig-
nificant or that many of those who wish to move westwards have already done so and that any further mi-
gration will be relatively small-scale. Some commentators have pointed out that the number of Romanians
already resident in Spain and Italy is several times greater than those in the Northern European countries
and that, despite the higher unemployment levels there, they and other Southern European countries remain
a more popular choice for Romanian migrants for cultural and linguistic reasons.
In short, much of the debate about the impact of the ending of restrictions on Bulgarian and Roma-
nian migration (and presumably Croatian migration six years down the line) has become the subject of
assertion and counter-assertion based on scanty evidence and has been dragged into broader debates
325
about the EU generally. It has also caused some offence in the new member states themselves. The real-
ity is that, at the point of opening of the labour markets, the impact is unknown. The 2004 enlargement
showed that there were both push and pull factors in migration. The ‘pull’ factors came from promises
of a better life and more opportunities in the destination countries and the push factors from the lack
of opportunity at home. However, many migrants from the CEE countries did not view their moves as
permanent and some returned home within a relatively short period of time. Allegations also have been
made that east to west migration has taken place so that migrants can take advantage of more gener-
ous welfare systems – the so-called ‘benefit tourism’. The evidence for this point of view tends to be
anecdotal whereas the evidence against has tended to show that migrants from 2004 accession states
are less likely to draw upon the welfare state than local citizens and that their contribution in terms of
taxation is greater than their call on welfare payments and other services.
Case questions
1 Research the impact of the 2004 enlargement. What, if anything, can be learned from the opening
of Europe’s labour markets after the 2004 enlargement that can assist subsequent enlargements?
2 Migration is a highly charged political issue in many member states and free movement is also
a fundamental principle of European integration. Discuss the challenges of accommodating the
debate without moving away from the principle of free movement.
3 ‘In a few years we will be faced with a shortage of labour, not a shortage of jobs. We should
break away from this artificial segregation of nation from nation. Who is going to pay for the old
age pension and social services unless we have an addition to our population, which only immi-
gration can provide in the years to come?’ This quotation is from James Callaghan, British Prime
Minister from 1976–9, speaking in the House of Commons on 19 June 1946. To what extent is
this quotation relevant to contemporary Europe?
Conclusion young, an ageing population and the need to

improve the quality and adaptability of Europe’s
As part of a trend towards a growing consensus workforce so it can compete in an increasingly
around modified economic liberalism, there has technological and knowledge-rich age are driv-
been a subtle but perceptible shift in the EU’s ing the EU’s employment strategy. The need for
labour market policy since the late 1980s and ear- flexibility is also increased by the need to improve
ly 1990s, when workers’ rights dominated the EU factor mobility to assist in the adjustment of coun-
agenda, towards a greater emphasis on improv- tries within the eurozone to internal economic
ing labour market flexibility. However, there is no pressures. The long-term solution to labour mar-
move to remove these rights or reduce standards ket problems would thus appear to be in line with
at European level which are, in any case, relatively the needs of enterprises which, given increasing
modest by the standards of most member states. global competition and the changing demands
Demographic and labour market trends, such placed on the workforce, require highly trained,
as rising unemployment, especially among the adaptable and mobile workers.
326
Key points
■■ Europe’s labour markets can no longer be characterised as composed predominantly of full-time
male workers employed in manufacturing and are increasingly made up of female workers on
atypical contracts in the service sector.
■■ The age profile of Europe’s population is becoming increasingly skewed towards the upper age
ranges with serious implications for European labour markets and welfare systems.
■■ Improvements in European labour market flexibility are important tools in the battle to boost
the competitiveness of European business in the face of globalisation and to ensure smooth
economic adjustments in the eurozone.
■■ Attempts to reform labour markets are fraught with political difficulty.
■■ The emphasis of labour market policy has shifted from a concern for workers’ rights to the battle
against unemployment and towards improvements in labour market flexibility.
■■ Increased labour mobility and migration are politically contentious but can play an important
role in the resolution of Europe’s labour market problems.
Activities
1 Research labour mobility in the United States and suggest reasons why labour mobility is much higher
there than in Europe. What advantages does this give the US over Europe?
2 Find examples of European firms relocating because of high labour costs.
3 The Amsterdam Treaty contained a clause banning discrimination based on gender, racial or ethnic
origin, religion or belief, disability, age or sexual orientation. Research how this Amsterdam provision
has affected employment practices in relation to one of the above forms of discrimination.
1 What are the most important problems facing Europe’s labour markets? What challenges do they pose
for business?
2 What role can increased labour market mobility and migration play in providing an answer to at least
some of Europe’s employment problems? What obstacles might attempts to increase labour mobility
encounter?
327
3 Consider the conflicting concepts of labour flexibility. To what extent can they be reconciled?
4 Consider ways in which business can respond to the ageing population in Europe.
Bibliography
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en/1/EF1183EN.pdf, accessed April 2015.
328
Chapter 15
Europe in a global context
The merchant has no country.

Thomas Jefferson (1743–1826), third
President of the United States
■■ understand the EU’s position in the global economy;

■■ explain the main principles of EU trade policy;
■■ analyse the EU’s Global Europe strategy and its progress to date;
■■ distinguish between the EU’s multilateral, bilateral and unilateral approaches to trade policy and
assess how they fit into the context of Global Europe.
External economic relations with non-member (see Chapter 2). A major motivation behind many
countries have been a priority for Community of the EU’s policies discussed in earlier chapters is
members since the signing of the Treaty of Rome. to promote this competitiveness.
How this priority has been addressed and the These themes remain prominent halfway
focus of policy have varied over time but two through the second decade of the twenty-first
key themes have remained constant – a commit- century. Despite the difficulties experienced in
ment to trade liberalisation, preferably through the Doha Round of multilateral talks launched in
the WTO, but also through bilateral relations 2001, the EU remains committed to achieving a
with third countries if necessary, and efforts to successful conclusion of the talks. The competi-
preserve and enhance the competitiveness of tiveness issue remains a central theme of the EU’s
Europe’s businesses relative to their major rivals external economic relations as Europe struggles
331
Europe and the rest of the world
to emerge strongly from the financial and eco- European business in the
nomic meltdown of 2007–8 and strives to meet wider world: trade
the competitive challenges posed by globalisation
in general and by the progress of Brazil, Russia, As Figures 15.1 and 15.2 show, the EU is the
India and China (the BRIC economies – see Chap- world’s biggest exporter of both goods and ser-
ter 18) and other emerging markets. vices. In the case of goods, the EU’s export
This chapter addresses these issues by first supremacy is under a strong challenge from Chi-
outlining the EU’s position as a global economic na: in 2004, Chinese exports were less than half
actor. This analysis confirms the internation- those of the EU-28 but by 2013 they were only
al role of European business – a factor which 5 per cent below those of the EU in value terms.
emphasises the need for European business to Although EU export growth has been stronger
engage fully in the world economy, supported by than many of its major competitors during this
appropriate policies. The chapter then goes on to century, if present trends continue, China will
explain the key elements in the evolution of this shortly overtake the EU as the world’s biggest
policy, highlighting the strong degree of both exporter. Within the EU, Germany is by far and
continuity and adaptability that have character- away the largest goods exporter, with more than
ised European policy since its outset. The policy twice the value of exports (€471 bn) in 2013 than
itself is then discussed in more detail in relation its nearest rival, the United Kingdom (€230 bn)
to the three levels at which it is conducted – the with Italy (€181 bn) and France (€178 bn) some
multilateral, bilateral and unilateral levels. More way behind in third and fourth place respectively.
detailed discussion of European relations with The EU’s dominance of world service exports
different trading partners are discussed in sub- is greater than that of goods. The US, in second
sequent chapters. place, is some way behind the EU and shows
2000
1800
1600
1400 Brazil
1200 China
EU-28
€ bn
1000
India
800
Japan
600
Russia
400 US
200
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 15.1 World’s major exporters of goods, 2004–13

Source: European Commission, DG Trade, September 2014.
332
800
700
600 Brazil
500 China
EU-28
€ bn
400
India
300
Japan
200 Russia
100 US
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 15.2 World’s major exporters of services, 2004–13

Source: European Commission, DG Trade.
little sign of closing the gap. The growth in the has one of the world’s highest GDPs per capita
value of service exports from India and China has and benefits in trade terms from its physical loca-
far exceeded that of the EU between 2004 and tion in the midst of the EU, its economy is the
2013 but both were starting from such a long world’s twentieth largest whereas China’s is sec-
way behind the EU that, at current growth rates, ond and Chinese growth between 2000–12 aver-
it will take many years before they approach the aged 10.6 per cent per annum compared to 1.9
level of EU service exports. However, an accel- per cent for Switzerland over the same period. A
eration of their growth rates cannot be ruled out. similar, albeit slightly less extreme, story applies
The main EU service exporter in 2013, and for to India which has experienced annual average
many years preceding that, was the UK at €144 growth rates of 7.7 per cent during 2000–12
bn, followed by Germany at €113 bn, France €83 and whose economy was the world’s tenth larg-
bn and Italy €39.3 bn. est in 2013. Moreover, the combined population
Unsurprisingly, given its rapid trade growth, of China and India comprises 36 per cent of the
China has become the major supplier of goods to world’s population compared to Switzerland’s
the EU (see Table 15.1). Russia is in second place 0.11 per cent. It is this type of analysis which has
with its exports boosted by oil and gas. In terms encouraged the EU to increase its focus on secur-
of EU exports, Table 15.1 yields some insights ing greater market access for European businesses
into why the EU in its Global Europe strategy is in emerging markets (see Chapter 18).
concerned about its relatively poor export per- Table 15.2 sets out the main components of
formance in the world’s most rapidly growing the EU’s trade in goods and services. Until 2013,
economies. The US is the world’s biggest econo- when the situation was reversed, for many years
my and shares many complementarities with the the EU consistently ran a small deficit in goods
EU so it is not surprising that it is the EU’s most trade. The main driver of this deficit was the pri-
important export market. Switzerland, more sur- mary sector, especially in terms of energy prod-
prisingly, is in second place. Although Switzerland ucts. The opposite is true of manufacturing with
333
Table 15.1 2013 ranking of the EU’s main trading partners
Goods
Rank Leading suppliers Share of EU-28 Leading customers Share of EU-28

imports (%) exports (%)
1 China 16.6 US 16.6
2 Russia 12.3 Switzerland 9.8
3 US 11.7 China 8.5
4 Switzerland 5.6 Russia 6.9
5 Norway 5.4 Turkey 4.5
6 Japan 3.4 Japan 3.1
7 Turkey 3.0 Norway 2.9
8 India 2.2 UAE 2.6
9 South Korea 2.1 Brazil 2.3
10 Brazil 2.0 South Korea 2.3
Share of top 10 suppliers 64.2 Share of top 10 markets 59.4
Commercial services
Rank Leading suppliers Share of EU-28 Leading customers Share of EU-28

imports (%) exports (%)
1 US 28.9 US 23.5
2 Switzerland 12.2 Switzerland 12.4
3 China 4.1 China 4.8
4 Russia 2.8 Russia 4.3
5 Japan 2.8 Japan 3.4
6 India 2.2 Canada 2.4
7 Canada 2.0 Brazil 2.1
8 Hong Kong 1.8 India 1.8
9 Brazil 1.3 Hong Kong 1.6
Share of top 9 suppliers 58.0 Share of top 9 customers 56
Source: European Commission, DG Trade.
the EU running clear trade surpluses in all sec- the domination of EU economies by the service
tors, bar miscellaneous manufactured articles. sector, manufacturing and its competitiveness
The value of exports of machinery and manufac- remains central to European business success and
turing equipment is particularly high, outstrip- that the EU can still compete in manufacturing. In
ping the total value of service exports altogether. order to do so, however, it must compete at the
In short, these figures demonstrate that, despite higher value-added end of manufacturing.
334
Table 15.2 Extra-EU-28 trade in goods and services by sector, 2013
Imports (€bn) Exports (€bn)

Goods
Food and live animals 85.5 75.3
Beverages and tobacco 7.6 29.0
Crude materials, inedible, except food 67.4 40.5
Mineral fuels, lubricants and related materials 498.7 121.5
Animal and vegetable oils, fats and waxes 8.7 4.8
Chemical and related products, not elsewhere specified 157.7 273.7
Manufactured goods classified by material 164.8 200.9
Machinery and transport equipment 434.2 709.4
Miscellaneous manufactured articles 217.1 182.2
Commodities and transactions 40.5 101.2
Services
Transport 115.8 140.2
Travel 87.4 101.2
Communications 16.9 20.3
Construction 7.8 17.8
Insurance 8.7 18.9
Financial services 22.8 59.2
Computer and information services 10.3 47.3
Royalties and licence fees 33.4 43.9
Other business services 145.9 219.2
Personal, cultural and related services 6.4 8.7
Source: European Commission, DG Trade, September 2014.
European service exports dominates world who are contemplating a presence outside their
services trade (see Figure 15.2) and, although domestic market.
this business is likely to come under increas-
ing competition from emerging markets in the

future, services will remain central to Europe’s European business in the
external commercial health. Of particular wider world: investment
importance are other business services, which
comprise legal, accounting, consultancy services, FDI is more volatile than trade: it tends to react in a
etc., and which frequently establish themselves more exaggerated manner to the ups and downs of
abroad to take advantage of the most buoyant the economic cycle and can be boosted significantly
markets and to locate themselves near existing by large mergers and acquisitions or by the start-up
clients who have themselves located abroad or of major investment projects. Conversely, major
to attract new clients from the host countries divestments can quickly pull down FDI figures in a
335
particular period. However, it is clear that, whatever The US and Switzerland are first and second in both
the unpredictability of FDI in any one year, the trend categories respectively: this reflects long standing
in FDI flows has been sharply upwards in the longer ties, the EU’s complementarities with these part-
term, making FDI a much greater contributor to ners and perhaps the perceived safer investment
cross-border commercial activity than in the past. environment than in the more rapidly growing but
This may partially explain why the EU has, since the riskier transition economies. Japan’s position as the
coming into force of the Lisbon Treaty, gained exclu- tenth ranked destination for FDI is explained by the
sive competence over investment within the context difficulties often encountered by foreign investors
of the common commercial policy.The FDI figures in in gaining access to Japanese markets but Japan is
this section represent a snapshot of EU inflows, out- third as a source of inward investment into the EU,
flows and stocks of FDI taken from the most recent reflecting its long tradition of investing in the EU.
statistics available at the time of writing. Although Most noticeable, however, is the fact that in 2012,
they do not necessarily pick up year-to-year changes, the EU invested 14 times more in the US than in
which have been particularly volatile since the 2007– China, despite the size and growth performance of
8 financial and economic crises, some of the conclu- the latter, implying that there are still many obsta-
sions arising from them are representative of longer cles to overcome in establishing a presence in Chi-
term trends (see also Case Study 17.1). na. India does not figure in the top ten for either
On a global level, FDI from developing coun- the EU’s investment inflows or outflows.
tries, largely the rapidly growing economies of In terms of the EU’s FDI stocks, Figure 15.4
Asia, has grown steadily over the years whereas confirms the dominance of North America which
that of the developed countries, not only those in holds almost three times as much of the EU’s
Europe, has been much more erratic. According stock of FDI than its nearest rival – Asia. FDI
to UNCTAD’s annual World Investment Report, as stocks measure the amount of FDI present in a
recently as 2008, 49.2 per cent ($983 bn) of the particular location and reflect the net inflows and
world’s FDI outflows originated in the EU where- outflows of FDI into that destination over time.
as in 2013 the equivalent figures were only 17.5 In this case, the strong position of North Amer-
per cent or $250 bn. In 2008, the EU accounted ica reflects the long-term and close ties between
for 30 per cent of world FDI inflows: by 2013, Europe and America.
this figure had fallen to 17 per cent. Figure 15.5 illustrates which EU members are
Figure 15.3 confirms some of the concerns the most active in terms of overseas investment.
of Global Europe that EU member states were not At first sight, the leading position of Luxembourg
engaged sufficiently with the world’s most rap- is surprising. However, this can be explained by the
idly growing economies. The EU’s FDI inflows large presence of special purpose entities (SPEs)
and outflows are dominated by North America there. SPEs are mainly foreign-owned financial
and non-EU Europe, which includes Switzerland, holding companies, mostly engaged in cross-
Norway, Turkey, the Ukraine and Russia. Asia, border financial transactions but with little or no
the world’s fastest growing region, trails in third activity in the member state of residence and are
place as a destination for EU FDI and is only the established for a variety of reasons. Taking Luxem-
fifth largest source of inward FDI within Europe. bourg out of the picture, the UK is the EU’s big-
Table 15.3 disaggregates the regional figures to gest originator of FDI, a position which it has held
some degree by setting out the EU’s top ten FDI for most years. Although it retained its leading role
partners for both inward and outward FDI flows. in 2011–13, the UK’s FDI activity has declined in
336
140
Outward Inward
120
100
80
€ billion
60
40
20
0
−20 Non-EU Africa North Central South Asia Oceania Offshore
Europe America America America financial
centres
Figure 15.3 EU-27 outward and inward FDI flows by region, 2012
Source: Eurostat, Foreign Direct Investment Statistics, August 2014.
absolute terms in recent years, more than the fall go a long way towards explaining the UK’s pre-
in the FDI outflows of other major EU players. eminence in EU FDI activity. Services, and finan-
Finally, the sectoral breakdown of the EU’s cial and insurance activities in particular, have also
inward and outward FDI stocks shown in been the main recipient of inward FDI.
Table 15.4 reflects Europe’s economic strengths
and the fact that the EU has, for some time, been a
service economy. Outward FDI for services is two Europe’s external commercial
and a half times greater than that of manufactur- relations: from the Treaty of
ing. Further disaggregation shows that the most Rome to the Treaty of Lisbon
important individual sector for EU outward FDI
stocks is financial and insurance services, activities The principles of and legal base for the formula-
in which the UK is particularly strong and which tion of the Common Commercial Policy (CCP)
Table 15.3 Ranking of EU-27 FDI partners, 2012
Outward stocks (€bn) Inward stocks (€bn)

US 1655.0 US 1536.4
Switzerland 679.0 Switzerland 505.2

Canada 258.0 Japan 161.5
Brazil 246.0 Canada 142.6
Russia 189.5 Brazil 98.1
Australia 141.6 Russia 76.6
Hong Kong 132.9 Singapore 68.6
Singapore 118.7 Hong Kong 50.2
China 118.1 Australia 34.3
Japan 98.8 China 26.8
337
2500
2000
1500
€ billion
1000
500
0
Non-EU North Central Near & Asia Oceania North Central South
Europe Africa & South Middle America America America
Africa East
Figure 15.4 Outward stocks of FDI by region, EU-27, end 2012

160
140
120
100
€ billion
80
60
40
20
0
Luxembourg UK Germany Italy France Netherlands Others
Figure 15.5 Origin of EU FDI outflows, average 2011–13

338
Table 15.4 EU-27 FDI stocks by economic activity, 2011
Outward (€bn) Inward (€bn)

Agriculture, hunting and fishing 4.1 2.1
Mining and quarrying 450.2 27.7
Manufacturing, including: 1245.8 374.0
■■ Food products, beverages, tobacco 181.6 82.0
■■ Textiles and wood activities 58.1 11.5
■■ Petroleum, chemical, pharmaceutical products 442.8 139.3
■■ Metal and machinery products 368.6 72.6
■■ Vehicles and other transport equipment 75.4 39.1
Electricity, gas, steam and air conditioning 63.7 17.7
Water supply, sewage and waste management 6.0 3.3
Construction 23.2 10.8
Services, including: 3087.6 3283.0
■■ Repairs of motor vehicles and storage 215.1 159.7
■■ Transport and storage 59.9 25.9
■■ Accommodation and food service 21.5 11.8
■■ Information and communication 338.0 88.7
■■ Financial and insurance 1849.6 2563.6
■■ Real estate 44.1 51.0
■■ Professional, scientific and technical 451.6 302.9
■■ Other services 107.8 79.4
Others 60.4 49.5
Total 4940.9 3768.1
were contained in Articles 110–116 of the Treaty abolition of customs duties between Member
of Rome. Article 110 set out the basic principles States may have on the increase in the competi-
of the CCP: tive strength of undertakings in those States.
By establishing a customs union between Article 110, thus, encapsulated key features of
themselves Member States aim to contribute, subsequent Community policy, both in the field of
in the common interest, to the harmonious internal and external integration, and alluded to
development of world trade, the progressive two key themes which remain central to the EU’s
abolition of restrictions on international trade external economic policy to the present day. First,
and the lowering of customs barriers. it embodied the fundamental principles of a lib-
The common commercial policy shall take eral free trade system, emphasising the principles
into account the favourable effect which the of ‘harmonious development’, ‘the progressive
339
abolition of restrictions on international trade’ relating to goods and the negotiation of trade
and ‘the lowering of customs barriers’ – princi- agreements with third parties, has generally been
ples which permeate the mission of the General accepted by member states as a necessary conse-
Agreement on Tariffs and Trade (GATT) and, quence of the adoption of a customs union format
after 1995, the WTO. Second, Article 110 high- for integration. However, as the scope of interna-
lights the importance of increasing the competi- tional trade negotiations has extended beyond the
tiveness of EU business. In particular, it identified traditional issues of tariffs and quotas (see below
the potential positive impact of the proposed cus- for discussion of Global Europe), there has been
toms union on the competitive strength of enter- inevitable pressure for transfer of competences in
prises in member states, foreshadowing many of this area to enable the European Commission to
the arguments surrounding the creation of the continue to act as the single negotiator on trade-
SEM in the 1980s and establishing a strong link related matters in the broadest sense. This has not
between internal integration and the achievement always gone down well with member states. In
of commercial success for European business in 1994, the European Court of Justice (ECJ) con-
an increasingly globalised trade and investment firmed the exclusive competence of the Commis-
environment. sion to negotiate agreements relating to trade in
Article 113 sets out the broad guiding rule goods in matters of both tariffs and non-tariff bar-
that: riers but determined that competence was shared
between member states and Community insti-
the common commercial policy shall be based tutions in negotiations relating to services and
on uniform principles, particularly in regard to intellectual property. In practice, member states
changes in tariff rates, the conclusion of tariff and accepted the Commission as sole negotiator at the
trade agreements, the achievement of uniform- Uruguay Round in issues of mixed competence
ity in measures of liberalisation, export policy but without prejudice on the competence issue.
and measures to protect trade such as those to Efforts to extend formal Community com-
be taken in case of dumping or subsidies. petence in external commercial negotiations in
line with the lengthening of the external eco-
Uniformity of approach was necessary to nomic agenda were resisted for some time. The
preserve the integrity of the customs union and Commission had to fight a long battle with mem-
the single market and, as such, along with agri- ber states to grant it exclusive competence in
culture, was the first policy area involving trans- the negotiation of airline agreements with third
fers of powers from member states to Brussels. It countries in order to protect the integrity of the
also gave the Community, as the world’s biggest single aviation market. Similarly, efforts to grant
trading bloc, much greater bargaining power in the EU exclusive competence in services and
international trade negotiations than if individual intellectual property within the Amsterdam Trea-
member states were acting independently. ty were unsuccessful and the status quo set out in
Article 113 also provides a good example of the 1994 ECJ decision was confirmed.
the ongoing struggle between the centralising This all changed with the Lisbon Treaty when
tendencies of European institutions and member the EU’s powers were brought more into line with
states keen to hold on to their sovereign power. the contemporary reality of a much broader agen-
The European Commission’s competence and da at international trade talks, both multilaterally
pre-eminence in the formulation of trade policy and bilaterally. Accordingly, member states agreed
340
to grant the EU full negotiating powers in relation industrialised economies, leading to a more com-
to services and intellectual property and exclusive plex world in which trade policy was formulated.
competence for FDI. This latter change supports These changes stimulated significant changes in
the Global Europe strategy by liberalising and pro- the way European MNCs operated. In particular,
tecting the investments of EU companies in over- the forces of globalisation had resulted in the emer-
seas markets, thereby increasing market access and gence of international supply chains which reflect-
facilitating the process of negotiating broader and ed ever more complex outsourcing of production,
deeper trade agreements. Extension of EU pow- and increasingly services, to lower cost economies
ers in cultural/audiovisual, education and social/ along vertical lines. Such activities were also mov-
health services were also agreed with certain ing higher up the value-added chain and involving
caveats relating to maintaining the EU’s cultural more capital- and technology-intensive industries.
and linguistic diversity; the provision of such ser- In turn these changes had major implications for
vices by member states and, where unanimity is international economic relations, not only creating
required, for the adoption of internal rules. new opportunities for trade and investment but
The other major trade-related change intro- also placing intense competitive pressure on many,
duced in the Lisbon Treaty was an enhanced role particularly traditional, industries; adding to the
for the EP which henceforth will have to be kept stress on the world’s eco-systems and intensifying
regularly informed of all trade negotiations and pressure for access to key raw materials.
approve all EU trade legislation. As such, the EP The EU recognised that Europe’s trade
will be involved in trade policy making at a much was strongest with its traditional trading part-
earlier stage and will bring a wider range of views ners but was significantly underperforming in
and voices to bear on trade policy. relation to the world’s more rapidly growing
emerging markets. This contrasted sharply with
the performance of the US and Japan in these
Europe’s emerging markets. Moreover, the EU recognised that,
strategy: Global Europe although sections of European industry were
performing well, notably those companies at the
In 2006, the European Union launched a new higher quality end of sectors such as telecom-
strategy for its international commercial policy munications, finance, insurance, environmental
– Global Europe – which was intended to bring its services, capital goods, machinery and transport
policies into line with the changing international equipment, the erosion of the brand, quality
economic order. These changes were many and and service advantages of European businesses
varied, including deeper international economic by newcomers from China and other emerging
integration as demonstrated by rapidly growing markets was a real danger.
trade and cross-border investment and capital Accordingly, the 2006 Global Europe initia-
flows; deeper and more far reaching financial mar- tive identified key themes which would drive
kets; and falling communication costs, particular- the future direction of Europe’s trade policy.
ly, but not only, arising from significant changes Although Global Europe was launched as a new
in information technology. As a result of the rapid initiative, in reality in some ways it represented
growth of emerging economies, especially the a relaunch of previous initiatives and themes and
BRIC countries (see Chapter 18), the world econ- provided a response to the ailing multilateral
omy was no longer dominated by the advanced talks under the umbrella of the WTO, retaining
341
The Common External Tariff

Box 15.1
The Common External Tariff (CET) lies at the heart of the CCP and is its most well-established and
visible element. A customs union, as opposed to a looser free trade area arrangement, requires its
members to adopt common tariffs. Without common tariffs, third countries would be able to by-pass
the higher tariffs involved in exporting to certain parts of the union by exporting to the lowest tariff
member and then re-exporting the goods within the customs union area, where internal trade is tariff-
free, to the final destination.
Eight successive rounds of trade liberalisation talks were completed prior to the formation of the
WTO in 1995, resulting in systematic reductions in its members’ tariffs. At the time of GATT’s launch
in 1948, average tariffs for most signatories to the original GATT agreement were well into double
figures (French tariffs, for example, averaged 21 per cent and those of the UK 23 per cent) – levels
which were a trade deterrent. According to the World Bank’s World Development Indicators, the EU’s
simple mean bound* tariff was 3.96 per cent in 2012 whereas the weighted mean tariff on all products
was 1.02 per cent. The weighted mean tariff is the average of effectively applied tariff rates weighted
by the amount of product imported and as such is a better reflection of the role of tariffs in a country’s
overall trade position than the simple average.
However, these figures still mask important variations in the degree of protection against imports af-
forded to EU business. Raw materials, in particular, often enter the EU duty-free and are relatively free
from non-tariff barriers: this is confirmed by the disaggregation of the 1.02 per cent weighted mean on
all products into a weighted mean tariff of 0.35 per cent for primary products and 1.61 per cent for
manufactured products. Moreover, a significant proportion of imports enter the EU duty-free under the
terms of the growing range of preferential agreements to which the EU is party.
The World Development Indicators also highlight the relatively low level of tariff protection within
the EU and the big differences in tariff rates across countries. The EU’s low mean average tariff rate
of 1.02 per cent on all products is not that dissimilar to tariffs in advanced industrial nations – the
equivalent figure for Canada, for example, is 0.83 per cent; for Japan 1.22 per cent; and the US 1.54
per cent. However, the tariff rates for large, emerging markets are higher: Brazil’s weighted average
tariff on all products is 7.73 per cent and on manufactured products 10.28 per cent: the corresponding
figures for China are 4.1 per cent and 6.22 per cent respectively and for India 8.18 per cent and 8.3
per cent. The rates of many of the least developed countries are significantly higher still, often well into
double figures. These factors go some way to explain why further tariff removal has formed an impor-
tant part of the Doha Agenda.
*Bound tariffs are tariffs which WTO members are committed to not raising.
its commitments to these talks while promot- The key theme of Global Europe is increasing
ing deeper and more extensive trade agreements openness to trade for European business wher-
with new countries as an insurance against failure ever it is achievable, but particularly in the most
of the Doha Round. rapidly growing markets. The strategy regards
342
Milestones in the EU’s external economic relations
Box 15.2
1968 Agreement on the CET and customs union – two years ahead of schedule
1994 ECJ rejects Commission’s argument that it should have limited competence over trade in
services and trade-related aspects of intellectual property
1996 Market Access Strategy launched
2006 Launch of Global Europe
2009 Lisbon Treaty extends the powers of the European Parliament over trade policy and gives the
EU exclusive competence over FDI and increased powers in services trade and intellectual
property
2011 July – EU-Korea FTA in force – most ambitious trade agreement negotiated by EU and first
agreement concluded in line with Global Europe strategy
trade openness as essential for growth and jobs by potential for European business. This is yet
allocating resources more efficiently, by facilitat- another way of promoting trade liberalisa-
ing economies of scale and by increasing domestic tion and is intended to extend EU bilateral
competitive pressure and rewarding innovation. agreements to include increasingly important
As such, it implicitly acknowledges that Europe’s beyond-the-border issues which are currently
prosperity is increasingly linked to other regions – dealt with only to a limited extent by the WTO;
especially the BRIC economies – and emphasises ■■ a wide-ranging agreement with the US with
that the priority for Europe’s trade policy is a focus the potential to create the world’s largest sin-
on opening markets abroad rather than on protect- gle market involving many non-traditional
ing its own borders (the latter is not abandoned, trade policy provisions (see Chapter 17);
however, as the later section on unilateralism dem- ■■ a new relationship with China: given its tre-
onstrates). Such an approach is intended to nur- mendous growth in recent decades, China has
ture the growing network of global supply chains been singled out as a priority when it comes to
in which European business is involved and give forming bilateral ties (see Chapter 18);
Europe the best chance of securing economic suc- ■■ a focus on the enforcement of intellectual
cess as a provider of high quality, specialised goods property rights (IPR) – the lack of adequate
and services in a knowledge-based economy. IPR protection has been a constant complaint
In order to support the above theme, the main of European business about their engagement
elements of Global Europe are: with China but it is an issue which extends to
many of Europe’s trading partners;
■■ a renewed and revitalised market access strat- ■■ initiatives to open third country public pro-
egy, first articulated in the 1990s – another curement markets;
way of pushing the trade liberalisation agenda; ■■ an appropriate use of trade defence instru-
■■ a strong commitment to the WTO’s trade lib- ments (TDIs);
eralisation agenda; ■■ to ensure that the key themes and issues of
■■ a new generation of free trade agreements Global Europe and Europe’s internal policies are
focused on those markets with the most consistent with and reinforce each other.
343
Opening markets for in third country markets. Its overall objectives,

European business therefore, are to adopt a ‘more systematic, coher-
ent and proactive approach’ to the negotiation
Greater openness in the global trading system and enforcement of trade deals and rules and to
has exposed European firms to a greater degree place greater emphasis on opening third country
of competition than ever before in their domes- markets. More specifically, the MAS pursued the
tic market and is also creating opportunities for following goals:
them to compete more effectively in overseas
markets. The goals of internal and external EU ■■ The compliance of trading partners with their
policy are converging as external policy increas- obligations arising out of WTO agreements.
ingly focuses on improving market access for EU Implementation and enforcement of WTO obli-
firms in third countries, including traditional gations extends beyond tariff reductions into
SEM issues such as technical standards and ser- issues such as service liberalisation and IPRs.
vice liberalisation. ■■ Full exploitation of existing market opening
In 1996, the Commission announced its new instruments – to be reinforced by the Trade
Market Access Strategy (MAS) which explicitly Barriers Regulation (TBR) and bilateral agree-
reflected these trends. The principles of MAS ments with key partners.
were not new to the EU’s external commercial ■■ Action against other barriers to cross-border
policy but MAS did imply a more systematic and economic flows which do not fall into the
coordinated use of existing policy instruments traditional category of ‘trade barrier’. These
and resources. The guiding principles of the MAS barriers include remaining high tariff barri-
are to concentrate the EU’s international com- ers; overly bureaucratic customs rules and
mercial relations efforts on improving the climate procedures and discriminatory tax rules and
in which European firms operate – principles practices; technical regulations and standards;
which are entirely consistent with general EU abuse of WTO sanitary and phytosanitary
economic policy and with the objectives of the (SPS) rules; restricted access to raw materi-
SEM. This was to be achieved by creating oppor- als; poor protection of IPRs, including geo-
tunities for Community firms to compete in third graphical indicators and poor implementation
country markets on equal terms with domestic and enforcement of international agreements;
businesses. ongoing barriers to service trade; barriers
The benefits of open markets arise, according to FDI; discriminatory public procurement
to the Commission, from increased competition, rules; misuse of legitimate trade defence
which in turn boosts competitiveness and gener- instruments such as anti-dumping or anti-
ates additional growth and jobs. This additional subsidy duties and discriminatory competition
liberalisation, interdependence and competition regulations.
requires constant adjustments from business in ■■ The provision of information to business-
terms of strategies for investment, networking, es about the possibilities offered by exist-
sourcing, financing, etc. – adjustments which ing instruments to press for greater market
were also necessitated by the SEM and related opening.
policies.
The MAS is based on the assumption that The Commission can choose to pursue its mar-
European firms face many and various obstacles ket opening objectives bilaterally or multilaterally.
344
In view of its role as the world’s largest trading market opening. Specific multilateral objectives
group, the EU has a strong interest in strength- include:
ening multilateral provisions. However, this has
proved complex and extremely time consuming, ■■ completion of the Doha Round of multilateral
leading to an enhanced role for bilateral actions in trade negotiations (see Case Study 15.1);
the interim. Bilateral actions can take the form of ■■ more extensive market opening in areas already
ad hoc country and country-sector-specific nego- subject to multilateral rules and the identifica-
tiations, visits, more comprehensive commercial tion of new areas suitable for market opening:
agreements with individual countries or regional sectors regarded as ripe for such action include
groupings and use of the TBR. More specifically, financial services, basic telecommunications,
the bilateral agenda includes: maritime transport, services generally and
government procurement;
■■ Identification of trade barriers: the Commis- ■■ responses to the challenges raised by globali-
sion has set up an online Market Access Data- sation, particularly in relation to cross-border
base which contains details of known trade investment, regulation of competition and the
barriers and which relies on information pro- links between trade and the environment and
vided by European business. This information trade and labour conditions.
is then used both as an information resource to
help EU exporters and as an aid to the Com- The MAS in 1996 was not a radical new depar-
mission in prioritising which market access ture for EU external commercial policy but it did
obstacles to address. The maintenance and herald a consolidation and intensification of exist-
availability of the database is part of a broader ing efforts and codified them within a consistent
Commission strategy of creating closer coop- framework. Similarly, market access remained
eration with business. central to the 2006 Global Europe strategy. The
■■ Identification of the most coherent opportu- motivations for and principles of market access
nities for the elimination of trade barriers, remained the same but, despite some notable
including the establishment of priorities and successes in opening individual product mar-
selection of appropriate instruments. kets since 1996, progress in market opening was
■■ Improved coherence between bilateral and regarded as slow, resulting in adjustments to the
multilateral approaches and their coordina- MAS. These included various technical initiatives,
tion with other initiatives such as the promo- stronger relationships among the Commission,
tion of industrial cooperation and technical member states and EU business and the decen-
assistance. tralisation of market access initiatives through the

■■ Improved coordination of market opening creation of locally based EU Market Access Teams
activities by the Commission, member states, in third countries involving Commission delega-
business and Commission delegations. tions, member state embassies and business.
The main multilateral forum is the WTO but

others, such as the OECD, the Energy Charter Multilateralism
Treaty, the International Maritime Organisation,
and the International Civil Aviation Organisa- Multilateralism literally means ‘many-sided’
tion, also provide opportunities for further and, in the trade context, refers to the approach
345
which tries to secure agreement on trade matters The 28 EU member states and the EU in its
by many partners. In practice, multilateralism own right are members of the WTO. European
refers to the activities and policies of the World countries were at the heart of the GATT since its
Trade Organisation and its 160 members (as of formation with Belgium, France, Luxembourg,
June 2014). The WTO is the successor organi- the Netherlands and the UK forming five of its
sation to the GATT which was signed in 1947 23 original signatories. In 1950, Italy, Denmark,
by 23 countries and came into force in 1948. Its Sweden, Finland and Greece also signed up fol-
purpose was to establish a rules-based interna- lowed by Austria and West Germany in 1952.
tional trading system dedicated to avoiding the Spain, Portugal, Ireland, Malta and Cyprus fol-
protectionist mistakes of the pre-World War lowed suit in the 1960s. With the exception of
Two era by basing these rules on the principles Poland, Hungary and Romania, who joined ear-
of progressive trade liberalisation. According to lier, the former Soviet satellites and the Baltic
the introductory paragraph of the GATT, this states signed up to the multilateral trading system
was to involve the ‘substantial reduction of tar- after the collapse of the Soviet Union.
iffs and other barriers to trade and the elimina- The EU and its member states have maintained
tion of discriminatory treatment in international a strong, unerring commitment to multilateralism
commerce’. and the principles of free trade. This commitment
In 1995, the GATT was transformed and inte- remains at the core of the Global Europe Strategy:
grated into the World Trade Organisation which the strong bilateral component of Global Europe
has a stronger legal and institutional basis than is regarded by the EU as a complement to rather
the GATT and which, through the Dispute Set- than as an alternative to its multilateral commit-
tlement Mechanism (DSM), has strengthened ments. As explained above, the EU in the form of
the ability to act against breaches of international the European Commission negotiates at the WTO
trade rules. The WTO’s role is to continue the on behalf of all 28 EU members. Its negotiating
core mission of the GATT but its task has become mandate is conferred upon it by the Council.
more complex because the membership is now The Commission also works closely with mem-
much bigger and more heterogeneous, leading ber states and the Trade Policy Committee of the
to a wider range of interests and priorities that Council to develop a feasible negotiating position.
must be satisfied. Moreover, changing geopolitics Any agreement negotiated at the WTO on behalf
and the evolving international economy and trad- of the EU by the Commission must be formally
ing system have further complicated matters: approved by both the Council and the EP.
multilateral talks are no longer simply about The EU’s resolve in favour of multilateralism
freeing up trade in goods through the progressive remains unshaken but the length of time taken to
elimination of tariffs but they also cover, among reach agreement in multilateral talks has grown
other things, agriculture, services, technical from months in the earlier rounds to 8 years for
barriers to trade, SPS measures, trade-related the Uruguay Round and 13 years and counting
aspects of intellectual property rights (TRIPS) in the case of the Doha Round which had still to
and procurement. At times, efforts, albeit unsuc- reach a conclusion in 2015. This has created frus-
cessful, have been made to include other topics tration, and hence has encouraged countries and
on the WTO agenda such as competition policy regional groupings, including the EU, to look to
and trade-related aspects of labour and of the bilateral agreements to achieve their trade policy
environment. objectives.
346
Case Study 15.1

The WTO: a victim of its own success?
Despite the absence of agreement, the EU continues to place multilateralism and the conclusion of the
current WTO talks – the Doha Round – at the heart of its trade strategy. Launched in 2001 and still
some way short of a conclusion in 2014, these talks have dragged on and, in the eyes of many, this fail-
ure is driving trading nations to seek alternative solutions for their trade policy concerns.
The Doha Round has been plagued by setbacks from the beginning: initial attempts to launch the
talks in 1999 in Seattle failed against a background of violent demonstrations and poor preparation.
When the talks eventually got underway in 2001 at Doha in Qatar, progress was tortuous: the headline
ministerial meetings, intended to make key political decisions, failed, or at best, ended inconclusively
and in 2006, the talks were even suspended for a while. Since then, progress has been mixed and the
talks have continued in a stop-go fashion. The most optimistic moments came after the Bali Ministerial
of December 2013 when apparent agreement was reached on the trade facilitation aspect of the talks.
However, subsequent meetings to settle outstanding technical arrangements arising from the political
settlement on trade facilitation have missed their deadlines and the hoped for schedule for the conclu-
sion of the talks on the remaining items on the Doha Agenda had not materialised by the end of 2014.
This makes it extremely unlikely that the 2015 deadline for putting the whole Doha Agenda to bed will
be met.
Press coverage of the failure of the talks so far has understandably focused on key negotiating is-
sues but some of the responsibility lies in the nature of the organisation itself. When it was launched in
1948, the GATT had only 23 members and the 1960 Dillon Round, for example, was concluded in under
a year. By 2014, the WTO had 160 members, the majority of whom were developing countries and the
Doha Round had been in progress for 13 years.
There has been a notable change in the dynamics of the trade talks over the years. For many years,
the US, the EU and Japan were able to reach a consensus on negotiating matters and impose it on the
rest of the members. This process was facilitated by the ‘Green Room’ where ministers from the bigger,
more influential countries would meet in an attempt to break the deadlock, perhaps inviting one or two
developing countries into the process but essentially excluding smaller and developing countries. During
the Doha Round, under the leadership of Brazil, India and China, developing countries have asserted
themselves and developed country domination of the talks has declined. Tension between developed and
developing countries has been apparent throughout the negotiations, particularly but not only in the
agricultural sphere. However, developing countries themselves have differing interests and their hetero-
geneity has increased the difficulties in reaching agreement.
The relative decline of tariffs on industrial goods arising from earlier rounds has highlighted the
importance of non-tariff barriers (NTBs) and attention has shifted to their removal and other issues
such as service and agricultural liberalisation. NTBs first appeared on the agenda in a minor way during
the Tokyo Round (1973–9) in relation to government procurement, technical standards and the special
and distinctive treatment of developing countries. The Uruguay Round expanded the agenda further to
347
include intellectual property, trade-related investment measures and dispute settlement. The agenda
had expanded even further by the Doha Round and includes agriculture; non-agricultural market access
(NAMA); services; trade-related aspects of intellectual property; anti-dumping and subsidies; regional
trade agreements; dispute settlement; trade and the environment; electronic commerce; small econo-
mies; trade, debt and finance; trade and technology transfer; special and differentiated treatment; and
trade facilitation.
The extensive Doha Agenda has also not helped the negotiating process. Launched ostensibly as a
‘development round’ designed to help developing countries in particular, the Doha Agenda has suffered
paradoxically from being both too wide and too narrow. Since the Uruguay Round, the negotiating
process has shifted from plurilateralism to a single undertaking. Under the plurilateral system, mem-
bers were able to choose which parts of the negotiated package they signed up to. As a result of the
introduction of the single undertaking, members have to sign up to the whole package. This makes
negotiations more complex and, ideally, should encourage members to seek trade-offs between one part
of the overall package and another. However, for the single undertaking model to work, there must be
something in the overall package for everyone.
Although the Doha Agenda encompasses a much broader range of issues than ever before, which can
make it more difficult to reach agreement, it can also be argued that the agenda is too narrow for the
single undertaking to work. For example, the EU and Japan were initially anxious to include the ‘Sin-
gapore issues’ (so-called because they were the subject of four working groups set up at the Singapore
Ministerial meeting in 1996) – greater transparency in procurement, trade and investment, trade and
competition policy and trade facilitation – on the Doha Agenda. The US was lukewarm about these is-
sues whereas developing countries opposed them. The only Singapore issue to remain on the Doha Agen-
da is trade facilitation, which is essentially about making the bureaucratic side of trade more efficient
and which could greatly benefit developing countries. Once the other three Singapore issues disappeared
off the agenda, and given the strong focus on liberalising agricultural trade, there has been limited scope
for developed countries to trade off any concessions they make on agricultural trade for gains elsewhere.
Agriculture proved to be a sticking point throughout the negotiations. Agriculture is a key and com-
plex component of the talks. Developing countries want, among other things, an end to agricultural sub-
sidies in developed markets and greater access to developed markets. This requires deep cuts in support
to farmers in developed countries, which will only be possible for developed country politicians to sell
at home if there are real gains to be made elsewhere – and, even then, they would find it far from easy.
The consequences of the stalled negotiations, and potentially their ultimate failure, are far reaching.
Many would celebrate the demise of the WTO which they see as a secretive, undemocratic institution
which rides roughshod over the interests of sovereign states with scant regard for the needs of the
poor. While the WTO is far from perfect, it has established the framework of a transparent, rule-based
international trading system which does not allow its members to arbitrarily raise tariffs. The rules for
businesses operating in this environment are, for the most part, clear and predictable. Without the trad-
ing environment established by the WTO, trading conditions would become infinitely more complex and
costly and could descend into trade wars.
348
Although a collapse of the multilateral trading system is a long way off, the present impasse does
damage it. An immediate consequence is the acceleration of the growth of bilateralism and preferential
trading agreements (discussed elsewhere in this and subsequent chapters). In order to avoid future
deadlocks, in the longer term it is possible that, once the Doha Round has been concluded, however that
might be, future negotiations will be less ambitious, dealing with single or a limited number of sectors
or issues.
Case questions
1 Why has it been so difficult for the WTO to conclude the Doha Round?
2 What can be learned from the difficulties of the Doha Round to prevent similar problems in the
future?
3 What are the benefits for European business of a thriving multilateral trading system?
4 What would be the consequences for European business of the substantial downgrading of the
multilateral system or even its demise?
Bilateralism preferential agreements with countries of the

southern and eastern Mediterranean. Indeed,
The conclusion of trade agreements between the an Association Agreement had been signed with
EU and individual countries or regional group- Turkey as early as 1963 and in 1975 a free trade
ings is not new. The first phase of such agreements agreement was signed with Israel. Under the
were with partners in close proximity to the EU umbrella of the Euro-Mediterranean Partnership
or with developing countries which had long- (EMP), launched by the Barcelona Declaration of
standing ties with certain European economies as 1995, the EU intensified its engagement with 12
the result of a former colonial relationship. countries of the southern and eastern Mediterra-
The former initially involved free trade agree- nean, concluding Association Agreements, which
ments with the members of EFTA which eventu- included preferential trade arrangements, with
ally resulted in the EEA agreement in the early many of them (and which in the case of Cyprus
1990s to be closely followed by the accession of and Malta led to full EU membership). The EMP
three EFTA countries – Sweden, Finland and was motivated by an assumption that the physical
Austria – in January 1995. The EFTA agree- proximity of the Mediterranean to the EU makes
ments were quickly followed by the Europe it of crucial political and economic importance
Agreements, preferential agreements negotiated to the EU and that closer trade and other links
during the 1990s with the former Soviet satel- are of mutual benefit to both parties in terms of
lite states of Central and Eastern Europe which enhanced economic and political security. Similar
became EU members during the first decade considerations fed into the later development of
of the new century. Also, as part of its strategy the EU’s Neighbourhood Policy (see Chapter 16)
of developing close ties with those in its imme- which built on the EMP approach and brought
diate neighbourhood, the EU has concluded in six states, which were formerly part of the
349
former Soviet Union, to form the Eastern Part- improvements in market access for both parties,
nership. The Arab Spring and the deteriorating the talks also focus on specific regulatory barri-
relationship with Russia have radically changed ers to trade in sectors such as financial services,
the dynamics of this initiative. textiles, chemicals, pharmaceuticals, cosmetics,
The EU’s bilateral agreements with develop- medical devices, cars, electronics, machinery and
ing countries which, until recently were largely engineering equipment and pesticides. Broader
non-reciprocal, go back to the Yaoundé Conven- regulatory issues such as SPS measures, public
tions, the first of which was signed in 1963 and procurement, international standards, geographi-
the later Lomé and Cotonou Conventions. The cal indications and small and medium-sized enter-
latter was signed in 2000 and is due to run until prises, among others, are also on the agenda.
2020. During this period, Economic Partnership Agreement for an EU–Canada Comprehensive
Agreements (EPAs) are to be negotiated between Economic and Trade Agreement neared conclu-
EU and developing countries, either as individual sion in 2014 and ambitious negotiations began
countries or as part of a regional grouping them- in 2013 for an FTA with Japan which will cover
selves, to liberalise trade in a reciprocal manner market access measures in goods, services, invest-
(see Chapter 19). ment and public procurement.
The above initiatives remain important to the China and India and the other emerging econ-
EU but, in line with Global Europe, the negotia- omies of Asia are also engaged in extensive talks
tion of a whole new range of agreements is taking with the EU in line with the principles of Global
centre stage. The emphasis of these agreements Europe (see Chapter 18). In 2014, the emphasis
is on opening markets for European business and is on attainment of an EU–Chinese investment
on concluding wide-ranging agreements with the agreement given that talks on upgrading the 1985
world’s largest and most dynamic economies, a Trade and Economic Cooperation Agreement had
description which is not applicable to the EU’s been stalled since 2011. Negotiations on an ambi-
trading partners referred to above. Moreover, the tious FTA with India have been underway since
scope of these new bilateral agreements is intend- 2007.
ed to go far beyond those of earlier trade agree- In terms of the smaller emerging Asian mar-
ments and encompasses the beyond-the-border kets, the EU reached agreement on the first of the
issues identified within the Global Europe frame- new generation of FTA agreements with South
work. It is worth noting that the expansion of the Korea in 2011, an agreement which touched
issues covered in bilateral agreements applies to upon all the beyond-the-border issues identified
the evolution of the commercial relationships dis- in Global Europe (see Case Study 17.2). The EU
cussed above. had hoped to negotiate a new generation FTA

In relation to developed countries, talks on the with the ten member states of the Association of
new generation of bilateral agreements are well Southeast Asian Nations (ASEAN) as a group but
advanced. Negotiators are hoping to reach agree- the region-to-region talks rapidly broke down
ment on the Transatlantic Trade and Investment given the significant differences in structure and
Partnership (TTIP) by 2015 (see Chapter 17). levels of liberalisation among ASEAN members,
Successful talks would result in the most wide- making it impossible for them to agree on nego-
ranging bilateral trade agreement ever reached, tiating objectives. Once regional negotiations
both in terms of the subjects and the percentage of broke down, individual negotiations began with
world trade and GDP covered. As well as general some ASEAN members: agreement was reached
350
on an FTA with Singapore with a view to ratifica- multilateral route, it would choose another way
tion in 2015, and negotiations are ongoing with to do so – and, indeed, US activism in the realm
three other ASEAN members, Vietnam, Malaysia of bilateralism has subsequently increased signifi-
and Thailand. Ultimately, the EU hopes that by cantly. Should the EU’s preoccupation with bilat-
aiming for consistency in FTAs with individual eral agreements also be seen in this light?
ASEAN members, a subsequent consolidation of On the other hand, there is the view that bilat-
these deals at regional level remains a goal. Simi- eralism increases the net amount of free trade in
larly, the EU would like to conclude a regional the world. The argument goes that the WTO can
FTA with Mercosur and previously stalled talks only move ahead slowly and must rely on securing
with these South American countries were agreement among all its 160 members whereas
relaunched in 2010 but progress has been limited the push for deep bilaterals that go beyond what
to date. Elsewhere in South America, Chile con- the WTO is offering does not undermine the
cluded a wide-ranging FTA with the EU in 2002 WTO but allows parties to road-test liberalisation
and FTAs have been provisionally agreed with in a way that can ultimately be extended to the
Colombia and Peru. global system. This extension can be applied not
The aforementioned agreements touch upon only to subjects which are moving slowly at multi-
many, albeit not all, of the bilateral agreements lateral level but also to issues such as competition
that the EU has negotiated or is negotiating with and investment which have not yet been taken up
its major trading partners. Particularly since the in any meaningful way by the international sys-
launch of Global Europe, the emphasis has been on tem. It is these arguments which have contributed
the negotiation of deep and comprehensive trade to the application of the epithet ‘WTO plus’ to
agreements which open markets not only at the Global Europe.
border in terms of reduced tariffs but within the A long standing argument against bilateralism
market itself as a consequence of the opening up is the perception that bilateral trade agreements
of beyond-the-border issues such as those includ- divert trade. That is, by encouraging preferen-
ed in the EU–Korea FTA (see Case Study 17.2). tial treatment of goods originating from partner
However, the EU’s strategy of deep bilater- countries, such agreements discriminate against
alism has re-ignited the debate about whether producers who are not party to such agreements
this greater focus on bilateral deals undermines and, as such, are essentially protectionist, particu-
the prospects of further progress in multilateral larly as those goods displaced may well be cheaper
talks under the WTO umbrella. On the one hand, than their replacements. It is for these reasons
there is the view that bilateralism is flourishing, that the WTO requires such agreements to be
not only on the part of the EU but also of the notified to it.
US and other major world traders as a result Critics also argue that bilateral agreements
of the delays and perceived failure of the Doha can be bad for developing countries in that small,
Round. As early as 2003, immediately after the weak economies will find it difficult to negotiate
failed Cancun Ministerial meeting, the then US on equal terms with larger, more powerful econ-
Trade Representative Robert Zoellick said, ‘As omies. The reality is very complex. In some cir-
WTO members ponder the future, the US will cumstances, developing countries could see some
not wait: we will move towards free trade with of their preferences eroded if the EU concludes
can-do countries.’ In other words, if the US could bilateral agreements with emerging markets.
not secure its trade policy goals through the However, bilateral agreements can help partners
351
lock in their own liberalisation and reform and is a key aspect of the Global Europe strategy.
provide market access opportunities for their However, the protection of EU production from
own producers. trade distorting imports remains an important
Overall, as would be expected, the EU claims EU policy objective and appropriate use of TDIs,
that its bilateral approach facilitates trade and which are regulated by the WTO, supports this
ultimately will promote the further opening of objective.The main TDI instruments at the EU’s
the world trading system. Upon launching Global disposal are anti-dumping duties, anti-subsidy
Europe in 2006, the then EU Trade Commissioner measures and safeguard measures.
Peter Mandelson asserted that the main choice
is not between bilateralism and multilateralism
but between ambitious bilateral agreements that Anti-dumping duties
drive forward and deepen the global liberalisation
agenda and bilateralism that avoids sensitive issues Dumping occurs when goods are sold in an export
and ‘looks for the quick political fix or opens market at prices below a ‘normal value’ (usually
some borders only to close others’. interpreted as the price at which the good is sold
on the home market or at a price below the cost of
production) and is regarded as giving exporters an
Unilateralism unfair competitive advantage and damaging pro-
ducers located in the export market. In order to
Unilateralism literally means one-sided. In the combat such trade distortions, the EU has devel-
context of trade, it refers to a policy or action oped its own rules and procedures in line with the
by a country or regional grouping that is made WTO’s Anti-Dumping Code. After an investiga-
or taken without consulting the relevant trade tion that establishes that dumping has occurred,
partner. Depending on the nature of the policy the EU is able to impose anti-dumping duties
or action, unilateral action can have a negative or for up to five years on dumped imports which
positive effect on the impacted party. The EU has cause significant damage to Community produc-
two major unilateral elements to its trade policy: ers. Although developed as a legitimate device to
ensure fair trading practices, anti-dumping duties
■■ Generalised System of Preferences (GSP): the GSP refers themselves are open to abuse, particularly in the
to the granting of enhanced tariff reductions or way dumping margins are determined. When
the complete removal of tariffs for the exports of such abuses are alleged, the case can be referred
developing countries to the EU. It exempts devel- to a WTO panel for resolution.
oping countries from the Most Favoured Nation As Tables 15.5 and 15.6 show, approximately
(MFN) principle of the WTO which requires three-quarters of anti-dumping investigations lead-
WTO members to grant equal tariff treatment to ing to the imposition of definitive anti-dumping
fellow WTO members. The GSP is an important duties have involved Asian countries, especially Chi-
element of the EU’s commercial policy towards na, in recent years (see Case Study 15.2 for details
developing countries and is dealt with more fully of one of the biggest ever dumping cases). These
in Chapter 19 (see Box 19.1). have been most frequently applied in the chemi-
■■ Trade defence instruments (TDIs): the emphasis of cal and iron and steel sectors. However, what these
EU trade policy has switched towards the secur- tables do not show is the overall fall in the use of
ing of access to markets for EU producers and anti-dumping duties by the EU in the longer term.
352
Table 15.5 A
nti-dumping and anti-subsidy investigations initiated by the EU against specific exporters,
2009–14
2009 2010 2011 2012 2013 20141

Argentina – – – 2 – –
Belarus – – 1 – – –
Bosnia & Herzegovina – 1 – – – –
China 7 10 8 7 6 3
India 2 3 3 2 1 –
Indonesia – 1 3 1 –
Iran 2 – 1 – – –
Japan – – – – – 1
Kazakhstan – – – 1 – –
Korea 1 – – – – 1
FYROM – – – 1 – –
Malaysia 2 1 – – – –
Oman – – 2 – – –
Pakistan 2 – – – – –
Russia – – 1 – – 1
Saudi Arabia – – 2 – – –
Taiwan 1 – – 1 – 1
Thailand 2 1 – 1 – –
Turkey – – 1 1 – 2
UAE 2 – – – – –
Ukraine – – – 1 – –
US – 1 2 – – 1
Vietnam – – – – 1 –
Total 21 18 21 19 9 10
Of which anti-dumping 15 15 17 13 4 8
Note
1 January–August 2014
Source: European Commission, Anti-dumping, anti-subsidies and safeguard statistics, 2013 and Jan–Aug 2014.
Anti-subsidy measures to take action against subsidies considered to be

an unfair trade practice. Subsidies are defined by
The EU’s anti-subsidy rules and procedures these rules as financial contributions made by or
are used less frequently than its anti-dumping on behalf of a government or public body which
rules (see Tables 15.5 and 15.6) and are based confer benefits upon the recipient. The EU may
on a WTO Agreement which allows members impose countervailing duties on imports to
353
Table 15.6 Anti-dumping and anti-subsidy investigations initiated by the EU by product, 2010–14
2010 2011 2012 2013 20141

Chemicals and allied products 7 11 – 1 –
Textiles and allied products – – – 3 –
Wood and paper 2 – – – –
Electronics 2 – 2 – –
Other mechanical engineering 1 1 1 – –
Iron and steel 3 6 11 1 8
Other metals – 1 – – –
Other 3 2 5 4 2
Total: 18 21 19 9 10
• of which anti-dumping 15 17 13 4 8
• of which anti-subsidy 3 4 6 5 2
Note
1 January–August 2014
Source: European Commission, Anti-dumping, anti-subsidies and safeguard statistics, Jan–Aug 2014.
offset the benefits gained from subsidies apply- Safeguard measures

ing to a specific firm, industry or group of firms
and industries. Safeguard measures are applied to cases where
In a trade context, subsidies are considered to sudden, sharp and unexpected increases in imports
distort competition when they make goods arti- mean that there is no reasonable opportunity for
ficially competitive (i.e. competitive by virtue of EU producers to adapt quickly to the changed
the subsidy rather than by innate advantages of the trade situation. In such circumstances, WTO and
firm coming from greater efficiency or quality) EU rules allow for short-term measures to be tak-
against non-subsidised goods. In such cases, EU en to give EU producers an opportunity to adapt
producers may ask the European Commission to to the surge in imports. Provisional safeguards last
levy countervailing duties to the extent that the for up to 200 days whereas definitive measures
trade distortion is eliminated. If, upon investiga- can last four years with a possible extension to
tion, the Commission finds that imports do ben- eight years if circumstances warrant it.
efit from subsidies which result in injury to EU In practice, the EU has not applied any safe-
industry, the Commission may impose definitive guard measures since 2005. That year’s measure
countervailing duties for a period of up to five was in response to the surge in Chinese textiles and
years. Exporters can request the acceptance of a clothing imports following the removal of quotas
price undertaking by which they offer to com- on such products after the demise of the Multifibre
mit to sell the product at or above a minimum Agreement which, since 1975, had been shielding
price. Acceptance of the undertaking means that the developed world’s textile and clothing sectors
no duty is imposed. from competition from developing nations.
354
Case Study 15.2

The EU–China solar power anti-dumping dispute
In the final quarter of 2012, the EU launched two separate investigations into Chinese exports to the
EU of solar panels and their key components – wafers and cells – after complaints by the European
industry (notably, the German manufacturer – SolarWorld) that China was dumping these products
onto the European market with the support of government subsidies. In international trade, dumping is
defined as exporting at a lower price than is charged in the producer’s domestic market or at a price
that is below the cost of production. The strategic intent is to use these price incentives to capture
market share, to undermine indigenous suppliers and to raise market prices thereafter. This particular
dumping allegation occurred against a background of a glut for solar panels in 2011 with the result
that the global supply of panels grew intensely competitive. The European complaint followed on the
heels of a US action which had resulted in the imposition of anti-dumping tariffs of up to 249.96 per
cent, and other duties – countervailing duties – of up to 15.97 per cent.
The costs associated with solar power have fallen substantially due to increased manufacturing ca-
pacity, aggressive cost cutting, and the pursuit of economies of scale and there can be no disputing the
scale and efficiency of the Chinese solar power industry which has led to sharp price reductions and the
increasing affordability of this technology for the mass market of consumers. Since 2000, solar power
technology prices have fallen consistently and have reduced by as much as 60 per cent (most notably
since 2011). The price of Chinese solar technology exports has fallen by as much as 75 per cent between
2009 and 2012 with the result that in less than a decade since entering the market in 2004, Chinese
manufacturers controlled as much as 50 per cent of the market. Such capacity renders China both the
largest manufacturer and exporter of this product. In 2011, the value of Chinese exports of solar power
equipment to the EU was in excess of €20 bn.
Given the US precedent, it came as little surprise that the EU found evidence of dumping and of
injury to EU manufacturers as a result of this process. The EU investigation found that Chinese prices
were on average 88 per cent below fair value. The evidence of a causal link between dumping and injury
legitimised the imposition of EU anti-dumping duties to prevent further injury. These duties were set
at between 37.3 per cent and 67.9 per cent. The anti-dumping advisory committee (which consists of
representatives of all states and to whom the EU makes recommendations) was deeply divided on the
issue with 18 voting against the measure, five abstaining and only four voting for it. Nonetheless, the
Commission decided to proceed with provisional duties. As of August 2013, targeted anti-dumping du-
ties were imposed on Chinese solar technology with the actual rate dependent upon the manufacturer
but the average tariff was 47.7 per cent. These duties were to be applied up to the beginning of Decem-
ber when they would be made permanent if a negotiated settlement proved elusive. However should a
majority of states oppose their imposition they would not be applied. In practice, state resistance di-
minished and China negotiated undertakings with the Commission to make the definitive measures less
punitive. The definitive measures were to be applied for two years. Alongside these negotiations, Chinese
355
manufacturers agreed to a number of measures that meant that, by the end of the transition period, 75
per cent of Chinese solar panel exports were not subject to any punitive duties. The negotiations with
90 of the main Chinese exporters (which accounted for 60 per cent of the EU market) led to agreement
on a minimum price for solar panels. For these companies, the anti-dumping duties were to be waived
so long as they adhered to the price agreement. This price agreement was also supported by an annual
volume supply ceiling (which covered 75 per cent of exports). If this ceiling were breached, then duties
would apply at the rate of 47.7 per cent. The rate for the 50 companies that did not cooperate was 64.9
per cent. These duties comprised an anti-dumping and an anti-subsidy element with the former ranging
between 27.3 and 64.9 per cent and the latter between 3.5 and 11.5 per cent.
Agreement on the imposition of the duties was by no means unanimous with opposition coming
from some member states and from parts of European industry. EU equipment retailers felt that
the process would lead to higher installation prices as 70 per cent of all EU panels were imported.
This could have a negative effect on both employment and the deployment of this technology across
Europe, especially at a time when many states were either reducing or totally eliminating solar power
subsidies. This latter point is seen as especially important given the green agenda within the EU where
low prices from China have been a key factor driving the growth of solar power across the EU. Ger-
many was especially vocal in its resistance to these measures for fear that it could stimulate retali-
ation. Indeed as a direct response to the duties, China opened up an anti-dumping investigation into
European manufacturers.
Case questions
1 Does this anti-dumping case undermine the EU’s strategy for renewable energy?
2 Identify the main stakeholders and their interests in the case.
3 How do you establish whether dumping has taken place?
Key points
■■ The European Commission represents the EU in its trade negotiations at both bilateral and
multilateral levels.
■■ Global Europe, launched in 2006, sets the priorities for EU trade and investment policy.
■■ The EU remains committed to the WTO and its free trade principles but, because of problems
reaching agreement at the WTO, is increasingly focusing on bilateral agreements.
■■ Concern about relatively poor trade and investment performance in the world’s most rapidly
growing economies, mostly located in Asia, has led the EU to choose FTA partners primarily
according to economic criteria.
356
■■ The EU intends to include many beyond-the-border issues that have traditionally been the
domain of domestic policy in the new generation of FTAs. So far, the EU–Korea FTA is the only
such agreement in force but agreement has also been reached with Singapore.
■■ Access to the markets of its trading partners rather than the protection of EU borders is a major
theme of EU trade and investment policy.
Activities
1 What do you understand by the term ‘WTO plus’?
2 Chose an EU member state and, using data from international organisations (for example, the EU, the
WTO, World Bank, etc.), research and compile a report on its long-term trade and investment profile.
3 Chose an EU manufacturing or services sector and research the international trade and investment
challenges it has faced in recent years. What does this tell you about the future?
1 Identify the extent to which Global Europe represents continuity with previous EU trade policy and the
extent to which it represents a new departure.
2 How much success has Global Europe had so far?
3 Does the EU’s policy of negotiating deep and comprehensive free trade area agreements undermine or
support the multilateral trading system?
4 How do the EU’s internal policies support its external commercial ambitions?
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Elsig, M. and Dupont, C. (2012) ‘European Union meets European Commission (2006) Global Europe: Competing in
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crimination and the negotiation of free trade agree- Falkner, G. and Muller, P. (eds) (2013) EU Policies in a
ments’, Journal of Common Market Studies, 60 (3), Global Perspective: Shaping or Taking International
pp. 492–507. Regimes, London: Routledge.
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Langhelle, O. (ed) (2013) International Trade Negotiations World Trade Organisation (2013) World Trade Policy
and Domestic Politics: The Intermestic Politics of Trade Review (European Union), Geneva: WTO.
Liberalisation, London: Routledge. Young, A. and Peterson, J. (2014) Parochial Global Europe:
Siles-Brugge, G. (2014) Constructing European Union 21st Century Trade Politics, Oxford: Oxford University
Trade Policy: A Global Idea of Europe, Basingstoke: Press.
Palgrave Macmillan.
UNCTAD, World Investment Report – an annual report by
UNCTAD (Geneva) which analyses the latest trends in
world FDI, available at UNCTAD.org.
358
Chapter 16
Engaging with the

European space
Enlargement and neighbourhood policy
A nation is a society united by a delusion about its ancestry and by common hatred of its
neighbours.
William Ralph Inge (1860–1954), British author and academic
■■ understand how and why enlargement of the European Union takes place;
■■ identify how transition and enlargement have helped shape the European business environment;
■■ appreciate how the EU interacts with its non-EU neighbours;
■■ describe the form and nature of EU neighbourhood policy.
The EU’s enlargement and neighbourhood poli- strives to restore its growth trajectory and deal
cies share very similar objectives in so far as they with emergent political and economic competi-
seek to foster democracy, stability and prosperity tion on the global stage. The difference between
in those areas of the European space that border the two policies is that the (currently) five states
the current geographic limits of the EU. These engaged with enlargement are at various stages
strategies reflect a clear interdependence between of becoming full members of the EU while those
the strategic interests of the EU and those of the (currently) 16 states subject to the neighbourhood
states on its borders. Moreover, the broad geo- policy do not (for the time being) have an acces-
political/geostrategic reasons underpinning the sion ambition. This chapter offers an overview of
enlargement and neighbourhood policies also both policies and, in so doing, examines linkages
reflect the pursuit of self-interest by the EU as it between them. Initially, the chapter examines the
359
progress and record of past EU expansions and paramount at the time of the eastern enlarge-
examines emergent issues in the debate caused by ment and which prompted the development of the
the so-called ‘enlargement fatigue’ and issues of Copenhagen criteria.
secession. Building on these themes, the chapter
then moves on to explore the core features and
strategies of the European Neighbourhood Policy. What does an enlarged
Europe mean?
Acceding to the EU Enlargement is a largely reactive process as

existing member states respond to applications
The EU has been through seven successive enlarge- by states seeking to become a member. The EU
ments between 1973 (when the first enlargement does not actively seek out new members and
occurred) and 2013 (when the latest took place lacks a coherent strategy for enlargement. Cur-
with the accession of Croatia). Expanding the EU rent enlargement debates are fuelled by two main
has always figured centrally in its existence (see issues: stability and security in the wider Europe,
Table 16.1 for details of its growth). For much of and economic prosperity and growth. Thus, geo-
its existence, the expansion of the EU was into political as well as economic issues shape the
Western Europe states. Since 2004, the EU has evolving process of EU enlargement.
expanded eastwards to include former Soviet sat-
ellite states of Central and Eastern Europe. This
expansion required a broader process of reform The impact of enlargement
to ensure it would be successful. This eastwards
expansion has in no small way changed the geo- Viewed in the round, enlargement is one of the
politics of Europe. EU’s strongest weapons in promoting political
The EU is a trading bloc built on the percep- and economic reform and – by default – in pro-
tion of the benefits of scale (Palan et al., 1996) so moting stability within the European theatre. In
expanding the area was seen as a move that was – addition, there is a geopolitical premium from
economically at least – to the benefit of all. This the process which enables states to punch above
crude commercial logic has been reshaped by the their weight in the global economic and politi-
political benefits of scale. The requirements for a cal arena – which they would not have been able
successful membership application – the Copenha- to had they been acting independently. However,
gen criteria – are set out in Box 16.1. States are only these longer term geopolitical issues have to be
admitted with the unanimous consent of the exist- set against the economic, political and institution-
ing members of the EU. This decision reflects the al impact of the process.
final point of the accession process. After an appli-
cation is made, the EU decides whether to accept
The economic impact
the application and recognise the state as a candi-
date. Thereafter an agreement is made between the Overall, there is a consensus that enlargement
state and the EU on the terms of membership. The has been beneficial to both existing and acceding
Copenhagen criteria were intended to ensure that members of the EU. Indeed, the enlargement pro-
widening of the EU would not be at the expense cess has been credited as one of the factors that has
of deeper integration – a consideration that was allowed member states to counteract the worst
360
Engaging with the European space
Membership eligibility and the Copenhagen criteria
Box 16.1
Traditionally, a country was regarded as eligible for EU membership if it was European, democratic
and operated accorded to market principles. The 1993 Copenhagen Council set out the following four
conditions which Central and Eastern European countries (from whom membership applications were
anticipated at the time) had to satisfy before accession could proceed:
■■ stable institutions which guarantee democracy, the rule of law, human rights and respect for and
protection of minorities;
■■ a functioning market economy;
■■ the capacity to cope with competitive pressure and market forces within the Union;
■■ the ability to take on the obligations of membership including political, economic and monetary
union.
In addition, the Council added a fifth condition which applied to the European Union, stipulating
that ‘the Union’s capacity to absorb new members while maintaining the momentum of European inte-
gration is also an important consideration in the general interest of both the Union and the candidate
countries’.
Underpinning the accession process is the requirement that the decision to apply for membership is
both legitimate and is made with the consent of its population. Beyond this legitimisation of the pro-
cess, the applicant state has to show compliance with the political and technical standards of the EU.
At each stage, the EU operates an extensive approval process. To smooth the process of accession, the
EU has a pre-accession strategy which includes agreements that establish rights and obligations and
which set out the reforms which the applicant must carry out to bring it into line with the Copenhagen
criteria as well as the EU financial assistance available to help it make the necessary adjustments.
Central to this is ensuring that the candidate has applied in its territory the more than 100,000 pages
of EU rules (the so-called acquis communautaire). This is non-negotiable – only the timing of their
implementation is open for discussion. Frequently, the pace of accession is driven by the rate at which
the acquis has been implemented with the result that states have a big incentive to implement it as
speedily as possible: some of the legislation can be controversial and complex, hence the importance of
popular support in the process.
To aid negotiations the body of EU law is divided into chapters each of which corresponds to an
individual policy area. The first step in the negotiations is to identify areas in need of alignment. A posi-
tion is then agreed between the EU and the applicant on the work needed to bring this alignment about.
The negotiations work on the basis that ‘nothing is agreed until everything is agreed’ so the closure
of a chapter following agreement on its content is only a staging post in the process. The Commission
has a reporting function to ensure that the Council is kept up to speed with the process of compliance.
The monitoring continues until accession, making it possible – at this stage – to offer extra guidance
on the obligations of membership. Once all chapters are closed, the formal accession treaty is agreed
and signed. Once the treaty enters into force, formal membership is attained. In the interim, the state is
granted provisional privileges such as commenting on draft legislative proposals from the EU.
361
Conditionality is central to the process of enlargement: that is, progress towards membership de-
pends upon a candidate meeting the specific prior conditions that enable it to satisfy the Copenhagen
criteria. As the EU has expanded, so the conditionality process has grown more exacting because of the
need to sustain credibility within an increasingly diverse set of economies. There is some evidence this
conditionality has not been applied as rigorously as it might have been given the economic and political
issues that emerged over the compliance of Romania and Bulgaria with the agreed criteria. There is also
the risk that a more stringent application of conditionality could deter aspirant states, especially if the
process is seen to be excessively intrusive.
Progress towards membership is derived from the speed with which the applicant state implements
the agreed accession criteria. To expedite this process the EU offers practical support to promote
compliance. This is especially salient where significant reform is needed in order to meet the obliga-
tions of membership and where there is a risk that the popular consensus around accession might be
threatened. In some cases, this support could facilitate the spread of know-how. This is particularly im-
portant where the implementation of the acquis involves significant costs, especially where a new set of
institutions needs to be established. In addition, the EU seeks to add to the legitimisation of the process
by funding campaigns that stimulate awareness among the broader civil society of the obligations and
impact of the accession process. These processes underline the importance of institution building during
the accession process. States need to create – where they are absent – the structures and training pro-
grammes to enable the system to adapt to changing criteria. For example, not all accession states have
competition agencies or food standard agencies as required by EU law. There is also a need for some
states to upgrade their physical infrastructure as a means of meeting water standards for example.
At the time of writing, there are six candidates:
■■ Iceland;
■■ Montenegro;
■■ Turkey;
■■ Albania:
■■ Former Yugoslav Republic of Macedonia;
■■ Serbia.
This list follows on from the Thessaloniki European Council that identified the western Balkans as
potential candidates. As the EU expands, the degree of divergence between existing and potential mem-
bers grows with the result that the degree of convergence needed is greater, with more being asked of
these states than in previous accessions. To support the process of adjustment to the EU, the EU offers
support through its Multi-Annual Financial Framework which includes support for technical assistance
and for funding the projects needed to develop the institutions required.
of the economic crisis since 2008. In many ways, growth and economic structures at the time of
this view reflects the classic neo-liberal perspec- accession, it is widely accepted that the process
tive that exposure to competition is a key driver has been especially beneficial to the newer mem-
in this growth process. Given the differences in ber states of the EU. However enlargement is not
362
Table 16.1 EU membership applications and current status
Applicant Date of application Accession status

Albania 28 April 2009 Potential candidate
Austria 17 July 1989 1 January 1995
Belgium Original member 1 January 1958
Bosnia and Herzegovina – Potential candidate
Bulgaria 14 December 1995 1 January 2007
Croatia 21 February 2003 1 July 2013
Cyprus 7 March 1990 1 May 2004
Czech Republic 17 January 1996 1 May 2004
Denmark 5 November 1967 1 January 1973
Estonia 24 November 1995 1 May 2004
Finland 18 March 1992 1 January 1995
France Original member 23 July 1952
West Germany Original member 23 July 1952
Greece 6 December 1975 1 January 1981
Hungary 31 March 1994 1 May 2004
Iceland 17 July 2009 Frozen
Ireland 31 July 1961 Withdrawn
5 November 1967 1 January 1973
Italy Original member 23 July 1952
Kosovo – Potential candidate
Latvia 13 September 1995 1 May 2004
Lithuania 12 August 1995 1 May 2004
Luxembourg Original member 23 July 1952
Macedonia 22 March 2004 Official candidate
Malta – 1 May 2004
Montenegro 15 December 2008 Negotiating
Morocco 20 July 1987 Rejected
Netherlands Original member 23 July 1952

Norway 30 April 1962 Withdrawn
21 July 1967 Rejected
25 November 1992 Rejected
Poland 5 April 1994 1 May 2004
Portugal 28 March 1977 1 January 1986
Romania 22 June 1995 1 January 2007
Slovakia 27 June 1995 1 May 2004
Slovenia 10 June 1996 1 May 2004
(Continued)
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Table 16.1 EU membership applications and current status (Continued)
Applicant Date of application Accession status

Spain 2 September 1962 Rejected
28 June 1977 1 January 1986
Serbia 22 December 2009 Negotiating
Sweden 1 July 1991 1 January 1995
Switzerland 25 May 1992 Frozen
Turkey 14 April 1987 Negotiating
United Kingdom 10 August 1961 Vetoed
10 May 1967 1 January 1973
a panacea for the deep seated problems of some The most evident economic impact of the post-
of these states. millennium expansions has concerned the free
Reliable figures on the actual economic gains movement of peoples (see Chapter 14). The east
of enlargement are difficult to determine with any to west flows were expected to deliver tangible
degree of accuracy. However, many of the gains benefits to western member states by addressing
which accrued to Central and Eastern European skill bottlenecks and other gaps in the labour mar-
states are likely to be replicated if the EU expands ket. Despite these much vaunted positive effects,
further. The obligation under Article 3 of the TEU not everyone agrees and there has been some
that a new member has to adopt the single currency political fall-out from this process.
represents a potential hurdle. Of the 2004 and 2007
new members, seven had joined the eurozone by
The political impact
January 2015 (see Chapter 8). The others have yet
to join ERM II, regarded as the waiting room for full The reforms demanded of potential members
eurozone entry, and so are some way off joining the of the EU often promoted models that gener-
former. Montenegro and Kosovo have already adopt- ated a substantive change in domestic political
ed the euro. In practice, the obligation to enforce systems: for example, leading to an Europeanisa-
membership will be impossible to implement. tion of some domestic political parties. Moreover,
There is consensus that the enlargement pro- enlargement changes the nature of the EU and its
cess has also been beneficial for pre-2004 mem- policies: it has been beneficial for environmental
ber states with the main gains coming from the and energy policies, for example. In the case of the
process of market opening. For example, the EU CAP, with expansion of the EU to states with lar
found that the expansion of the SEM to the ger agricultural populations, the impact has been
newer states helped businesses throughout the more difficult to discern. The political effects of
EU cope better with the globalisation. Indeed, enlargement have also led to a lurch to the right
the 2004 and 2007 expansion of the EU 2007, by some political parties as a result of the rise in
added an extra 104 million consumers to the migration from new member states. Although
SEM and around £11 trillion to the EU’s GDP. such flows can be beneficial economically, con-
These benefits tended to be higher in those states cerns have been raised regarding the political
located closer to the geographical core of the EU. impact of such large and unanticipated flows.
364
The 2004 enlargement was the largest to date of exactly where the borders of Europe are and
but, despite concerns it did not appear to hin- thus where the physical limits to the process of
der the institutional system of the EU nor slow enlargement lie. A slowing of the process also
down its decision making. Despite this, enlarge- reflects geopolitical changes: for example, further
ment fatigue has emerged with a growing view enlargement may alienate Russia which does not
that the accession of Romania and Bulgaria was want the EU to expand to its borders and particu-
too hasty and took place before convergence of larly to incorporate former Soviet republics. Some
EU norms, values and full adoption of the acquis regard enlargement fatigue as the expression of
had occurred. Moreover in the 2004 accession growing disillusionment with neo-liberalism and
states, there was a sharp rise in the popularity of the implications of free movement of peoples,
nationalist parties hostile to EU membership. In goods and services among the general popula-
the light of this, the European Commission has tion. Szolucha (2010) argues that the main driver
placed increased emphasis upon good governance behind enlargement fatigue is economic, especially
during the pre-accession period with the most regarding the large – mainly unanticipated – flows
difficult areas being tackled early in the negotia- of workers across borders. For example, the UK
tion process and conditionality becoming more expected around 10,000 migrants from the east
exacting for applicant states. but has had to deal with over 500,000. The result
has been popular discontent with the enlargement
process, even in the more liberal states.
The future of EU enlargement The rejection of the Constitutional Treaty by
and enlargement fatigue France and the Netherlands in their national refer-
enda in 2005 provided early signs of enlargement
In the aftermath of the enlargements encompass- fatigue. The rejection was driven by a number of
ing Central and Eastern European states, many factors, including the unpopularity of the govern-
claim that the EU has come up against enlargements concerned; the perception that the EU was
ment fatigue which is slowing down the process of undemocratic; and the belief that governments
further expansion. As a result, policy makers are were growing increasingly powerless to resist
looking for an alternative to enlargement for appli- globalisation pressures of which enlargement
cant states: the most notable of which has been was just one manifestation. A further undercur-
the establishment and retrenchment of the Euro- rent was suspicion that the welfarism of the social
pean Neighbourhood Policy. In its simplest form, democratic model of Western European states
fatigue means a basic reluctance to offer member- would be sorely tested by further expansion of the
ship to new states, reflecting the view of some that EU, reflecting the need for a mature debate about
the EU has expanded too far, too fast and that the the nature of the EU itself. This need is especially
European institutions are simply unable to cope evident in the continuing internal debates about
with the extra workload. The debate surrounding the accession of Turkey (see Case Study 16.1).
the process also reflects the latest in the continu- According to Hanson (2008), there is also a view
ing debate between EU expansionists (who want that the EU has been subject to ‘rhetorical entrap-
to expand the EU as a defence against deepening) ment’ in so far as it has been so keen to encour-
and the deepeners (who want the opposite). age reform that it risks violating its own ideals
This has prompted something of a stocktake by by refusing entry to those states who undertook
the EU: some states wanting a clear delineation reform on anticipation of entry.
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Case Study 16.1

Turkey and EU accession
There is perhaps no more controversial – and certainly protracted – potential accession to the EU than
that of Turkey. Turkey’s membership application was made on 14 April 1987. Turkey gained associate
status in 1963: since then it has become a member of other European and western organisations such
as the Council of Europe, the OECD, NATO and OSCE. Turkey signed a customs agreement with the
EU in 1995 and was recognised as a candidate for full membership in 1999 with negotiations starting
in 2005. However Turkey’s potential membership has been a major source of controversy with many
arguments being proffered for and against (see Table 16.2).
Table 16.2 The case for and against Turkey’s accession to the EU
For Against
Geography Istanbul is a great European city which Turkey is not a European state and 97 per
stands at the nexus of Europe and cent of it is in Asia. The EU does not need
Asia. Turkey in Europe would provide shared borders with many of the world’s
a bridge to West Asia and the Middle trouble spots. Turkey is also too big for
East Europe to absorb: with a projected popula-
tion of 91 million in 2050, it would dominate
the EU
Politics Turkey is a vibrant democracy which Turkey is not a mature European style
has undertaken substantive reform in democracy. Its politics are often a tussle
key areas such as human rights and between the army and Islamists. Human
the lure of membership will encourage rights are often abused and the current elite
further reform. Moreover leaving it seem intent on moving away from democratic
outside could result in it emerging as a systems. There are also issues related to the
rival to European interests persecution of minorities. EU public opinion
is also opposed and the Turks are at best
lukewarm to membership
Economics The Turkish economy is growing very Despite recent growth, Turkey is still an
fast, with sound finance and with a GDP under-developed economy with a GDP per
per capita per head that exceeds some capita at less than half the EU average. Its
existing members. Adding Turkey to the wealth is unevenly spread and creates the
EU would immediately add 75 million risk of mass migration to Western Europe
consumers to the internal market should it accede
History, Membership would send out a mes- Turkey’s history and culture are undeniably
culture, sage that the EU is open to the Muslim Asian. It missed the shared experiences that
religion world. It could be a role model for brought Europe together from the Renais-
other states undertaking democratic sance to the Second World War. Turkey’s cul-
reform. Turkey is embedded in Euro- tural tradition is unique but is fundamentally
pean history and it has had a westward different from the rest of Europe
outlook since its foundation in 1922
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The resistance to EU membership by many European states is a source of frustration for Turkey
which has seen its application repeatedly delayed and obstructed by existing member states. It has
watched while later applicants have joined while it has remained side-lined. Despite applying in 1987,
it had to wait 12 years before it gained equal status with other applicants. Since 2005, its membership
application has progressed in fits and starts with some states (Austria and France) suggesting they
would hold a referendum on Turkish accession with the latter even amending its constitution to allow
this to happen. Central to the delay has been Turkish relations with Cyprus. Such problems led to a ces-
sation of accession negotiations in 2006 and no new chapter for accession has been opened since 2010.
The normalisation of relations with Cyprus is often cited as a pre-condition for progress in the negotia-
tions. However by 2012, the Commission set up a positive agenda to re-open talks. On the basis of this,
Turkey expressed its hope that it could gain membership by 2023 – a century since the foundation of
the Turkish state. However, with increased concerns over democratic rights in Turkey, Germany blocked
further discussions. This must be set against rising hostility to Europe within Turkey.
Despite reservations, there is a consensus within Turkey’s political classes as to the desirability of
accession. To Turkey, the crises in the Middle East have made closer cooperation with Europe, leading
to accession, ever more important. Indeed, it refers to accession as the ‘most important modernisation
process after the proclamation of the Republic of Turkey’. The Turkish Government by 2014 was toning
down any anti-EU sentiment as a means of reigniting the accession process. A strategy for accession
published in 2014 by the Turkish Government targets a change in the Constitution, better implementa-
tion of existing laws as well as a public relations exercise to drum up popular support for membership
which has slid back in recent years. However this should not hide fact that Turkey has struggled to meet
its obligations in areas such as human rights.
The EU in its 2014 Progress Report on Turkey’s membership application struck a very mixed tone.
The report recognised the strategic political and economic importance of Turkey to the EU and stressed
a need for accession talks to regain momentum. In its report, the Commission acknowledges the imple-
mentation of previous reforms especially with regards to the democratisation process and to the long run-
ning treatment of minorities (most notably the Kurds). However there was concern that the government’s
response to allegation of corruption in late 2013 had compromised the independence of the judiciary.
These concerns were also reinforced by restrictions on the use of social media and on freedom of assem-
bly. There can be little doubt that such actions – in the eyes of many Europeans – have set the accession
process back. Moreover, the EU continues to feel that Turkey needs to make more robust progress on the
normalisation of relations with Cyprus. To the Commission, progress on this single issue, more than any
other, would signal a willingness to make progress towards accession. On the economic side, there are few
problems as Turkey has a functioning market economy but the EU is concerned about the size of its trade
deficit and that the fiscal framework may need to be enhanced to meet its obligations in this area.
Case question
Discuss the relative merits of Turkey’s membership of the EU from the perspective of all
stakeholders.
367
There is, in practice, nothing new about The issue of conditionality reflects on the
enlargement fatigue. It has been a feature of the absorptive capacity of the EU and on the alleged
EU since its inception and was first apparent in incapacity of the EU to function effectively after
the persistent refusal of French President Charles enlargement, because of reductions in its ability
de Gaulle to assent to UK membership in 1963 to make quick and easy decisions and continuing
and 1967 due to his fear it could threaten French– concerns over the democratic deficit.There is also
German hegemony and create divisions in Europe a perception that the enlargement and integration
as a result of the UK’s colonial and Atlanticist process is driven by elite interests instead of those
interests. Later, France under the leadership of of the population as a whole. Despite safeguards
President Mitterrand also expressed reluctance in the Lisbon Treaty (see Chapter 4), the EU has
about agreeing to Greek and Spanish member- not addressed this popular concern that integra-
ship. In the past, membership debates have often tion is an elite-driven process, moving irrevers-
been reconciled in line with the broader geopo- ibly towards a centralised state. This implies that
litical interests of the EU. What arguably makes alleviation of enlargement fatigue is not simply a
enlargement fatigue different this time is the sheer matter of the EU pausing for breath but is also
diversity of states who are potential members, all about securing reform and developing a clearer
of which present a set of unique problems regard- view of the end point and purpose of the integra-
ing their absorption into the EU system. Conven- tion process.
tionally, the EU has tended to assent to expanding The strategy of countering enlargement fatigue
membership slowly, allowing states that were is not straightforward. The EU mainly differenti-
economically, politically or socially tied or similar ates between members and non-members. There-
into the EU at the same time. This made it easier fore, once a country becomes a member, the
for the EU to absorb these states. ability of sanctions to generate full compliance
There have been evident failures relating to with agreed conditions is an insufficient deterrent
the application of the conditions for membership. to achieve full adherence to rules. This implies
For example, there have been issues regarding that the EU should move towards grades of mem-
the capability of Bulgaria to operate a system free bership based on the principle of variable geom-
from corruption and there have been cases within etry. By placing different conditions on different
members, such as Poland, where absorption took members, the EU could move towards regaining a
place prior to the full adoption of the acquis. This degree of legitimacy. Such an outcome would also
creates the perception that states are not adher- make the borders of the EU increasingly indeter-
ing to EU values and norms and were admitted minate. While elements of a multi-speed Europe
erroneously. Such debates merely fuel enlarge- already exist within the EU – most notably in the
ment fatigue but can also fuel rising nationalism case of EMU – there has clearly been a failure of
within existing members. Although the strictness conditionality in the case of Greece which misled
of the Copenhagen criteria was meant to militate member states over its preparedness for adoption
against such developments, it was evident that of the single currency – a major contributor to
they were often applied leniently, especially with the euro crisis.Thus, even within the inner core of
regard to the adoption of the acquis, leading to members, there is an absorption problem which
the argument by its critics that the EU puts its the politics of the EU seems unable to resolve.
geopolitical interests above the strictness of the However, there are risks in stalling the enlarge-
conditionality of membership. ment process. First, the EU could lose legitimacy
368
in those countries who wish to join but who find no treaty provision for withdrawal from mem-
their ambitions increasingly frustrated. Second, bership. There are three main reasons why this
those countries for whom membership is look- was the case: first, to secure commitment to the
ing more and more distant may backtrack on the Union; second, offering the option could increase
process of reform. This could lead to a third risk the likelihood of it being taken up; and third, to
– that is, the risk of increased political and eco- avoid the large task of understanding entailed by
nomic uncertainty on the EU’s borders. the process. It is evident that the secession would
The longer the process of accession, the great- be extremely complicated and would affect citi-
er is the likelihood of enlargement fatigue kicking zens both within and beyond the departing ter-
in. This can occur when applicants react to delays ritory. Many regard the Treaties as an irreversible
by losing patience with the protracted accession commitment as testified by the commitment to
process and turn away from the EU. The other ‘ever closer union’; acceptance of the acquis and
danger is that, if the EU is seen as making the pro- restrictions on renegotiation of accession. All
cess unnecessarily protracted, the result could be these seem to imply that members were not free
popular discontent with the process and disillu- to withdraw.
sion with the EU among the populations of appli- Alternatively, there is the possibility that, in
cant states. This process has been evident in the extreme circumstances, a state might leave the
cases of Iceland and Turkey (see Case Study 16.1). EU as a remedy for its problems. This could occur
when another state has infringed the treaties and
continues to do so; when EU institutions have act-
The potential for secession ed ultra vires or when a member state faces severe
difficulties in sustaining membership. However
Partly as a legacy of enlargement fatigue and part- the Treaty does not include the right to withdraw
ly as a consequence of growing nationalist senti- in protest. If a state does decide to withdraw on
ment in current states, there is an increased focus grounds of sovereignty, there is little the EU can
on the potential for secession from the EU. The do about it. It has no lawful sanction to compel a
potential for this exists in three ways. The first state to sustain membership with the result that it
is when a state voluntarily decides to leave the is of little consequence whether the legal right to
EU; the second is when a state is expelled from withdraw exists or not.
the EU; and the third is when part of a current The second possibility is that a state could actu-
member state decides to secede from that state, ally be expelled from the EU. This was to some
resulting in either its departure from the EU or in degree raised by the euro crisis when there was
creating enlargement from within. a risk that some members could be ejected from
Every EU state has the right to leave the EU the system as a means of preserving its integrity.
under Article 50 of the Lisbon Treaty which states At present, there is no Treaty provision for the
that ‘any member state may decide to withdraw expulsion of a member state: the most that the
from the Union in accordance with its own con- EU can do under existing treaties is to suspend
stitutional requirements’. Under this Article, a a member’s rights for a serious and persistent
member state must notify the European Council breach of its principles. However, this does not
of its desire to leave the EU and – from an agreed constitute a formal right of expulsion. In practice,
date – the Treaties no longer apply to the depart- including a right of expulsion would create dif-
ing state. Prior to the Treaty of Lisbon, there was ficulties: it would require change in the Treaties.
369
This requires unanimity to which the state threat- state then, by default, it secedes from the EU.This
ened with expulsion is unlikely to agree, thereby was evidently not the choice of either Scotland
rendering the process politically difficult if not or Catalonia, both of whom sought/seek inde-
impossible. Moreover, the process would involve pendence from a larger state but who prefer to
complex legal issues which could result in legal remain in the EU. The EU’s position spelt out in
action by the threatened state objecting to a loss 2009 was that if a state left another member state,
of rights which it had expected to exist in per- then the Treaties would fail to apply to that state.
petuity. The final problem is the extent to which Moreover, the rump of the member state would
the sanction of expulsion is consistent with the be able to veto the accession of the seceding state.
letter and spirit of the treaties which have the role In addition, the EU does not believe it is in its
of encouraging compliance rather than punishing own interests to contain an increasing number
errant states. of veto-wielding members. In short, automatic
Given that expulsion not an option for the enlargement from within created by sub-national
EU, if the circumstances ever arose, alternative secession is a non-starter. Overall, the likelihood
options would have to be considered. One such of a successful application by a seceding state for
option could be use of the ‘enhanced cooperation EU membership will depend on the attitude of
procedure’ which can isolate a member state as the parent state and on the attitude of other states
the others move towards deeper integration. Such that do not want to encourage their own sub-
a process has never been used and its potential national forces.
usage is strictly limited. This process merely mar- To date, no member state has withdrawn from
ginalises members and does not formally exclude the EU but there have been a number of depend-
them and is more a device for ostracism than a ent or semi-autonomous areas that have left:
more aggressive sanction. An alternative could be Greenland in 1985 after a referendum and Algeria
a new treaty-based partnership with an independ- in 1962 when it was granted independence from
ent structure outside the ‘old EU’ – in effect, the France. Moreover, so far only the UK has to date
creation of a new Union. However, as the new held a referendum on the continuation of mem-
system would exist in parallel with the existing bership.This occurred in 1975, two years after the
Treaties, it could result in competition between UK’s accession, when over two-thirds of British
old and new systems and create a risk of further voters declared a preference for remaining within
division. In addition, the system would only work the EU. Nevertheless, in the aftermath of the euro
if all states agreed and it could be used by more crisis and given the Euroscepticism within the rul-
Eurosceptic states to slow down the process of ing Conservative party, the UK government has
integration. made a commitment to hold another referendum

The third possibility is the paradox of secession on British membership of the EU in 2017.
with enlargement resulting from the dissolution
of an existing member state. With rising nation-
alism within sub-national areas of Spain and the Europe beyond enlargement:
UK, there has been increased debate about what the EU neighbourhood policy
would happen should a state secede from anoth-
er state and whether the seceding state could Since 2003, the EU has developed the European
remain in the EU (see Case Study 16.2). In the Neighbourhood Policy (ENP) based on 16 states
EU’s eyes, should a state secede from a member (see Table 16.3) which have a direct and lasting
370
Case Study 16.2

Enlargement from within: secession and EU membership
The conventional notion of enlargement is one of territorial expansion of the EU created by a state
joining the existing group. However, the surge in nationalist sentiment across Europe, notably in Scot-
land and Catalonia, has raised the prospect that an increase in EU membership could come without
an expansion of territory. Central to these emerging nationalist movements is the wish to secede from
their existing home nation while maintaining a foothold within the EU. Indeed the slogan of independ-
ence within Europe has been a key slogan of many of these movements. For them, the EU represents an
opportunity to minimise the disruption created by the process of secession. In so doing, the assumption
made by many secessionists is that membership of the EU is a given. This assumption may be misplaced.
Given the Euroscepticism in other parts of the UK, the Scottish National Party’s (SNP) pro-
European stance was a key differentiating point for the party. The initial thinking of the SNP was that
secession would not lead to Scotland’s expulsion from the EU. This view was based on the precedent of
Greenland (whose withdrawal from the EEC became effective in 1985, although the territory did re-
main part of Denmark) and on the nature of the relationship between Scotland and England. The SNP
pointed to the absence of any clear rules about secession and to a consequent need to exhibit flexibility
if a situation of secession should emerge. In part, these views were also shaped by the precedent of
German reunification which was accommodated without any short-term disruption. In the run up to the
independence referendum in 2014, the SNP’s arguments changed little. In short, the SNP’s strategy
took for granted that there would be an almost seamless move for Scotland to join Europe if Scotland
were to leave the UK.
As the Scottish referendum moved closer, there was increased scrutiny of this position. The SNP
argued that – given that Scotland had been part of the EU for over 40 years – it would be undemocratic
to strip it of its rights simply because it had exercised the right of self-determination. Moreover, given
the aforementioned lack of precedent regarding secession, its membership could be negotiated within
the pre-existing treaties. This was in sharp contrast to the attitude of the UK government which asserted
that as soon as Scotland declares independence, it would forfeit its right to be part of the EU and would
have to re-apply for membership. While the UK has given no indication that it would do so, the Spanish
government – fearful of the consequences if Catalonia went down the independence route – indicated
that it would veto such a move and would certainly veto any attempt by the Scots to seek automatic
membership of the EU, stressing that Scotland would have to go to the back of the queue behind other
applicant states. The EU itself has said that when a territory ceases to be part of a state, the treaties
will no longer apply to that territory which would become a third country in regard to the EU. This was
supported by the ECB which also held that the seceding state would forgo EU membership. Nonetheless,
in the run up to the referendum in Scotland, the SNP argued that Article 48 of the Treaty of Rome al-
lows members of the EU to amend the treaties to allow for the internal expansion of membership which
could be done within 18 months. However, it is unlikely that states would support such a change – and
unanimity is required for amendment of the treaties. In the event, Scotland voted against independence
371
but the issues raised by the referendum campaign could have relevance in the future, if not for Scotland
for some other part of the EU.
Case questions
1 What are the main obstacles to a state leaving the EU?
2 What could be the consequences for major stakeholders of a state leaving the EU?
impact upon the welfare of EU citizens. This was stable theatre in which EU states can prosper and
brought into particular focus following the politi- is positioned at the nexus of EU foreign, security,
cal instability arising from the Arab Spring. The development, enlargement and trade policies.
logic of ENP was that as the EU expanded, so The aim is to shape the ENP into a broad and
it acquired a new set of neighbours whose wel- integrated policy framework and to identify all
fare became of direct interest to the EU. The EU the areas in which the neighbour can collaborate
was – to continue the analogy – very keen to be with the EU. Prior to the ENP, the EU supported
surrounded by a ‘circle of friends’. Importantly, reforms in its neighbours, either through direct
the ENP was not seen as a precursor to further funding or the promise of enhanced relations in
enlargement but was arguably driven more by the specific policy areas (such as cohesion, economic
fatigue engendered by previous expansions. Thus, reform etc.). These programmes were not coher-
the ENP should not be seen as a waiting room for ent and the ENP sought to remove this complexity
potential members. At its core, the ENP is about as it streamlined the complicated and overlapping
geopolitics and the intention to prevent political series of initiatives that the EU had with its neigh-
and economic instability becoming a feature of bours. In seeking to prevent the emergence of new
the European theatre. The EU ultimately envisag- harmful borders with its neighbours, the European
es the ENP as integral to its strategy to generate a Commission has adopted two broad approaches
The first aims to facilitate the involvement by
Table 16.3 Europe’s neighbourhood partners neighbours in pan-EU networks of all kinds,
including transport, energy, environment, culture
Mediterranean partners Eastern partners
etc. Second, the EU aims to foster cross-border
Algeria Armenia cooperation, focusing especially on those facilities
Egypt Azerbaijan that link neighbours to the EU. To this end, the EU
Israel Belarus has simplified funding arrangements to allow this.
Jordan Georgia In the seven years to 2014, the EU allocated €11
Lebanon Moldova bn in aid with twice as much allocated to Mediter-
Libya Ukraine ranean partners than to those in the east.
Morocco At its core, the ENP is about empowering the
Palestinian Authority EU with devices that allow it to foster friendly
Syria neighbours. It also reflects debates – which have
Tunisia
been ongoing since the formation of the EEC – as
to the precise definition of Europe’s borders. This
372
debate was reinforced by the end of the Cold War the EU sets out the values and standards that the
and by the desire of many former Soviet republics neighbours should adopt. These are accompanied
to reorient themselves in a western direction. In by more detailed objectives and precise priorities
addition to the new neighbours in Eastern Europe, for actions. Although there is no obligation upon
the ENP also engages with the states of the south- these states to stick to these standards, they do
ern and eastern Mediterranean. Although the act as frameworks for bilateral relations between
EU’s borders with these states have remained stat- the partners. These Actions Plans are bespoke to
ic during previous enlargements, they have been the needs of each partner and are based on dis-
a long standing concern for Europe. In practice, cussions between the partners. The incentive for
there is little synergy between the two Mediterra- neighbours to adhere to these plans is that EU aid
nean and eastern partners in the ENP groups: the is linked to their implementation and states are
latter are considered potential members of the EU regularly monitored to ensure progress on these
whereas the Mediterranean states are not Euro- issues. What is striking is the sheer list of priori-
pean in location and are not considered eligible. ties that states have to adopt: Ukraine had over
An obvious absence from the list is Russia which 300 priorities and the Palestinian Authority over
has excluded itself. In any case, the geopolitical 100. Moreover the EU only briefly outlines the
power of Russia means it would have to be treated benefits available for reform.
differently from the other states. As was demon- Smith (2005) argues that many of the Action
strated in 2014 in Ukraine and in 2008/9 in Geor- Plans are notable for two reasons. The first is the
gia, Russia’s relations with its neighbours can be prominence of political objectives within them.
awkward and have undermined the efficacy of the For example, many include a reference to respect
ENP as a tool for dealing with difficult transnational for human rights and democracy which, if adhered
issues. The exclusion of Russia renders the ENP – to, would signal substantial progress in reform for
especially regarding the Eastern European states – many states, especially those within the Mediter-
as an attempt to handle the membership aspirations ranean basin. These reforms prove difficult in the
of the participants. As the experience of Ukraine turmoil generated by the Arab Spring. From the
demonstrates, this risks upsetting Russia. The EU outset, the ENP was seen as a measure to aid the
has set up a separate initiative with Russia – the so- security of the EU in the post 9/11 context and
called EU–Russia Strategic Partnership which has to stem the flows of migrants into the EU from
similar goals to the ENP (see Chapter 18 for fur- these regions. The second striking feature of the
ther details of the EU’s relations with Russia). Action Plans – according to Smith – is that they
The EU’s definition of a good neighbour is one are often merely a reflection of EU self-interest.
who not only conforms to general EU principles For example, many of the plans for Eastern Euro-
and values but also to its standards and laws in pean states include elements clearly aligned to the
specific economic and social areas. The logic is EU’s security and defence mandate.
that by approximating themselves to these value The new approach to the ENP outlined by the
and standards, the neighbour can offer the most Commission in 2011 to some extent offers conti-
effective framework for generating economic nuity with existing themes in relations with these
prosperity and political security for all stakehold- countries but also contains explicit functions to:
ers. One would have to question whether accept-
ance of the acquis is sufficient on its own to help ■■ provide support to create deep democracy;
the reform process. With each of its partners, ■■ support inclusive development;
373
■■ strengthen the two regional dimensions of ENP members tend to be interested in the Mediter-
(the Eastern and Mediterranean Partnerships) ranean dimension of the ENP and the benefits of
to conclude sector-specific programmes; stability that can be gained from this.
■■ to develop mechanisms to fit these objectives. The big issue for the success of the ENP is
the role played by Russia and the consequences
In combination, these changes are designed to of the Arab Spring. In short, despite the rheto-
enhance the ENP and to offer greater incentives ric of the ENP, the EU could do little to counter
to ensure that states continue with the reform the political and economic instability created by
process, especially against a background of slower these processes. It is evident that European values
economic growth. and norms are not shared by these states and – in
While the EU’s short-term strategy for the the case of Russia – have been actively resisted.
ENP is encapsulated in a series of Action Plans, To some – Grant (2011) – the EU’s inability to
there is also scope for longer term frameworks. help reflects flaws within the ENP, especially with
This requires the EU to develop new forms of regards to North Africa which has often boasted
agreement beyond those that already exist. Many authoritarian regimes. The difference between
agreements are often of limited scope (such as these states and those of Central and Eastern
free trade). Building on the ENP will require Europe – and their success in reform – was that
agreements to include broader themes and to the latter were very much motivated to sustain a
deepen links with partners which stop short of trajectory of reform by the prospect of accession.
facilitating accession. For the Commission, the This leads to the conclusion that there is little
objective is to deepen existing Action Plans to chance of success in the ENP where there is lit-
enhance trade and investment links and to pro- tle chance of accession. It also reflects that many
mote the four freedoms within and between the of these states are simply not ready to adopt EU
neighbours. Alongside this, there is a desire to norms and values as they are not a feature of their
build on existing political and security links. political and economic cultures.
It was already evident – prior to recent tur-
moil – that the EU was rethinking the ENP and
Record of the ENP seeking to offer more to its neighbours in rela-
tion to finance, trade and mobility. There was also
While the limited intent of the ENP is evident, a commitment that the EU would be stricter on
there is nonetheless a cleavage both between conditionality (where benefits are linked to per-
existing members and potential members and formance in relation to Action Plans), potentially
neighbours over the extent to which the ENP is making commitment to democratic reform a core
operating as an ante-chamber for full membership point of the ENP. However austerity and enlarge-
for some states. In part, the process will depend ment fatigue may stymie greater support, both
upon the intent and desire of the neighbours and politically and economically from existing mem-
the extent to which the EU overcomes the much ber states.
vaunted enlargement fatigue. The concern over In its appraisal of the ENP, the Commission
the success of the ENP is not a universal issue noted that the policy has been more successful
as it tends to be more important to states which in economic terms than in generating political
border these states, such as Poland or which have reform. The ENP has enabled the EU to make
strong historical ties with them. Southern EU substantive progress towards the development of
374
a free trade area that extends across these states. the finance is important but the levels offered do
Trade between its neighbours and the EU has little to reduce the endemic problems many of the
risen greatly through new trade and investment states possess. Better assistance might be offered
links. However, there are problems. Not least has through expansion of the work of the EIB and
been the failure to assist private sector develop- EBRD in these states. Moreover, there also need
ment through facilitation of the necessary insti- to be greater efforts by the EU to liberalise trade
tutional frameworks. Indeed much of the support in those market segments (most notably agricul-
has been centred on state-focused structures and tural produce) where these states are competitive.
activities and has been prompted by the EU’s Grant (2011) advocates the creation of a customs
reaction to the migrant flows across the Medi- union agreement with these states to replace the
terranean and which has involved working with network of free trade agreements that currently
states to deter and limit these flows. As a result exist. It is also suggested that the EU should make
the EU has moved away from pushing for well- the mobility of peoples between these states and
governed states towards creating firmly governed itself easier. However, in the current political and
states especially on its southern fringes. economic climate, member states are unlikely to
There has arguably been greater success in the agree to such efforts. Finally, there is the poten-
East but the EU has moved away from encourag- tial for the EU’s neighbours to be more closely
ing these states to improve their political systems. involved with EU policies. For example, there are
Indeed, if there has been a success story, then it already moves to involve Balkan states in energy
has been Moldova where pro-EU politicians have policies and others already participate in research
engaged with reform. However, events in Belarus – policies.
and more recently Ukraine – underline the relative In pushing for an improved ENP, there is a
lack of influence of the EU in this area. It is evi- belief that the policy needs to exhibit greater dif-
dent that Russia is unwilling to allow states to move ferentiation in response to the diversity of these
from its sphere of influence to that of the EU. In states, all of which differ in terms of political pri-
other cases, such as Georgia, there was a reluctance orities, economic development and social issues.
to adopt EU standards when it was felt adherence In short, policy needs to be more bespoke. It has
to such norms would hinder competitiveness and also been suggested that the EU should ease up on
economic development. Overall, the eastern part- conditionality in that it simply has not worked.
ners are less willing to integrate into the EU than Grant (2011) suggests that the EU should focus
the Central and Eastern Europeans were, especially on ‘positive conditionality’: that is, offer aid to
when it would constrain national political cultures. the best performing partners. This contrasts with
Moreover, there is limited consensus within these a policy that can merely punish when norms and
states to allow them to change their perspective to values have not been adhered to.
engage more closely with the EU. However the success or otherwise of the ENP
Ultimately, there is a belief that the efficacy will be judged by the ability of these states to
of the ENP is directly linked to the incentives demonstrate political and economic stability and
offered within the programme. As such, there is a progress towards EU norms. Since the formation
view that many of the EU’s neighbours are insuffi- of the policy, the EU neighbourhood has been
ciently incentivised to commit themselves firmly extremely volatile. While this is not the fault of
to the programme. This is not simply about the the EU, this emphasises the need to strengthen the
EU offering more money to these states. Clearly, programme to enable these areas to adjust.This has
375
not happened. In fact, in many cases the EU has nothing to do with the ENP, the policy has not been
done very little – but this may be due to its own able to cope with its pressures.
difficulties rather than to a growing lack of interest
in these states. Moreover, the ENP and the reform
embodied within the Action Plans have only been Conclusion
patchily implemented. In the case of the Mediter-
ranean states, there can be little doubt that the Successive enlargements have seen the EU expand
Arab Spring has affected the process of reform. In from 6 to 28 members. However, the seemingly
the East, the EU has attempted to stimulate reform endless expansion is not merely slowing down
by more clearly spelling out the implications and but is arguably stalling and big problems remain
benefits of the process but is unable to counter the for any future expansion. Moreover, the possible
wishes of Russia. For example, despite the wishes nature of expansion is changing as the potential
of Poland the EU has been persistently stand-offish for secession increases. Alongside this process,
regarding the Ukraine. Moreover, the EU has little the EU has developed an ENP which has a multi-
notion as to what to do with ‘troublesome states’. tude of functions but of which geopolitics is at the
In short, evidence suggests that the ENP has been forefront. The ENP has had to date a rather mixed
ineffective in generating political reform. Although record as events both to the east and in the Medi-
the changes generated by the Arab Spring were terranean have eroded the salience of the policy.
Key points
■■ Since its formation the EU has undertaken seven enlargements as it has extended beyond
Western Europe into Central and Eastern European states.
■■ Membership of the EU means that acceding states have to accept all EU laws and adhere to the
core Copenhagen criteria.
■■ There has been the emergence of enlargement fatigue as many states feel that the EU has
expanded too far too fast.
■■ As a complement to the enlargement process the EU has instigated a neighbourhood policy.
■■ The neighbourhood policy has both political and economic objectives.

Activities
1 Choose an aspirant member of the EU and examine the main barriers to and opportunities from mem-
bership of the EU.
2 In the light of the recent Scottish independence referendum, assess the main issues in joining the EU
for a state seceding from an existing EU member.
3 Assess the argument that the Ukraine crisis of 2014 undermines the notion of the ENP.
376
1 To what extent do the Copenhagen criteria form a credible set of membership conditions?
2 What are/should be the limits to EU expansion?
3 How do you account for enlargement fatigue?
4 How has the ENP been affected by the events of the Arab Spring from 2010?
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Chapter 17
European business in
a global context
The developed world
At the WTO, it’s never a general surgery. It’s always a very specific, clinical, precise surgery –
and you can’t miss the target. If you miss the target, you kill the patient. It’s as simple as that.
Roberto Azevedo, Director-General of the WTO (2013–)
■■ recognise the importance of the EU to global trade via its position within the main global trading
economies;
■■ highlight the interface between the EU and its main developed economy trading partners;
■■ understand the form and nature of intra-industry trade;
■■ appreciate the EU’s trade relations with its major trading partners – the US and Japan.
Implicit within such policy pronouncements on EU in terms of trade. In analysing this pattern,
European growth is the presumption that the this chapter focuses on the EU’s trade within the
EU will ultimately have to trade its way out of triad framework – that is, the EU, US and South-
its slow growth trajectory. In recent years, pop- east Asia (excluding China) – as a force within the
ular discourses to remedy this have focused on global economy and on the linkages and relations
the BRIC states as the most prominent source between the EU and the other parts of the triad.
of trade relations for the EU. However, the main The sustained importance of these regions in the
thrust of EU trade is still with other developed global economic system demonstrates that these
economies. While the BRIC states exhibit higher developed states remain the EU’s major com-
rates of growth, in absolute levels it is other lead- petitors. Initially, this chapter sets out the current
ing industrialised states that matter most to the context for trade among the triad with a focus on
378
European business in a global context
the impact of the financial crisis on trade policy. synergies exist in terms of product, marketing,
Thereafter, it analyses trade relations between uniform competitive moves, integrated value
the EU and other triad members, particularly the chains and uniformity of customer demands,
higher profile members of these regional groups. thereby underlining the intra-industry nature of
much of the trade between these countries.
Across the triad there is consensus that trade
The triad, trade and the is a mutually beneficial activity. For the EU, the
global economic crisis sustenance of an open trading system is key to its
growth strategy as it is estimated that up to 90
In 1985, Ohmae used the term ‘triad’ to argue – per cent of Europe’s economic growth will be
perhaps too simplistically – that the world econ- externally generated. Much of this growth will
omy is based around a tri-polar regional structure come from exports to the markets of the triad
consisting of North America, East Asia and Europe. which account for nearly one-quarter of EU trade
Dicken (2010) suggests that the popularity of this (which is significant given that the EU’s trade
concept has been driven by the practicalities of flows are very splintered) and nearly half of its
modern business given that these regions dominate FDI. This supports the belief that there is much
trade, production and foreign direct investment to be gained from extending trade with these key
especially so with the rise of China as an economic areas of the global economy. Indeed, it is antici-
power (see Chapter 18). The triad shares a number pated that further opening of these major markets
of common traits: low macro-economic growth; to the EU would add 2 per cent to EU growth and
similar technological infrastructure; the presence create more than two million jobs over the medi-
of large, capital and knowledge-intensive firms um term. Moreover, the EU remains the focus of
in most industries; a relative homogenisation of considerable activity by overseas MNCs, especial-
demand and protectionist pressures. Interesting ly in terms of market access and the re-organising
and pertinent as Ohmae’s concept of the triad is, of their value chains. In addition, overseas MNCs
in many ways it has been overtaken by events. The want to sell to and invest in EU states.
extension of regional trading blocs around these However the consensus among the triad on
three regions has enhanced their power and promi- the benefits of open trade has been tested by the
nence within the global economy and fosters ever global financial and economic crisis which was
deeper intra-regional integration. However more focused on these triad regions. In the aftermath
recent work by Rugman (2005) suggests that the of this crisis, trade flows suffered a sharp fall
triad remains an important organising concept for and protectionist pressures began to strengthen
the study and operation of international business. across the triad. There has been a notable increase
Global trade is focused on these regions in more covert forms of protectionism designed
because of a combination of the ability of MNCs to by-pass WTO regulations and not contravene
to overcome the liability of foreignness in their their WTO commitments. Common examples of
host region and the problems of achieving global these trade distorting measures are:
reach with a global product. In addition, where
there is a trade-off between responsiveness/inte- ■■ sector subsidies: a notable example here were the
gration and global strategy, the issue of region- subsidies offered by the US government to the
alisation becomes attractive if it allows overlap automobile industry which has renationalised
between the two areas. Thus, at the regional level, its value chains (notably over EU, Mexican and
379
Canadian firms). This type of support was also especially regarding the EU. Clearly, these meas-
offered by other parts of the triad, notably by ures do not suggest that the triad states are lead-
the EU for its own car industry as well as by ing the world economy towards de-globalisation.
Canada. Indeed, at most, it can be argued that the current
■■ Government procurement and ‘buy national’ strate- phase of globalisation has peaked and that the
gies: in the stimulus packages offered by gov- relationships between these states is changing.
ernments, there were pressures to ensure that Indeed, as seen below, there does appear to be a
public money was directed towards national trend away from multilateralism towards more
economies. For example, under the terms of bilateral measures (see Chapter 15). It is to this
the bailout packages, domestic banks were issue that the rest of the chapter is devoted.
encouraged to install a home bias in lending.
This device was also used by the US to aid its
iron and steel sector through installing home The EU and bilateral trade
preference in public procurement – a move deals within the triad
which attracted a degree of retaliation.
Within the context of its WTO commitments, the
In addition, states are utilising the legitimate EU has shifted trade policy towards the greater
discretion allowed within WTO agreements on use of FTAs. These agreements have been and are
the grounds of health and safety, environmental- being negotiated with states at all levels of eco-
ism and security to aid indigenous producers. The nomic development but it is those agreements
major offenders are countries within the triad but with other leading developed nations that are
they are by no means the only ones. the focus of this chapter. While such agreements
While trade has recovered from the sharp do not run counter to the EU’s commitment to
decline in the immediate aftermath of the global a multilateral trading system, they represent an
crisis, protectionism remains a problem. There attempt by the EU to pursue bilateralism, espe-
is a popular sentiment in many triad states of a cially with higher growth Asian economies (see
rising resistance to further liberalisation. The Chapter 15), in the absence of a broader global
measures outlined above produced little inter- agreement.
triad dispute: the measures were deployed widely According to Woolcock (2007), the trend
by these states and few states were motivated to towards the use of FTAs is rooted in a series of
launch a complex legal case to explore the legal mixed motives dependent on the nature of the
issues about what is and what is not legitimate states. With regards to the leading developed
assistance. As such, the WTO as a mitigating body economies, the main motives for FTAs derive
found itself largely superfluous as there was an from commercial motivations and are driven by
apparent consensus among many triad states that the desire to tap into rapidly growing markets
such methods were legitimate tools of a growth (see Chapter 15); to prevent trade diversion
strategy. (where the partner was signing a regional trade
The above indicates that the economic cri- agreement) and to ensure the enforcement of
sis led many states within the triad to introduce international trade rules. The difficulties over the
more discriminatory trade regimes as part of their Doha Agenda combined with the failure of the
adaptive strategies to the consequences of the EU to achieve its objectives within this frame-
crisis. However, this only tells part of the story: work has been one of the major drivers within
380
Case Study 17.1

FDI In Europe
FDI is a long-term business investment relationship between the overseas investor and the indigenous
investee. This investment in the physical capital of another country tends to be one of two types – either
the creation of a new firm in the host economy or the merger or acquisition of pre-existing assets. Such
acts are driven by a multitude of reasons which can be synthesised into one or more of the following:
market seeking; resource seeking; strategic asset seeking; and efficiency seeking. In the EU, market ac-
cess is not always a national question due to the SEM. Overall, FDI is seen as positive for an economy
when it results in better access to capital and foreign knowledge as a precursor to higher rates of
growth. Despite these intuitive benefits, evidence to support their existence can be difficult to establish,
often as the result of data issues or other such methodological problems. There are also, for example,
more context-driven factors such as host states failing to offer the necessary complementary factors
(such as human capital or infrastructure) needed to turn FDI into growth.
For many years, the EU was the world’s largest recipient of FDI. In the early 2000s, EU members
accounted for over half the global inflows of FDI. The rise of China has supplanted the EU from this
position. By 2014, most EU FDI was intra-EU FDI (around 60 per cent of the total) implying an intra-
European shift of resources. Moreover, changes in FDI across the euro area have proven to be uneven:
inflows were high for both Spain and Ireland between 2012 and 2014 while FDI into France declined
strongly. Greece and Italy also proved to be much less attractive destinations for FDI, reflecting their
longer term competitiveness issues.
EU states are comparatively open for inward FDI. However it is evident that openness does not
always translate into FDI flows especially in the peripheral states of the EU where the euro crisis and
issues of competitiveness are most prominent. Such anomalies reflect structural conditions within these
economies and a failure to offer business environments that are attractive to investors. The changing
position of the EU in relation to FDI inflows reflects how the euro crisis has changed the distribution
of FDI. The EU’s share of global FDI has fallen from over one-half in 2000 to less than one-fifth in
2014. The rise of China has been responsible for much of the EU’s declining share. However, this rela-
tive decline of the EU’s share of FDI has come from a fall in intra-EU FDI whereas the extra-EU share
has continued to rise, albeit from a low base.
Until the mid-2000s, the EU’s FDI dominance was reflected in its stock of FDI. The total accumu-
lated FDI stock in Estonia is over 240 per cent of GDP, 200 per cent in Luxembourg, 170 per cent in
Ireland and over 80 per cent in Hungary and the Netherlands. Moreover, FDI plays a more important
role for the UK, France and Germany than it does for other developed states, notably the US, Japan and
Korea. The most popular EU states for FDI in 2013 were the UK, Spain and Ireland. However trends
within these states are mixed: Spain’s FDI showed a marked increase while the UK and Ireland experi-
enced small declines in FDI. There were large gains for Germany, the Netherlands and Italy but France
showed a large fall. In terms of FDI outflows, the US was the most popular destination, accounting for
30 per cent of European outflows.
381
The impact of FDI differs across sectors: in high technology, skill-intensive sectors there is much
greater scope for technology transfer. In practice, much foreign investment flows into manufacturing,
financial intermediation and other services. FDI in primary industries is of minor importance to the
EU states. The Netherlands and Sweden attract the highest levels of manufacturing FDI while the UK,
Luxembourg and Ireland attract the highest levels of service sector FDI.
Although the impact of FDI can be overstated, it is nonetheless an important barometer of the state
of the EU economy. In a post-crisis, growth-fixated economy, there is an emphasis upon creating the
conditions in which intra-EU FDI can flourish. This can be done by making the process of FDI easier
through simplified systems and processes as well as by improving the resource environment. The EU has,
on the whole, eliminated many of the barriers faced, especially compared to many developing nations.
However, Europe scores poorly in terms of market conditions and the skills and wages of local workers.
Thus further openness is not necessarily the solution to encourage more FDI. Italy has always tended
to have lower FDI than the other large European economies and, of the smaller states, Greece has a
lower level (11.5 per cent of GDP) of FDI when compared to other smaller states which average over
50 per cent of GDP. In the case of both Italy and Greece, the low level of inward FDI reflects high unit
labour costs and poor performance in the main barometers of the ease of doing business. This indicates
that serious structural problems exist in these states.
Case question
Identify and rank the major determinants of EU FDI.
this strategy. Moreover, shifts in US trade policy rapid increase in imports during the implementa-
have also forced the EU’s hand in trade policy. The tion process. There are also special safeguard meas-
US regard FTAs as a ‘pathfinder’ strategy to direct ures that can be used for sensitive sectors such as
states towards an open system through bilateral- agriculture. In addition, the EU retains the right to
ism rather than multilateralism. Moreover, the impose anti-dumping duties.
longer the Doha Round took, the more the EU Unsurprisingly, given its competitive advan-
felt that its firms were losing out in key growth tage in this sector, many of the EU’s signed (or
markets. proposed) FTAs allow the EU to extend the com-
FTAs are pragmatic within a common frame- mitment in services beyond those in the WTO
work that underpins all these agreements.There is a rules.This appears to be based on the success of the
high degree of variance over factors such as border US in its FTA strategy which has done something
measures and rules of origin. These barriers tend similar. The EU has been proactive in its FTA in its
to be higher across developed states. As with all insistence on competition policy provisions (see
trade agreements, the EU’s FTAs have safeguards Chapter 6) but in practice these have been rather
within them. These can be permanent and reflect modest in scope. In addition, the EU is keen to
the EU’s rights under the WTO regime. They include provisions on intellectual property pro-
can also be temporary, giving the EU the right to tection within its FTAs (see Case Study 17.2 for
impose controls should there be an unexpectedly details of a contemporary EU FTA).
382
The EU and trade with the triad around 3 per cent of the EU’s total trade. The
main focus of this trade is intra-industry trade
The EU is the single biggest trading entity within with nearly two-thirds of EU imports from Japan
the global economy (see Chapter 2) with a large comprising machinery and transport equipment
proportion of its external trade and investment while this segment comprises around 40 per cent
focused on the other triad regions – the US and of EU exports to Japan. However, trade between
East Asia. Trade and investment relations between the two has been declining. In the five years to
these states are not just significant in terms of 2010, EU exports to Japan fell by 0.6 per cent
inter-partner economics but important because (compared to a global rise of 3.8 per cent) while
harmony between these states is central to the Japanese exports to the EU fell by over 3 per cent
effective functioning of the global trading sys- per annum at a time when its trade with other
tem. In combination, these states shape the global states was rising.
trade and investment agenda. However, relations To boost trade between these partners (and
between these parties can often be fractious. This to reverse the trend of declining trade), at an
section will focus on the form and nature of the EU–Japan Summit in 2011, the partners agreed
interaction between the EU and its established to negotiate a free trade agreement. The move is
trading partners in Asia and the West. asymmetric: the Japanese economy is much less
open to imports than that of the EU. Indeed, EU
exports to Japan are less than 2 per cent of Japan’s
The EU and East Asia GDP – a figure substantially below equivalent
states. This has fallen in recent years due to eco-
While there has been considerable focus on the nomic stagnation in both the EU and Japan which
emerging markets of China and other parts of has driven both to look elsewhere for trading
Asia, a considerable effort of EU trade policy is opportunities. While tariffs between Japan and
focused on longer term trading relations with the EU are low (around 3.8 per cent on aver-
other economies on this continent. This has been age), there are still significant improvements to
largely focused on four major partners: Japan, be made to the trading regime, not least from the
South Korea, Singapore and Australia. removal of non-tariff measures. These are signifi-
cant in the Japanese economy, not only because
of formal non-tariff barriers, technical standards
The EU and Japan and regulatory issues but also because of differ-
ences in consumer preferences and language. The
Historically – as one, and for a long time the impact of these barriers is that many EU firms
only, leg of the oft-cited triad – Japan was seen exporting to Japan limit what they sell and expe-
as Europe’s primary commercial rival from Asia. rience high trading costs.
However two decades of economic stagnation It is estimated that a free trade agreement
and the rise of alternative Asian economic power- between the EU and Japan could increase trade
houses – notably China – have diminished Japan’s by 23 per cent or €13 bn if tariffs were abol-
commercial salience. Nonetheless Japan remains ished, especially those related to agriculture and
the EU’s seventh most important trading partner processed foods. If non-tariffs barriers are also
with the EU running a trade deficit with Japan reduced by as much as is practical, EU exports
of around €2.5 bn in 2013. EU–Japan trade is to Japan could increase by as much as 50 per cent
383
(some €29 bn). The largest gains would be in mainly intra-industry in nature with 92 per cent
chemicals (including the pharmaceutical sector), of EU imports from and 82 per cent of exports
motor vehicles and medical equipment. Similar to South Korea consisting of manufactured goods,
opportunities would also be open to Japan with mostly of machinery and appliances.
its exports to the EU expected to increase by up Trade between the EU and South Korea is cov-
to 30 per cent (or €25 bn). The main beneficiary ered by a bilateral free trade agreement which
of such changes would again be the motor vehi- was signed in 2011 (see Case Study 17.2). This
cles sector. Overall, the EU has estimated that agreement – once fully implemented – will save
the overall welfare gain from a free trade agree- EU exporters €1.6 bn annually. In the interim,
ment would be in the order of €33 bn in the EU savings of around half this figure are expected.
and €18 bn in Japan. Two-thirds of these benefits The impact of the agreement is marked with
would come from the dismantling of non-trade sectors as diverse as chemical and textiles see-
barriers. ing substantial cost savings. Moreover, the EU
It is within knowledge-intensive sectors such agricultural sector – which has a strong presence
as pharmaceuticals where the barriers to trade are in South Korea though the export of pork – is
most marked. In pharmaceuticals, for example, expected to benefit by nearly €400m annually. In
trade is severely impeded by a series of non-tariff addition, it is estimated that the FTA will open
barriers such as the complex approvals process up new trade opportunities especially in broad-
and the non-recognition of non-Japanese clinical casting, telecommunications, transport, finance
data. The removal of these barriers could lead to and law.
an almost doubling of EU exports in this sector. As part of the process of freeing up trade
There are similar patterns for medical devices, between these two trading partners, mutual rec-
processed foods and motor vehicles where rig- ognition (thereby removing the need for dupli-
orous Japanese standards and conformity costs cate testing) of EU certificates and tests has been
inhibit the full exploitation of this market. Inevi- agreed – a factor that is especially important to the
tably, the proposed FTA between Japan and the consumer electronics and household appliances
EU has focused on the removal of non-tariff bar- sectors. Furthermore, pharmaceuticals and medi-
riers, however the process has been slow and pro- cal devices are also expected to benefit from new
tracted. The progress of the mutual recognition forms of transparency and predictability of regu-
agreement, for example, has been limited to a lations especially over pricing. Car manufacturers
few sectors where the gains were easy and non- are also expected to benefit from the removal of
controversial and the Regulatory Reform Dia- the 8 per cent tariff as well as an acceptance of
logue has made only limited progress. Currently, testing regulations and a commitment to no new
it is hoped that a final agreement will be in place regulations. Also included are agreements on
by 2015 – a possibly optimistic deadline. improved access to government procurement,
stronger protection of intellectual property rights
and cooperation in related policies in areas such as
The EU and South Korea competition. The immediate impact of the agree-
ment has been undoubtedly stronger for the EU
In 2013, South Korea was the EU’s eighth biggest than for Korea. In the three years following the
trading partner with the balance of trade in the signing of the agreement, the deficit for South
EU’s favour. The EU’s trade with South Korea is Korea has widened to nearly €4 bn. This was no
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Case Study 17.2

EU–South Korea Free Trade Agreement: an exemplar of the
Global Europe approach
In 2011, the EU–Korea Free Trade Agreement (FTA), the first of the new generation of bilateral agree-
ments envisaged by Global Europe, came into force. That it was South Korea with whom the EU would
pioneer its new strategy was no surprise. Previous trade agreements had been with neighbouring countries
or with countries with which the EU had strong historical or political ties. Although extremely important,
such agreements were not generally negotiated on economic grounds. Although South Korea is physi-
cally distant from the EU and has limited links with Europe, it has exhibited highly impressive economic
growth and the economic opportunities there have been taken advantage of by Europe’s main economic
rivals more effectively than by Europe itself. Thus the choice of South Korea by the EU as its partner for
the first of the new round of trade agreements was based on economic criteria, notably the potential for
increasing EU access to this highly dynamic economy, and was regarded as merely the first stage in im-
proving economic exchange with Asia where the world’s most dynamic economies are located but where
many obstacles continue to face European exporters and investors trying to gain access to them.
The negotiations between the EU and South Korea also took place at a time when the Doha talks
were stalling and it was becoming increasingly apparent that a comprehensive multilateral agreement
was far from imminent. The negotiation of this bilateral agreement and potentially others, was thus
regarded by the EU as a way of furthering liberalisation and making progress on issues that it seemed
were unlikely to receive support in the multilateral talks – otherwise known as ‘WTO plus’. According to
the EU, the EU–Korea FTA does not represent a turning away from a commitment to multilateralism
as some have claimed, but is a way of increasing the total amount of liberalisation in the world.
The EU–Korea FTA is the most ambitious trade agreement ever negotiated by the EU and the first
it has concluded in Asia. As such, it represents the deep and comprehensive agreements envisaged by
Global Europe. The agreement is unique in its scope: once fully implemented, the vast majority of in-
dustrial trade between the two will be duty-free as well as most agricultural products. The agreement
also seeks to remove significant non-tariff barriers (NTBs), especially those relating to motor vehicles,
pharmaceuticals/medical devices and consumer electronics. Furthermore it improves market access
for a wide range of service sectors and also makes advances in intellectual property protection, public
procurement and competition policy and sets in place an institutional framework to implement and
monitor the agreement. The measures introduced by the agreement are discussed in more detail below.
Tariff removal
The biggest removal of duties on industrial goods occurred when the FTA came into force with 98.7
per cent of Korean duties in terms of trade value to be eliminated within a five year transition period
intended to help domestic producers prepare for and adapt to the new situation. The main EU benefi-
ciaries of this increased market access in terms of value were machinery and appliance manufacturers,
followed by the chemical sector. Other major EU beneficiaries include textile producers for whom 93
385
per cent of the duties facing them in the South Korean market were eradicated immediately; glass – 85
per cent; leather and fur – 84 per cent; footwear – 95 per cent; iron and steel – 93 per cent; and optic
instruments – 91 per cent.
EU industrial tariffs were also removed from Korean exports: transition periods of up to five years
were applied to for more sensitive products such as cars with smaller engines, consumer electronics,
TVs and LCD monitors.
The opening of Korea’s market for EU agricultural products is highly significant. South Korea has
negotiated, or is in the process of negotiating, trade agreements with major agricultural producers such
as Chile, the US, Canada, Australia and New Zealand which, without greater access to Korean markets
for EU producers, could seriously undermine EU agricultural exports to Korea. Moreover, prior to the
FTA, only 2 per cent of EU agricultural products entered Korea duty-free. The FTA eliminates tariffs
completely for most agricultural products: wine became duty-free as soon as the FTA came into force;
whisky faced no tariffs after three years; and pork after five. The market for the most sensitive product,
frozen pork belly, is scheduled for opening after ten years. Excluded from the agreement are products
which the EU does not export or exports insignificant amounts – such as rice.
Technical barriers to trade (TBTs)

TBTs include a wide range of regulatory requirements such as technical regulations and standards,
conformity assessment procedures and similar requirements which can have a negative and costly im-
pact on exporters by requiring them to undergo different and time-consuming procedures and to adapt
their product to each individual export market, thereby increasing costs.
The FTA contains a number of general commitments on TBTs, including cooperation on standards,
including recognition of international standards where appropriate, and regulatory issues and transpar-
ency and marking/labelling regulations that go beyond WTO obligations. The four EU sectors likely to
benefit most from the FTA, however, are pharmaceuticals/medical devices; consumer electronics; motor
vehicles and parts; and chemicals for which individual annexes containing sector-specific commitments
are attached to the FTA. These annexes contain measures requiring mutual recognition of standards
and the acceptance of European certificates as equivalent to domestic certificates, thereby reducing
red tape and costs.
In relation to motor vehicles and parts, for example, the Annexe provides potentially important
breakthroughs on standards which will significantly ease market access for both parties. South Korea
will consider United Nations Economic Commission for Europe (UN-ECE) regulations on core safety
standards as equivalent to Korean regulations and will align a further 29 of its standards to UN-ECE
standards. Korea has also undertaken to ensure that standards not subject to equivalence or harmonisa-
tion will be applied in a way that does not create market access problems. Korea has also agreed that
any future standards it adopts will be based on UN-ECE regulations and where there are no UN-ECE
regulations, the EU and South Korea have agreed to cooperate to develop international standards or
to achieve convergence in their respective standards. Korea will also accept EU on-board diagnostic
(OBD) devices conforming to Euro 6 as compliant with Korean standards. Finally, South Korea will
386
extend Most Favoured Nation (MFN) treatment to EU producers if Korea decides to give more favour-
able treatment to other countries in matters of international taxation or emission regulation.
Sanitary and phytosanitary (SPS) measures

The agreement aims to stimulate trade in animal and animal products; plant and plant products; and
other food products while paying due regard to high levels of human, plant and animal health. Commit-
ments to transparency, consultation, and forging a common understanding on international standards
provides a foundation for resolving SPS issues such as standards for additives to foodstuffs.
Government procurement
Government procurement typically accounts for 12–15 per cent of GDP in OECD countries and more in
emerging and developing countries but these markets are notoriously difficult to access for non-domestic
suppliers. Both the EU and Korea have made a commitment to change this. The WTO Government
Procurement Agreement (GPA) contains substantial transparency and non-discriminatory procedural
rules for tenders for some goods and services by central and some sub-central authorities. The FTA goes
beyond the GPA, creating significant opportunities for EU and Korean companies. Korean companies
gain new opportunities in EU public works concessions and EU construction companies can compete for
Korean build-operate-transfer (BOT) contracts which are used in many Korean infrastructure projects.
Intellectual property
Using the WTO’s TRIPS (trade-related intellectual property rights) agreement, the FTA develops a le-
gal framework for the protection and enforcement of legal property rights and establishes mechanisms
for information exchange and cooperation. The agreement covers, among other issues, trademarks and
the rights of authors and performers. Protection is also given to geographical indications (GIs) – a
sign/name that indicates that a product originated from a specific location and which confers upon
that product a certain quality or reputation. EU products that will benefit from this protection include
champagne, Scotch whisky, Parma ham, Manchego cheese, Tokaji wines, etc.
Services
In terms of the sectors covered and the degree of market access, the FTA is the most ambitious service
agreement negotiated by the EU or Korea so far. The FTA preferentially opens the growing Korean ser-
vices to EU suppliers and investors and ensures national treatment. In other words, EU suppliers and
investors will not be discriminated against and will be treated the same as their domestic counterparts
in Korea. The agreement covers cross-border service provision and investment liberalisation in many
service and non-service sectors. The sectors covered by the FTA include telecommunications, environ-
mental services, transport, construction, finance, postal and express delivery, professional services such
as legal, accounting, engineering and architecture and a large variety of other business services. Overall,
Korea has committed itself to liberalising market access in over 100 sectors. In telecommunications, for
387
example, Korea agreed to relax foreign ownership rules and allow 100 per cent indirect foreign owner-
ship two years after entry into force of the agreement and EU satellite TV and telephone operators will
be able to operate directly cross-border into Korea without having to go through a Korean operator.
Institutional framework
In order to monitor the implementation and operation of the FTA, a Trade Committee meets annually
and is co-chaired by the Korean Trade Minister and the EU Trade Commissioner. A number of special-
ised committees and working groups have been set up to support the work of this Trade Committee.
Case questions
1 Why is South Korea the first country with which the EU has negotiated a comprehensive free
trade agreement?
2 Identify ways in which the EU–Korea FTA differs from earlier EU trade agreements.
3 Identify ways in which the EU–Korea FTA is in line with the Global Europe strategy.
4 What are the potential advantages for European and South Korean businesses from this FTA?
5 In what ways do the new generation of FTAs (as represented by the EU–Korea FTA) replicate
some of the key principles and features of the Single European Market?
doubt influenced by sluggish consumer demand of cars from Korea only added to further pressure
and a stronger Won (Korean currency). This was upon these businesses. The car makers were push-
despite there being a rise in South Korean exports ing for a ‘snapback clause’ that allows for states to
to the EU which rose by 7.8 per cent and as bilat- re-impose tariffs should trade become too one-
eral trade increased by 10 per cent per annum in sided. Such clauses have been installed in similar
the three years to 2014. agreements between the US and Korea and the
However there have been complaints from EU are placing such clauses into its agreements
European car manufacturers over the deal and by with Japan and India.
2012 they were stepping up lobbying efforts to
change it. The most immediate source of com-

The EU and Singapore
plaint was that the deal led to a sharp rise in car
imports from Korea. Indeed, in the nine months While Singapore is not an important trading part-
to March 2012, these imports rose by 67 per cent ner in terms of volume (it ranks fifteenth in terms
whereas EU car exports to Korea only rose by 7 of EU trade flows), the state is important to the
per cent. This sharp rise in Korean exports to the EU as it is its largest trading partner in the ASEAN
EU must be set against the impact of austerity on trade grouping. Indeed EU–Singapore trade is one-
the European car industry whose sales fell in the third of all EU–ASEAN trade and 60 per cent of
five years to 2012 resulting in both excess capac- investment. As such, the EU–Singapore free trade
ity and falling sustainability. Inevitably the influx agreement (EUSFTA) is key to allowing the EU to
388
build broader agreements within this high growth trade flows generating – in 2013 – around 1.3
segment of the global economy. Over 9,000 EU per cent of total EU trade flows: in 2013 the EU
companies (especially service sector businesses) are operated a net trade surplus of over €20 bn with
using Singapore as a regional hub to enter this area. Australia. Unsurprisingly, Australia’s exports to
The EUSFTA is wide-ranging and allows mar- the EU are dominated by minerals and commodi-
ket access in areas beyond those the states are ties (63 per cent of total exports). EU exports to
already committed to under the WTO Agree- Australia are mainly manufactures notably motor
ment. For example, the states have agreed to com- vehicles and telecoms equipment (87 per cent of
mon regulatory principles for services, to remove total imports). Trade in services has grown mark-
many technical barriers to trade, to eliminate vir- edly over the past decade or so with these now
tually all tariffs and to operate a ‘mature’ frame- comprising around one-third of the total trade
work for the protection of IPR. All of this is set between them. Again, the EU operates a net sur-
within a broad ‘green growth’ framework which plus in the trade of services to Australia; these
seeks to allow an open market for green technol- mainly comprise of transportation and tourism
ogies and a commitment to sustainable growth. It services. These ties between Europe and Australia
is estimated that the EUSFTA would see – in the are enhanced by the close investment ties. The
ten years from its implementation – an increase in EU has for a substantive period been the leading
over €4 bn in intra-Singapore–EU trade with the foreign investor in Australia. By 2010, there were
gains to Singapore being three times what they are over 2,500 EU companies in Australia. The EU is
for the EU. The EU sees such asymmetric benefits the second largest destination for overseas invest-
as worthwhile in enabling the agreement to act as ment by Australian companies.
a platform for trade agreements with other ASE- Trade and investment relations between the
AN states. Thus the trade agenda with Singapore EU and Australia are covered by the EU–Australia
is part of a wider strategy of the EU gaining trade Partnership Framework. This was signed in 2008
credibility in Asia especially the rest of the ASE- and serves as an instrument for the development
AN states. In 2012, the ASEAN states were the of bilateral relations across a range of issues not
EU’s third largest trading partner after the US and just trade. The agreement reflects commonality
China where trade in goods has grown by over 50 of purpose between Australia and the EU based
per cent in the five years to 2012. Importantly the notably on the use of multilateral frameworks
ASEAN region is an especially salient market for to work for their combined agenda within the
EU manufactures. global economy. The second objective within the
framework agreement commits the signatories to
‘promote and support the multilateral rules trad-

The EU and Australia
ing system and consolidate and expand bilateral
The EU is Australia’s second largest trading part- trade and investment relationship’. This reflects a
ner comprising around 17 per cent of Australian consensus of the benefits of trade and investment
trade; just below China which has around 18 per liberalisation for both parties. Australia – within
cent. This will only grow in salience as the Chi- the context of this framework – was especially
nese economy cools and demands less of the min- keen to push for the further liberalisation of agri-
erals that have driven Australia’s exports over the cultural products. It is also Chair of the Cairns
past decade. For the EU, Australia is of less impor- Group – a group of states pushing for the liberali-
tance ranking only eighteenth in terms of overall sation of trade in agricultural goods.
389
The EU and Western economy trade has been a long standing goal with an agreement
first mooted in 1990 and then later via a series
Both currently and historically, the EU’s major of initiatives throughout the 1990s and right up
trading partners are other Western states. As to 2006. This was in part driven by the shifting
we shall see, some of this has been driven by geopolitics of the end of the Cold War. However
the economic hegemon that is the US, but sim- it was not until 2013 that recommendations for
ple geographic proximity has also been a factor the launching of an agreement were advanced.
through the trade the EU does with other non- This was the basis for the TTIP. The TTIP has three
EU European states, notably Switzerland and main elements:
Norway.
1 improving market access through the removal
of customs duties and other non-tariff barriers
The EU and the US
to trade and investment;
The US is the EU’s largest trading partner (it 2 enhancing regulatory coherence and cooperation;
comprises over 14 per cent of total EU trade) 3 improving cooperation in the setting of inter-
with whom it runs a net trade surplus of over €90 national standards.
bn (2013). It is the EU’s largest export market
and is the third largest source of imports into Like other trading partners, tariffs between
the EU. Much of this trade is of an intra-industry the US and the EU are relatively low due not
nature with nearly 80 per cent of imports and 85 just to their membership of the WTO but also
per cent of exports being within manufactured to a series of recent agreements such as the
products. Trade between the EU and the US has Open Skies Agreement within the airline sec-
continued to rise in the ten years to 2013 though tor. However the volume of trade flowing
there were declines in total trade between 2008 between these partners means that tariffs can
and 2010 when there was an almost a 20 per cent still have a significant effect on bilateral trade
fall in total trade. Since then trade volume has flows. Moreover the US applies customs duties
been restored though there was another decline in some segments where the EU has a competi-
between 2012 and 2013. These falls were large- tive advantage (such as textiles and processed
ly triggered by the fall-out from the euro crisis. agricultural products). As a result of these poli-
The stagnation in trade between the two partners cies, trade between the US and the EU can be
(especially when compared to rising flows to oth- fraught, with disputes between the trade part-
er states) was not merely driven by short-term ners being fairly frequent. It is felt that the
drivers such as the financial crisis and the euro TTIP can have its biggest effect though adjusting
crisis; it is also felt that longer term trends could technical barriers to trade through greater con-
be at play such as the process of economic integra- sistency of standards and regulations. While the
tion in both continents and the rising importance relevant bodies within their respective domains
of other parties such as China. may have the same aims (notably in terms of
The EU and the US are moving towards a protecting the welfare of consumers) they differ
Transatlantic Trade and Investment Partnership markedly in terms of regulatory structures and
(TTIP) which seeks to secure free trade between traditions. Such differentials can operate as de
these two important trading areas. Indeed a free facto customs duties, estimated in some product
trade agreement between the EU and the US areas of up to 20 per cent of costs. Such costs
390
can prove especially problematic for small and economic growth – in both the US and the EU –
medium-sized enterprises. as a result of the TTIP and spillover effects created
The incentives for the conclusion of the deal by common regulatory approaches the agreement
lie in the welfare gains from such a deal at a time is expected to lower the cost for companies in
of low growth for both European and US econo- other states. It is estimated that the major trading
mies. For the EU, the TTIP is seen very much as partners of both the US and the EU will benefit
a core plank of its growth strategy. It is estimated by around €100 bn.
the EU economy could grow by around €120 bn Despite the belief that such benefits are avail-
per annum (0.5 per cent of GDP) through such able to states from the signing of the TTIP there is
an agreement with freer trade in services being by no means a consensus on the agreement; with
a main driver of the realisation of these benefits. some states growing increasingly resistant to the
Moreover as large investors in the US, EU com- agreement. Indeed in parts of the EU there is out-
panies have a clear incentive to ensure their FDI right hostility to the conclusion of the agreement.
is adequately protected. It is estimated that the It is evident that within the EU a consensus is get-
benefits to the US economy would be around €95 ting difficult to form due to the very broad nature
bn (0.4 per cent of GDP). Overall it is anticipated of the deal that will require the agreement of both
that 80 per cent of the gains from the agreement national and European parliaments. This allows
are sourced from the resolution of duplication of one state to have a veto over the entire TTIP. The
EU and US rules and in the development of com- typical fears are that:
mon standards.
It is the EU’s high value manufactured and ■■ deregulation could create a race to the bottom
knowledge-based goods that are expected to be and allow for the adoption of weaker regula-
the primary beneficiaries of the TTIP. Motor vehi- tion in environmental, consumer, health or
cles are expected to be an especially notable ben- social areas;
eficiary with trade expected to increase by some ■■ it could result in a loss of a regulatory
40 per cent. Other notable beneficiaries are metal sovereignty;
products, processed foods and chemicals. The net ■■ investment protection could lead to the EU
impact in terms of employment is difficult to pre- being sued by US MNCs over legitimate regu-
dict though the European Commission estimates lation (see more on investor state dispute set-
suggest an increasing number of jobs (a ballpark tlements below).
figure of an increase of several million is offered)
becoming dependent upon exports as a result. Moreover there are specific sectoral concerns
Another major beneficiary of the TTIP is antici- with regards to agriculture (based on a fear that
pated to be consumers who will be expected to the EU could become open to the excesses of US
benefit from cheaper products. The Commission agri-business and its use of genetically modified
estimates that – for an average family of four – foods and hormone treated beef), data protection
the benefit will be around €500 per annum; a (the US has lower standards) and financial deregu-
figure attained through the combined effects of lation (a notable concern in the aftermath of the
wage increases and price reductions. The TTIP financial crisis). The French have also raised con-
is also expected to have ripple effects on the cerns over limits to the ability of the EU states to
respective trading partners of both the EU and secure preference for their own cultural products
the US. Through the mechanism of higher rates of via the use of quotas and subsidies.
391
As mentioned the investor state dispute settle- to the EU of which gold and silver ore account for
ments (ISDS) has proved especially controversial 30 per cent of total exports.
(see Box 17.1). The ISDS is an instrument within Trade between the EU and Canada is covered
the agreement that allows an investor to bring a case by the Comprehensive Economic and Trade Agree-
directly against a FDI hosting state without having ment (CETA). CETA is a bilateral agreement to
to go through the home state system.The fear is that eliminate tariffs and reduce non-technical barriers
the ISDS opens up an avenue whereby MNCs can to trade across both manufactures and services.
directly challenge a state’s policy while reciprocal The agreement will phase out 99.6 per cent of all
rights by a state or its civil society to hold an MNC non-agricultural tariffs with immediate effect with
accountable are lacking. Thus some fear that the a full elimination within seven years of the agree-
ISDS can be open to abuse due to its investor pro- ment being signed (the final draft was agreed in
tection clauses and directly erode state sovereignty. late 2014). Over that time it is planned that 94 per
These issues are not simply limited to the EU cent of agricultural tariffs will be eliminated. The
as parties in the US also have concerns. There are major export product groupings (i.e. raw miner-
anxieties about opening up the agricultural sec- als) are not subject to any tariffs though those that
tor to EU imports and a resistance to what some had been processed were subject to tariffs. The
see as high levels of business regulation from the average tariff for agricultural goods was 13.9 per
EU.The US simply does not want to accept higher cent but these will be reduced by the agreement,
levels of regulation that run counter to its busi- though those for the most important product –
ness culture. The US President no longer has a wheat – are only going to be reduced slowly.
‘fast track’ capability to allow for the passing CETA also covers FDI: where the EU is the sec-
of trade deals via a simple yes/no vote in Con- ond largest source of FDI into Canada (some 24
gress. This allows for lawmakers to offer endless per cent) and the EU is the second largest destina-
amendments. Many politicians within Congress tion for Canadian FDI (some 28 per cent of the
are loathe to offer the US government a new fast total). Under CETA – and the interlinked Invest-
track mandate. ment Canada Act – thresholds for approval will be
raised to improve the ease of smaller investments
into their respective economies. Tariffs on auto-
The EU and Canada
mobiles are also to be reduced though this is likely
The EU is Canada’s second largest export desti- to be felt more on the Canadian side than the EU’s.
nation after the US which dominates Canadian However rules of origin remain on both sides.
exports. Canada is the EU’s twelfth largest major
trading partner. Canada, in 2012, absorbed 1.9

The EU and Switzerland
per cent of the EU’s exports. The major imports
into the EU from Canada are a mix of primary Switzerland is the EU’s fourth largest trading
products and manufactures while the EU mainly partner with around 8 per cent of its total trade.
exports manufactures to Canada. The trade in The EU was a net exporter to Switzerland with
services is also a key driver of the trade between around 80 per cent of this trade being in manu-
the partners with – in 2012 – the flow of services factures while the EU imports chemicals, pre-
(the largest being commercial, transport and gov- cious metals and other manufactures from the
ernment services) accounting for C$18 bn. Min- Swiss economy. By far and away the largest type
ing, oil and gas account for 45 per cent of exports of imports are those related to pharmaceuticals
392
The Transatlantic Trade and Investment Partnership (TTIP) and
Box 17.1
the UK National Health Service
It has been said that the UK’s National Health Service (NHS) is the closest thing the British have to
a religion. This became apparent with the growing concern in the UK about the potential implications
for the NHS of the TTIP. TTIP provisions on health and healthcare are expected to have a wide-
ranging impact on the NHS and there are fears that the TTIP could restrict the government’s freedom
to regulate on healthcare where such acts were deemed to contravene themes within the agreement.
Furthermore, it is feared that intellectual property clauses in the TTIP could extend patent protection,
thereby delaying access to generic medication and raising the cost of NHS treatment. These problems
are compounded by the potential harmonisation of EU and US regulations on food safety, toxic chemi-
cals and labour rights, all of which could have an impact on the NHS.
The main concern regarding the TTIP is the proposal to open up public services and government
contracts to unrestricted competition from US profit-driven concerns. Given the amount EU states
spend on healthcare, this will inevitably attract US healthcare companies who would be accorded equal
treatment with indigenous suppliers who, given the differences in resources, could be disadvantaged
in bidding for contracts. Furthermore the TTIP commits the EU to maintain this position, meaning a
marketised NHS would be irreversible. This concern is compounded by a fear that the investor state
dispute settlement provisions (ISDS) within the TTIP will offer US healthcare companies and their
profits legal protection irrespective of their performance. This gives operators the power to sue the NHS
should their interests be threatened.
By 2014, the NHS had become the focal point of UK opposition to the TTIP and the UK government
sought assurances regarding protection of the NHS under the TTIP. The EU has implied that the NHS
could be protected from the TTIP but critics fear these assurances are not watertight and that should
the UK choose to exercise its right to control its own NHS, then it could be liable to claims from US
investors. The UK government insists that the NHS is safeguarded under the WTO’s General Agreement
on Trade in Services but these safeguards are ambiguous in the eyes of TTIP’s critics. Further guidance
from the EU in December 2014 offered some reassurance, stressing that there is no obligation to open
up public health and that member states are free to change policies without fear of legal action. This
reflects a series of reservations regarding the TTIP that allow member states to manage their public
services as they wish. Moreover, the EU insists that just because a service is outsourced does not mean
that it is irreversibly part of the commercial sector. Finally the EU also maintains that claims that, under
the investment protection provisions of the TTIP, it would be difficult to bring a service back into the
public sector are simply false. However the UK government does not intend to make the NHS exempt
from the TTIP and as a consequence many remain sceptical of its benefits.
which represent over one-third of the total. One- volumes have increased by 6 per cent per year in
third of Switzerland’s wealth comes from its trade the decade to 2013.
with the EU which comprises 80 per cent of the While Switzerland has remained peripher-
total trade that the Swiss economy does. Trading al to the integration process, it has sought to
393
develop a separate arrangement to deal with The EU and Norway

the EU. Initially this was done via the creation
of the EFTA. The basis for Swiss–EU trade is Norway is the EU’s fifth largest trading partner
a 1972 bilateral agreement which made it pos- with which it currently operates a trade deficit.
sible for the participants to trade in industrial The majority of imports into the EU from Norway
goods free from trade barriers. This was driven comprise mineral products (nearly 60 per cent)
in part by the other large members of EFTA to which are mainly oil and gas for which Norway is
seek full membership of the EU which was a a major supplier for the EU. The oil and gas sector
catalyst for the agreement. This persisted until contributes around one-quarter of Norway’s total
the 1980s, when Switzerland signed a bilateral output and it is one of the top five global suppli-
agreement with the EU to improve access to the ers for these products. Norway is the EU’s main
bloc. When the EEA was proposed, the Swiss supplier of gas with Germany, France and the UK
initially rejected it (through a referendum) due being its major markets. The EU’s main export to
to the absence of satisfactory decision making Norway takes the form of manufactures.
and sought full membership, which was also Trade relations between the EU and Norway
rejected (again by referenda). Thereafter the are covered under the EEA which gives Norway
Swiss moved to create a series of bilateral agree- access to the single market. This extends the four
ments with the EU between 1994 and 2004. core freedoms to Norway (as well as Iceland and
The first set of bilateral agreements between Lichtenstein). The end point is to create a homog-
1994 and 1999 dealt with gaining better access enous market place across the European theatre.
to the SEM. This set of agreements covered the As suggested, the focus is on the four freedoms
free movement of peoples, technical barriers to with the inclusion of flanking policies such as edu-
trade, public procurement, agricultural trade cation, competition policy etc. However the EEA
and transport. excludes agriculture and fisheries as well as trade
The second set of agreements between 2002 and security policies.
and 2004 moved beyond simple trade and invest-
ment issues to seek agreement on factor mobility.
As of 2014, the EU–Swiss framework consists of Conclusion
20 treaties and 100 secondary agreements. How-
ever, full access to the SEM has not been real- This chapter has highlighted some of the EU’s
ised, with Switzerland being selective in the way main trading relationships with states within the
that it deals with the EU. Despite this the sanc- core triad of regions that dominate the global
tity of Switzerland’s sovereignty – which it was trading system. Given the delays in reaching an
keen to protect – has to some degree been vio- agreement in the latest round of multilateral
lated by these agreements as it has to accept EU trade talks under the auspices of the WTO (see
rules (over which it has little or no say) as part Chapter 15), the EU has developed or is develop-
of the bilateral agreements. Overall, it is widely ing a series of bilateral free trade agreements with
accepted that there is still a lot of work to do to these states in particular in an attempt to achieve
fully open up the markets. This is most evident its trade policy objectives by other means. These
in terms of the service sector where barriers are agreements are becoming an increasing part of
still apparent. the EU’s Common Commercial Policy.
394
Key points
■■ Trade is a catalyst stimulating growth in the EU.
■■ Much of the EU’s trade is with the other triad regions of the global economy.
■■ The EU is developing or has developed a series of free trade agreements with many of these
states.
■■ The proposed free trade agreement with the US (TTIP) is especially salient in this process.
Activities
1 To what extent does the concept of the ‘triad’ remain a valid concept in international trade?
2 Develop a profile of a developed state’s trade with the EU, identifying the major problem areas in this
trade.
3 Choose an EU member state and identify the main trading challenges it faces.
1 Why have free trade agreements become so important to the EU’s Common Commercial Policy?
2 Compare and contrast inter- and intra-industry trade.
3 The EU stresses that it is committed to ‘fair’ trade. What do you understand by this term?
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396
Chapter 18
Europe and the BRICs

Opportunity or threat?
When China wakes it will shake the world.

Napoleon Bonaparte
This chapter will help you:
■■ understand the growing importance of the EU’s business links with the BRIC economies;
■■ identify key differences in the EU’s business links with the four largest emerging economies;
■■ understand the competitive challenges facing European business as a result of the rapid
integration of the BRICs into the world economy;
■■ consider how European business can respond to these competitive challenges;
■■ identify opportunities for European business as a result of the rapid integration of the BRICs into
the world economy.
The acronym ‘BRICs’ was coined in a 2001 The rise of the BRICs poses both challenges
report by the international investment bank and opportunities for European business. The
Goldman Sachs in reference to Brazil, Russia, challenges come from the intensification of com-
India and China, the world’s four largest emerg- petition in both domestic and foreign markets as a
ing economies which, if they fulfil their econom- result of the lower cost and increasingly sophisti-
ic potential, will become the world’s leading cated output of these countries.The opportunities
economies within a few decades. Indeed, China come from the opening of these large and grow-
is already the world’s second biggest economy ing markets to incoming trade and investment,
and is homing in on the top spot currently occu- potentially enabling European business to sell
pied by the US. to the increasingly well-off populations of these
397
countries and to use these lower cost centres as of Europe and North America remain two to
export platforms to serve the rest of the world. three times higher than those of Brazil and Rus-
Success in meeting these challenges and taking sia and 20–40 times higher than that of India. If
advantage of these opportunities depends not only BRIC growth continues to outpace that of Europe
on the development of appropriate strategies by and North America, the increasing BRIC living
European companies but also on the ability of the standards will yield serious market potential for
European Union, given its exclusive competence European business if it can keep a tight control of
in the fields of trade and investment, to foster a its competitiveness.
strong formal framework of international com- In general, the BRICs are transforming key
mercial relations with these countries, especially aspects of their economies and experiencing accel-
in applying the Global Europe strategy of increasing erated growth and development which promise
access for European business to the world’s most to lift them from low or middle income to high
rapidly growing markets (see Chapter 15). income economies in the longer term. India and
Accordingly, this chapter begins by establish- China, for example, can both be described as
ing why the BRICs have become a priority for ‘developing countries’ but in certain locations
European business and political leaders. It then and/or industrial and service sectors they already
explores Europe’s developing economic and for- resemble developed economies.
mal commercial links with each of the four BRIC Each BRIC economy, as seen below, sits within
economies which help shape the operating envi- its own unique historical, social, cultural, political,
ronment of European business. In the process, the legal and economic context but they do have broad
chapter identifies obstacles and areas of tension characteristics in common. They are all in the
when forging these relationships, both commer- process of moving from developing to developed
cially and politically. Indeed, it becomes apparent country status and/or from a state-dominated to
that high politics frequently intervene and colour a freer, more liberal market economy, albeit from
the development of these links. different starting points. State-owned enterprises
and general state control remain important in
China but their role is diminishing and China is
About the BRICS rapidly transforming itself from a command eco-
mony into a market economy. India has long been
The BRICs are not the world’s only emerging a mixed economy but its recent past has seen, if
or transition economies – other countries fit- not the elimination of, at least the scaling down
ting this description are to be found elsewhere and limitation of state ownership, regulation and
in Asia, Latin America, the Middle East and parts general state intervention.
of Africa. However, the BRICs stand out because Whatever the specific circumstances under-
of the sheer size of their populations, economies pinning the emergence of individual BRICs, their
and, in the case of Russia and Brazil, their natural overarching policy thrust is one of liberalising
resources. Taken together, the four BRIC coun- their economies, domestically and externally –
tries accounted for 41 per cent of the world’s a trend which both helps the competitiveness of
population and 21 per cent of the world’s econo- their own businesses, and intensifies the com-
my in 2013. Despite the rapid economic growth petition facing European businesses at home
of the BRICs in recent decades (see Table 18.1), and abroad, and makes it easier for European
the GDP per capita of the high income economies businesses themselves to trade with and invest
398
in the BRICs. However, European business still 2007–8 financial and economic crises – although
faces significant barriers to trade and invest- the continued dynamic economic performance
ment in these markets; barriers which the EU of the BRICs cannot be taken for granted and
is committed to reduce and ultimately remove each BRIC faces its own internal problems which
through Global Europe’s market access strategy could undermine further progress. Nevertheless,
(see Chapter 15). the EU has identified its relatively poor trade and
As a result of this progressive economic lib- investment performance in these economies as a
eralisation, the BRIC economies have grown cause for concern. Consequently, a major priority
more strongly than most OECD countries since of Global Europe is to increase European involve-
1990 (see Table 18.1) and, in the case of China, ment with these, the world’s currently most rap-
for a decade before that. Indeed, China’s annual idly growing economies (see Chapter 15). In line
average growth since 2000 has been almost ten with Global Europe, the strategy will focus on mar-
times greater than that of the eurozone. The ket access and, where possible, the negotiation of
BRICs were also much less badly affected by the wide-ranging trade and investment agreements.
Table 18.1 G
rowth in BRIC, large European and other developed economies (average annual percentage
growth)
Agriculture Manufacturing1 Services GDP
1990–2000 2000–12 1990–2000 2000–12 1990–2000 2000–12 1990–2000 2000–12

BRIC economies
Brazil 3.6 3.5 2.2 2.2 2.4 3.8 2.7 3.7
Russia -4.9 1.5 -7.1 3.5 -4.7 5.9 -4.7 4.8
India 3.2 3.3 6.9 8.4 7.8 9.2 6.0 7.7
China 4.1 4.4 13.7 11.6 11.5 11.2 10.8 10.6
Large EU economies
France 2.0 0.7 2.2 0.1 2.1 1.5 1.9 1.1
Germany -3.8 3.1 0.3 1.7 2.5 1.4 1.6 1.1
Italy 2.2 -0.3 1.5 -0.8 1.8 0.6 1.5 0.2
Poland 0.5 1.1 8.1 8.7 5.2 3.6 4.7 4.3
Spain 6.1 -0.5 1.9 -0.2 3.6 2.8 2.7 1.7
UK -0.2 0.6 1.3 -0.8 3.8 2.3 3.4 1.5

Eurozone 1.4 0.5 1.5 0.6 2.5 1.5 2.1 1.1
Other developed economies
Canada 1.1 2.1 4.5 -1.9 3.1 2.9 3.1 2.9
Japan 0.8 -1.3 1.2 1.9 1.0 0.8 1.0 0.7
US 3.6 1.7 3.7 0.2 3.6 – 3.6 1.7
Note
1 The figures for China, Russia, Spain and the US refer to industry not manufacturing. Industry includes mining,
manufacturing, construction, electricity, water and gas.
Source: World Bank 2014 World Development Indicators.
399
Case Study 18.1

Siemens: a European MNC with a long history in BRIC markets
Siemens is an engineering and electrical multinational with headquarters in Munich and Berlin. In
2014, it was fifty-eighth by revenue on the Global Fortune 500 list with 362,000 employees worldwide
and revenue in Fiscal 2013 (ending September 30, 2013) of €75.9 bn. Its activities are organised
within four divisions – industry, energy, healthcare and infrastructure and cities – spread over almost
190 countries worldwide.
Siemens was founded in 1847 for the purpose of developing and exploiting the invention of the
telegraph. By the late nineteenth century, the company was manufacturing light bulbs, electric light-
ing and electric trains. In the interwar years, Siemens started to produce radios, television sets and
scientific equipment and began its involvement in power generation. During the post-war era, Siemens
developed its existing strengths and diversified rapidly into those activities that form the basis of its
current portfolio, including electrical appliances, information and communication technology, nuclear
power, advanced medical equipment, etc.
Siemens’ initial involvement in what later became the BRIC economies goes back to the nineteenth
century and was grounded in telegraphy. As early as 1853, Siemens founded an office in St Petersburg
to coordinate the building of long distance telegraph networks in Russia. In 1867, Siemens installed the
first telegraph line between the states of Rio de Janeiro and Rio Grande do Sul in Brazil. Also in 1867,
Siemens laid the world’s first transcontinental undersea telegraph cable which linked London and Cal-
cutta. In 1872, Siemens exported pointer telegraphs to China and in 1899 built China’s first electric
tram in Beijing. In the early twentieth century, Siemens built power plants, steelworks and China’s first
high voltage line. By the 1930s, Siemens China Company was Siemens largest company outside Europe.
The current rapid development of the BRIC economies makes them very attractive markets for
Siemens with great potential for much higher levels of engagement. A priority for these economies is
to develop the quantity and quality of infrastructure to support their long-term economic aspirations,
aspirations which require the acquisition of modern industrial technology. Energy developments, both
from the producer and consumer perspectives, are also central to long-term success. Moreover, develop-
ment should involve better quality of life for which improvements in the quality of healthcare are para-
mount. Siemens can be an important partner for the BRIC economies in all these areas but, as shown
below, although the rewards are potentially high, involvement in these markets can also be problematic
and associated with significant risks.
Industry
Siemens’ industry division, which in 2013 accounted for 24 per cent of the company’s revenue, spe-
cialises in automation technology, motors and drivers, metal technology and industrial services and
training. In Russia, the company has a number of cooperation agreements with big Russian customers
including Transneft Oil, Ural Mining and Metallurgical Company and United Aircraft Corporation. An
example of these activities is its €270 m, 1.8 m tonne annual capacity hot briquetting iron plant which
400
Table 18.2 Siemens in the BRIC economies, fiscal year 20131
Revenue (€bn) Employees

Brazil 1.95 7,910
Russia 2.17 3,120
India 1.83 18,500
China 6.14 31,830
BRIC total 12.09 61,360
BRIC as % of total 15.9 17.0
Note
1 1/10/12–30/9/13
Siemens, in conjunction with US-based Midrex Technology Inc., is developing for the Lebedinsky mining
company. The following ventures are typical of Siemens activities in China. In 2013, Siemens Electron-
ics Works Chengdu, Siemens’ first digital enterprise outside Germany, began operations. A joint venture
with Shanxi Lu An Mining Group has also begun producing large and special motors and generators
and other electrical products for the Chinese market. Siemens and Tangshan Steel Group have signed
a €100 m contract to produce high strength steel sheets for the automobile industry. Similarly, in
Brazil Siemens has been developing an automation platform for a beer plant; designing an innovative
electrical mill for a new pulp and paper plant; and project managing the rebuilding of the largest blast
furnace in Brazil.
Healthcare
In 2013, 18 per cent of Siemens’ revenue came from healthcare equipment including clinical IT sys-
tems; in-vitro diagnostic equipment; imaging equipment such as CT and MRI scanners, angiography
and mammography, ultrasound and X-ray equipment. In 2012, Siemens was the leading supplier of CT
and MRI scanners in China and has opened a factory for the manufacture of X-ray products in Shang-
hai and has plans to expand its activities in X-ray technology in China. Siemens has also been involved
in training Chinese medical staff in the use of its equipment. In Brazil, Siemens has established a facility
to produce imaging equipment such as X-ray systems and CT and MRI scanners for the Brazilian and
Latin American markets. Its diagnostics division provides equipment to over 20 per cent of the Brazil-
ian market. Given its economic growth, demographic trends and its lower costs and skilled medical
personnel, which make it a destination for a growing number of medical tourists, India is considered a
potentially fruitful market for healthcare. Siemens has been producing a range of medical equipment
in Goa since 1995, much of which has been serving export markets. Siemens is one of Russia’s lead-
ing suppliers of diagnostic equipment. For example it has supplied ultrasound systems to the Yaroslavl
region and is participating in the national medical modernisation programme which involves the supply
of advanced medical equipment to eight cities in the Moscow region.
401
Energy
In fiscal year 2013, energy provided 35 per cent of Siemens’ revenue. True to its roots, Siemens has
been extremely active in the power sectors of all four BRIC economies but it has also, in line with con-
temporary demands, become a leader in green, particularly wind power, in these countries. In China,
among a number of projects in the energy sector, Siemens supplied transformers for the Three Gorges
Dam Project, which became fully operational in 2012, and has built high voltage power lines. Siemens
was also responsible for the production of China’s first mobile 110 kV substation at its transformer
factory in Wuhan – an important technical milestone for Siemens in vehicle-mounted intelligent mobile
substations. Together with Shanghai Electric, Siemens delivered 20 wind turbines to the Guangrao
onshore wind farm which became fully operational in early 2013. Siemens has also been very active
in the Russian power sector, supplying steam turbines to Kurganskaya and Syzranskaya thermal power
plants. It is also providing equipment and has been awarded a service contract for the Yamal LNG pro-
ject. Siemens is also involved in a large-scale transmission project for the Novovoronezhskaya nuclear
power plant. In addition to supplying equipment to conventional power stations in Brazil, Siemens has
a contract to supply 470 MW of generating capacity to 18 wind farms in the north-east of the country.
The company also has service contracts for wind, sugar and ethanol and thermal power plants through-
out Brazil. Estimates suggest that Siemens electrical equipment is involved in generating 50 per cent
of Brazil’s electricity and has made a contribution to two-thirds of the offshore platforms built since
the early 2000s.
Infrastructure and cities

Siemens’ activities in infrastructure overlap with those of its other divisions, particularly energy and
industry. For example, the company has been instrumental in modernising power grids and introducing
smart grid technology in Ufa, Russia, and has sold three control centres for the management of power
generation and transmission to Brazil’s national grid operator. More generally, Siemens has provided
equipment and technology to upgrade power generation and transmission in all four BRIC economies.
Siemens is also active in transportation infrastructure, particularly in the rail and urban transport sec-
tor. For example, Siemens and Russian Railways have a memorandum of understanding for the produc-
tion and delivery of 675 freight locomotives by 2020 and is contracted to supply other rail equipment
in Russia. In China, Siemens has been awarded a contract for advanced propulsion systems and bogies
for low-floor trams in Guangzhou and has equipped one of Beijing’s metro lines with an advanced train
control system designed to enhance the line’s safety, reliability and capacity. The company also involves
itself in one-off projects: for example, it provided building technology for a number of the stadia built
for the 2014 World Cup in Brazil.
The above examples show the potential benefits for Siemens of doing business in the BRIC econo-
mies but it could be argued that Siemens, as other European multinationals, could do more in these
countries. However, things are not necessarily that straightforward and there are likely to be reasons,
apart from the alleged slowness of European business to get off the mark, for relatively low levels of
402
European involvement in the BRIC markets. As seen elsewhere in this chapter, many regulatory obsta-
cles continue to face European exporters to and investors in these markets. Businesses involved in these
countries also have to navigate very different cultures and ways of doing business.
Continued strong economic performance of these countries is not guaranteed: China’s economy, for
example, appears to be faltering in 2014 with hesitancy in the hitherto booming property market and
questions being asked about the scale of the public debt incurred, particularly by regional authorities,
as a result of attempts to stave off any recessionary effects of the 2007–8 international economic
crisis. The double digit growth experienced by China over 30 years cannot continue indefinitely. The key
questions for Siemens and other actual and potential investors are:
■■ Are the weaknesses being shown in 2014 part of a temporary blip or the beginning of a long-term
structural adjustment in China’s economic performance?
■■ What will be the response of China to economic slowdown, whether it is short or long term? For
example, will it lead to greater restrictions in Chinese policy or will there be political implications
resulting from any shocks to the apparently inexorable rise of China’s economic power?
As a result of Russia’s annexation of Crimea in the spring of 2014 and the ongoing brittle relation-
ship between Russia and the EU, European businesses are experiencing greater uncertainty in their
dealings with Russia, especially in sectors affected by the EU sanctions imposed against Russia as a re-
sult of its action in Ukraine. Siemens, for example, is vulnerable because of the high technology nature
of its products with sanctions being levelled against dual use technology, that is, machinery, equipment
and other technology that can be used for civilian and potentially for military purposes. Siemens’ energy
sector could also be affected by the sanctions on equipment and services to be used in the exploration
for and production of oil in deep-sea areas and in the Arctic region. In addition, the damage being done
to the Russian economy at the end of 2014 by lower oil prices and the falling value of the rouble will,
European sanctions aside, damage the prospects of European business in Russia.
Case questions
1 What benefits does the presence of a company such as Siemens bring to the host country?
2 Research the risks facing Siemens in its involvement in each of the BRIC economies.
3 Choose another European multinational and research its involvement in one of the BRIC markets.
What are the attractions of that market for it and what obstacles/risks does it face?
Brazil important partner for the EU. In 2013, Brazil’s

economy was the seventh and its population the
Despite a population significantly smaller than fifth largest in the world. Moreover, Brazil’s GDP
that of India and China and economic growth, per head, although slightly lower than Russia’s,
although healthy, that has lagged behind that of was 40 per cent greater than the GDP per head
India and China since 1990, Brazil remains an of China and over seven times greater than that of
403
India. As such, Brazil’s market is somewhat more The Brazil–EU FDI relationship is more sig-
mature than that of the other BRICs and offers nificant than the EU’s equivalent relationship with
greater possibilities for the export of consumer the other BRIC countries. Although FDI flows
and higher value-added goods. have declined in 2011–12, the EU remains the
As Figure 18.1 shows, trade between the EU biggest source of inward FDI for Brazil and, in
and Brazil grew steadily until 2009 when it was 2012, EU stocks of FDI in Brazil were over twice
hit by the economic downturn. However, this those in China. Conversely, in 2012 the EU held
trade has subsequently recovered and, until 2012, the biggest stocks of Brazil outward FDI which
the EU ran a small trade deficit with Brazil. Since were almost four times greater than the stocks of
then, and for two years at least, the situation has Chinese FDI in Europe.
reversed and the EU has run a small trade surplus In terms of the formal relationship between
with Brazil. the two parties, a Strategic Partnership was
The EU is Brazil’s biggest trading partner launched in 2007 and focuses on five priority
(over 20 per cent of Brazilian exports go to areas including peace and security; sustainable
Europe) and Brazil is the EU’s tenth biggest sup- development; regional cooperation; science,
plier of imports and its ninth biggest export mar- technology and innovation; and people-to-
ket. Europe’s imports from Brazil are dominated people contact and cultural exchanges. Annual
by primary products, notably agricultural and fuel summits are held to discuss these and related
and mining products (see Table 18.3), supporting issues and frequent high-level visits take place
the perception of Brazil as a country rich in natu- between these summits. Potentially, the most
ral resources. Manufacturing products, although significant formal bilateral agreement between
important, account for approximately only one- the two partners concerns the airline sector.
quarter of Brazil’s exports to the EU. Manufac- Negotiations on an agreement to open up the
turing, especially chemical, transport equipment air transport market between the two partners
and machinery dominate EU exports to Brazil. were apparently concluded in March 2011 (see
50
Exports Imports Balance
40
30
20
€ bn
10
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
−10
−20
Figure 18.1 EU merchandise trade with Brazil, 2003–13

Source: Eurostat.
404
Table 18.3 EU trade with Brazil, 2013

Agricultural products 15.1 1.8
Fuel and mining products 7.3 2.1
Manufactures, of which 7.7 34
■■ Iron and steel 0.5 1.0
■■ Chemicals, including pharmaceuticals 2.3 8.8
■■ Other semi-manufactures .5 2.7
■■ Office and telecommunications equipment 0.1 0.9
■■ Transport equipment 1.4 7.3
■■ Other machinery 1.3 10.6
■■ Textiles and clothing 0.1 0.5
■■ Scientific and controlling equipment 0.1 1.3
■■ Other manufactures 0.5 1.2
Total goods 33.1 40.0
Total services 6.3 14.0
Inward Outward
FDI stocks – 2012 98.1 246.8
Source: Eurostat.
Chapter 10 for discussion of the EU’s bilateral Russia

airline policy) but, following Brazilian requests
for a review of some of the agreement’s provi- Russia’s economy and its trade and investment cli-
sions, the agreement was never implemented. mate have been and continue to be the most volatile
However, in 2014 the Brazilian position has been of the BRICs. During the 1990s (that is, the decade
clarified and both partners are hopeful of finally immediately following the disintegration of the Sovi-
reaching an agreement. et Union), Russian GDP fell by an annual average
More comprehensive trade and investment of 4.7 per cent, whereas between 2000–12 it grew
bilateral agreements between the EU and Brazil 4.8 per cent (see Table 18.1). However, the greatest
are more likely to come through Brazil’s mem- period of growth was from 2000–7 when 6–7 per
bership of Mercosur, the regional grouping com- cent per annum plus was the norm. Following the
posed of Argentina, Brazil, Paraguay, Uruguay international financial and economic crash, Russian
and Venezuela. In 2010 talks, initially suspended GDP fell by almost 8 per cent in 2009. Growth then
in 2004, were relaunched between the EU and resumed but did not reach pre-crisis levels. By 2013,
Mercosur with a view to concluding an Associa- GDP growth rates had fallen to 1.3 per cent with
tion Agreement intended to cover trade in goods growth forecast to be barely positive in 2014 and for
and services, investment, IPRs, government pro- recession to hit hard in 2015–16.
curement, technical barriers to trade and SPS Russia’s economic fortunes remain overly
barriers. dependent on oil and gas. Indeed, in recent years,
405
oil and gas revenues have regularly accounted for an extremely large margin. Russia’s second larg-
two-thirds of Russia’s export revenues and 40–50 est trade partner – China – accounted for less
per cent of state budget revenues. Consequently, than half the value of Russian imports from the
the health of the Russian economy remains highly EU and less than one-sixth of the value of Rus-
sensitive to the state of energy markets and of oil sian exports to Europe. On the other hand, Russia
and gas prices in particular. This is all too appar- is the EU’s third most important trading partner,
ent in the EU–Russia relationship. Until 2000, accounting for 9.5 per cent of EU trade in 2013
EU–Russian trade was roughly in balance. After (that is, 12.3 per cent of EU imports and 6.9 per
2000, the EU’s trade deficit with Russia increased cent of EU exports).
substantially as a result of higher energy prices Russia’s more modest share of EU trade does
(see Figure 18.2). However, energy prices fell not, however, tell the full story of the importance
significantly in 2014, leading to forecasts of reces- of Russia as an economic and commercial part-
sion in Russia for 2015–16 and of a reduction in ner for the European Union. EU imports from
the EU–Russia trade imbalance. The rouble came Russia are dominated by energy: in 2013, 80 per
under acute pressure, losing half its value towards cent of EU imports from Russia were composed
the end of 2014 (although the revenue effect is of oil and gas (see Table 18.4). This is particularly
eased somewhat by the denomination of oil prices important given the EU’s growing dependency on
in dollars) which, among other things, increased imported energy (see Chapter 11): in 2012, 30
inflationary pressure within Russia. per cent of EU gas consumption and 35 per cent
On the face of it, the EU is a more impor- of oil consumption was supplied by Russia. Thus,
tant trading partner for Russia than Russia is for Russia’s trading importance to the EU comes not
the EU. In 2012, 45 per cent of Russian exports only from the value of the trade but also from its
headed for the EU and over one-third of Russia’s strategic nature. In the short term, Russia and the
imports originated in the European Union. In EU’s fortunes remain closely linked – the EU is
short, the EU is Russia’s main trading partner by heavily reliant on Russian energy and Russia is
250
200
150
100
€ bn
50
−50
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
−100
−150
Figure 18.2 EU merchandise trade with Russia, 1996–2013

Source: Eurostat.
406
Table 18.4 EU trade with Russia, 2013

Fuel and mineral products 165.9 2.0
Manufactures, of which 16.7 103.9
■■ Other semi-manufactures 4.2 9.5
Inward Outward
FDI stocks – 2012 76.6 189.5
Source: Eurostat.
heavily reliant on energy exports to the EU. In the uncertainties facing European business in Russia
longer term, the situation may change: new pipe- become even greater.
lines can be built, giving Russia more options in EU–Russian relations are affected not only
terms of its gas exports and gas contracts signed by immediate economic imperatives. A broader
with China in 2014 signal Russia’s intention to political framework establishes the context for
diversify its export markets. Similarly, if frack- economic and business relations. After the break-
ing becomes a commercial reality in Europe (see up of the Soviet Union and the shattering of the
Case Study 11.2), Europe’s reliance on Russian long held assumptions of the Cold War era, the
gas may diminish. EU’s initial concerns about Russia focused around
Thus, disregarding any economic fall-out from traditional ‘hard’ security issues in general and
the political differences arising from events in individual issues such as the Chechen wars. For
Ukraine in 2014, Russia’s economy is vulnerable most of its existence, the Soviet Union did not
to external shocks arising from oil and gas mar- differentiate between or deal with individual
ket developments. The rest of its economy is not Western nations apart from the US. Therefore,
broadly based enough to compensate for nega- Europe’s relationship with the Soviet Union was
tive developments in this dominant sector. From largely determined by Cold War rhetoric, with
the EU’s perspective, Russia is thus a crucial but the tone set by the state of play between Wash-
volatile partner. Once political factors are added ington and Moscow. Any diplomatic contacts
to the mix, the challenges for the EU and the between Western European countries and the
407
Soviet Union were on a bilateral basis. As far as external relations therefore created room for the
Moscow was concerned, the European Commu- EU to step in as a partner of its eastern neighbour.
nity’s role was limited to trade policy. The current formal legal basis of Russia’s rela-
For several years after the end of the Cold War tionship with the EU is the PCA which came into
and the disintegration of the Soviet Union, it was effect in 1997. The PCA had an initial lifespan
difficult for the EU to develop a consistent policy of ten years and was automatically extended in
towards Russia given the political and economic 2007. The PCA’s objectives include:
twists and turns that have made Russia’s transition
into a market economy much less straightforward ■■ provision of ‘an appropriate framework for
than those of its former satellites in Central and the gradual integration between Russia and a
Eastern Europe. However, two factors make Rus- wider area of cooperation in Europe’;
sia an important partner for the EU – proximity ■■ creation of ‘the necessary conditions for
and energy. As the EU has enlarged, its borders the future establishment of a free trade area
have moved further east and a much greater pro- between the Community and Russia covering
portion of the EU’s eastern border is with Russia substantially all trade in goods between them,
than hitherto. The presence of such a potentially as well as conditions for bringing about freedom
powerful economy as a direct neighbour makes the of establishment of companies, of cross-border
forging of good relations with Russia imperative. trade in services and of capital movements’.
As domestic economic reform became more
urgent, Russia sought to transform its economy The first objective is fairly general and does
into a market-led economy, and needed to reach not define exactly what aspects of the Russian–EU
out beyond its conventional trading partners, relationship should be integrated nor exactly how
especially as the closed circle of Comecon links wide the area of cooperation should be, but the
had collapsed. The ‘economisation’ of Russia’s second objective is more specific and, as a result,
Milestones in EU–Russia links

Box 18.1
1991 EU delegation established in Moscow

1997 Partnership and Cooperation Agreement (PCA) in force
1999 EU Strategy Paper on Russia
2000 Energy Dialogue launched

2001 High Level Group on CEES set up
2005 EU–Russia Summit adopts roadmap on CEES
2007 Automatic extension of PCA
2008 Negotiations begin on new EU–Russia agreement
2010 Negotiations halted on new EU–Russia agreement
2012 Russia becomes a member of the WTO
2014 Russia annexes Crimea and the EU imposes sanctions against Russia
408
potentially more ambitious. Not only does it refer In 1999, the European Council adopted a
to the establishment of a free trade area, it also Common Strategy on Russia. The strategy set
refers to free movement of capital and liberalisa- out the EU’s vision that ‘a stable, democratic and
tion of services trade – only free movement of prosperous Russia, firmly anchored in a united
labour is missing to make up the four freedoms of Europe free of new dividing lines is essential to
the single market. The PCA also makes provision lasting peace on the continent’. Achievement
for the principles of national treatment and free- of this vision requires an ‘open and pluralistic
dom of transit and for freedom of establishment, democracy in Russia, governed by the rule of law
with exceptions for various transport modes. The and underpinning a prosperous market econo-
most telling and ambitious provision for enhancing my’. Of particular potential interest to European
integration and interdependence between the two business was the prospect of the integration of
PCA signatories is Article 56 which states that: Russia into a ‘common European economic and
social space (CEES)’.
The Parties recognise that an important condition In response to the EU’s strategy, Russia pub-
for strengthening the economic links between lished its own common strategy for dealing with
Russia and the Community is the approximation the EU. The strategy was driven by two concepts.
of legislation. Russia shall endeavour to ensure The first was the establishment of a multipolar
that its legislation will be gradually made com- world, an aspiration shared by some EU mem-
patible with that of the Community. bers, and which was intended to challenge the
possible hegemony of the US in international
This list of laws for which approximation was affairs and to give other big players a voice in such
deemed appropriate was extensive and included matters. The second was the promotion of eco-
company law, banking law, company accounts nomic security in Russia, a goal largely shared by
and taxes, protection of workers at the work- the EU given that an economically secure Russia
place, financial services, competition rules, pub- will enhance peace and stability on its borders and
lic procurement, protection of health and life of will also provide major commercial and economic
humans, animals and plants, the environment, opportunities for EU business.
consumer protection, indirect taxation, customs The Russian common strategy, although con-
law, technical rules and standards, nuclear laws firming the mutual economic and security ben-
and regulations, transport. efits of close Russian–EU cooperation and the
The PCA also established the institutional attraction of a strategic partnership with the EU,
arrangements to manage the Russian–EU rela- also exhibits some important differences. These
tionship. These include two summits each year differences go a long way to explaining why the
involving the heads of the governments of Russia ambitious objectives of the PCA have not been
and EU member states, the President of the Euro- met. First, Russia locates its European strategy
pean Commission, and the Secretary-General/ in a much broader context than its EU counter-
High Representative for the CFSP; annual coop- part. In describing itself as ‘a world power situ-
eration councils at ministerial level; and coopera- ated on two continents’, and by reminding the
tion committees of senior officials that meet on EU of its role as a Euro-Asian state and of its sta-
an ad hoc basis. A joint parliamentary committee tus as the largest country in the Commonwealth
provides a regular forum for members of the EP of Independent States (CIS), Russia is signalling
and the Duma to discuss current issues. the importance of its broader international role,
409
thereby making it more difficult for the EU to according to common rules in key sectors across
dictate the terms of the relationship to it. an area of over 500 million consumers.
Second, Russia’s strategy contains a long In May 2005, the EU–Russia Summit agreed
list of how Russia can help the EU. The list on a CEES roadmap and in December 2005,
includes additional EU growth and employ- the partners agreed two permanent frameworks
ment through enhanced trade and investment; within the context of the roadmap to reduce the
the provision of long-term and stable energy trade and investment barriers between them.
supplies and raw materials; greater scientific These were:
cooperation and commercialisation of Russian
research in European markets; greater integra- 1 a regulatory dialogue to promote the harmo-
tion of key transport and energy infrastructures nisation of technical standards on industrial
and information systems; collaboration in space products;
research; strengthening of the international 2 a dialogue on industrial and enterprise policy
role of the euro through including it in Russia’s to improve the administrative, regulatory and
foreign currency reserves; military and techni- investment environment for companies oper-
cal cooperation and joint initiatives to prevent ating in Russia. Telecommunications and infor-
local conflicts; and combating organised crime. mation technologies, automobiles, textiles,
Such a long list reflects Russia’s determination chemicals and pharmaceuticals were identified
to be regarded as the EU’s equal. In particular, as needing specific attention.
when discussing the issue of harmonisation and
approximation with EU legislation, the Strategy In short, the CEES appeared to be shaping up
emphasises ‘the independence of the Russian to extend, if not the SEM in its entirety to Russia,
legislation and legal system’, the need to pro- at least a significant part of it. The problem with
mote broader application of ISO standards and this approach remains its reliance on harmonisa-
the mutual recognition of certificates. In other tion of regulations, and the adoption by Russia of
words, the EU cannot expect Russia to change much of the acquis communautaire. From the Rus-
everything to conform to EU practices. sian point of view, this is unacceptable if it has no
Notwithstanding Russia’s reservations, some say in designing those regulations. On the other
steps have been taken regarding the develop- hand, the EU rejects the idea that non-members
ment of the CEES – one of four common spaces participate in the EU’s internal decision-making
included in the framework of the EU–Russian or that the EU should move closer to Russian
relationship, the others being freedom, security standards.
and justice; external security; and research and Despite these signs of tension, talks on a new
education, including culture. EU–Russia agreement began in 2008. The aim of
The CEES is the common space of greatest rel- these talks was to:
evance to European business. It is based on the
neo-liberal economics that underpin the Single ■■ provide a more comprehensive framework
European Market and promises Russia access to a for EU–Russia relations, reflecting increased
massive market, helping it to recover lost ground cooperation since the early 1990s;
in Central and Eastern Europe and explore ■■ include substantive, legally binding commit-
new opportunities in Western Europe. Regula- ments in all areas of the partnership, including
tory convergence will allow business to operate political dialogue, freedom, security and justice,
410
economic cooperation, research, education and to talk with the EU. The abandoning of the talks
culture, trade, investment and energy. with the EU led to widespread unrest in Ukraine,
eventually leading to the ousting of the Ukrain-
Progress on the new talks was essentially ian President, the annexation of Crimea by Russia
halted in 2010 because of inability to make pro- and widespread fighting in eastern Ukraine. The
gress on trade and investment. Further progress EU response was, along with others, to impose a
appeared difficult following the deepening of the range of sanctions on Russia (see Box 18.2).
customs union involving Russia, Kazakhstan and Thus, at the end of 2014, EU–Russian rela-
Belarus. Russia’s accession to the WTO in 2012, tions are at a stand-off. The normal business of
and the commitments that this brings, would, the seeking gradual improvements in the trade and
EU hoped, make trade with Russia easier. How- investment environment is suspended and the
ever, the EU is concerned that Russia introduced future of this important bilateral relationship is
measures to protect key sectors in the run up to uncertain. Will Russia be prepared to escalate the
WTO membership. situation further as pro-western factions in coun-
Central to the simmering problems in the EU– tries such as Moldova seek closer ties with the
Russia relationship is the isolation felt by Russia EU? Will Russia be able to escalate the situation
as the EU’s creeping influence in its ‘near abroad’ further given the shakiness of its economy? How
appears to be increasing and the hankering by effective, if at all, will EU sanctions be and will
Russia, still smarting after its loss of superpower further sanctions hurt the EU as much as Russia
status, for a return to centre stage in world affairs. given its dependence on Russian energy?
This manifested itself in Russia’s attempts to per-
suade its near neighbours to join its new Eurasian
Union instead of proceeding with new agree- India
ments with the EU. Armenia and Ukraine were
persuaded in late 2013 to cease talks with the India has been somewhat overshadowed by the
EU and begin them with Russia – Moldova and emergence of China but it is increasingly rec-
Georgia ignored Russian pressure and continued ognised as an awakening sleeping giant. India’s
EU sanctions imposed on Russia in 2014 in response to the
Box 18.2
annexation of Crimea and events in eastern Ukraine
■■ Suspension of talks on new EU–Russian agreement and of most cooperation programmes.

■■ The EIB and EBRD suspend signatures for new financing in Russia.
■■ Assets of 119 individuals and 23 entities frozen.
■■ Ban on new investment and infrastructure projects in Crimea and Sebastopol.
■■ Ban on sales of and services relating to certain bonds, equities and other financial instruments.
■■ Ban on loans by EU nationals and companies to five Russian state banks.
■■ Embargo on arms and dual use technologies (i.e. technologies that can be used for military as well
as civilian purposes).
■■ Ban on supply of services for deep-sea, Arctic and shale oil exploration and production.
411
reforms have been more gradual and not as com- occurred in the 1980s but serious reform only
prehensive as those of China and India is not so began in 1991 following a major balance of pay-
integrated into the world economy in terms of ments crisis. The post-1991 reforms included the
trade and investment as China but nevertheless, abolition of industrial licensing; a reduced num-
India’s economy is much more market-oriented ber and scope of public sector monopolies; the
and open than at the onset of its reforms. beginning of the freeing up of FDI; wide-ranging
China’s development has been based on indus- trade liberalisation, including the end of import
try whereas India’s has been driven by services, licensing and the reduction of non-tariff barriers;
especially the IT sector. China’s reform has some financial services liberalisation and the lib-
involved heavy investment in physical infrastruc- eralisation of trade and investment in key service
ture, an area in which India is still seriously lack- sectors. Despite the changes, India can still be a
ing. However, India is widely held to have a better difficult place to do business and, although much
institutional infrastructure and corporate gov- freer than previously, major obstacles to trade and
ernance than China, factors that are increasingly foreign investment remain.
regarded as crucial for long-term development. EU–India trade is relatively balanced (see
India also has a more favourable long-term demo- Figure 18.3) and has been for some time, unlike
graphic profile than China whose population is the EU’s trade with China with whom the EU runs
ageing. India’s population is much younger: this a significant trade deficit. The European Union
creates employment challenges but also means is India’s biggest trading partner, accounting for
that India is less likely to face labour shortages in 13 per cent of its total trade in goods in 2013 –
the future. Moreover, India’s education system that is, 10.7 per cent of India’s imports and 16.6 per
has already yielded a plentiful supply of skilled cent of its exports. EU imports from India are
technical graduates which goes a long way to concentrated in textiles and clothing, agricultural
explaining its competitive edge in the IT sector, products and chemicals whereas EU exports to
for example. India are dominated by machinery and chemicals
India’s place in the limelight has come from (see Table 18.5).
consistent annual economic growth of 6 per cent Europe is also the leading foreign inves-
plus since 1990 and the growth of skill-intensive tor in India. Despite this, the EU believes there
large-scale industries and services, particularly in is much unfulfilled potential for investment in
telecommunications, services and the outsourc- India and would like to negotiate reductions
ing of back-office functions. Its emergence into in the remaining obstacles to foreign investment
the international economic arena has been based in India. According to the Europe India Cham-
on gradual but persistent economic reform. Pri- ber of Commerce, European companies invested
or to the early 1980s, India’s economy was built almost €200 bn in the ten years leading up to
on the philosophy of self-sufficiency, involving 2013: this compares to €138 bn and €50.7 bn for
import substitution; extensive public involve- the US and Japan respectively. The three largest
ment in key industries; control of the private European investors in India over this period were
sector through investment and import licens- the UK (€70.3 bn), Germany (€34.5 bn) and
ing; foreign exchange and credit and price con- France (€21.6 bn). Approximately 60 per cent
trols; and extensive labour protection laws. The of European investment in India was in green-
first attempts at economic liberalisation and a field projects with the remaining €80 bn, or 40
reduction of state involvement in the economy per cent, spent on acquiring interests in 1,442
412
45
40 Exports Imports Balance
35
30
25
€ bn
20
15
10
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
−5
Figure 18.3 EU merchandise trade with India, 2003–13

Source: Eurostat.
Table 18.5 EU trade with India, 2013
Imports Exports
Manufactures, of which 27.8 30.3

Inward Outward
FDI stocks – 2012 8.8 41.8
Source: Eurostat.
413
companies. In contrast, during the same period sanitary and phytosanitary measures, procure-
Indian companies invested €56 bn in Europe, €38 ment and customs cooperation. In short, the EU’s
bn of which went on mergers and acquisitions and emerging policy towards India was in line with
€18 bn on greenfield projects. the 2006 Global Europe strategy which called for
European–Indian commercial contacts, deeper and more comprehensive bilateral trade
although growing, are underdeveloped and place agreements, particularly for those countries, such
the forging of deeper and broader links between as India, which were growing rapidly and with
the two firmly within the objectives of Global whom the EU was underperforming (see Chapter
Europe. India and the EC first established diplo- 15).
matic links in 1963 and India was one of the first However, Strategic Partnerships in EU terms
beneficiaries of the EU’s Generalised System of are about more than purely economic ties and
Preferences (GSP) scheme introduced in 1971. have other objectives, sometimes described as
During the 1970s and 1980s, the EC and India European values, such as the promotion of sta-
signed various Commercial and Economic Coop- bility, democracy, human rights, the rule of
eration Agreements to facilitate their commercial law and sustainable development, including
relationship. For many years, although coopera- environmental protection and climate change.
tion between the partners intensified and became Accordingly when, in 2007, the EU and India
increasingly institutionalised, their relationship launched negotiations on a comprehensive free
remained relatively low key. trade area agreement, also known in this case as
In 2004, however, in recognition of India’s the Bilateral Trade and Investment Agreement
growing international profile and its blossoming (BTIA), the negotiators, subject to intense lob-
economy with the promise of a large market and bying by civil society, often found it difficult to
a skilled labour force, the EU identified India as reconcile economic objectives with these other
a Strategic Partner. This resulted in the drawing broader objectives. Consequently, by 2014,
up of a Joint Action Plan to strengthen and deep- seven years into the talks, there are many areas
en economic ties in trade, investment, intellec- on which agreement is still to be reached (see
tual property rights, technical barriers to trade, Table 18.6).
Milestones in EU–India links

Box 18.3
1963 India establishes diplomatic relations with EEC

1971 Launched of EEC’s GSP scheme – India is a beneficiary
1981 EEC–India five year Commercial and Economic Cooperation Agreement
1983 EC delegation established in India
1996 Commission Communication – EU–India: Enhanced Partnership
2000 First annual EU–India summit
2004 The EU identifies India as a Strategic Partner
2007 Launch of negotiations for an EU–India FTA, also known as the BTIA
414
Table 18.6 Key issues in the EU–India BTIA talks

Services Mode 1 of the WTO’s General Agreement on Trade in Services (GATS) covers IT-enabled
services, business and knowledge process outsourcing – all of which have been central to
India’s economic progress. India is aiming for greater access to European markets in these
areas
Mode 4 of the GATS covers the movement of skilled professionals like software engineers.
Improved access to European markets would allow such professionals from India to live
and work temporarily in the EU
Investment The EU wants further liberalisation of FDI in insurance and multi-brand retailing and the
opening of closed sectors like accountancy and legal services. Easier access for European
banks is also sought. In 2014, it appears that the new government has agreed to lift the
ceiling on FDI in insurance to 49 per cent. It remains unclear whether pre-election changes
to multi-brand retailing will also apply to supermarkets
Agriculture A key sector for India but the EU’s agriculture remains protected. India wants the EU
to cut tariffs on agricultural imports and remove its agricultural subsidies. India’s dairy
sector has been particularly vociferous in opposing the opening of India’s market to
European dairy products. The EU, however, is keen for improved access to India’s
agricultural markets, especially for dairy, poultry and fishery products
Procurement According to the EU, Indian public procurement is closed, non-transparent and discrimi-
nates against foreign producers. Given that procurement accounts for almost 13 per cent
of India’s GDP, opening of this market is a priority for Europe but India is reluctant to
negotiate on this issue
Data security India wants ‘data secure’ status from the EU which requires business from countries not
regarded as ‘data secure’, like India, to follow stringent compliance rules. According to
India, these rules increase operating costs and undermine the competitiveness of India’s
thriving outsourcing and IT businesses, especially SMEs
Tariffs Indian tariffs on auto parts and components have been reduced but the EU is pushing
for reduction of Indian tariffs on passenger cars, currently levied at 60 per cent or above
depending on fuel and engine capacity. Car manufacturers in India, including those from
Japan and Korea, fear lower tariffs will flood the Indian market with European cars whilst
others argue that tariff cuts reduce the incentive for European manufacturers to manufac-
ture in India
The EU also wants cuts on Indian tariffs on wines and spirits – the Indian government
regards these as a critical source of tax revenue
Intellectual India is unwilling to go beyond WTO commitments in this field to avoid undermining its
property thriving generic drugs sector
Successful conclusion of the BTIA would lead could yield significant benefits for Europe’s engi-
to a wide range of new opportunities for Euro- neering and construction companies, for exam-
pean business in India. A combination of the need ple. Tariff and tax reductions and agreements on
to address issues surrounding the poor quality of conformity and standards would enhance India’s
India’s infrastructure, particularly in transport and potential as a manufacturing base and financial
energy, which is holding back the country’s devel- and business services liberalisation would provide
opment, and a freeing up of procurement markets opportunities for many European companies.
415
China according to the WTO, China’s share of world

trade had risen to 11.4 per cent.
China began the long process of transforming Chinese exports to the European Union have
itself from a command economy into a market also grown rapidly (see Figure 18.4) and the bal-
economy in 1978. The tasks of liberalisation and ance of trade is heavily in China’s favour. Indeed,
the development of market institutions continue the EU’s trade deficit with China is its biggest
to the present day. China rapidly began to reap with any single trade partner. This explains both
the benefits of reform and has grown at an annual the reluctance of some member states, concerned
average rate of over 10 per cent for many years that greater Chinese access to European markets
(see Table 18.1) – a rate that is several times great- will only undermine their own producers, to
er than that of developed countries and explains negotiate a free trade agreement with China –and
why China has become the world’s second largest why greater access to China’s market has been
economy behind the US. given priority in Global Europe. However, the EU’s
The annual average growth of Chinese manu- imports from China fell in 2009 following the cri-
facturing and services has been well into double sis and, although they rebounded in 2010, import
figures during the last quarter century. This com- growth has been relatively subdued since then,
pares to eurozone manufacturing growth of 1.5 reflecting the lack of buoyancy in the European
per cent during the 1990s and 0.6 per cent since economy. EU exports to China have continued
2000. Average growth in services has been more to grow steadily as China managed to compen-
buoyant than that of manufacturing in most devel- sate for the sluggish international economy by
oped countries but still lags far behind that of stimulating its own economy. However, this trend
China. The discrepancy in economic performance may not continue and conditions could tighten for
between the developed countries and China wid- European exporters to China.
ened even more after the 2007–8 financial and EU–China trade is dominated by manufac-
economic crises. tured goods (see Table 18.8) in both directions.
Export growth has underpinned China’s devel- The growing sophistication of China’s manu-
opment. As Table 18.7 shows, Chinese export facturing is demonstrated by the dominance of
growth has far outstripped that of the developed office and telecommunications equipment in its
countries for many years. At the onset of reform exports to the EU and by the fact that the value
in the late 1970s, China accounted for approxi- of these goods is 16 times greater than the value
mately 1 per cent of world trade. By 2012, of EU exports of these goods going in the oppo-
site direction. Indeed, apart from chemicals and
Table 18.7 A
verage percentage growth in annual transport equipment, China runs a trade surplus
real value of exports of goods and ser- with the EU in all broad manufacturing sectors.
vices by China and developed countries
The EU does run a surplus in service trade with
1990–2000 (%) 2000–2012 (%) China but the total value of this trade is only one-
China 18.8 15.0 eighth of that of the trade in goods and offsets the
Eurozone 6.8 3.6
manufacturing deficit to a limited extent only.
Many of China’s exports are by affiliates or
US 7.3 4.5
joint ventures of foreign multinationals but in the
Japan 4.3 4.3
long run, a greater proportion will come from
Source: World Bank, 2014 World Development Indicators. private domestic firms that have benefited from
416
400
300
200
€ bn
100
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
−100
−200
Figure 18.4 EU merchandise trade with China, 2000–13

Source: Eurostat.
Table 18.8 EU trade with China, 2013

Manufactures, of which: 270.0 125.7

Inward Outward
FDI stocks – 2012 26.8 118.3
Source: Eurostat.
417
technology transfer and have established their some point but the real issue concerns the man-
own brands. At present, state-owned enterprises agement of this process. Hong Kong and other
comprise the majority of the growing number of economies closely tied to that of China are already
Chinese MNCs in Fortune’s Global 500 List of the experiencing the negative impact of reduced Chi-
world’s biggest enterprises but China’s outward nese economic activity and domestically the Chi-
FDI has been growing steadily since the mid-2000s nese government has a major task in managing
and, although still relatively limited in Europe, the potentially thwarted aspirations of its populace.
SEM and Europe’s stability, albeit not its strong eco- For those investing in and trading with China and
nomic growth, are important attractors. Europe’s for those policy makers trying to increase market
outward FDI to China has also grown steadily but access to the Chinese market for European busi-
is minimal compared to flows into China from ness, the great unknown is whether future eco-
other Asian nations. According to figures from Chi- nomic difficulties will encourage or discourage
na’s Ministry of Commerce, only 3.2 per cent of China to open its markets further.
inward FDI in China in 2012 came from Europe’s In 1978, when China began to open its econ-
three biggest outward investors (Germany, Neth- omy to the rest of the world, commercial links
erlands and the UK) compared to 85 per cent from between China and Europe were negligible but
elsewhere in Asia. Such statistics support the view China has subsequently become the EU’s second
that European business needs to be more proactive biggest trade partner and by far its biggest source
in the world’s most rapidly growing economies and of imports. Similarly, the EU has become China’s
explains the priority given to China in the Global largest source of imports and its biggest trading
Europe strategy (see Chapter 15). partner overall. As China increasingly integrated
A note of caution does need to be made about into the world economy and its trade links grew
China’s economy. In 2014–15, there are signs of a with the EU, formal relations at an official level
slowdown in China’s economy and indications that intensified, albeit not always harmoniously, as the
the years of double digit growth are ending. The years progressed. These contacts have concerned
present slowdown, which still threatens impres- both high politics and the forging of further trade
sive growth of 6.5–7.5 per cent in 2014 and 2015, and investment links and have helped shape the
has its roots in the global downturn of 2008–9 environment in which European and Chinese
when the government ordered large increases in businesses operate and interact with each other.
lending, much of which boosted the real estate Indeed, the development of a new strategy to
sector and the construction of large factories, manage the commercial relationship with Chi-
resulting several years later in over-capacity in the na was presented as a major objective of Global
previously booming property market and some Europe (see Chapter 15).
industrial sectors. Consequently, property prices In 1975, following the normalisation of rela-
have plummeted and industries associated with tions between the US and China, a new era of
construction, iron and steel, building materials in European–Chinese links was ushered in by with
general and household appliances and other goods the establishment of formal diplomatic relations
to furnish new homes are suffering. This is accom- between the two. By 1978, the EU and China had
panied by unprecedented levels of debt which signed their first trade agreement. In the 1980s,
ultimately will have to be tackled. bilateral cooperation was extended into scientific
The end to the seemingly inexorably high lev- cooperation, business management training and
els of Chinese economic growth is inevitable at rural development and in 1988 the EU opened its
418
delegation in Beijing. This greater closeness was to the Chinese market for European producers
temporarily halted in 1989 following the suppres- across a wide range of sectors
sion and deaths of protestors in Beijing’s Tiananmen In 2003, China published its first policy paper
Square which resulted in the freezing of EU–China on links with the EU and in September 2005, the
relations and the imposition of EU sanctions. Eighth Annual EU–China Summit agreed to nego-
By 1992, relations had been normalised with tiate a new China–EU Framework Agreement ‘to
the exception of the arms embargo. This remains reflect the full breadth and depth of the strate-
in force, albeit loosely interpreted in some quar- gic partnership between China and the EU’. This
ters and is the subject of some division among EU commitment promised to place the EU–China
member states. In 1995, the European Commis- relationship on a more formal basis and in 2007,
sion’s first Strategy Paper on EU–China relations negotiations began on a Partnership and Coopera-
was adopted and in 1998, the first annual EU– tion Agreement with China similar to the one in
China summit was held. As part of the process of place with Russia – but with limited success.
WTO accession, bilateral negotiations take place Given the inevitable and inexorable intensifi-
between the applicant and any existing WTO cation of the EU–China relationship, both on a
member requesting such talks. The EU–China business and a diplomatic basis, what do Europe
bilateral pre-accession talks concluded in 2000 and China want from each other? In view of the
and resulted in reduced tariffs and easier access prominent role played by both parties on the
Milestones in EU–China links
Box 18.4
1975 Formal diplomatic relations established between the EC and China
1978 EC–China sign Trade Agreement – includes the creation of an EC–China Joint Committee
1979 First visit of a European Commission President, Roy Jenkins, to China
1988 EU delegation opens in Beijing
1989 Tiananmen Square massacre led to freezing of relations and EU sanctions
1992 Relations normalised in most areas but arms embargo remains
1995 First European Commission Strategy paper on EU–Chinese relations
1998 First annual EU–China summit
2000 EU–China conclude bilateral talks relating to China’s WTO accession which takes place
in 2001
2003 China publishes its first policy paper on the EU
2003 Launch of EU–China Strategic Partnership
2004 The EU becomes China’s biggest trading partner and China, the EU’s second biggest
2007 Negotiations begin on Partnership and Cooperation Agreement
2013 Adoption of EU–China Strategic Agenda for Cooperation, covering peace and security,
prosperity, sustainable development and people-to-people exchanges
2014 Launch of negotiations on EU–China Investment Agreement
2014 China publishes its second policy paper on the EU
419
world stage, the evolution of this relationship has Europe (see Chapter 15), key objectives of which
both an economic and a political dimension which include a central and enhanced role for EU–China
can and do interact with each other. links; trade liberalisation; and greater access for
China’s rapid economic development poses European business to the markets of its partners.
opportunities and challenges for European busi- In 2014, talks began on a bilateral investment
ness. China has a large private sector, providing treaty (BIT) between the EU and China. Success-
investment and partnership opportunities. The ful conclusion of these talks will remove many of
world’s biggest steel and telecommunications the obstacles (see Box 18.5) to European invest-
markets, for example, are in China, although in ment in China and will serve the mutual aspira-
the case of the latter, technical and legal obsta- tions of both partners.
cles significantly restrict what telecommunica- The EU is engaged in negotiations with China
tions operators can do in China (see Box 18.5). on a BIT but is less enthusiastic about a possible
Corporate Europe needs the removal of barriers FTA with China. China itself is promoting the
to trade and investment in China – and not just case for an FTA in visits by Chinese officials to
in telecommunications. Although European firms Europe and in its second policy paper on relations
have not invested in China to the same extent with the EU published in April 2014. The FTA
as firms from Asia and the US, many European moved onto the agenda following resolution of a
firms with a presence in China have shown a deep serious dispute in 2013 in which the EU threat-
level of commitment to China, including signifi- ened to impose anti-dumping duties on imports
cant investment in R&D. For China, such strat- of Chinese solar panels (see Case Study 18.2). In
egies assist the process of technology transfer return China threatened to introduce duties on its
and generally enhance its technological skills and imports of European wine.The dispute was finally
capabilities. ended with an agreement on minimum prices for
European firms investing in and trading with the export of solar panels from China to Europe.
China frequently refer to the need for further Following a visit to Brussels in March 2014 by
improvements in intellectual property protection the Chinese President Xi Jinping, the EU agreed
in China – a need which is becoming increasingly to open talks on an FTA if the investment talks
important for Chinese firms themselves as they proved successful.
develop their own technological base. European Despite agreement in principle to start FTA
firms also complain of lack of clarity and conflict- talks, a number of considerations could make their
ing information about Chinese standards. China is launch problematic. First, member states are divid-
developing many new standards as it moves into ed on the issue: countries in Northern Europe,
new areas of production. Given the export ori- such as Germany, the UK, Denmark and the Neth-
entation of much of Chinese industry, the adop- erlands, and some countries in Eastern Europe,
tion of international standards is helpful to both such as Poland and the Czech Republic, have a
Chinese importers and exporters. In telecommu- more liberal attitude to trade and would support
nications, for example, European multinationals such talks whereas others such as France, Italy and
have worked closely with Chinese counterparts to Spain are more wary, citing the dangers of opening
develop new standards. their markets further to Chinese imports.
China wants access to European markets for As alluded to above, political considerations
traded goods and increasingly for investment. In figure largely in the China–EU relationship,
theory, this fits in with the philosophy of Global including:
420
■■ Taiwan and the ‘one China principle’ accord- these links. Internal political divisions and differ-
ing to which China wishes to see exchanges ing economic interests make it more difficult for
between the EU and its member states and Europe to reach a united position on some issues.
Taiwan limited to non-official and people-to-
people activities; asks the EU not to sell Taiwan
any weapons or equipment that can be used for Conclusion
military purposes; and not to support Taiwan’s
accession to any international organisation that The potential for mutual benefits from a deep and
requires statehood. comprehensive EU–India BTIA is significant but
■■ The issue of Tibetan independence: Chi- the negotiations are taking a long time to reach
na wants the EU and its member states to a conclusion. Agreement on the desirability of a
acknowledge Tibet as part of Chinese territory FTA with China, let alone the start of negotia-
and deal with Tibet-related issues in a way that tions, has not yet happened, despite improvement
respects China’s sovereignty and territorial of the EU’s relations with China being identified
integrity, and not allow members of the Dalai as a priority in the Global Europe strategy.The EU’s
Lama’s inner circle to visit the EU in a manner relationship with Russia is in turmoil following
which may be construed as promoting Tibetan the 2014 events in Ukraine.
independence. In short, just as it appears to be overly ambi-
■■ Human rights: China views intervention on tious to reach wide-ranging agreement on trade
individual human rights issues as interference at a multilateral level, so it is also proving difficult
in its internal affairs. at a bilateral level. In relation to the new genera-
tion of FTAs, the only agreement in force in 2014
Infringements of what China views as appro- is that with South Korea (see Case Study 17.2)
priate behaviour in relation to the above issues with the probable entry into force of the Singa-
have clouded the relationship on occasion. For pore FTA in 2015. Negotiations with larger coun-
example, in 2008 the then French President tries such as China and India are proving more
Nicolas Sarkozy’s intended meeting with the difficult and have been suspended for political
Dalai Lama led to a postponement by China of the reasons with Russia.
Eleventh EU–China summit. Similarly, UK Prime The reasons for difficulties in reaching agree-
Minister David Cameron and Deputy Prime Min- ment with the BRICs, despite the general consen-
ister Nick Clegg met with the Dalai Lama in May sus of the desirability of doing so, are manifold.
2012, resulting in 18 months of frosty relations Each set of talks has its own dynamics but there
with China. These examples, and there are oth- are several common features. First, the scope of
ers, demonstrate that political tensions between the negotiations is very broad and within these
Europe and China can have a negative impact on broad agendas, there is potential for intensive
business links between the two and that politics lobbying against specific proposals. Within the
and economics cannot be separated. Specific EU, although the Commission has been given a
political issues operate at one level but broader negotiating mandate to proceed with these bilat-
geopolitical issues, such as balancing Europe’s eral talks, member states do have varying stances
relationship with China and the US upon which on the likely impact of opening their markets fur-
member states have different positions, can also ther to goods from the BRIC economies. Some
exercise a major influence on the development of member states fear that greater opening of their
421
Obstacles to Foreign Direct Investment in China

Box 18.5
In January 2014, the EU and China opened negotiations on a BIT that is intended to ease FDI in both
directions. On the launch of the negotiations, an EU spokesman declared, ‘just 2.1 per cent of overall
EU FDI is in China. The main purpose for these negotiations is the progressive abolition of restrictions
on trade and foreign direct investment and to improve access to the Chinese market for EU investors’.
At present, there are 26 separate BITs between China and individual member states. It is likely that,
in line with the investment competence gained by the EU in the Lisbon Treaty (see Chapter 15), the
negotiations will consolidate existing BITs and replace them with one BIT covering the whole of the
EU. This would benefit both Chinese and European business by simplifying investment rules. However,
early indicators suggest that the EU has more ambitious targets for the talks: at a minimum, it is seek-
ing national treatment for European investors in China – that is, European firms should be treated the
same as Chinese firms when operating in China.
In support of its negotiators, the EU commissioned a study, published in August 20141 (and sum-
marised here), to identify and categorise the major investment restraints facing EU firms in China. The
report distinguished between horizontal restraints (that is, restraints imposed by central and provincial
governments that apply to investors across all sectors) and vertical restraints (that is, restraints im-
posed by central and provincial governments that apply to investors in a particular sector). Within these
categories, the study identified the following restraints:
1 restraints that favour domestic investors over foreign investors;

2 restraints that favour investment by state-owned enterprises (SOEs) over private investors
(domestic or foreign);
3 restraints that possibly favour domestic over foreign investors depending on whether the foreign-
invested enterprise (FIE) is regarded as ‘Chinese’.
These restraints are broken down further into:
1 Pre-establishment restraints including:
■■ discriminatory local partner/equity requirements: these limit foreign investment in many industries
to joint ventures and require particular levels of local equity in such ventures. In the automobile
and telecommunications sectors, for example, joint ventures cannot be majority foreign-owned;
■■ market entry restrictions: these include limitations on licences for FIEs in China. They are, for
example, restricted from holding some types of telecommunications licences in China and, in other
cases, FIEs are subject to more stringent licensing rules than domestic firms. Restraints can also
be placed on the employment of foreign personnel: foreigners, for example, cannot normally be
used in commercial art performances. FIEs are also prohibited from listing on the Shanghai and
Shenzhen stock exchanges. In strategically important activities such as the import of crude oil and
oil products, both FIEs and domestic private companies are prohibited from entering the market;
■■ approval process restraints: FIEs are frequently subject to additional, and allegedly non-
transparent, approval requirements compared to domestic investors;
422
■■ technology transfer-related measures: these require FIEs to transfer advanced technologies to

Chinese firms as a condition of entering the market.
2 Post-establishment restraints including differential treatment through:
■■ targeted enforcement: campaigns aimed at enforcement of Chinese laws and regulations

against FIEs are frequently complained about. This is usually the result of administrative
custom and practice rather than explicitly mandated by central or local authorities;
■■ government financial support: such support includes the provision of grants, loans, subsidies
and the provision of land at below market prices and often applies only to domestic firms to
promote domestic technological innovation or local champions;
■■ government procurement: all levels of government frequently use procurement to support
domestic industry;
■■ broad policy statements that potentially result in less favourable treatment for foreign
investors: although not explicitly mandating discriminatory treatment, they can provide a
framework for and encourage central and provincial governments to introduce discriminatory
measures or to implement procedures or exercise administrative discretion in a way that
discriminates against foreign investors.
The motivations underpinning these restraints are wide-ranging and include the promotion of Chi-
nese champions that can compete both domestically and internationally (a policy that has characterised
certain European countries at various times); the promotion of strategic industries; policies to help
domestic companies move up the global value chain and, linked to this, the promotion of domestic
technological innovation.
Overall, administrative practices are cited by many FIEs as providing greater restraints on their
activities than specific rules or regulations. Such practices arise from factors such as administrative
ambiguity that gives central and local authorities scope to interpret rules in a discriminatory fashion or
to impose additional rules. These concerns reflect broader characteristics of Chinese business culture
about which it is often said that laws and rules of all types are open to a wide range of interpretations
and often depend on entities establishing good relations (guanxi) with central and local administrators.
For businesses originating from cultures where laws and regulations are applied more literally, this can
be a bewildering environment in which to operate.
Measures and Practices Restricting Foreign Investment in China – a report carried out by law firm Covington
1
and Burling on behalf of the European Commission and published on the European Commission website in
August 2014.
economies will undermine the competitiveness of what they regard as unwarranted EU influence in
their own businesses. their spheres of influence. Russia, for example, is
Second, broader political issues are at stake. conscious of its status as an erstwhile superpower
The BRICs themselves are, in various ways, sensi- and sees the EU spreading its influence to its near
tive about their role and want to avoid what they neighbours. Russia is also reluctant to accept the
regard as the imposition of EU values on them and gradual ‘creep’ of the acquis into its business rules
423
and regulations through the CEES. China is con- on approaches to the BRICs as a result of the Lis-
scious of its growing role in the world and rejects bon Treaty which gives the EP a bigger role in the
any European attempts to raise the issue of human conduct of external relations. In view of the EP’s
rights. India also resists attempts by the EU to support for human rights, social clauses and green
introduce clauses on labour conditions or human issues, wide-ranging negotiations with partners
rights into the BTIA. From the EU’s perspective, for whom these are not a priority can complicate
it has become more difficult to reach agreement negotiations.
Key points
■■ The BRICs are important emerging economies which present diverse challenges to the EU and
its businesses.
■■ Progress on furthering bilateral relations with these countries has been slow – in part, because
of the wide range of issues at stake and in part because of the interaction with broader political
issues.
■■ The EU’s links with Brazil are the least developed of the BRICs and the least problematic.
Progress is more likely on a regional level through Mercosur.
■■ EU–Russian relations are at a low ebb because of events in Ukraine but it was proving difficult
to develop the relationship prior to 2014 because underlying differences between the two were
undermining important areas of mutual interest.
■■ The EU–India BTIA falls firmly within the framework of Global Europe, particularly the
emphasis on market access, but is taking a long time to negotiate.
■■ China’s rapid economic progress has made greater access to its markets a priority for the EU.
A slowing down of Chinese growth is probable, leading to some uncertainty.
■■ Overall, the BRICs potentially provide European business with a range of challenges and
opportunities but major obstacles remain and nothing should be taken for granted when
engaging in business with the BRICs.
Activities
1 Identify inward investment into Europe from one of the BRICs. What trends are apparent (for exam-
ple, investment growth, sectoral composition of investment, etc.)? How do you explain such trends and
what are the prospects for future investment?
424
2 Make a list of why European firms may wish to invest in one of the BRIC economies and a list of why
they may be reluctant to do so. What is your conclusion about your chosen market?
3 Compare the relative attractiveness of the Chinese and Indian markets for European investors and
exporters.
4 Individual EU members have their own interests in relation to specific BRIC economies. Research how
these interests may vary in relation to Brazil, Russia, India or China. To what extent do these differ-
ences make it difficult for the EU to develop a common approach to these important trading partners?
1 European business is coming under increasing competitive pressure as a result of the emergence of
China and India on the world economic stage. Discuss ways in which European business can and should
respond to this pressure.
2 Discuss the consistency of the EU’s approach to the BRIC economies with Global Europe. Why is it
proving difficult to achieve progress in relation to the BRICs?
3 Russia is the least dynamic of the BRICs but it is of crucial importance to the European Union and to
European business. To what extent and why does the EU need Russia and, similarly, to what extent and
why does Russia need the EU?
4 Discuss the main issues shaping the EU–China or EU–India relationship and assess the implications for
business.
5 Discuss how politics influences the relationship between the EU and either China or Russia. To what
extent can such political matters influence the conditions in which European business operates?
Identify how the pursuit of purely economic and business goals can conflict with key political and moral
principles. In relation to one issue of your choosing, how can and should politicians reconcile these
conflicts?
Bibliography
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Companies in India: Reigniting Economic Growth, avail- Studies, 49 (2), pp. 293–313.
able at www.eicc.be/Events/EiccEbtcColloboration/
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Keukfleire, S. and Hooumaaiers, B. (2014) ‘The BRICs Meyer, K. (2004) ‘Perspectives on multinational enterprises
and other emerging power alliances and multilateral in emerging economies’, Journal of International Busi-
organisations in the Asia-Pacific and the Global South: ness Studies, 35 (4), pp. 259–76.
challenges for the European Union and its view on mul- Wouters, J., Goddeeris, I., Natens, B. and Ciorutz, F. (2013)
tilateralism’, Journal of Common Market Studies, 52 Some Critical Issues in EU–India Free Trade Agreement
(3), pp. 582–99. Negotiations, Working Paper No. 102, Leuven Centre
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51 (4), pp. 684–700.
426
Chapter 19
Europe and the least

developed countries
Trade, aid and the ACP states
In Africa today, we recognise that trade and investment, and not aid, are pillars of development.
Paul Kagame, President of Rwanda (2000–)
■■ understand the changing nature of the EU’s relationship with the ACP states;
■■ comprehend the main interests within the joint strategy;
■■ appreciate the diversity within and across the African continent;
■■ identify the key themes within the assorted Economic Partnership Agreements across the EU.
The least developed countries (or LDCs) as states that form the focus of this chapter. Initially
defined by the United Nations are those states the chapter outlines the main facets of the EU’s
who are both the most impoverished and vulner- agreements with the ACP states, before moving
able. Normally this status is allocated according to on to examine in more detail the form and nature
three main criteria, namely their low gross nation- of the EU’s agreements with African states.
al income (GNI), their weak human assets and
their high degree of economic vulnerability. The
EU’s involvement in many of these states is driven The EU and the ACP states
by a mixture of humanitarian and economic assis-
tance. However the fact that many EU members These are 79 ACP states (48 from sub-Saharan
are former colonists has helped shape the focus of Africa, 16 from the Caribbean and 15 from the
policy. The cornerstone of the EU’s development Pacific) who initially signed up to the 1975 Lomé
policy is the ACP group of states, and it is these Convention. The aim of this Agreement was to
427
promote the economic development of these trend within ACP states for regional integration;
states through integrating them into the global increased threats to state security; the impact of
economy. All of these states, bar Cuba, were sig- climate change; and the need to ensure the inclu-
natories to Lomé’s replacement – the Cotonou siveness of the agreements.
Agreement which was signed in 2000 (and later In terms of trade, the ACP states are divided into
revised in 2005 and 2010). The Cotonou Agree- seven regions – five in Africa (see Table 19.1), one
ment widens the scope of the EU–ACP partner- in the Caribbean and one in the Pacific. The EPAs
ship and is based around three pillars, namely: signed with each of these regions are designed to
demonstrate synergy by including multiple states
■■ development cooperation funded by the Euro- in a single agreement but also to be sufficiently
pean Development Fund (EDF); flexible to account for the needs of individual
■■ economic and trade cooperation through states. These needs reflect:
Economic Partnership Agreements (EPAs) to
ensure that the ACP agreements are compat- ■■ the geography and structure of individual states;
ible with WTO membership; ■■ the need for ACP states to push their own
■■ a stronger political dimension with a focus on development strategies and trajectories;
sustained political dialogue. ■■ the need to ensure the inclusion of both civil
society and business;
The Cotonou Agreement was signed for a 20 year ■■ the level of economic development.
period from March 2000. Underpinning the agree-
ment is the intent to reduce, and eventually, eradicate Despite the fact that the ACP states have had
poverty.These objectives are set within the context of preferential access to EU markets since 1975, the
achieving sustainable development and the further- volume of ACP exports to the EU has actually been
ance of the integration of these states into the global declining. The EPAs – in the EU’s opinion – are
trading system, and are based on the principles of designed to counter this trend. To this end, there
partner equality, inclusive partnership, mutuality of is an expectation that ACP states ensure that their
obligations, differentiation and regionalisation. Thus, exports are compliant with and adapted to EU
the agreement seeks not only to include states but standards. For this reason and to smooth the path
also other main actors such as business and civil soci- of adjustment, the EU offers financing to promote
ety. The EDF as the main funding instrument (in its knowledge transfer and to enhance public services.
tenth incarnation) during 2008–13 offered €22.7 bn The emphasis on regionalism within the EPAs
to these states, most of which has been directed to reflects the need for ACP states to take charge
covering the costs of adjustment of the ACP states to of their own development strategies and the low
the demands of the global economy. levels of intra-regional trade. However, many of
Under the Cotonou Agreement, there is a revi- these states lack the basic infrastructure to enable
sion clause that allows it to be amended every five them to trade with regional partners. This is com-
years. To date, such amendments have reflected pounded by the absence of competition within
the shifting contexts of the EU–ACP agreements key business service segments (such as logistics)
arising from international events, changes within as well as high administration costs which keep
and between parties and other issues that need the cost of regional trade flows high. Such chal-
to be accounted for in the agreement. The 2010 lenges underline the more general aim of the
amendments, for example, reflected the increased EPAs to promote a broader process of reform.
428
Europe and the least developed countries
The Generalised System of Preferences
Box 19.1
GSP schemes were created in 1968 as a trade preference facility offered by developed states without
any negotiation to developing states on a non-reciprocal basis. The schemes themselves vary markedly
from donor state to donor state. In the light of the ‘Everything but Arms’ initiative (see Box 19.2),
the EU GSP grants eligible states almost duty-free and quota-free access to the European market.
The GSP reflects the conventional method of attempting to increase trade with the least developed
countries, namely via tariff preferences. The key idea is that these devices incentivise traders to import
products from these states and provide a catalyst for fuller integration into the global economy. This
implies that the benefits of tariff preferences should be sufficiently attractive to alter the behaviour of
EU importers.
The EU’s GSP covers 178 developing states that are offered duty-free access or lower tariffs. For
the 49 least developed states, the EU offers special benefits in return for these countries adopting
specified labour and environmental standards as well as special arrangements designed to combat drug
production and trafficking. The precise nature of these arrangements differs on a state by state basis as
does the product coverage of such preferences. The EU’s GSP exists in addition to other arrangements
offered by the EU to developing states such as EPAs. The integrity of the GSP depends on its rules of
origin ensuring that the eligible products emerging from these states did in fact originate from these
states. The arrangements cover some 7,000 products of which 3,250 are classified as non-sensitive.
This sensitivity/non-sensitivity classification is determined by the specifics of local manufacturing with-
in the EU. Sensitive products continue to be given a higher level of protection.
The EU offers additional preferences to states committing themselves to specific standards in the
areas of labour (that is, countries must conform to core labour standards of the International Labour
Organisation [ILO]) and the environment. For example, in textiles this amounts to additional tariff reduc-
tions of 20 per cent. In the environmental field, special tariff reductions are offered on tropical products.
According to the special arrangement for the 49 LDCs, the only goods exempt from special treat-
ment are arms and ammunition. Some products are subject to phased liberalisation (such as bananas,
rice and sugar). There is also flexibility within the rules of origin for these countries, for example: where
there is cumulation of origin from states other than the one which is directly exporting to the EU.
Where there is significant input from another state that is part of regional grouping, then it is treated
as being from the ultimate exporting country.
Europe and the new not only the great diversity across the continent
‘Scramble for Africa’ in terms of peoples and cultures but also under-
states the range of opportunities across these
Africa as a continent has often been portrayed as an countries. In short, the persistent perception of
economic and political basket case. This reflects a political and economic instability that has shaped
tendency within business circles to treat the con- the conventional image of Africa hides the rela-
tinent rather amorphously. Such treatment masks tive political and economic stability that has taken
429
hold across the continent more recently. Although African countries – a process aided by a commod-
not perfect, the stability has been such that parts ities boom driven by rising demand from China,
of the continent have attracted large-scale invest- which has become Africa’s largest single trading
ment from both European and Chinese compa- partner. Many of the better governed states are
nies attracted mainly by the abundance of natural using this money to invest in much needed social
resources. Moreover, parts of the continent have and economic infrastructure that forms the basis
substantial commercial potential given an emer- for sustained economic development.
gent middle class that offers European business While it is important to see through the hype
new outlets for merchandise. surrounding such claims, these developments are
In the decade to 2013, real income across Afri- nonetheless important for European business as
ca grew by more than 30 per cent; compared to it seeks to trade itself out of its persistent eco-
a reduction of 10 per cent during the previous 20 nomic difficulties. Promoting economic develop-
years. Until the mid-2020s, real incomes in Africa ment and interaction with Africa are not merely
are expected to grow an average of 6 per cent per important for economic reasons but also have
annum (World Economic Forum, 2013). A large significant political implications. For many, the
proportion of this rise in incomes has been driv- flows of illegal economic migrants from Africa
en by the sharp increase in FDI which has grown to Europe can only be stopped in any meaning-
from $15 bn in 2002 to over $46 bn in 2012. The ful way by improvements in the economic condi-
impact of higher incomes and FDI inflows has tions in Africa. This issue is also compounded by
been a rise in the availability of goods and services a desire for the EU to promote political stability
(such as telecommunications) that used to be rela- within these regions (especially in the aftermath
tively rare. Mobile phone usage, for example, has of the Arab Spring) to head off further flows of
soared and over 30 per cent of African households refugees from Africa. In this context, Europe has
are expected to have a TV set by 2017 – a 500 per a deep seated and historical interest in ensuring
cent increase in a little over half a decade. positive outcomes for the African continent.
Of course, Africa is not a single entity but is
composed of 54 nations. Thus, generalisations
about the continent should be treated with cau- The EU’s African relations
tion as states are taking divergent paths to eco-
nomic development. However, there is a trend Historically the bedrock of relations between
towards political and economic stability in Africa Africa and the EU has been the development
that was often lacking throughout the continent, framework offered to ACP states through the EU’s
and towards the embedding of core market econ- development policy within the founding treaties.
omy institutions within many African countries. These have evolved through several cycles and are
In 1991, there were only three democracies in now governed by the aforementioned Cotonou
Africa: today, there are 25 with only four lack- Agreement. The main thrust of the agreement for
ing a multi-party system. While true democracy African states is to offer preferential trading terms
remains patchy, other emerging signs of stability for the sectors covered by the arrangement. Coto-
are apparent, including a reduction in civil war, nou contains a major and controversial shift of a
more vibrant civil societies and a shift towards political nature compared to its predecessors. In
market economies. This latter process has been short, the agreement ties access to European mar-
driven by the spread of economic reform in many kets to respect for so-called ‘essential elements’
430
such as democracy, respect for human rights beneficiaries of earlier agreements. The EPAs
and the rule of law. This affirms the principle of include special arrangement for these states.
conditionality to the granting of development
assistance. It has been argued that conditionality The EPAs go beyond simple trade issues and
undermines the principle of equal partnership move into broader, tailor-made issues related to
which was central to previous agreements. the specific development needs of particular set of
Another important change to development states and also include assistance to enable states
assistance within the Cotonou Agreement has been to adapt to the new rules. The EPAs allows these
explicit acknowledgement of the role of civil soci- states 15–20 years to open their markets while
ety (more especially the private sector) in the pro- there is commitment by the EU to open up its
cess of economic development.The agreement also markets with immediate effect. This is covered by
places a great deal of emphasis – especially within the ‘Everything but Arms’ scheme (see Box 19.2)
Africa – on the importance of regional integration which allows free trade in everything but the
as a platform for trading relations. Arguably the specified products. These acts enforce a belief that
most important innovation was the foundation laid there is no better method to promote the process
within it for EPAs. EPAs are designed to counter of economic development than the liberalisation
criticism that the EU’s development programme of markets.
is discriminatory and runs counter to WTO rules. The EPAs are supported by the broader Joint–
The EPAs were meant to be in place by 2008 but EU Africa Strategy which was adopted in 2007.
were seriously delayed. The EPAs are based on a The strategy has the following aims:
number of principles, namely:
■■ moving cooperation beyond development into
■■ Reciprocity: the aim is to remove any discrimi- areas of joint concern such as employment;
nation within the relations between the EU and ■■ addressing areas of global concern such as the
African states while simultaneously complying environment;
with EU commitments to the WTO. Thus, the ■■ stimulating better regional cooperation to
EPAs offer no advantages to signatories that find pan-African solutions to the continent’s
are not available to other states.This effectively problems;
ends the status of ACP states as a special group- ■■ improving the participation of civil society in
ing as EPAs will be available to all developing this process of change.
states. However, the impact of this is expected
to be limited given the inherent flexibility in These are reflected within eight areas of coop-
how the EPAs can be applied. eration, namely:

■■ Regionalism: partners in EPAs are encouraged
to enter into EPAs with other states within the ■■ peace and security;
context of regional groupings. As seen below, ■■ democratic governance and human rights;
this has been a feature of the manner in which ■■ trade, regional integration and infrastructure;
the EU has approached partnership with Afri- ■■ millennium development goals;
can states. ■■ energy;
■■ Special impact: the EPAs do contain the possi- ■■ climate change and environment;
bility of allowing some remaining preferential ■■ migration, mobility and employment;
treatment for those LDCs who were the main ■■ science, information society and space.
431
Since 2010 and the launch of the second Europe’s economic

Joint EU–Africa strategy covering 2011–13, partnership agreements with
these themes have been re-emphasised with an African regional groupings
increased focus on regional integration and coop-
eration. The cooperation has resulted in a series Taken as a whole – and despite the rise of China –
of initiatives such as the Africa Peace facility, the collectively the EU remains Africa’s biggest trad-
EU–Africa Infrastructure Trust Fund and the ing partner. The EU represents 40 per cent of
Comprehensive Africa Agriculture Development African trade, three times the level of trade with
Programme. China.There has been a sharp rise in China’s trade
The 2014 EU–Africa Summit built upon with Africa, which, as a result, has seen the EU’s
these themes and established a roadmap for rela- share decline but, despite the rhetoric of the rise
tions for the period 2014–17. One immediate of China in Africa, the EU remains a solid founda-
effect of this summit was to deepen pre-existing tion base for Africa’s trade. This trend is also evi-
dialogue and cooperation in response to a view dent in FDI where the flows are dominated by EU
that pre-existing forums were not efficient in states – but again the share of FDI from China is
terms of synergy. The new framework identi- also rising sharply. Between 1999 and 2013, EU–
fies five main themes, many of which (peace and Africa trade increased on average by over 10 per
security, democracy, regional integration and cent a year. Over this period, EU imports from
global issues) re-iterate pre-existing themes. Africa rose by over 11 per cent and EU exports
Other issues are encapsulated in the broadly to the continent increased by nearly 10 per cent
defined human development (which reflect in per annum. In 2012, the EU’s main imports from
part the pre-defined millennium development Africa were mineral products, precious stones
goals) theme. Once again, cutting across all and metals which, between them, contributed
the themes in the dialogue is the promotion of nearly three-quarters of total trade. Exports
regional integration. As in the EPAs, the EU is from the EU to Africa are more evenly spread
keen to use these Joint Strategies to pursue its with machinery (24 per cent), mineral products
agenda of promoting democracy in Africa by (17 per cent), transport equipment (12 per cent)
using regional groups such as the African Union and chemical products (10 per cent) representing
as a platform to achieve this objective. the four main categories of EU exports to Africa.
The Everything But Arms Arrangement

Box 19.2
Everything but Arms (EBA) is an agreement tailor-made for LDCs. Created in 2001, it covers 49 of
the least developed states. Under the terms of the EBA, all eligible LDCs are offered full duty-free and
quota-free access to the EU for all their exports with the exception of arm and armaments – hence the
name of the arrangement. The EU argues that the EBA offers many LDCs the most preferential terms
of any existing trade agreement. In 2011, EBA beneficiaries accounted for 12 per cent of all prefer-
ences under the GSP. The EBA was enhanced in 2014 through a refocusing on those states that needed
it most. The EBA lapses when a state ‘moves up’ the development ladder but states are allowed a three
year transition period during which these preferences are phased out.
432
The EU’s biggest individual trading partners in states. West Africa accounts for over 40 per cent
Africa in 2012 were: of all trade between the ACP states and the EU.
In the decade leading up to 2014, West Africa’s
■■ Algeria (16 per cent of total EU–African exports to the EU increased by nearly 300 per
trade); cent while EU exports in the opposite direction
■■ South Africa (13 per cent of total EU–African increased by 125 per cent. Moreover, West Afri-
trade); ca dominates EU FDI in Africa: in 2013, 30 per
■■ Nigeria (13 per cent of total EU–African cent of EU FDI outflows to Africa went to West
trade); Africa. Of the 17 states in this group, the Ivory
■■ Libya (11 per cent of total EU–African trade); Coast, Nigeria and Ghana dominate trade rela-
■■ Morocco (8 per cent of total EU–African tions, accounting for 80 per cent of exports from
trade). this region to the EU. However, trade within West
Africa remains stunted. Liberia is unusual among
The EU has been in negotiations on EPAs – these states as it is the only one that is not a mem-
which cover trade, investment and other eco- ber of the WTO. However, it is currently going
nomic matters – with five African groupings (see through the accession process.
Table 19.1).These five groups form the basis for the In 2013, the EU ran a trade deficit with the
rest of this chapter as they provide the structure for West African region but this trade remains largely
the EU to deal with the complex multilateral oper- incidental to the EU as it comprises only 2 per
ating environment that is created by dealing with cent of the EU’s total trade. Despite imports
such a large number of states with diverse needs. falling by nearly 10 per cent in 2013, the aver-
age annual growth of imports between 2009 and
2013 was 22 per cent. Exports from the region
West Africa are dominated by primary products (96 per cent
of total exports), a result of the dominance of
The West African region comprises the EU’s most mineral fuels, lubricants and related materials
prominent set of trading partners of all the ACP which account for nearly 80 per cent of exports
Table 19.1 The African Economic Partnership Agreement groupings
African grouping Constituent states

West Africa Benin, Burkina Faso, Cape Verde, Ivory Coast, Gambia, Ghana, Guinea,
Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo,
Mauritania
Central Africa Cameroon, Central African Republic, Chad, Congo (Brazzaville), Congo -
Democratic Republic of (Kinshasa), Equatorial Guinea, Gabon, São Tomé
& Principe
Eastern and Southern Africa Comoros, Djibouti, Eritrea, Ethiopia, Madagascar, Malawi, Mauritius,
Seychelles, Sudan, Zambia, Zimbabwe
East African Community Kenya, Uganda, Tanzania, Burundi and Rwanda
Southern African Development Angola, Botswana, Lesotho, Mozambique, Namibia, South Africa,
Community Swaziland
433
in their own right and underscore the dominance regional trade between these countries and their
of Nigeria and Ghana in EU trade. In addition, trade with developed economies also remains
both Ghana and the Ivory Coast are large cocoa relatively low.
exporters. This indicates the high vulnerability of These states are conventional commodity-
this region to swings in commodity prices as high- based economies with oil representing over 70
lighted by the impact of the rapid fall in oil prices per cent of their exports to the EU: only the
from mid-2014. Not surprisingly EU exports to Central African Republic in this group does not
West Africa are dominated by industrial goods, export oil to the EU. The other major exports
machinery, vehicles and transport equipment. are also commodities with cocoa, wood, copper,
The EPA between West Africa and the EU bananas and diamonds especially prominent. Like
covers goods and development cooperation with many other African states, imports from the EU
a commitment to open up negotiations on ser- are dominated by manufactures and capital equip-
vices and other trade-related issues. By 2014, ment. In 2013, the EU ran a trade deficit in the
an EPA was finally agreed between the EU and region of €3.5 bn with this group of countries.
ECOWAS (the Economic Community of West Trade with this region was largely incidental
African States). While the EU will open its mar- to the EU as it comprised only 0.5 per cent of
ket from day one of the agreement coming into its total EU trade. However, this trade is cur-
force, ECOWAS members are allowed to phase in rently growing at an annualised rate of around
its implementation over 20 years with the longest 20 per cent.
lead times allowed for agricultural goods. In addi-
tion, the EU pledged €6.5 bn assistance to aid the
transition process. Eastern and Southern Africa
Eastern and Southern Africa (ESA) is a diverse

Central Africa group of countries, covering not only nations on
mainland Africa but also island states in the Indian
As of 2015, the EU was still in negotiation with Ocean (see Table 19.1). Such diversity means that
the states of Central Africa regarding the creation regional integration remains difficult. However
of a regional EPA. Cameroon was the only state all states in this group, bar Eritrea, are members
that managed to quickly reach an interim agree- of the WTO. In 2013, the EU operated a trade
ment with the EU. This agreement was signed in surplus with these states of €1.3 bn. As with other
2009 but was only formalised by the EP in 2013. African regions, these states are largely inciden-
The agreement allowed for a 15 year transition tal trading partners for the EU: its trade with the
period for Cameroon. Of the other Central Afri- Eastern and Southern Africa grouping comprised
can states, Gabon and Congo had yet to agree an only 0.3 per cent of total EU trade in 2013 but
EPA though the latter benefits from the Gener- both its imports and exports with this region
alised System of Preferences (see Box 19.1). All are bordering on double digit growth – a major
the other states qualify as LDCs and benefit from improvement on the longer term trend of slightly
duty-free, quota-free access under the EU’s ‘Eve- over 2 per cent annual growth. Exports to the EU
rything but Arms’ scheme (see Box 19.2). Achiev- are focused on cash crops with sugar and coffee
ing a regional agreement among these states has being prominent. There are also relatively high
proved difficult as there is comparatively little volumes of copper and crude oil exports. The
434
imports of this African grouping are dominated trade is relatively low, registering a little over 3
by machinery, mechanical appliances, vehicles per cent between 2009 and 2013.
and pharmaceuticals. In 2014, the EAC agreed a region-to-region
In 2009, Mauritius, Seychelles, Zimbabwe and EPA with the EU. The agreement covers goods
Madagascar signed an interim EPA, to which the and development cooperation with duty-free
EP gave its consent in January 2013. This agree- access to the EU for all imports from the EAC
ment eliminates duties and quotas for imports (though rice and sugar are given an extended
from these states to the EU. Once again, recip- transition period). The transition for EU goods to
rocal liberalisation is a transitional process. The access the EAC is more gradual reflecting differ-
agreement also contains provisions for rules of ences in economic development. Thus, while the
origin, fisheries, trade defence, development EAC has agreed to liberalise nearly 83 per cent of
cooperation and a dispute settlement mechanism. its imports from the EU, 30 per cent are given a
15 year transition and 2.6 per cent a 25 year peri-
od of adjustment. The goods excluded entirely
East African Community from liberalisation include agricultural products,
wines and spirits, chemicals, plastics, textiles and
Unlike other African regions, the East African Com- clothing. The agreement has also other provisions
munity (EAC) is an homogenous region, both geo- such as the right to trade defence should there be
graphically and economically. As such, there is a any disturbance to their respective economies.
strong commitment to regional integration between
these states with the EAC – established in 2005 –
operating as a customs union with zero internal Southern African Development
tariffs since 2010. Since then the region has made Community (SADC)
a commitment to further develop this integration
process by the development of a common market Not surprisingly, EU–SADC trade is dominated
protocol and an open-ended commitment to mone- by EU–South African trade (see Case Study 19.1).
tary union. The integration between these states has The SADC extends beyond the eight states iden-
a strong political dimension with the explicit long- tified within Table 19.1. The other six members
term objective of becoming a federation. are – for the purposes of EPAs – part of other
As with other states across the African con- groups, namely the Central African, and Eastern
tinent, EAC trade with the EU tends to be and Southern African regions. The eight SADC
inter-industry trade. The members of the EAC states identified in Table 19.1, once again spe-
specialise in commodity products with the main cialise in commodities. The SADC EPA states are
exports to the EU being coffee, cut flowers, tea, especially strong in the export of diamonds, most
tobacco, fish and vegetables. Imports from the notably South Africa, Botswana, Lesotho and
EU are – again – dominated by machinery and Namibia. Elsewhere these states are strong in the
mechanical appliances as well as by vehicles and export of agricultural goods (such as beef, fish
pharmaceuticals. In 2013, the EU ran a trade and sugar). South Africa’s exports are much more
surplus with these states of €1.4 bn. As with the diversified (see Case Study 19.1). The EU largely
other African regions, EU trade with the EAC is exports manufactures to this region, notably vehi-
largely peripheral, comprising only 0.2 per cent cles and electrical equipment. In 2013, the EU ran
of total EU trade. The growth rate for EAC–EU a trade surplus with these states of €2.3 bn.
435
In July 2014, an agreement was concluded with Indeed since their inception, they have been
this group for an EPA for all these states (barring fraught with difficulties and many states have been
Angola which has an option to join at a later date). unhappy with what was on offer.
These states, with the exception of South Africa, There has been pronounced criticism of EPAs
are guaranteed duty-free, quota-free access to the from NGOs. Indeed within the trade justice
EU. South African trade relations are covered by movement there have been concerted movements
the Trade, Development and Cooperation Agree- to block or adjust EPAs. There is a fear, for exam-
ment (see Case Study 19.1). Under the terms of ple, that EPAs could splinter regionalism (see
the agreement all states (bar South Africa) do not page 431) and that the aid offered is not enough to
have to reciprocate the EU offer of 100 per cent compensate states for the threat of more intense
access but they can shield sensitive areas from competition. Other problems for African states
the full force of liberalisation with specified sec- from these EPAs could arise from:
tors benefiting from funding to aid the adjust-
ment process (World Economic Forum, 2013). ■■ loss of tariff revenue from trade, thereby
In practice most of the new access granted under limiting the ability of these states to put into
the EPA relates to agriculture and fisheries with place the necessary social and economic infra-
states forfeiting the right to use export subsidies structure to secure longer term economic
in trade with each other. development;
■■ the potential for negative effects on multilater-
alism: this is a common criticism of prudential
Are economic partnership trading agreements that the EPAs were meant
agreements beneficial to overcome.
for Africa?
One of the main criticisms is that the EPAs
Much of the discourse regarding EPAs that reflect an asymmetry of power between the EU
has emerged from both the EU and the lead- and African countries and that these agreements
ing regional and international bodies involved are self-serving methods of opening up EU access
in Africa has been unequivocal in its support for to African markets. This criticism is enforced by
the wider adoption and implementation of these a belief that the EU is linking aid directly to the
agreements. Many of the arguments surround- willingness of a state to sign an EPA. To many, this
ing these agreements reflect conventional neo- suggests an aggressively mercantilist policy by
liberal perspectives on the perceived benefits of the EU which is aiming to dominate these states.
free trade. As such, there is little need to revisit The EU has a vastly superior negotiating capabil-
these arguments to any large extent. However, ity compared to the African states. Moreover, the
it is worth emphasising that there is a consensus regional split in EPAs is seen by some as a strategy
around the compatibility of freer markets with of divide and rule by the EU and as a means of
effective development strategies. The logic is that avoiding a pan-African EPA. This asymmetry of
of the competition state in terms of facilitating power is also reflected in the relative importance
inward flows of investment through creating the of trading relations between these two areas.
conditions under which competition can flourish. For the EU, trade with Africa is relatively minor
There is by no means a consensus that such agree- (about 5 per cent of total trade) but comprises
ments are always to the benefit of signatories. about 40 per cent of African trade.
436
Case Study 19.1

EU relations with South Africa
South Africa, despite the more recent emergence of Nigeria, remains the EU’s largest trading partner in
Africa. Of all the states within sub-Saharan Africa, South Africa has demonstrated the greatest economic
resilience. However, despite the EU being South Africa’s largest single trading partner and EU–South
African trade growing at an annual average rate of over 10 per cent between 2009 and 2013, trade with
South Africa accounts for only 1.2 per cent of the EU’s total trade. One aspect of the EU’s trade with
South Africa which sets it apart from trade with other African states is its increasing diversity. South
Africa is moving away from the commodity-based economy which characterises other African states to-
wards increased trade with the EU in industrial products. In 2013, 37 per cent of South African exports
to the EU were manufactures with primary products representing nearly 45 per cent. The EU’s exports to
South Africa are dominated by manufactured goods (nearly 90 per cent) and in 2013 the EU ran a trade
surplus in both manufacturing and services. In the case of the former, the surplus was €9 bn and the surplus
for the latter was €3.3 bn. In 2012, the EU’s stock of FDI assets in South Africa had a value of €49.1 bn.
EU–South Africa trade relations are governed by the Trade and Development Cooperation Agree-
ment (TADCA) which was concluded in 1999. Thus, although South Africa is part of the ACP group of
states, it is not part of the same trade and investment arrangements. TADCA’s liberalisation has been
fully implemented with a large percentage of EU–South Africa trade now subject to preferential tariff
rates. Notwithstanding the almost 24 per cent reduction in exports from South Africa to the EU in
2013 as the euro crisis resulted in stagnant eurozone demand, since 2000, when the agreement was
signed, there has been a substantial rise in trade between the EU and South Africa. In the longer term,
the agreement has increased trade by over 120 per cent with FDI increasing fivefold.
The EU’s relations with South Africa extend beyond simple trade relations. In 2006, the EU formed
a joint strategy with South Africa to formalise cooperation between them. One of the core objectives is
to fully understand and increase the prominence of South Africa within the broader region. For the EU,
South Africa is a key power player in Southern Africa, prominent in stabilising the continent economi-
cally and politically but also operating as a powerful catalyst for the process of economic integration
across the continent. Integral to the strategy is enabling South Africa to face up to its internal chal-
lenges, such as poverty.
Case question
Apart from poverty, what are the main challenges faced by South Africa as it seeks to become a
more equal trading partner of the EU?
A further criticism is that the EU has used its implies the imposition of a trade sanction against
power to impose unrealistic deadlines upon Afri- the offender. Such short deadlines, so the criti-
can states which gave them little time to adjust cism goes, have allowed the EU to play states off
to the new rules. Moreover, failure to comply against each other and to inhibit the ability of
437
states to form common positions. Without this EPA. Many NGOs proposed that African states
common position, trade between African states be offered an adapted GSP (the so-called GSP+)
could be hindered and new barriers created. For which was WTO compatible on the proviso that
example, the reciprocity demanded in EPAs defies certain governance criteria were met. The GSP+
the non-reciprocal provisions under the WTO. In would be non-contractual (unlike the EPAs) so
addition, new barriers could be created between could be withdrawn at any time. The GSP+ and
African states and other trading partners. Indeed, the EPA not only differ in terms of governance
one of the legacies of the process to date has been but also vary in terms of product coverage with
the increase in tension between states who do and sensitive products being subject to more limited
those who do not receive assistance. coverage within the GSP.
Some states insist that the price of the access The inclusion of the Singapore issues (such as
required by the EU is too high. The EU insistence competition policy, government procurement and
on 80 per cent liberalisation of goods markets in trade facilitation) was also controversial. The EU
Africa can curtail the capability of African states wanted these included as it believed these issues
to develop their own productive capability within are central to the process of economic develop-
these key sectors to supply regional or local mar- ment. Many NGOs see their inclusion as merely
kets. This problem is compounded by the fact that another attempt by the EU to open markets in
the EU does not allow for infant industry protec- the poorest states where the uneven negotiating
tion and other forms on trade protection. The capabilities render the outcomes of such discus-
result is that these states risk remaining commod- sions a fait accompli. Moreover, the cost upon
ity exporters and all that this entails in terms of these states of implementing the Singapore issues
vulnerability to economic cycles and to remaining would be substantial, especially in countries that
at the lower end of the global value chain. In the are still struggling to come to terms with their
process of liberalising investment, the EU liberal- WTO obligations. The development of a staged
ised investment with these states at a level beyond approach to the implementation of EPAs should,
that expected under the WTO and the accusation to some degree, militate against such problems.
is that the EU is again operating a divide and rule
policy to open these markets.
After protracted negotiations, there are con- Conclusion
cerns that the EU is turning to strong arm tactics
to get its way on the EPAs. It has been threatening The EU’s relations with the world’s least devel-
to withdraw preferential market access to those oped economies as represented by the ACP group
states that have not begun the ratification process of states highlights the multi-faceted nature of
of the agreements by specified dates. Moreover, its relations with the developing world. Of these
the EU has reformed its Generalised System of ACP states, there can be little doubt that the eco-
Preferences (see Box 19.1) so that it is no longer nomically (and arguably politically) most impor-
a fallback option for states. While the Cotonou tant states are in Africa, of which those in West
Agreement allows for the provision of alterna- Africa dominate. The EU has attempted to estab-
tive arrangements to an EPA, in practice it quick- lish a series of EPAs across these states but success
ly became clear that there was little alternative remains mixed. Indeed there is growing criticism
for these states other than to accept an interim of the use of these devices.
438
Key points
■■ The EU has long standing trade relations with ACP states.
■■ The EU is attempting to establish a series of EPAs with these states as a basis for advancing
trade relations.
■■ Economically, the African states are the most important ACP states.
■■ Progress towards EPAs in Africa has been slow and highly controversial.
Activities
1 Select one of the 48 African ACP states and study the form and nature of its trade relations with the
EU. Identify the main challenges and opportunities it faces in its relations with Europe.
2 Identify – as a group exercise – the main characteristics of the least developed states. How do they
compare with EU states?
1 To what extent is the scramble for Africa more hype than reality?
2 Assess the rationale for the EU’s ‘regional’-based approach to EPAs?
3 Given its low share of total EU trade, why is Africa so important to the EU?
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439
Index
Page references in bold refer to Tables and Figures; those in italic refer to case studies and boxes
Abbott, J. 35 Trading Scheme (ETS) 278; fifth freedom 205; global

ACP states, EU relationship with 427–39, 429, 432, marketplace 215 see also low-cost carriers (LCCs)
433, 437 Albania, candidacy for EU accession 362, 363
acquis communitaire 7, 52, 361, 362, 368, 369, 410 Algeria 433; energy supplies from 246, 247; secession
Action Plans, European Neighbourhood Policy 373, from EU 370
374, 376 alternative dispute resolution (ADR), consumer claims
active labour market policies (ALMPs) 316, 318 182, 190
Aer Lingus 114–15, 216, 219 Amsterdam Treaty see Treaty of Amsterdam
Africa: EU relationship with 430–8, 432, 433, 436–8, Andorra 4
437; foreign direct investment (FDI) 430, 432, 433; Anglo-American Corporation of South Africa Limited
new ‘scramble for Africa’ 429–30; trade with China (AAC) 124–5
430, 432 see also ACP states, EU relationship with Anglo-Saxon model 10, 10, 11 see also Ireland; UK
Africa Peace facility 432 (United Kingdom)
age dependency ratio 311, 312, 323 Angola 433
ageing population 9, 296, 311, 312, 321 annulment of legislation 77
Agency for the Cooperation of Energy Regulators anti-discrimination policies, Treaty of Amsterdam
(ACER) 240 provisions 56
Agenda for new skills and jobs (Europe 2020 initiative) 17 anti-dumping duties 352, 353, 354, 355–6, 382, 420
agriculture: employment levels 307; EU trade relations anti-subsidy measures 353, 353–4, 354
with Canada 392; EU trade relations with US 391, antitrust investigations, Google case study 299–300
392; GVA statistics 8, 8; and WTO negotiations 348 Arab Spring 372, 373, 374, 376
Air France 216, 217 Armenia 411
Air Iberia 216, 217 Ashton, Catherine 59 see also High Representative of the
Air Quality Directive 270 Union for Foreign Affairs and Security Policy
air traffic management (ATM) system 214 Asia: competition from 9, 321; foreign direct investment
air transport: consumer protection 189; Single European (FDI) 336, 337; free trade agreements 350 see also
Sky 89 East Asia; South-East Asia
airlines 205; changes in European sector 215–17; Association of Southeast Asian Nations (ASEAN) 350–1,
Common Transport Policy (CTP) 212–17, 213, 388, 389
218–20; consumer protection 189; Emissions AU Optronics 126–8
440
Index
Audi Hungaria 276 BRIC states (Brazil, Russia, India and China): economic
austerity 167–8, 170 profile of 398–9, 399; EU trade relations with 378,
Australia: airline agreements with 215; EU trade 397–8, 400–3, 401, 421, 423–4; Siemens case study
relations with 389 400–3, 401 see also Brazil; China; India; Russia
Austria: and EFTA (European Free Trade Area) 49; British Airways 216, 217
EU accession 48, 55; and EU migration 325; and broadband 294–5, 296
Eurobonds 171; flexicurity 316, 317; and GATT Brussels Airlines 216
346; rail transport 220; renewable energy 242, 243, BSE crisis 183, 184, 185
243; shale gas 250; unemployment 305, 306, 306; budgets: European Commission role 72; European
WEF Global Competitiveness Index 27, 27 see also Parliament (EP) role 71
Continental model Bulgaria: energy import dependency 246, 246; EU
Austrian Airlines 216, 217 accession 4, 48, 362, 365, 368; and EU migration
Azerbaijan, gas supplies from 249 325, 326; infrastructure 26; labour mobility 323,
324; migration from 94; nuclear energy 228; part-
Bali Ministerial, WTO 347 time employment 309, 310; R&D 17, 18; shale gas
Balkan states 375; airline agreements with 215; EU 250; WEF Global Competitiveness Index 27, 27
accession negotiations 4 business friendliness of economies see World Bank, Ease
Baltic states: and the Anglo-Saxon model 10; renewable of Doing Business Index
energy 242, 243, 243; social welfare provision 8;
tertiary education 19, 20, 21; unemployment 304, cabotage 203, 205, 215
305, 306; union membership rates 311; World Bank’s Cairns Group 389
Ease of Doing Business Index 29, 29 Cameron, David 421
Bank for International Settlements 166 Cameroon 434
Bank of England 165 Canada: airline agreements with 215; bilateral
bankruptcy, and enterprise policy 142, 144, 145, 146 agreement on competition policy 122;
Basel III 166 Comprehensive Economic and Trade Agreement 350;
Beijing, as headquarters of MNCs (multinational EU trade relations with 392; tariffs 342
corporations) 31 Canadian Chemical Producers Association 269
Belarus 375, 411 Cancun Ministerial, WTO 120–1, 351
Belgium: agriculture 8, 8; and establishment of EEC carbon capture and storage 241, 249
47; and EU migration 325; and GATT 346; nuclear Caribbean see ACP states, EU relationship with
energy 228; social welfare provision 8; and the Treaty cars: BMW case study 262–4, 263; electric cars 263;
of Paris 46; WEF Global Competitiveness Index 27, ownership rates 199; passenger transport 199, 200,
27 see also Continental model 200, 201
‘benefit tourism’ 326 cartels, Liquid Crystals Displays case 126–8
Bethell, Lord 205 Cassis de Dijon case 78
Bilateral Trade and Investment Agreement (BTIA), EU Catalonia, nationalism 370, 371
and India 414, 414–15, 415, 421, 424 Cecchini Report (1988) 90, 93, 205
Bjerregaard, Ritt 258 Central Africa, EU trade relations with 433, 434
Blair, Tony 57 Central African Republic 434

Blue Angel eco-label 273, 274 Central and Eastern Europe (CEE) 374, 375; Eastern
BMW, sustainability case study 262–4, 263 Partnership 349–50; and economic and monetary
Bosman, Jean-Marc 78 union (EMU) 153; energy intensity 227; EU
Botswana 435 accession 4, 55, 360, 361, 362, 364; free trade
Brazil: airline agreements with 215, 404–5; agreements 349; industrial sector 8, 9; migration
competition cooperation 123; economic growth/ from 94, 325, 326; transition to market economies
power of 399, 403–4; EU trade relations with 7; and transport system 198–9; unemployment 304,
332, 333, 334, 403–5, 404, 405; foreign direct 305, 306; union membership rates 311; World Bank’s
investment (FDI) 404; Siemens case study 401, 401, Ease of Doing Business Index 29, 29 see also former
402, 440; tariffs 342 see also BRIC states (Brazil, Soviet Union
Russia, India and China) (FSU) states
441
Index
Cerny, P. 35 Community Courts, and competition policy 113,

Charter of Fundamental Rights 59, 60, 322–3 125, 128
chemical industry, Responsible Care programme 269, 273 Community Dimension (CD) test 124
Chile 351 Competition Commission, UK 115
Chimei InnoLux Corporation, Liquid Crystals Displays competition policy 105, 125, 128; bilateral cooperation
case 126–8 121–3; core features of 106–7, 109; enforcement
China: anti-dumping dispute 352, 353, 354, 355–6, gap 114–15; international dimension 118–25;
382, 420; competition cooperation 123; consumer Liquid Crystals Displays case 126–8; multilateral
protection cooperation 181; economic growth/ cooperation 118–21; policy instruments 108; private
power of 143, 379, 397, 398, 399, 399, 416; enforcement 113, 116–18; reform of 109–13;
economic slowdown 403, 418; economic statistics theory and types of 106; unilateral action 123–5
6; EU trade relations with 332, 332, 333, 333, competition states, EU (European Union) as a set of
334, 350, 416, 417, 418–21, 419, 4166; exports 35–6
332, 332, 333, 334, 416, 416, 417; foreign direct competition, between states 12–14
investment (FDI) 336, 337, 381, 418, 422–3; competitiveness 331; and environmental policy 257,
imports 334; infrastructure 26; MNCs (multinational 261; of Europe 11–14, 23, 24–5, 25, 26–7, 27, 27,
corporations) 31; population statistics 4; raw 28, 29, 29–30, 143; and industrial policy 132; and
materials 134, 137; Siemens case study 401, 401, information and communication technologies (ICTs)
402, 403, 440; state-owned enterprises (SOEs) 32, 284–6, 285
418; tariffs 342; trade relations with Russia 406 see Completing the Internal Market White Paper (1985) 51,
also BRIC states (Brazil, Russia, India and China) 52, 87, 88, 205, 235, 314
China-EU Framework Agreement 419 Comprehensive Africa Agriculture Development
Chungahwa Picture Tubes, Liquid Crystals Displays case Programme 432
126–8 Comprehensive Economic and Trade Agreement
Citizens’ Initiative 72, 175 (CETA), EU and Canada 392
citizenship 175–6; citizens’ rights 59, 60, 175 conditionality 362, 368, 374, 375; and development
civil society: in Africa 431; and European Economic and assistance 431
Social Committee (EESC) 77, 79 conferral principle 57
Clegg, Nick 421 Congo 434
climate change and energy sustainability targets: Europe Connecting Europe Facility (CEF) 209, 294
2020 initiative 15, 16 consolidation, and the Single European Market
climate change, and energy policy 240–1 (SEM) 87
Club of Rome 258 Constitutional Treaty, referendums on 57–8, 365
coal 227–8, 229, 247, 252 see also solid fuels construction industry 36, 37
code sharing agreements 217 consumer policy 174–7, 192; emergence of 177–80;
Cohesion Funds 153 and the euro 182–3; and financial services
Colombia 351 190–2; and food safety 183–6, 186–7; strategy for
Committee of the Regions (CoR) 53, 79 consumers 180–2
Common Agricultural Policy (CAP) 49, 50, 55 Consumer Product Safety Regulation 188
Common Commercial Policy (CCP) 337, 339–40, 394 consumer protection 176, 177–80, 181–2; and
common European economic and social space (CEES) e-commerce 189–90; EU legislation 187–90, 189;
409, 410, 424 financial services 190–2; mobile phones roaming
Common External Tariff (CET) 342 charges 184 see also food safety
common foreign and security policy (CFSP) 52, 52 consumers 174–5; EU trade relations with US 391;
Common Transport Policy (CTP): airlines 212–17, and the euro 182–3; role in European policy 176–7;
213, 218–20; evolution of 202–3, 205–7, 206; strategy for 180–2
milestones 204, 204–5; rail 217, 220–2; road Continental model 8, 10, 10, 11, 19 see also Austria;
haulage 207, 209–12; TEN-T (Trans-European Belgium; France; Germany; Luxembourg
Transport Networks) 208–9, 220, 223 Convention on the Future of Europe 48, 57
Commonwealth of Independent States (CIS) 409 convergence criteria, economic and monetary union
Community Charter of the Fundamental Social Rights (EMU) 157–8
of Workers see Social Charter convergence, in industrial policy 136
442
Index
cookies 187, 190 Deans, P. 35

cooperation, and competition policy 109 Decisions (EU legislation) 76
Copenhagen criteria 360, 361–2, 368 Defrenne v. SABENA case 78
copyright see intellectual property rights (IPR) Delors, Jacques 51, 52, 55, 156, 314
Coreper (Committee of the Permanent Delpla, J. 171
Representatives) 68 demand conditions, of competition between states 13
corporate entrepreneurship 141 democracy, in Africa 430
corporate social responsibility (CSR) 195 democratic deficit 368
cost competitiveness 37 Deng Xiaoping 137
Costa v. ENEL case 78 Denmark: dissent over TEU 54; EC accession 47, 50;
Cotonou Agreement 350, 428, 430–1, 438 eco-labelling 273; and economic and monetary union
Council of Ministers 67, 68–9, 69; TEU changes 53; (EMU) 157, 161–2; and EFTA (European Free Trade
and transport policy 202, 203, 205, 208, 222; Area) 49; energy exports 245, 246; and environment
Treaty of Amsterdam changes 56; Treaty of Lisbon policy 266; and the Exchange Rate Mechanism
changes 59 (ERM) 156, 158; flexicurity 315–16; and GATT
Council of the European Union see Council of Ministers 346; R&D 17, 18,; renewable energy 242, 243, 243;
counterfeiting 100–1 see also intellectual property rights service industry employment 307; shale gas 250; and
(IPR) the TEU 54; unemployment 305, 306, 306; WEF
Court of Auditors 79–80 Global Competitiveness Index 27, 27; World Bank’s
Court of First Instance (CFI) 51, 76 Ease of Doing Business Index 29, 29 see also Nordic
Court of Justice of the European Union (CJEU), model
competition cases 123–4, 125 deposit guarantee system 191
Creutzfeldt-Jakob disease 183, 184, 185 Derbez, Luis Ernesto 120
Crimea, Russian annexation of 403, 411, 411 developing countries: and the Doha Round, WTO
Croatia: EU accession 4, 48, 61; unemployment 305, 348; Economic Partnership Agreements (EPAs)
306, 306 350; FDI from 336; free trade agreements with
cross-border transactions 291; and consumer protection 350 see also least developed countries (LDCs), EU
176–7, 178, 181, 189–90; energy supply 238; relations with
financial services 191 DFDS 259, 260
customs unions 43; East African community 433, 435; Diamond Framework (Porter) 12–14, 24
European 42, 43; Russia, Kazakhstan and Belarus 411 Dicken, P. 379
cyber-security 294, 298, 301 Digital Agenda for Europe (Europe 2020 initiative) 16
Cyprus: and economic and monetary union (EMU) digital copyright see intellectual property rights (IPR)
162; energy import dependency 246, 246; EU digital divide 295–6
accession 4, 48; and Eurobonds 171; and GATT 346; digital policy 283–4; challenges facing 296–8, 301;
industrial sector 8, 9; labour mobility 323, 324; and competitiveness 284–6, 285; Digital Agenda for
MEPs 70; public perceptions of EU 62, 63; R&D 17, Europe (DAE) 287–91, 290, 293–6; and Google
18; relations with Turkey 367; service industries 8, 9; 299–300; overview of 286–7
WEF Global Competitiveness Index 27, 27 Digital Single Market 290–1
Czech Republic: energy import dependency 246, 246; Directive 2012/33/EU 259
energy supplies 228; EU accession 48; and the Fiscal Directive 91/440 221
Compact Treaty (FCT) 167; opt-out from Charter of Directive on certain rules governing actions for damages under
Fundamental Rights 322–3; public perceptions of EU national laws for infringements of the competition law
62, 63; rail transport 220; shale gas 250; WEF Global provisions of the Member States and of the European Union
Competitiveness Index 27, 27; World Bank’s Ease of (2014) 113, 116–18
Doing Business Index 29, 29 Directive on Consumer Rights 187, 188, 189
Directive on Privacy and Electronic Communications 187
Dalai Lama 421 Directive on Sale of Consumer Goods and Associated
damages claims: competition policy, private Guarantees 187
enforcement 113, 116–18 Directive on Unfair Commercial Practices 187, 188
Data Protection Directive 187, 190 Directives (EU legislation) 76; consumer protection
de Gaulle, Charles 49, 368 187–8, 189, 190, 191; energy 235, 241, 248;
443
Index
environmental 257, 258, 259, 268, 270, 276, 277; electricity 235–40, 238
equality 314 Electricity Directive (1996) 236–7, 238, 239
Dispute Settlement Mechanism (DSM) 346 Electricity Directive (2003) 235, 237, 238, 239
Doha Round, WTO 119, 120, 121, 122, 128, 331, 342, Electricity Transit Directive (1990) 235
345, 346347, 348, 351, 380 Emissions Trading Directive (2003) 268
double majority voting 56, 59, 69 Emissions Trading Scheme (ETS) 241, 277–8
Draghi, Mario 168, 168 employment: Europe 2020 targets 11, 15, 16, 18,
Dublin Products 276 19, 20; and gender 307, 308, 309; and the Single
Dullien, S. 97 European Market (SEM) 94
dumping; anti-dumping duties 352, 353, 354, 355–6, Employment Chapter 55, 321, 322
382, 420 Employment Guidelines 321
Dyestuffs case (1972) 123–4 ‘empty chair’ crisis 49
Endesa 239
e-commerce 289, 291, 294; and consumer protection Energy 2020 233, 233, 278
177, 181, 182, 189–90; cookies 187, 190 Energy Charter Treaty 345
E-commerce Directive 187 energy companies, MNCs (multinational corporations)
e-government services 287, 289 31, 31
e-Health systems 296 energy efficiency 15, 16, 139, 230, 232, 233, 233, 241;
E.On 239 product labelling 274–5
East Africa community, EU trade relations with 433, 435 Energy Efficiency Directive (EED) 241, 248, 296
East Asia: EU trade relations with 383–4, 385–8, 388–9 energy import dependency 245, 245, 246, 252
see also Asia; South-East Asia energy intensity 226–7, 227
Eastern and Southern Africa, EU trade relations with Energy Labelling Directive 248
433, 434–5 energy markets, and the Single European Market (SEM)
Eastern partners of EU 372, 373 89, 96, 98
Eastern Partnership 349–50 Energy Performance of Buildings Directive 248
eco-industries 261 energy policy 224–6, 249; competition pillar 226,
eco-labelling 273–5, 274, 275 231–2, 234–40, 238; current supply and demand
Eco-Management and Audit Scheme (EMAS) 275–6 trends 226–9, 227, 228, 229, 230; Energy 2020
Eco-Management and Audit System (EMAS) 257 233, 233, 278; linkages with other policies 229–31;
Ecodesign Directive 248 milestones 232; overview of 229–34, 231; security
ecological modernism 258, 261 of supply pillar 226, 231–2, 244–9, 245, 246, 247;
economic and monetary union (EMU) 42, 43, 43, sustainability (environmental) pillar 226, 231–2,
47, 48, 52, 55, 151; 1999-2009 period 160–2; 233, 233, 240–1, 242–4
benefits and risks 158–60, 159; characteristics of Energy Roadmap 2050 233, 278
152; convergence criteria 157–8; development of energy supply insecurity 9
155–8; euro crisis 162, 165–6, 166, 168–70, 169; Energy TENs 230–1
milestones 154–5; overview of 152–3, 155; TEU energy utility companies 31, 31
changes 53; UK opt-out 54; Werner Report (1970) ‘enhanced cooperation procedure’ 370
50, 151, 155 enlargement see European enlargement

Economic Community of West African States enlargement fatigue 360, 365, 368–9, 372, 374
(ECOWAS) 434 enterprise policy 131–2, 140, 149; entrepreneurship
economic integration 42–6, 43 education 145, 147–8; nature of entrepreneurship
Economic Partnership Agreements (EPAs) 350; ACP 140–2, 141, 142; SME internationalisation 146,
states 428, 429, 431, 433; developing countries 148–9; themes 143–6
350; impact of in Africa 436–8; Southern African entrepreneurship: corporate 141; entrepreneurship
Development Community (SADC) 435–6 education 145, 147–8; nature of 140–2
economic structure of EU states 8, 8–9 environment policy 256–7; BMW and sustainability
EDF 32 262–4; and European business 257–8, 259–60, 261;
education, Europe 2020 targets 15, 16–17, 19, 20, 21, 38 evolution of 261, 265–6, 267, 268; expanding range
efficiency-driven economies 25, 25 of 268–9, 273–80, 274, 275, 278, 279; international
electric cars 263 dimension of 280; milestones 265
444
Index
Environmental Action Programmes (EAPs) 268; Fifth European Banking Authority 165
268; First 265, 268; Seventh 269, 270–1; Sixth 268–9 European business: and environment policy 257–8,
Environmental Liability Directive 267, 276, 277 259–60, 261; size distribution of 30, 30; and SMEs 30,
environmental management schemes 275–6 30, 33–4; state-owned enterprises (SOEs) 30, 31–2,
environmental management system (EMS), BMW 261 32, 33; structure of, by sector 34, 35–6, 36, 36
environmental taxes 278–80 European Central Bank (ECB) 79, 156, 167, 168,
equal opportunities legislation 314 170, 371
Equal Pay Directive 314 European Chemical Distributors Association (FECC) 273
Equal Treatment Directive 314 European Chemical Industry Council (CEFIC) 269, 273
equity/efficiency matrix, European social models 10, European Coal and Steel Community (ECSC) 46
11–12 European Commission (EC) 55, 67, 71–3, 74–5, 75–6;
Eritrea 434 anti-dumping duties 354; commercial policy 340;
Estonia: energy supplies 228; EU accession 48; and competition policy 109–11, 114, 116–18, 125;
foreign direct investment (FDI) 381; MEPs 70; consumer policy 179–80, 182; energy policy 235,
unemployment 304, 305, 306; union membership 237–8, 239–40, 246–9; enterprise policy 140, 144; EP
rates 311; WEF Global Competitiveness Index 27, 27 scrutiny of 70–1; and Eurobonds 171; food safety policy
EU Food Fraud Network 185 183, 184–5; and GATT 346; industrial policy 138–40;
EU-Australia Partnership Framework 389 lobbying of by business 67, 75–6; neighbourhood policy
EU-Korea FTA 123, 127, 350, 351, 384, 385–8, 388 372, 373–5; Nice Treaty changes 56; resignations over
EU-Russia Strategic Partnership 373 corruption charges 48, 71, 80; transport policy 199,
EU-Singapore free trade agreement (EUSFTA) 388–9 202–3, 210, 217, 220–2, 221–2;Treaty of Amsterdam
Eurasian Union 411 changes 56;Treaty of Lisbon changes 59
Euratom Treaty 46, 47, 226 European Community Merger Regulation (EMCR)
euro: and consumers 182–3; and EU enlargement 108, 114, 124
364; Fiscal Compact (2012) 61; public support for European Competition Network 110
169; and the Single European Market (SEM) 97–8; European Consumer centres 182
timeline 163–4; and the UK 164–5 European Council 67–8; Common Strategy on Russia
euro crisis 17, 63, 157, 160, 162, 165–6, 166, 168–70, 409; lobbying of by business 67; Treaty of Lisbon
169; and Eurobonds 171–2; and Europe’s lack of changes 59, 60
competitiveness 25; and expulsion from EU 369; and European Court of Justice (ECJ) 51, 67, 72, 76–7;
Greece 17, 368 commercial policy 340; and the Fiscal Compact
Euro-Mediterranean Partnership (EMP) 349 Treaty (FCT) 167; landmark decisions 78–9; TEU
Eurobonds 171–2 changes 53; transport policy 202, 203, 205, 222
Europe: challenges facing 3–4; competitiveness of European Development Fund (EDF) 428
11–14, 23, 24–5, 25, 26–7, 27, 27, 28, 29, 29–30; European Economic and Social Committee (EESC)
contemporary overview of 4, 5–6, 7, 7, 8–9; historical 77, 79
significance of 4; social models 9–12, 10, 18 European Economic Area (EEA) 55, 323, 349, 394
Europe 2020 14–17, 24, 27, 48, 287, 292; climate European Economic Community (EEC) 8, 46, 47, 49
change and energy sustainability targets 15, 16; European Employment Strategy 321
education targets 15, 16–17, 19, 20, 21, 38; European enlargement 359–60, 376; in 1973 47, 50;
employment targets 11, 15, 16, 17, 18, 19, 20; in 1981 7, 47, 50; in 1986 7, 47, 50; in 1995 48, 55;
industrial policy 133; and Nordic model countries in 2004 4, 48, 325, 326, 364, 365; in 2007 4, 48,
11; poverty and social inclusion targets 15, 17, 18, 325, 364; in 2013 4, 48, 61; accession process 360;
20; progress and prospects 17–19, 20–1, 21; R&D economic impact of 360, 362, 363; enlargement
targets 18, 15, 16, 17–18; and the Single European fatigue 360, 365, 368–9, 372, 374; future of 365,
Market (SEM) 88, 101 368–9; membership applications and current status
Europe Agreements 349 363–4; membership eligibility criteria 360, 361–2;
Europe India Chamber of Commerce 412 political impact 364–5; sub-national secession issues
European Atomic Energy Community 46, 47 370, 371–2; and Turkey 366–7
European Aviation Safety Agency 214 European Financial Stability Facility (EFSF) 166, 167
European Bank for Reconstruction and Development European Food Safety Authority (EFSA) 183–6
(EBRD) 375 European Free Trade Area (EFTA) 47, 55, 349, 394
445
Index
European integration 1–2, 41–2, 43, 44, 46; business euroscepticism 62–3
support for 66–7; emergence of the EEC 46, 47, 49; Eurosclerosis 50
flexible integration 56, 56; milestones in 47–8; mixed Eurowings 216, 217
fortunes in the 1970s and 1980s 47, 50; problems ‘Everything but Arms’ initiative 429, 431, 432
with TEU and other setbacks 49, 54–63, 56, 58, Exchange Rate Mechanism (ERM) 151, 155–6; ERMII
59, 60, 61, 62; renewed vitality from mid-1980s 156, 158
47–8, 50–4, 51, 52–3; Treaty of Rome to the first exit clause, Treaty of Lisbon provisions 59
enlargement 48, 49–50 expert witnesses: European Commission (EC) 76;
European Interoperability Framework 293 European Parliament (EP) 71
European Investment Bank (EIB) 80, 145, 375 exports 332, 332–3, 333, 334, 334–5, 335; SMEs
European Investment Fund (EIF) 80 (small and medium-sized enterprises) 34, 146,
European Merger Area 111, 112 148–9 see also trade relations of EU
European Monetary Cooperation Fund (EMCF) 155 external economic relations see trade relations of EU
European Monetary Institute (EMI) 156
European Monetary System (EMS) 47, 151, 155 Facebook 300
European Neighbourhood Policy (ENP) 360, 365, factor conditions, of competition between states 12–13
370–4, 372; record of 374–6 Federico, J. 133
European Network of Transmission System Operators female employment: activity rates 307; Netherlands
(ENTSO) 240 316; service industries 307
European Parliament (EP) 69–71; commercial policy Fifth Company Law Directive 314
341; environment policy 268; increased role under fifth freedom 205
SEA 51; lobbying of by business 67, 71; TEU changes finance, access to 145, 146
53; transport policy 203, 205; Treaty of Amsterdam Financial Services Action Plan (1999) 95, 191
changes 55, 56; Treaty of Lisbon changes 59, 424; financial services, consumer protection 190–2
turnout for elections 70 financial/economic crisis (2007-8) 14, 17, 24, 63,
European platform against poverty (Europe 2020 379–80; and BRICS countries 399
initiative) 15, 17 Finland: eco-labelling 273; energy import dependency
European Political Cooperation (EPC) 50 246, 246; EU accession 48, 55; EU migration
European Rail Agency (ERA) 221 325; Eurobonds 171; and GATT 346; information
European Register of Road Transport Users (ERRU) 210 and communication technologies (ICTs) 286;
European Research Area 16 infrastructure 26; nuclear energy 228; R&D 17,
European Roundtable of Industrialists 51, 66 18; renewable energy 242, 243, 243; state-owned
European Social Fund (ESF) 314 enterprises (SOEs) 31, 32, 33; unemployment
European System of Central Banks (ESCB) 156 305, 306, 306; union membership rates 311;
European Systemic Risk Board 165 WEF Global Competitiveness Index 27, 27 see also
European Union (EU): business sectors 34, 36, 36; Nordic model
contemporary overview of 4, 5–6, 7, 7, 8–9; FinNet 191–2
convergence and diversity in 7–9, 8; economic Fiscal Compact Treaty (FCT, 2012) 61, 167–8
structure of 8, 8–9; enlargement of (see European fiscal deficits, and economic and monetary union
enlargement); expulsion from 369–70; GDP (EMU) 160–1

statistics 5, 6; global economic relations (see trade fiscal integration 97–8
relations); and globalisation 29–30; institutional flexible specialisation 313–14
framework 66–80; labour productivity statistics 5; flexicurity 7–8, 19, 306, 315–17
manufacturing industry 36; population statistics 4, Flower, the (eco-labelling) 273–5, 274, 275
5; productivity 36–7, 37–8, 38; public perceptions Fontainebleu Council (1984) 50
of 60, 61, 61–3, 62; secession from 369–70, 371–2; food price labelling 179
as a set of competition states 35–6; social welfare food safety 183–6; genetically-modified (GM) food
expenditure 5; state-owned enterprises (SOEs) 183–4, 186–7 see also consumer protection
31–2, 32, 33 For a European Industrial Renaissance (European
European-Mediterranean Association Agreements Commission, 2014) 138–40
(EMAAs) 121–2 Forbes Global Fortune 500 list 30–1, 31
446
Index
Fordism 313, 318 GATT (General Agreement on Tariffs and Trade) 340,
foreign direct investment (FDI) 335–7, 337, 338, 339, 342, 346, 347
379, 381–2; Africa 430, 432, 433; Asia 336, 337; Gazprom 31, 32, 247, 252
Australia 389; Brazil 404; Canada 392; China 336, GDF Suez 32
337, 381, 418, 422–3; India 412, 414, 415; and the GDP: EU (European Union) statistics 5, 6; and the
Single European Market (SEM) 94, 95 Single European Market (SEM) 90–1, 93, 95
foreign-invested enterprises, China 422–3 Gencor case (1999) 124–5
Foreman-Peck, G. 133 gender: and employment 307, 308, 309; pay gap 314
Forestry Stewardship Council 273 General Court 76; Gencor case (1999) 124–5 see also
formal integration 45 Court of First Instance
former Soviet Union (FSU) states 373; Eastern General Product Safety Directive 187, 188
Partnership 349–50; energy intensity 227; EU Generalised System of Preferences (GSP) 352, 414,
accession 360, 365 see also Central and Eastern 429, 434, 438; GSP+ 438
Europe (CEE) genetically-modified (GM) food 183, 184, 186–7, 267
Forum for Civil Society 57 geographic indications (GIs) 387
four freedoms, and the Single European Market (SEM) Georgia 373, 375, 411; airline agreements with 215
88, 98 Germanwings 216–17
fracking see shale gas Germany: agriculture 8, 8; car ownership rates 199;
France: ‘empty chair’ crisis 49; dominant role in dominant role in EU 4; eco-labelling 273, 274, 275;
EU 4; eco-labelling 274, 275; energy import energy import dependency 246, 246; environment
dependency 246, 246; establishment of EEC 47; policy 266; establishment of EEC 47; EU migration
EU migration 325; EU trade relations with US 325; Eurobonds 171; export-led economic model
391; and Eurobonds 171; exports 332, 333; foreign 37–8; exports 332, 333; and the Fiscal Compact
direct investment (FDI) 381, 412; and GATT 346; Treaty (FCT) 167–8; foreign direct investment (FDI)
MEPs 70; micro-economic reform 161; MNCs 381, 412; and GATT 346; industrial sector 8, 9;
(multinational corporations) 30, 31; nuclear energy information and communication technologies (ICTs)
228; Paris, as headquarters of MNCs (multinational 286, 288; manufacturing industry 36; MEPs 70;
corporations) 31; public support for the euro 169; micro-economic reform 161; MNCs (multinational
referendum on Constitutional Treaty 57, 58, 365; corporations) 30, 31; nuclear energy 228; public
shale gas 250; state-owned enterprises (SOEs) 31, support for the euro 169; R&D 17, 18; rail transport
32, 32, 33; transport policy 203; and the Treaty of 220; renewable energy 242, 243, 244; shale gas 250;
Paris 46; union membership rates 311; WEF Global social welfare provision 8; state-owned enterprises
Competitiveness Index 27, 27 see also Continental (SOEs) 31, 32, 33; and the Treaty of Paris 46;
model unemployment 304, 305, 306; union membership
Francovich judgement (1991) 79 rates 311; WEF Global Competitiveness Index 27,
free trade agreements 375; bilateral 349–52, 380, 382; 27; World Bank’s Ease of Doing Business Index 29, 29 see
with China 420, 421; EU-Korea FTA 123, 127, 350, also Continental model
351, 384, 385–8, 388; EU-Singapore free trade Ghana 433, 434
agreement (EUSFTA) 388–9; with Japan 383–4; Giscard d’Estaing, Valery 48, 57
multilateral 345–6, 347–9; unilateral 352–4, 353, global economic relations 331–2; bilateralism 349–52;
355–6 see also GATT (General Agreement on Tariffs Common Commercial Policy (CCP) 337, 339–40;
and Trade); World Trade Organisation foreign direct investment (FDI) 335–7, 337, 338,
Free Trade Areas (FTAs) 43, 43; and competition policy 339; Global Europe strategy 122, 128, 336, 341–3,
122, 123 350, 351, 352, 398, 399, 414, 420, 421; milestones
freight transport 200, 201, 202, 202 343; multilateralism 345–6, 347–9; opening markets
Fukushima nuclear energy plant, Japan 228, 229, 248 for European business 344–5; trade relations 332,
332–5, 333, 334, 335; unilateralism 352–4, 353,
Gabon 434 355–6 see also trade relations of EU
gas 227, 228, 229, 230, 235–6, 238, 239–40, 246, 247, Global Europe strategy 122, 128, 336, 341–3, 350, 351,
248; energy import dependency 245, 245; sources of 352, 398, 399, 414, 420, 421
supply 246, 247, 247 Global Fortune 500 list 30–1, 31
447
Index
globalisation: and EU MNCs 341; and the EU’s Iceland: candidacy for EU accession 362, 363; and
industrial strategy 29–30; and information and EFTA (European Free Trade Area) 49; EU trade
communication technologies (ICTs) 284, 285; relations with 394; and the Schengen agreement 175
peaking of 380 ICI (Imperial Chemical Industries) 123–4
Goldman Sachs 397 Impala Holdings Limited 124–5
goods, exports and imports 332, 332, 334, 334–5, 335 imports 333, 334, 334–5, 335 see also trade relations
Google case study 299–301 of EU
government procurement: EU trade with South Korea inclusive growth (Europe 2020 priority) 15, 101
387; and the Single European Market (SEM) 96 India: competition cooperation 123; economic growth/
Grant, C. 374, 375 power of 398, 399; economic statistics 6; EU
Greece 7; agricultural employment 307; trade relations with 332, 333, 333, 334, 411–12,
competitiveness of 25; debt crisis 162, 165–6, 166; 413, 414, 414–15, 415; foreign direct investment
EC accession 47, 50, 55, 368; employment 19, 20; (FDI) 412, 414, 415; free trade agreement 350;
and the euro crisis 17, 368; female employment international trade 332, 333, 333, 334; population
rates 307, 308; foreign direct investment (FDI) 381, statistics 4; Siemens case study 401, 401, 440 see also
382; and GATT 346; public perceptions of EU 62, BRIC states (Brazil, Russia, India and China)
63; public support for the euro 169; social welfare industrial policy 131–2, 143, 149; nature of 132–3;
provision 8; state-owned enterprises (SOEs) 31, 32, raw materials policy 134–5, 137; supranational 133,
33; transport policy 203; unemployment 304, 305, 135–6, 138–40, 139
306, 306; WEF Global Competitiveness Index 25, industry: GVA statistics 8, 8–9; Industrial policy for the
27, 27 see also Mediterranean model globalisation era (Europe 2020 initiative) 16
greenhouse gas emissions, reduction of 233, 234, 268, informal integration 45
278, 278, 296 information and communication technologies (ICTs)
Greenland: rare earths 137; secession from EU 370, 371 36, 37, 283; challenges in Europe 296–8, 301; and
Growth, Competitiveness, Employment White Paper (1993) competitiveness 284–6, 285; current overview in
14, 24, 208, 321 Europe 286–7; Digital Agenda for Europe policy
GVA (gross value added) statistics, EU states 8, 8–9, 36 29–293, 287–91, 290, 293–6; EU and Google
case study 299–301; EU spectrum policy 292–3;
Habitats Directive 270 interoperability and standards 291, 293; SPA case
Hague Summit (1969) 47, 50, 155 study 288; trust and security 294
HannStar Display Corporation, Liquid Crystals Displays information economy 283, 284–7, 285, 290
case 126–8 information society 287, 289
Hanover Council (1988) 52 infrastructure: and airlines 213; and information and
Hanson, G. 365 communication technologies (ICTs) 285, 285–96,
Heavy Fuel Oil (HFO) 259 289; and the Single European Market (SEM) 89–90,
High Representative of the Union for Foreign Affairs 98; and transport policy 206–7; in the WEF Global
and Security Policy 59, 67, 68 Competitiveness Index 24, 26–7
home affairs, TEU objectives 52, 52 innovation: and energy technologies 241; and
Hong Kong 418; infrastructure 26; World Bank’s Ease of entrepreneurship 141; and transport policy 206
Doing Business Index 29 Innovation Union (Europe 2020 initiative) 15, 16,
Horizon 2020 research programme 138–9; and energy innovation-driven economies 24–5, 25
policy 230, 241 integration phase of economic integration 45
horse passports 186 intellectual property rights (IPR) 291, 343, 344; EU
horsemeat scandal (2013) 185–6 trade with China 420; EU trade with Singapore
human capital, and productivity 37–8 389; EU trade with South Korea 387; and the
human rights, in China 421 Single European Market (SEM) 100–1; TRIPS
Hungary: energy import dependency 246, 246; EU (trade-related aspects of intellectual property
accession 48; foreign direct investment (FDI) 381; rights) 346, 387
and GATT 346; shale gas 250; union membership interaction phase of economic integration 44
rates 311; WEF Global Competitiveness Index interdependence phase of economic integration 44–5
27, 27 internal energy market (IEM) 230–1, 235, 239, 247
Hydrocarbon Licensing Directive 235 International Airlines Group 216, 217
448
Index
International Civil Aviation Authority 207, 278, 345 Jessop, R. 35

International Competition Network (ICN) 121 Joint EU-Africa Strategy (2007) 431–2
International Convention for the Prevention of Jordan, airline agreements with 215
Pollution from Ships (MARPOL) 259 Juncker, Jean-Claude 73; Juncker Commission 73,
International Labour Organisation 429 74–5, 75
International Maritime Organisation (IMO) 207, 259, 345 justice, TEU objectives 52, 52
internet: balkanisation of 297–8; broadband access 287,
294–5; interoperability and standards 291, 293; net Kazakhstan 411
neutrality 297; radio spectrum policy 292–3; skills Keynesian economics 7, 50
and usage 287; trust and security 294, 298, 301; US KLM 216, 217
surveillance activities 298 Kosovo, adoption of euro 364
internet service providers (ISPs), net neutrality 297 Kowalski, P. 31
interoperability, of ICTs 291, 293 Krugman, P. 12
intrapreneurship 141
Investment Canada Act 392 labelling: eco-labelling 273–5, 274, 275; energy
investor state dispute settlements (ISDS) 392, 393 efficiency product labelling 274–5
Ireland: debt crisis 166, 166, 168, 169; EC accession labour market policy 326; evolution of 314, 317,
47, 50; EU migration 94, 325; Eurobonds 171; 319–21; flexicurity 315–17; and labour mobility
foreign direct investment (FDI) 381, 382; and GATT 316, 323, 324, 325–6; milestones 319; Treaty of
346; labour mobility 323, 324; migration from 95; Amsterdam and beyond 321–2, 322; Treaty of Rome
Nice Treaty referendum 56; opt-out from Charter provisions 314, 318
of Fundamental Rights 322–3; and the Schengen labour markets 303–4; European trends 304, 305, 306,
agreement 175; service industry employment 307; 306–7, 308–10, 310–11; flexibility 311, 313–14,
shale gas 250; SOEs (state-owned enterprises) 32, 32, 326; key concepts 318
33; Treaty of Lisbon referendum 60; unemployment labour mobility 175, 323, 324, 325–6; and
304, 305, 306; WEF Global Competitiveness Index economic and monetary union (EMU) 153; and
27, 27 see also Anglo-Saxon model EU enlargement 325–6; and the Single European
Israel 349 Market (SEM) 94–5
Italy: age dependency ratio 311, 312; car ownership labour productivity statistics 5
rates 199; dominant role in EU 4; eco-labelling 274, Laeken Council 56–7
275; employment 19, 20; establishment of EEC Laffan, B. 45
47; EU migration 94, 325; Eurobonds 171; and the Lamy, Pascal 120
Exchange Rate Mechanism (ERM) 156; exports 333; late payment 145, 146
female employment rates 307, 308; foreign direct Latvia: EU accession 48; and the euro 61, 169; labour
investment (FDI) 381, 382; and GATT 346; MEPs 70; mobility 323, 324; R&D 17, 18; unemployment 304,
micro-economic reform 161; MNCs (multinational 305, 306; union membership rates 311; WEF Global
corporations) 30, 31; nuclear energy 228; public Competitiveness Index 27, 27
perceptions of EU 62, 63; public support for the euro least developed countries (LDCs), EU relations with
169; rail transport 220; shale gas 250; and the Treaty 427–39, 429, 432, 433, 437
of Paris 46; unemployment 304, 305, 306; union legislation: annulment of 77; European Commission
membership rates 311; WEF Global Competitiveness (EC) role 71–2; European Parliament (EP) role 70;
Index 27, 27 see also Mediterranean model types of 76
Ivory Coast 433, 434 Lesotho 435
LG Display, Liquid Crystals Displays case 126–8
Japan: bilateral agreement on competition policy 122; Liberia 433
economic statistics 6; EU trade relations with 332, Libya 433
333, 334, 383–4; foreign direct investment (FDI) 336, Liechtenstein 4; EU trade relations with 394; and the
337, 381, 412; free trade agreement 350; information Schengen agreement 175
and communication technologies (ICTs) 286; MNCs Liquefied Natural Gas (LNG) 240, 249
(multinational corporations) 31; population statistics Liquid Crystals Displays case 125, 126–8
4; tariffs 342; Tokyo, as headquarters of MNCs Lisbon Agenda 14, 17, 18, 24, 48
(multinational corporations) 31 Lisbon Treaty see Treaty of Lisbon
449
Index
Lithuania: EU accession 48; R&D 17, 18; unemployment Marine Gas Oil (MGO) 259
304, 305, 306; union membership rates 311; WEF Marine Stewardship Council 273
Global Competitiveness Index 27, 27 maritime transport 200, 201, 202; sulphur dioxide
lobbying of EU by businesses 67, 71, 75–6 emissions from shipping 259–60
logistics: BMW case study 264; and road transport market access 344–5; BRICS countries 398; and EU
211–12; and the Single European market 86 enlargement 364 see also global economic relations
Lomé Convention 350, 427–8 Market Access Strategy (MAS) 344–5
London, as headquarters of MNCs (multinational market failure, and enterprise policy 142
corporations) 31 market service industries 34, 36
long-term unemployment 306, 316 market surveillance regulation 188
Lonhro plc, Gencor case (1999) 124–5 Mauritius 435
low-cost carriers (LCCs) 212, 216–17, 218–20 see also MCR (Merger Control Regulation) 51
airlines mediation, European Commission (EP) role 73
LSEs (large-scale enterprises): and corporate Mediterranean countries, free trade agreements 349
entrepreneurship 141; and economic and monetary Mediterranean model 10, 10–11 see also Greece; Italy;
union (EMU) 159; importance in European business Portugal; Spain
30–1, 31 see also MNCs (multinational corporations) Mediterranean partners of EU 372, 372, 373, 376
Lufthansa 216, 217 Mercosur 351, 405
Luxembourg: age dependency ratio 311, 312; Merger Control Regulation (MCR) 112, 124, 125
agriculture 8, 8, 307; establishment of EEC 47; mergers and acquisitions: airline sector 216–17; EU
EU migration 325; foreign direct investment (FDI) merger control 111–13; and the Single European
336, 338, 381, 382; and GATT 346; information Market (SEM) 87 see also European Community
and communication technologies (ICTs) 286; Merger Regulation (EMCR)
labour mobility 323, 324; MEPs 70; R&D 17, 18; Merkel, Angela 38
renewable energy 242, 243, 243; service industries Messina Conference (1955) 46, 47
8, 9, 307; shale gas 250; and the Treaty of Paris micro-enterprises 30, 30, 34, 142
46; unemployment 305, 306, 306; WEF Global Microfund 145
Competitiveness Index 27, 27; World Bank’s Ease of Microsoft 299, 300
Doing Business Index 29, 29 see also Continental model Middle Eastern countries, energy supplies from 246, 247
Luxembourg Compromise 49 migration, into EU 375, 430
‘Luxembourg process’ 321 migration, within EU 94–5, 325, 364, 365
mining industry 37
Maastricht Treaty see Maastricht Treaty); TEU (Treaty on Mitterand, François 368
European Union MNCs (multinational corporations) 379; and
Macedonia (Former Yugoslav Republic of Macedonia), globalisation 341; importance in European business
candidacy for EU accession 362, 363 30–1, 31; investor state dispute settlements (ISDS)
Madagascar 435 392 see also LSEs (large-scale enterprises)
Maersk Line 260 mobile phones: in Africa 430; internet access 287;
Major, John 54 roaming charges 184, 291
Malaysia 351 Moldova 375, 411; airline agreements with 215

male employment: Netherlands 316; service industries Monnet, Jean 46, 47
307 Montenegro: candidacy for EU accession 362, 363;
Malta: and economic and monetary union (EMU) 162; euro membership 364
education 19, 20; energy import dependency 246, Monti, Mario 14; Monti Report (2010) 89
246; energy supplies 228; EU accession 4, 48; EU Morocco 433; airline agreements with 215
migration 325; female employment rates 307, 308; Most Favoured Nation (MFN) principle 352; EU trade
and GATT 346; MEPs 70; R&D 17, 18; renewable with South Korea 387
energy 242, 243, 243; service industries 8, 9; WEF motor manufacturers, EU trade with South Korea 388
Global Competitiveness Index 27, 27 motor vehicles and parts: EU trade relations with US
manufacturing industry 37, 143; China 416, 417; 391; EU trade with South Korea 386
EU trade relations with US 391; foreign direct Multifibre Agreement 354
investment (FDI) 337, 339, 382; GVA statistics 36 Multilateral Competition Framework (MCF) 119–20
450
Index
Mundell, Robert 153 Ombudsman 80

‘mutual recognition’ principle 88, 90 oneworld 217
online dispute resolution (ODR), consumer claims 182, 190
Namibia 435 online sales 289, 291, 294; and consumer protection
national champions policy 132, 133 177, 181, 182, 187, 189–90; cookies 187, 190
national competition authorities (NCAs) 109, 110, Open Skies Agreement 390
111, 116 Optimum Currency Areas (OCAs) 152–3, 169
nationalism 370 ordo-liberalism 167–8
negative integration 42
Neighbourhood Policy 349–50 P&O Ferries 260
neo-functionalism 44 Pacific see ACP states, EU relationship with
neo-liberalism 7 Palan, R. 35
Netherlands: eco-labelling 273, 275; energy import Palestinian Authority 373
dependency 246, 246; environment policy 266; Parental Leave Directive (1996) 320
establishment of EEC 47; EU migration 325; Paris, as headquarters of MNCs (multinational
Eurobonds 171; flexicurity 316–17; foreign direct corporations) 31
investment (FDI) 381, 382; and GATT 346; parliaments, national, Treaty of Lisbon changes 59, 60
MNCs (multinational corporations) 30, 31; part- part-time employment 307, 309, 310, 310–11,
time employment 309, 310; rail transport 220; 316–17, 321
referendum on Constitutional Treaty 57, 58, 365; Partnership and Cooperation Agreements (PCAs),
renewable energy 242, 243, 243; service industry Russia 408, 408–9
employment 307; shale gas 251; and the Treaty of passenger transport 199–200, 200, 201
Paris 46; unemployment 305, 306, 306, 316; WEF passive labour market policies 318
Global Competitiveness Index 27, 27 patents see intellectual property rights (IPR)
network economy 45 payment systems, and consumer protection 190
New Zealand: airline agreements with 215; World Peru 351
Bank’s Ease of Doing Business Index 29 petroleum products 228, 228, 229, 230; energy import
NGOs (non-governmental organisations), criticism of dependency 245, 245 see also oil
Economic Partnership Agreements (EPAs) in Africa pharmaceuticals industry 36, 384
436–8 Piore, M.J. 313
NHS (National Health Service), UK, Transatlantic Trade piracy 101 see also intellectual property rights (IPR)
and Investment Partnership (TTIP) case study 393 platinum group metal (PGM) 124–5
Nice Treaty (2003) 48, 55–6, 73, 322 Podemos, Spain 170
Nigeria 433, 434 Poland 376; energy import dependency 246,
non-market service industries 34, 36 246; energy supplies 228; EU accession 48,
non-tariff barriers (NTBs) 347; trade with Japan 383–4; 368; and GATT 346; labour mobility 323,
trade with South Korea 385 324; manufacturing industry 36; opt-out from
Nordic model 7–8, 10, 10, 11, 19 see also Denmark; Charter of Fundamental Rights 322–3; R&D
Finland; Norway; Sweden 17, 18; shale gas 251; unemployment 304, 305,
Nordic Swan eco-label 273 306; union membership rates 311; WEF Global
Norway 4; eco-labelling 273; and EFTA (European Free Competitiveness Index 27, 27; World Bank’s Ease of
Trade Area) 49; energy supplies from 246, 247; EU Doing Business Index 29, 29
trade relations with 394; referendum on EEC accession Polder Model 316–17
50; and the Schengen agreement 175; state-owned political integration 45–6; and economic and monetary
enterprises (SOEs) 31, 32, 32, 33 see also Nordic model union (EMU) 152, 170
nuclear energy 228, 228–9, 229, 230, 248 polluter pays principle (PPP) 266, 267, 268, 272, 277
pollution: shale gas 251; sulphur dioxide emissions from
OECD 345; and competition policy 121, 122, 127; and shipping 259–60
environment policy 280 pollution havens 280
Ohmae, K. 379 population statistics: EU (European Union) 4, 5; and
oil 228, 228, 229, 230, 235, 246, 247, 248; and voting in the Council of Ministers 69
maritime pollution 259 see also petroleum products Porter, M. 12–14, 24, 87
451
Index
Portugal 7; debt crisis 166, 168; EC accession 47, referendums: on Constitutional Treaty 57–8, 365; UK
50; education 19, 20; and EFTA (European Free (United Kingdom) referendum on EU membership
Trade Area) 49; energy import dependency 246, 17, 370
246; EU migration 325; Eurobonds 171; and GATT Registration, Evaluation and Authorisation of Chemicals
346; public perceptions of EU 62, 63; R&D 17, 18; (REACH) 273
renewable energy 242, 243, 243; unemployment Regulation (EC) No 1071/2009 210
304, 305, 306; WEF Global Competitiveness Index Regulation (EC) No 1072/2009 211
27, 27 see also Mediterranean model regulation, World Bank’s Ease of Doing Business Index 29
positive integration 42 Regulations (EU legislation) 76; consumer protection 188
poverty alleviation 428; Europe 2020 targets 15, 17, 18, 20 renewable energy 227, 228, 228–9, 229, 230, 230,
precautionary principle 266, 267, 271, 277 233, 233, 234, 241, 242, 242–4, 243; BMW case
President of the Council of Ministers 69 study 264
President of the European Commission 67, 73; Juncker resource efficiency 139; Resource efficient Europe
Commission 73, 74–5, 75 (Europe 2020 initiative) 16
President of the European Council 59, 60, 69 Responsible Care 269, 273
prevention principle 266, 267 road safety 199
Price Transparency Directive (1990) 235 road transport: Common Transport Policy (CTP) 207,
prices: budget airlines pricing policies 189; and 209–12; freight 198, 200, 201, 202, 203; passengers
economic and monetary union (EMU) 159; food 198
price labelling 179; impact of euro on 182–3; and Rodrik, D. 133
the Single European Market (SEM) 93–4 Romania: agricultural employment 307; car ownership
Product Liability Directive 187, 188 rates 199; EU accession 4, 48, 362, 365; EU migration
productivity, EU (European Union) 36–7, 37–8, 38 325, 326; and GATT 346; infrastructure 26; labour
property rights, World Bank’s Ease of Doing Business mobility 323, 324; migration from 94; R&D 17, 18;
Index 29 renewable energy 242, 243, 243; service industry
proportionality principle 57 employment 307; shale gas 251; social welfare
protectionism 379–80 provision 8;WEF Global Competitiveness Index 27, 27
public procurement 380; EU trade with South Korea Rome Treaty see Treaty of Rome (1957)
387; and the Single European Market (SEM) 96 Rosneft 32
public support for the euro 169 Rugman, A.M. 379
Russia: airline agreements with 215; common European
qualified majority voting (QMV) 49, 51, 56, 56, 68–9; economic and social space (CEES) 409, 410, 424;
and environment policy 266, 268; Treaty of Lisbon economic growth/power of 399, 405, 423–4;
changes 59 energy supplies from 225–6, 246, 247, 247, 248; EU
relationship/trade relations with 332, 333, 333, 334,
R&D (research and development) 138–9, 139; and 365, 373, 374, 375, 376, 405–11, 406, 407, 411,
energy policy 230, 241; Europe 2020 targets 15, 16, 421; EU sanctions 411, 411; EU strategy of 409–10;
17–18, 18; and information and communication exports 332, 333, 333, 334, 406, 406–7, 407; imports
technologies (ICTs) 284, 289, 295; and small 406, 407; raw materials 134; Siemens case study 401,
businesses 145–6 401, 402, 403, 440; state-owned enterprises (SOEs)

Radio Spectrum Policy 292–3 31, 31, 32; trade relations with China 406 see also BRIC
rail transport: Common Transport Policy (CTP) 217, states (Brazil, Russia, India and China)
220–2; freight 200, 201, 202, 220; passengers Ryanair 114–15, 213, 216, 219
199–200, 200, 201, 220, 222
RAPEX 188 Sabel, C.F. 313
Rapid Alert System for Food and Fraud (RASFF) 186 SABENA 216, 217
rare earth materials 137 safeguard measures 354
raw materials strategy 134–5 Samsung Electronics 126–8
Recommendation on Anti-competitive Practices Affecting Trade sanitary and phytosanitary (SPS) measures 344, 350,
(OECD) 121, 122 346; EU trade with BRICS countries 405; EU trade
Recommendations and opinions (EU legislation) 76 with South Korea 387
rectification at source principle 266, 267 Santer, Jacques 55
452
Index
Sapir, André, European social models 9–12, 10, 18 Single European Transport area 206
Sarkozy, Nicolas 421 single market 43 see also Single European Market (SEM)
Sberbank 32 Single Market Act II 91, 101–3, 102 see also Single
Schaus Memorandum 202–3 European Act (SEA)
Schengen agreement 175 Single Market Action Plan (1997) 95
Schröder, Gerhard 38 skills: and industrial policy 139–40; and information
Schumann, Robert 46 and communication technologies (ICTs) 284, 295–6;
Scotland, nationalism 370, 371–2 internet 287 see also education, Europe 2020 targets
Scottish National Party (SNP) 371 Skyteam Alliance 217
sea transport see maritime transport Slovakia: and economic and monetary union (EMU)
secession from EU 369–70, 371–2 162; EU accession 48; nuclear energy 228; R&D 17,
Serbia, candidacy for EU accession 362, 364 18; WEF Global Competitiveness Index 27, 27
service industries: China 416; employment levels 307; Slovenia: and economic and monetary union (EMU)
EU trade with South Korea 387–8; exports and 162; energy import dependency 246, 246; EU
imports 332, 332–3, 334, 335, 335; foreign direct accession 48; labour mobility 323, 324; WEF Global
investment (FDI) 337, 339, 382; GVA statistics 8, 9, Competitiveness Index 27, 27
36; and the Single European Market (SEM) 96, 99; Small Business Act (SBA) (2008) 144–6
WTO General Agreement on Trade in Services 393 small claims procedure 182, 190
Services Directive (2004) 99 smart growth (Europe 2020 priority) 15, 101
Services Directive (2006) 96 SMEs (small and medium-sized enterprises): criteria for
Seychelles 435 142; definition of 141; and economic and monetary
shale gas 248, 250–1, 250–3, 407; US (United States) union (EMU) 159; and enterprise policy 140–2;
226, 244, 251, 252 importance in European business 30, 30, 33–4;
Shanghai Electric 402 internationalisation of 146, 148–9; and the Small
Shanxi Lu An Mining Group 401 Business Act (SBA) (2008) 144–6
shipping see maritime transport Smith, K. 373
Singapore: EU trade relations with 388–9; free trade Social Action Programme (SAP) 286, 288, 314, 319,
agreement 351; infrastructure 26; World Bank’s Ease 321–2
of Doing Business Index 29 Social Agreement 53, 321, 322; UK opt-out 54
Singapore Four 120–1, 122, 128 Social Charter 51, 53, 315, 319–20
‘Singapore issues’ 348, 438 social dumping 317, 318, 319
Single Buyer Model (SBM) 237 social inclusion: Europe 2020 targets 15, 17, 18, 20; and
single euro payments area (SEPA) 183 information and communication technologies (ICTs)
Single European Act (SEA) 51, 51–2, 88; and consumer 295–6
protection 19; and environment policy 266, 267, social models, European 9–12, 10
268; and social policy 314, 317, 319, 320 see also social policy 314, 315–17, 317, 318, 319, 319–23, 322
Single Market Act II Social Protocol 53, 320, 321, 322; UK opt-out 54, 319
Single European Market (SEM) 4, 13, 42, 44, social welfare provision 9; diversity within EU 7–8; EU
85–6; barriers to be removed 87, 88; business (European Union) expenditure statistics 5
opportunities of 86–8; commercial effects of solar panels, EU-China anti-dumping dispute 355–6, 420
initial programme 90–1; concerns over 92–3; and solid fuels 227–8, 228, 229, 230, 247; energy import
consumers 176; costs of 91–2, 95; economic effects dependency 245, 245 see also coal
of 93–5, and the euro crisis 97–8; gaps in 95–6, South Africa: EU trade relations with 433, 435, 436,
98; implementation of 98–9, 99; and infrastructure 437; raw materials 134
89–90; intentions and objectives of the initial South Korea: EU trade relations with 350, 384, 385–8,
programme 88, 90; energy policy 234–40, 238; 388; and foreign direct investment (FDI) 381; and
progress after TEU 55; relaunch of 99, 101–3, 102; information and communication technologies
SMA II 91, 101–3, 102; and social policy 314; and (ICTs) 286
Switzerland 28; and transport policy 198–9, 205 South-East Asia see Asia; East Asia; Triad
Single European Sky (SES) 89, 214–15 Southern African Development Community (SADC),
Single European Sky AT Management Research EU trade relations with 433, 435–6
(SESAR) 214 Southern Gas Corridor 249
453
Index
Southwest Airlines 218 dependency 246, 246; EU accession 48, 55; EU

sovereignty, and economic and monetary union (EMU) migration 325; flexicurity 316; foreign direct
152, 162 investment (FDI) 382; and GATT 346; information
Soviet era, end of 7 and communication technologies (ICTs) 286; nuclear
Soviet Union 407–8 energy 228; rail transport 220; renewable energy
SPA case study 288 242, 243, 243; service industry employment 307;
Spain 7; age dependency ratio 311, 312; debt crisis 166, shale gas 251; unemployment 305, 306, 306; WEF
168; EC accession 47, 50, 368; eco-labelling 275; Global Competitiveness Index 27, 27 see also Nordic
education 19, 20; energy import dependency 246, model
246; EU migration 94, 325; female employment Swiss International Airlines 216, 217
rates 307, 308; foreign direct investment (FDI) 381; Swissair 216, 217
and GATT 346; MNCs (multinational corporations) Switzerland 4, 333, 334; bilateral agreement on
31; nationalism 370, 371; public perceptions of competition policy 122; competitiveness of 28–9;
EU 62, 63; public support for the euro 169; shale and EFTA (European Free Trade Area) 49; EU
gas 251; unemployment 304, 305, 306, 306; trade relations with 33, 334, 392–4; foreign direct
WEF Global Competitiveness Index 27, 27 see also investment (FDI) 336, 337; infrastructure 26;
Mediterranean model and labour mobility 323; MNCs (multinational
special purpose entities (SPEs) 336 corporations) 30, 31; and the Schengen agreement 175
spectrum policy 292–3 Syriza Party, Greece 170
Stabilisation and Association Agreements (SAA) 121 Szolucha, A. 365
Stabilisation Mechanism 165
Stability and Growth Pact (SGP) 157–8, 160–1, 162, Taiwan 421
167–8, 170, 208 Tangshan Steel Group 401
standards, for ICTs 291, 293 taxation; environmental taxes 278–80
Star Alliance 217 Taylorism 313, 318
state aid: to airlines 212–13; and competition policy technical barriers to trade (TBTs), EU trade with South
107, 109 Korea 386–7
state-owned enterprises (SOEs): and CEE states 7; and temporary employment 307, 309, 310, 321
China 32, 418; importance in European business 30, TEN-T (Trans-European Transport Networks) 208–9,
31–2, 32, 33 220, 223
states, competition between 12–14 TENs (trans-European networks) 52, 89, 98, 203, 208;
Statoil 32 energy TENs 230–1, 238, 240, 248
Strange, S. 35 tertiary education, Europe 2020 targets 15, 19, 20, 21
Strategic Partnerships: Brazil 404; China 419; India TEU (Treaty on European Union; Maastricht
414; Russia 373 Treaty) 47, 48, 52, 52–3, 53–5, 79, 89, 167; and
strategic trade policy (STP) 132 competition policy 107; and consumer protection
Structural Funds 153; 1992 reform of 55 179; and economic and monetary union (EMU)
structure-content-performance (SCP) paradigm 106 156, 157–8; and environment policy 266; and EU
subsidiarity principle 54, 57 enlargement 364; and European citizenship 175; and
subsidies: anti-subsidy measures 353, 353–4, 354; the Social Charter 320; and transport policy 199,
sector subsidies 379–80 208 see also Treaty of Amsterdam
sulphur dioxide emissions from shipping 259–60 textile industry 429
Sulphur Emission Control Areas (SECAs) 259 TFEU (Treaty on the Functioning of the European Union)
sustainability: BMW case study 262–4, 263; EU trade 60; and competition policy 108, 109, 110, 111, 116,
with Singapore 389; and transport policy 206 see also 121, 122, 123, 124, 125; and consumer policy 179,
environment policy 182, 191; and European citizenship 175; and labour
sustainable development 428 mobility 323
sustainable growth (Europe 2020 priority) 15, 15, Thailand 351
16, 101 Thatcher, Margaret 50, 53–4; and the Social Charter
Sweden: eco-labelling 273, 275; economic and 319–20
monetary union (EMU) 157, 161, 162; and EFTA ‘Think Small First’ policy 144, 146
(European Free Trade Area) 49; energy import Third Party Access (TPA) agreements 236, 237
454
Index
Three Gorges Dam Project 402 transport markets, and the Single European Market
Tiananmen Square, China 419 (SEM) 89, 98
Tibet 421 transport policy 199–200 see also Common Transport
Tobacco Advertising Directive (1998) 77 Policy (CTP)
Tokyo Round, WTO 347 transport sector 198
Tokyo, as headquarters of MNCs (multinational Transport White Paper (2001) 199, 208
corporations) 31 Transport White Paper (2011) 205, 205–7, 209
Towards a more effective EU merger control (EU Merger Treaty of Amsterdam 48, 54, 55, 56, 78; and
White Paper, 2014) 112–13, 114 commercial policy 340; and consumer protection
trade: Common Commercial Policy (CCP) 337, 179; and environment policy 268, 270, 272; labour
339–40, 394; Common External tariff (CET) market provisions 320, 321, 322; and social policy
342; and the Single European Market (SEM) 94; 320; and transport policy 221
strategic trade policy (STP) 132 see also trade Treaty of Lisbon 48, 57, 59–60, 73, 322, 368, 369, 424;
relations clarification of competences 58; and commercial
Trade Barrier regulations 344 policy 340–1; and consumer protection 179; and
trade creation 43–4 environment policy 268; main features of 59
trade defence instruments (TDIs) 343, 352 Treaty of Paris (1951) 46, 47, 226 see also ECSC
trade diversion 43–4 (European Coal and Steel Community)
trade relations of EU 332, 332–5, 333, 334, 335; Treaty of Rome (1957) 8, 46, 47, 49, 152, 175, 261,
with ACP states 427–39, 429, 432, 433, 437; 265–6, 371; and commercial policy 339–40; and
with Australia 389; bilateral 349–52, 380, 382–4, competition policy 107, 108; social policy provisions
385–8, 388–94, 393; with Brazil 332, 333, 334, 314, 318, 320; and transport policy 202, 203 see also
403–5, 404, 405; with BRIC states (Brazil, Russia, EEC (European Economic Community)
India and China) 378, 397–8, 400–3, 401 (see Triad, trade relations with EU 369–80, 382–4, 385–8,
also individual countries); with Canada 392; with 388–94, 393
Central Africa 433, 434; with China 332, 332, TRIPS (trade-related aspects of intellectual property
333, 333, 334, 416, 417, 418–21, 419, 4166; rights) 346, 387
with East African community 433, 435; with East Turkey: EU accession negotiations 4, 362, 364, 365,
Asia 383–4, 385–8, 388–9; with Eastern and 366–7; free trade agreements 349; relations with
Southern Africa 433, 434–5; with India 332, 333, Cyprus 367
333, 334, 411–12, 413, 414, 414–15, 415; with Turkmenistan 249
Japan 332, 333, 334, 383–4; multilateral 345–6, Tusk, Donald 68
347–9; with Norway 394; with Russia 332, 333,
333, 334, 405–11, 406, 407, 411; with Singapore UE-Africa Infrastructure Trust Fund 432
388–9; with South Korea 350, 384, 385–8, 388; UK (United Kingdom): agricultural employment
with Southern African Development Community 307; agriculture 8, 8; car ownership rates 199;
(SADC) 433, 435–6; with Switzerland 333, 334, dissent over TEU 53–4; dominant role in EU 4;
392–4; with the Triad 369–80, 382–4, 385–8, early application for EEC membership 49, 368;
388–94, 393; unilateral 352–4, 353, 355–6; with EC accession 47, 50; eco-labelling 274, 275;
US (United States) 332, 332–3, 333, 334, 390–2; economic and monetary union (EMU) 152, 157,
with West Africa 433, 433–4 161; and EFTA (European Free Trade Area) 49;
trade unions: in the Anglo-Saxon model 10; in the energy import dependency 246, 246; EU migration
Continental model 10; decline in membership 311 94, 325, 365; and the euro crisis 164–5; and the
Trade, Development and Cooperation Agreement Exchange Rate Mechanism (ERM) 156; exports
(TADCA), EU-South Africa 436, 437 332, 333; and the Fiscal Compact Treaty (FCT)
trademarks see intellectual property rights (IPR) 167; foreign direct investment (FDI) 336–7, 338,
Transatlantic Trade and Investment Partnership (TTIP) 381, 382, 412; and GATT 346; information and
350, 390–1; UK NHS case study 393 communication technologies (ICTs) 286; London, as
Transneft Oil 400 headquarters of MNCs (multinational corporations)
transport 197–8; importance to European business 31; manufacturing industry 36; MEPs 70; MNCs
198–9; long-term European trends 199–200, 200, (multinational corporations) 30, 31; nationalism
201–2, 202 370, 371–2; opposition to Juncker Presidency of the
455
Index
European Commission 73; opt-out from Charter van Gend en Loos case 78
of Fundamental Rights 322–3; public perceptions Van Rompuy, Herman 59, 68
of EU 62, 62; rail transport 220; referendum Vattenfall 239
on constitutional treaty 57; referendum on EU vertical integration, in the energy industry 238
membership 17, 370; renewable energy 242, 243, Vietnam 351
243, 244; and the Schengen agreement 175; service Vredeling Directive 314
industries 8, 9, 307; shale gas 251, 251; and the
Social Charter 319–20; state-owned enterprises wage flexibility, and economic and monetary union
(SOEs) 32, 32, 33; sulphur dioxide pollution 259; (EMU) 153
Transatlantic Trade and Investment Partnership Wallace, W. 45
(TTIP) case study 393; union membership rates 311; Water Framework Directive 270
WEF Global Competitiveness Index 27, 27 see also waterborne transport 200, 200, 201, 202
Anglo-Saxon model WEF (World Economic Forum), Global
Ukraine 225, 226, 247, 373, 375, 376, 403, 407, 411, Competitiveness Index 24–5, 25, 27, 27, 29
411, 421 Weizsäcker, J. 171
unbundling, in the energy industry 238–9 Werner Report (1970) 50, 151, 155
unemployment 303, 304, 305, 306, 306, 320 West Africa, EU trade relations with 433, 433–4
Unfair Contract Terms Directive 187 White Paper on Food Safety (2000) 183, 184–5
unilateralism, in global economic relations 352–4, 353, Wi-Fi, EU spectrum policy 292–3
355–6 Wood pulp case (1988) 124, 125
unions see trade unions Woolcock, S. 380
unit labour cost 37 Working Time Directive 319
United Aircraft Corporation 400 Works Council Directive (1994) 320
United Arab Emirates 26 World Bank 342; Ease of Doing Business Index 29, 29
United Nations Conference on the Human World Development Indicators 342
Environment (1972) 265 World Trade Organisation (WTO) 72, 340, 342,
United Nations Economic Committee for Europe 344, 345–6, 347–9; Agreement on Government
(UN-ECE) 386 Procurement (GPA) 387; Bali Ministerial 347;
United Nations, and environment policy 280 Cancun Ministerial 120–1, 351; and competition
Ural Mining and Metallurgical Company 400 policy 118–21; Doha Round 119, 120, 121, 122,
Uruguay Round, WTO 346, 347–8 128, 331, 342, 345, 346347, 348, 351, 380; and
US (United States): airline agreements with 215; environment policy 280; General Agreement on
bilateral trade agreements 122, 351; consumer Trade in Services 393; genetically-modified (GM)
protection cooperation 181; economic statistics food 186; and protectionism 379–80; Tokyo Round
4, 6, 7; EU trade relations with 332–3, 333, 334, 347; Uruguay Round 346, 347–8
343, 390–2332; exports 332, 332–3, 333, 334;
foreign direct investment (FDI) 336, 337, 381, Xi Jinping 420
412; genetically-modified (GM) food 186; imports
333, 334; and information and communication Yaoundé conventions 350
technologies (ICTs) 286; internet surveillance Youth on the move (Europe 2020 initiative) 16
activities 298; MNCs (multinational corporations) youth unemployment 306, 306; Europe 2020
31; population statistics 4; rare earths 137; sector initiatives 16
subsidies 379–80; shale gas 226, 244, 251, 252;
trade policy 381–2; World Bank’s Ease of Doing Zimbabwe 435
Business Index 29 see also Triad Zoellick, Robert 351
456

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Copyright © 2015. Taylor & Francis Group. All rights reserved.

Debra Johnson and

List of illustrations xiii

Part I A portrait of Europe: squaring the circle of

2 European business: structure and performance 23

3 The evolution of European integration 41

4 Europe’s institutional framework 66

Part II The business environment and market integration 83

5 The Single European Market: towards a new phase

6 European competition policy: the guardian of integrated markets 105

7 Promoting structural change: EU industrial and enterprise policy 131

8 Economic and monetary union: a step too far

9 The European citizen and consumer 174

Part III Inputs and factors of production 195

10 Transport: towards efficient and effective mobility 197

11 Energy policy: the quest for competitive, clean

12 EU Environment policy: a green light for competitiveness? 256

13 A Digital Agenda for Europe: creating the

14 European labour markets and the search for flexibility 303

Part IV Europe and the rest of the world 329

15 Europe in a global context 331

16 Engaging with the European space: enlargement

17 European business in a global context: the developed world 378

18 Europe and the BRICs: opportunity or threat? 397

19 Europe and the least developed countries: trade,

This chapter will help you to understand:

■■ key features of modern Europe;

and Italy.Their economic dominance helps explain

Population Population GDP per Social protection Labour productivity

Spain 46.7 94 94 25.9 110

Eurozone 334.6 107 30.4 109

Figure 1.1 GDP of EU economies, 2013

of the highest GDPs per head. Countries fall- Table 1.2 S

produced in a particular region, industry or com- Spain 2.5 26.0 71.5

have become inefficient and reliance on strict

Table 1.3 Europe 2020’s five priority targets

Employment 75% of 20–64 year olds to be employed

In order to further Europe 2020 goals, the Research and Development

Employment Education Poverty and social exclusion

Actuals National Actuals National Actuals National Actuals 2013 National

Portugal 65.4 75 18.9 10 30 40 25.3 27.5

EU-28 68.4 75 12 10 35.9 40 24.7 24.5

Source: Eurostat – Europe 2020 Indicators.

■■ Competitiveness is a complex issue which is open to various interpretations.

Questions for discussion

2 What makes a nation competitive?

This chapter will help you to:

Basic Efficiency Innovation and sophistication

Key for factor Key for efficiency Key for innovation

Figure 2.1 The WEF’s Global Competitiveness Index

Case Study 2.1

9. Austria (16) 25. Cyprus (58)

Such broad-brush aspirations tend to ignore the Table 2.2 E

Note: out of 189 countries

Chapters 18 and 19) that initially challenged the Table 2.3 S

Source: European Commission.

Table 2.4 Top European MNCs, 2013

European rank Firm Industry Turnover

Source: Forbes Global Fortune 500 (2013).

This is not only about intra-European interac- Table 2.5 E

Country Number of companies Number of SOEs SOEs as percentage of total

Source: Forbes, 2013.

Case Study 2.3

■■ a shift from macro- to micro-economic interventionism;

List of illustrations xiii

Part I A portrait of Europe: squaring the circle of

2 European business: structure and performance 23

3 The evolution of European integration 41

4 Europe’s institutional framework 66

Part II The business environment and market integration 83

6 European competition policy: the guardian of integrated markets 105

7 Promoting structural change: EU industrial and enterprise policy 131

9 The European citizen and consumer 174

Part III Inputs and factors of production 195

10 Transport: towards efficient and effective mobility 197

12 EU Environment policy: a green light for competitiveness? 256

14 European labour markets and the search for flexibility 303

Part IV Europe and the rest of the world 329

15 Europe in a global context 331

17 European business in a global context: the developed world 378

18 Europe and the BRICs: opportunity or threat? 397

Figure 1.1 GDP of EU economies, 2013

Figure 2.1 The WEF’s Global Competitiveness Index

Figure 3.1 Does the EU conjure up a negative, positive or neutral image?