European Economic Relations Vorlesung SS 2016

European Economic
Relations
Prof. Dr. Dirk Wentzel

Jean Monnet Chair in European
Economic Relations
Summer Semester 2016
1
Agenda
 Part 1: Foundations and Basics of European Integration

 Introduction
 Eight questions about Europe
 Theories and Strategies of Economic Integration
 Where does Europe come from?
- The historical perspective
 Institutions and bodies of the European Union
 Part 2:
 Monetary Integration in Europe: The EMS
 European Central Bank (ECB)
 The Evolution of a Stability Culture in Europe
2
“United in Diversity!”
3
Eight questions about Europe
A systematic economic introduction
 What is Europe?
a) Europe is a Community of Values
 Tolerance
 Democracy (all countries must be democratic)
 Rule of Law
 Openness (open to new ideas, technology, culture…)
 Non-discrimination (for example, women and minorities
are not discriminated against)
4
What is Europe?
b) Europe is an Economic Community
 Europe is “economically a giant” (Henry Kissinger)

 Biggest Common Market worldwide (over 500 million people)
 Free trade elevates the prosperity and wealth of all
participating nations (Adam Smith)
 Trade relationships drive dependence and interdependence - “He
who trades doesn’t shoot!”
 Development of the European Union, starting with the
European Coal and Steel Community in 1951, was primarily
a result of similar economic interests (the Monnet Plan)
 The realization of the Common Market was a decisive
milestone for European integration
5
What is Europe?
c) Europe as a Geographical Entity
 Europe is surely a geographical entity

“European Council” vs “Council of the European Union” ?
 But: Some European countries (e.g., Russia, Turkey) are
partially in Asia
 North African countries (Morocco and Tunisia) want to become
EU members
 Israel is a part of Europe, at least in respect to sports and culture
 Norway and Switzerland are a geographical part of Europe, but
are not EU members
6
What is Europe?
d) Europe is a Political Community
 Europe is “politically a dwarf” (Henry Kissinger)
 The basic consensus of democracy binds the nations
 But: the political willingness to act is restricted
(Balkan crisis, Kosovo conflict, currently Crimea crisis)
 Real political unity requires political sovereignty to be
centralized – is that the solution European countries want?
 Example 1: the question of environmental protection
 Example 2: conflict between “old and new Europe” in Iraqi war
 Example 3: opting out regarding the adoption of the EURO?
7
What is Europe?
e) Europe as a Religious and/or an Ethnic Community
 Is Europe a “Christian community”?

 Europe is based on specific Christian ideologies
 EU is ruled by a clear separation of church and state
 Basic tenets of religious freedom and tolerance
 “Behind closed doors”: The political dimension of religion
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What is Europe?
f) Europe is a Cultural Entity
 Europe is defined by its common cultural heritage (Greece,

Turkey, Rome, Russia)
 Important: what constitutes “European style” and “European
culture”?
 Cultural borders are not congruent with the present
geographical borders of the European Union (e.g., Russia)
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What is Europe?
What is Europe?
 Europe is much more of an open dynamic process in which

the outcome is not clearly foreseeable
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 Who belongs to the European Union?

 European Economic Community (EEC) in 1957 after the
ratification of the Treaty of Rome, beginning with “the Six”
 Precursor of the EEC: the European Coal and Steel Community
(later merged as part of the European Community)
 “The Six”: Germany, Belgium, the Netherlands, Luxembourg,
France and Italy
 In 1973, the EC 9 (+ Great Britain, Ireland and Denmark)
 In 1981, the EC 10 (+ Greece), “Cradle of Democracy”
 In 1986, the EC 12 (+ Portugal and Spain)
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Who belongs to the European Union?
 In 1990, the EC due to the German reunification the EU
expanded
 Treaty of Maastricht in 1992, EC became EU
 On January 1, 1995, EU 15 (+ Austria, Finland and Sweden )
 Norway decided against EU membership in referenda in 1973
and 1995
 On May 1, 2004, EU 25 (+ Slovenia, the Czech Republic,
Slovakia, Malta, Cyprus, Hungary, Estonia, Latvia, Lithuania
and Poland )
 On January 1, 2007, EU 27 (+Romania and Bulgaria)
(“Economies of shortage”)
 January 1, 2010: Treaty of Lisbon
 2013: Acceptance of Croatia to EU 28
 2014: The Banking Union (SSM + SRM) 12
 How have the integration steps been implemented
so far?
 Differentiation between political and economic
logic
 Europe is characterized by political as well as
economic considerations
 “Common market” and “freedom of
movement”, European economic integration in
general has been extremely successful and
improved further integration
13
How have the integration steps
been implemented so far?
 But: Political implications: EC created a military
counterweight against the Soviet Union
and the Warsaw Pact; Parallelism between NATO and
the EC
 And: Sometimes trade-off between political and
economic decisions
 Neglecting the economic ratio – a great danger for
Europe!
 An example of the interplay of politics and
economics: The Airbus A380
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 Which integrations steps were fundamental?
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Which integrations steps
were fundamental?
 In 1946, Churchill challenged the establishment, calling for the
United States of Europe (USE) during a speech in Zurich
 With that he referred to continental Europe, viewing England as
a long-time independent power outside of the old continent
 In 1948, the Marshall Plan was implemented in Europe
(European Recovery Program) (up until 1952)
 NATO was established in Washington, DC
 In 1950, French foreign minister Robert Schuman suggested the
first step towards European integration (Schuman Declaration)
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Which integrations steps were
fundamental?
 In 1951, the European Coal and Steel Community (ECSC) was

founded to combine management of the most important resources
at that time – coal and steel
 In 1952, a proposal for a European Defense Community was put
forth – failed in ratification in France in 1954 and was abandoned
 Europeans favored membership in NATO because only in
cooperation with the USA would a credible counterweight against
the USSR be created
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fundamental?
 In 1957, Treaty of Rome led to the establishment of the European

Economic Community (EEC) in 1958, considered the birth of the
European Community. At the same day, the EURATOM-Treaty
(European Atomic Energy Community) was passed
 EEC: Created a common market
 EURATOM: Cooperation in nuclear power; shared the Common
Assembly and the Court of Justice of the ECSC, but not it’s
executives. EURATOM is still a distinct legal personality, treaty
remains in force after the Maastricht-Treaty created the EU
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fundamental?
 1957: The founding of the European Free Trade Association

EFTA (Austria and Northern Europe; today European Economic
Area) – “second pillar of Europe”
 Important: Austria was committed to neutrality and was not
allowed to be a member of the EEC
 1963: First great conflict between France and England - De Gaulle
used his veto against the admittance of Great Britain (regarding
agriculture commodities market )
 This began France’s “empty chair” politics in the European
Council
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fundamental?
 1967: The Merger Treaty fused the 3 main institutions (EEC,

Euratom, ECSC) to one council and a commission
 1971: The Werner Plan for the creation of a monetary union
 1973: Admission of Great Britain, Ireland and Denmark
 1974: Founding of the European Council (also referred to as
European Summit)
 1976: First general European election
 1979: Through the initiative of Helmut Schmidt and Valéry Giscard
d’Estaing, the European Monetary System was founded
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fundamental?
 1981: Admittance of Greece

 1985: Adoption of the single market program
 1986: Acceptance of Portugal and Spain
 1986: The Single European Act (Einheitliche Europäische Akte),
in a first step towards the creation of the union
 April 12, 1989: The Delors report detailed plans for the Economic
and Monetary Union (EMU) of the EU
 November 9, 1989: The fall of the Berlin wall led to a drastic
structural change for the entire system of European integration
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fundamental?
 The complete liberalization of capital flows in Europe

 1992: The Maastricht Treaty established the European Union and
the adoption of a common currency, Euro. Convergence criteria
were defined to secure lasting monetary and fiscal discipline
 1992: Beginning of the first phase of the EMU
 1993: Beginning of the single European market
 January 1, 1994: Beginning of the second phase of the EMU
 1995: Acceptance of Austria, Finland and Sweden
 1996: Customs union between the EU and Turkey
 1997: Treaty of Amsterdam
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fundamental?
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fundamental?
 1998: The eastern expansion of the EU was agreed

 1999: Start of the third phase of the EMU
 March 15, 1999: The European Commission stepped down in the
face of corruption charges
 2000: European Charter of Fundamental Rights
 2000: Denmark voted against the introduction of the Euro
 2001: Treaty of Nice, which sought reform of the EU Treaty, was
deemed as a difficult political setback
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fundamental?
 January 1, 2002: Introduction of the Euro currency
 2002: In the Treaty of Copenhagen, the principles and criteria
of the eastern expansion were defined
 May 1, 2004: eastern enlargement (EU 15 + 10)
 2005: Beginning of accession negotiations with Turkey
 2005: Consent granted for Romania and Bulgaria to join in
2007
 2007: Admittance of Romania and Bulgaria
 January 2010: Lisbon Treaty
 May 2010: Crash of the Greek economy
 2013: Acceptance of Croatia (No. 28)
 November 2014: The Banking Union (SSM + SRM) 25
 Is there an optimal integration depth?

 How deep should we integrate?
 Optimal integration depth is discussed from different ec. angles
 Concept of “Economics of standardization”
 Common standards: language, traffic rules (e.g., driving on the
left or right side), or technology (e.g., computer standards)
 Common standards reduce transaction costs, thus increasing
economic efficiency: But how should the common standards be
determined?
26
Is there an optimal integration depth?
 Danger: wrong standards can be applied or that the standards will

need to be updated due to technological innovation, but path
dependencies make modifications unlikely
 The famous case of QWERTY
 Integration of an economic area is practical if same standards are
possible, trade barriers eliminated and trading intensity increased
 Within EU: Strong tendency towards harmonization within the
technical and institutional framework
 But: Standardization leads to bureaucratic centralization
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Is there an optimal integration depth?
 Note: “Standardization” is always a restriction to competition

and thus to a reduction of innovation potential
 Standardization that follows the principle of subsidiarity: “Each
problem that arises should be solved at the most local level
possible.”
 An “optimal” depth of integration is achieved when the
advantages of the use of common standards and markets
outweigh the disadvantages of standardization
 Note: Competition and harmonization (or centralization) are
difficult areas of conflict for future European integration politics
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 Is there an ideal integration speed?

 It requires in turn a considered decision
 A very fast integration can lead to a step backwards in reform
efforts, and benefit domestic market by increasing the relevant
market
 A slow or even a delayed integration can lead to disappointment of
accession countries, e.g., Turkey
 It must be determined how to proceed with some of the former
Soviet Republics and especially the Balkan States
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Is there an ideal integration speed?
 Politically, it may be argued that advantages of a faster

expansion outweighs disadvantages of a bigger union
 There are graduated integration forms (see “Trade Theory”), so
integration is not an “either/or” decision
 Important: the more humbly and realistically integration is
conducted, the faster new accession countries can be admitted
 Note: before every new integration step, it must be guaranteed
that the union remains capable of acting!
30
 How should Europe design its economic foreign

relations?
 In foreign relations, Europe is frequently considered protectionist,
(e.g., to developing countries or at the WTO negotiations)
 Europe has an economically successful domestic market
 Europe partially follows a common trade policy – Its trade policy
belongs to collective politics
 But: Europe is in danger of risking its domestic integration
advantages by imposing trade restrictions in foreign relations
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How should Europe design its economic
foreign relations?
 “Fortress Europe”
 Currently: in WTO negotiation, EU agricultural protectionism is
the major bottleneck
 EU promotes economic development in Africa, Asia and Latin
America, but creates serious obstacles with the Common
Agricultural policy (CAP)
 “less aid for more trade”
 Important: special relationship of the EU with Russia
 Should Europe become an economic “counterweight” to the
USA?
 The idea of economic networks instead of economic poles
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How should Europe design its
economic foreign relations?
 Economically speaking: It is impractical to only think in a few

meaningful categories of polarized trade regions
 Europe is characterized by relatively weak economic growth in
comparison to other economic regions of the world economy –
in large part “home-grown” and can be traced to failed
regulatory policy
 Continued isolation and formation of blocs will surely
contribute to the further stagnation of economic growth
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 What freedoms does Europe need?
 Economically speaking, Europe is built on the basic principle

of political and economic freedom
 The economic freedoms are manifested in the Single European
Act, which was introduced in the summer of 1985 in Milan and
signed on February 17, 1986
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What freedoms does Europe need?
Characteristics of the economic freedoms:
 Free movement of goods
 Freedom to provide services
 Free movement of capital
 Free movement of people
 Cassis de Dijon Case (1979)

 German beer and the “Reinheitsgebot” (purity law)
 The Bosman case (1995) on European football
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What freedoms does Europe need?
Central feature: freedom of opinion, ideas and the press
 Europe relies on the free exchange of ideas and opinions in a

special way
 The exchange is promoted through the mutual recognition of
university degrees and ease of student exchange
 Important: uncompromisingly guaranteed freedom of the press
 The European Union has earned recognition for breaking up
national broadcasting monopolies, especially in Germany
 Long run: it must be ensured that no country reverts back to
protectionism in international competition of ideas
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Theories and Strategies of Economic
Integration
 Global vs. regional integration

Global Economic Integration
 General rule: “to whom it may concern”

 Global integration of markets addresses everyone and is
based upon the common principle of nondiscrimination
 Trade liberalization can be interpreted as a dynamic
process (cause) as well as a final state (effect)
 Cause of trade liberalization through removing trade
barriers
 Effect of the flow of trade under free trade conditions
37
Global vs. regional integration
 Idea of free trade: promotion of international trade through

imports and exports leads to increased wealth for all
participants (theories of absolute and comparative advantage)
 Consumers profit the most from free trade because they can
consume better quality for lower prices
38
 Protectionism: protection of ones own industry by
discriminating against other countries and their industries
 Tariffs: addition to foreign prices and defense of imports
(Example: protectionism of the EU in the agricultural
sector)
 Tariffs in “infant industries”
 Non-tariff trade barriers: Quotas
 Neo-protectionist measures: With a rhetorical guise: social
dumping, ecological dumping, tax dumping
 So-called “strategic trade policy”
39
Institutions of global integration
1. World Trade Organization (WTO) (1995)

2. General Agreement on Tariffs and Trade (GATT)
3. General Agreement on Trade and Services (GATS)
4. Trade Related Aspects of International Property
Rights (TRIPS)
40
Regional economic integration
 Ex ante restricted to a limited number of nations

 Empirical examples: NAFTA, APEC, Mercosur, EFTA
 A regional economic integration is regarded as a quasi- “club
good”
 “Economic Theory of Clubs” by James M. Buchanan
 Participants voluntarily offer a “club good”, which has differing
advantages for the participants
 But: Clubs as we know them can have exclusion effects
41
Regional economic integration
 Static and dynamic effects
 Trade creating effects and trade diverting effects (Jakob
Viner)
 Pro-competition effects and economies-of-scale effects come
about in the longer run by the impact of changes in economic
structure
 Dynamic effects come about in the longer run by the impact of
changes in the economic structure of the Economic Union on
the pattern and rate of economic growth
42
 Question: from the viewpoint of the common economy, when
does regional economic integration have advantages and when
does it have disadvantages?
 To scientifically discuss this question, you need to determine
quantitative criteria
 If trade creating effects outweigh trade diversion effects
(tce > tde), then regional economic integration is compatible
with WTO regulations of non-discrimination
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Integration
 Development scheme of regional integration
Alternatives for regional integration
 Functional integration (1st degree): free trade zone or

customs/tariff union
 A relative production maximum is reached in the best case without
increasing factor mobility between the countries of the integration
area. The Gap to an absolute maximization of production follows
from the fact that marginal productivity of production factors can
only be balanced between the participating countries (Because the
production factor mobility is still missing in the integration area).
44
Development scheme of regional
integration
 Functional integration of the 2nd degree: common market with
free production factor movement
 Not only can products and services be traded on national
market without restrictions, but also production factors are free
to move among countries of common market. Discrimination in
the economic exchange as well as competition tampering are
forbidden
 Institutional integration 1st degree: incomplete economic union
with coordinated economic policy
 Institutional integration of the 2nd degree: economic and
monetary union with common trade policy-making body in the
shape of supranational administration
45
Options of regional integration
Institutional Free Trade Common Free Factor Common Complete
Option Among Customs to Mobility Economic Monetary
Members Third Policy Integration
(Single Currency)
Parties
Free Trade X
Area
Customs X X
Union
Common X X X
Market
Economic X X X X
Union
Monetary X X X X X
Union
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integration
Free trade area
 Reduction of tariffs and trade barriers within the tariff union
 The participants of the tariff union cling to their autonomy
against third countries
 No common foreign tariff
Customs Union
 One or more trade areas are joined into a common tariff area
 There is a common tariff applied to third countries
 Differences: complete customs union vs. preference union

47
integration
Common Market
 Abolishment of all barriers concerning the production factor
mobility
 Right of freedom of travelers, students, employees, and
money…
 Attempt to coordinate and fit to the domestic economic
policy like:
 Harmonized economic and competition policy
 Harmonized monetary policy or complete convertibility
of currency
 Harmonized tax and finance policy
 Harmonized social policy 48
integration
Economic Union and Monetary Union
 Standard currency with a supranational central bank

 Completely harmonized economic and competition policy
 Supranational institutions
 Assignment of national sovereignty rights in all
fundamental areas of economic policy
 Idea is the complete creation of an “exchange-, price- and
payment-community” (Wilhelm Röpke)
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integration
Note: The last three integration forms are characterized by an

internal dynamic that it can drive them to further integration
 Increasing interdependence triggers externalities

 States have to adopt cooperative policies to internalize these
externalities
 New supranational rules and institutions are needed
 Externalities to non-member states may lead to a further
integration of these states (enlargement)
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Integration
 Expansion or deepening within the European Union

 The answer to the future perspective of the EU depends primarily
on the chosen integration strategy
 Important: Natural tension between deepening and expansion. That
does not mean that they are mutually exclusive; but they are at
minimum conflicts of interest
 Principally, it is possible that single countries realize a very deep
integration (such as France and Belgium) and may even use
common political and economic institutions
 With other countries, such an intense integration is unlikely, e.g.,
between the “old” Europeans and a country of the “second wave”
51
Expansion or deepening within the
European Union
 Important: until the fall of the wall, the Europeans used

primarily a deepening strategy (also for political and military
reasons); since the fall of the wall, expansion has become
dominant. That leads to unavoidable conflicts!
 But: regulatory policy requires a balance between opposing
goals because with continued deepening, possible expansion
reaches its financial limits!
 Systematic criterion for such a balance is the extent of domestic
integration between two economic areas
 Domestic integration is the internal integration of markets
52
Expansion or deepening within the
European Union
 Domestic integration predetermines common values and legal

principles: the higher the extent of domestic integration, the
more a functioning foreign integration is to be expected
 The more heterogeneous the extent of domestic integration, the
less a functional foreign integration is probable
 Heterogeneous economic regions are typically well linked
through flexible exchange rates
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Integration
 Free market competition integration methods vs.
bureaucratic centralistic integration methods
Market concept
 “Competition as a discovery method” (F.A. von Hayek)
 Important: Take a look at the different production factors and their
efficient combination in an international market concept
 The four basic freedoms of the Single European Act and the
country of origin principle are an expression of such a competition
concept
 Income differences between regions are accepted consciously
and are the result of a search process in the market 54
Market competition vs. political
integration methods
Bureaucratic administrative concept
 Max Weber and the role of administration

 Primarily rests on the ability of political conferences and
bureaucratic administrative bodies to set economic standards
 “Community property” (acquis communautaire) must be taken
over for all new accession countries
 Acquis communautaire currently comprises about 80,000 pages
 Examples: Agricultural policy and countless attempts at a
European industrial policy
 The goal is, among other things, the equality of living standards,
which shall be secured by extensive transfer payments from
structural funds (or similar) 55
Free market competition vs. bureaucratic
centralistic integration methods
Classification and political assessment
 Effectiveness: Political bureaucratic concept has to be carefully

considered. It shows that European integration was especially
successful when common market interest was in the foreground
and freedom was guaranteed!
 On the other hand, all big setbacks in the recent past are political
in nature (e.g., the failure of the conference of Nice, the
interrupted constitutional process or the broken stability pact)
56
Where does Europe come from? - The
historical perspective
 Common History, common Traditions: the roots of

the European Union
 The Roman Empire as a first “European Empire”: A single

Currency, a (partly) centralized bureaucracy, common transport
networks, standardized goods, …
 But: “Clanship” was still a decisive factor for identity
 962: “Otto the Great” is the first monarch crowned as the
emperor of the “Holy Roman Empire” by the pope to underline
his religious legitimacy
57
58

the European Union
 During the 17th and 18th century: Age of enlightenment and the
birth of democratic ideas and basic rights for the people (1789
French Revolution)
 Raising national states and nationalism in the 19th century;
protectionism and no free trade
 Competition for leadership and power on the European continent
as well as resources in Europe and elsewhere
59

the European Union
 Italian writer/politician Giuseppe Mazzini called for the creation
of a “federation of European republics” in 1843
 French writer Victor Hugo used the term “United States of
Europe” during a speech at the International Peace Congress: "A
day will come when all nations on our continent will form a
European brotherhood... A day will come when we shall see...
the United States of America and the United States of Europe
face to face, reaching out for each other across the seas."
60

the European Union
 The Italian philosopher Carlo Cattaneo wrote “The ocean is
rough and whirling, and the currents go to two possible endings:
the autocrat, or the United States of Europe”.
 In 1867 the anarchist Mikhail Bakunin stated "That in order to
achieve the triumph of liberty, justice and peace in the
international relations of Europe, and to render civil war
impossible among the various peoples which make up the
European family, only a single course lies open: to constitute the
United States of Europe". 61
the European Union
 Several Great Powers (Germany, Austria, France, Russia, Great
Britain) were the leading nations in this time
 World War I from 1914 – 1918
 Germany was left behind humiliated and was seeking for
revenge
 World War II from 1939 – 1945 left Europe totally destroyed
with millions of people dead, homeless and displaced
 “Ground zero” of Europe
62
Where does Europe come from?
 After the war: The Marshall Plan and connection

to the West
 The economies of Europe were to a great extent devastated after

WWII
 The immediate post-war phase following the collapse of
Germany was internationally characterized through currency
control and bilateralism
 The immediate damage was total collapse of international trade
63
The Marshall Plan and connection to the
West
 The US had become an economic and military world power

that was superior to all other (declining) great powers
 The increasing confrontation between the US and USSR led
1947 to the “Truman-Doctrine” (“containment policy”)
 The new orientation of American foreign policy moved away
from the isolationism of the inter-war period to active
organization of the European post-war order
 The US supported the idea of a further integration of Europe
 Note: The serious economic/political errors that were made
after WWI (Treaty of Versailles) had to be avoided
64
West
 The US suggested the Marshall Plan in order to build up
Germany and Europe and to stabilize world trade
 The Marshall Plan became in 1948 legitimized as “Foreign
Assistance Act” and “Economic Cooperation Act”
 Note: The Marshall Plan also targeted aid for the USSR and
nations of Eastern Europe!
 From 1948 to 1952, the US supported the war-torn countries
with loans, foodstuff, raw materials and industrial goods to
the amount of 12,4 billion US-Dollar
 The sponsor of the Marshall Plan from 1948 was the OEEC
(Organization for European Economic Cooperation)
65
West
Distribution of Marshall Plan aid to the following countries
(in $m.) Total Per Capita
Great Britain 3,641 72

France 3,104 72
Italy 1,578 33
West Germany
(including West Berlin) 1,475 29
The Netherlands 980 93
Austria 726 104
Belgium & Luxembourg 557 63
Greece 264 33
66
West
 In order to prevent starvation and epidemic plagues, the Federal

Republic of Germany was provided with GARIOA funds
(Government and Relief in Occupied Areas) in upwards of $1.6
billion, which didn’t have to be paid back
 Through the Marshall Plan, bilateralism was abolished, and
multinational trade could once again be established
 The Marshall Plan funds were exclusively earmarked for
economically meaningful investments
 Further information at http://www.marshallfoundation.org
67
West
 The Marshall Plan was extremely successfully psychologically
because the German “Wirtschaftswunder” would have never
been possible without the Marshall Plan.
 It marked a political and economic upturn in direct contrast to
the situation after World War I, which paralyzed Germany with
extreme reparation payments and occupation of the Rhineland,
and it was more successful in keeping peace in (Western)
Europe.
 Is a global Marshall plan possible? Is it desirable?
68
West
 Five Success factors
1. Limited financial support (help to self-improvement)
2. Limited period of help with clear expections
3. Psychological and media effect (Keynes: upturn of
expectations)
4. Only economically „reasonable“ projects (… in contrast to
modern development aid…)
5. Close cooperation with the German government and the very
successful economic policy of Ludwig Erhard
69
Where does Europe come from?
 The European Coal and Steel Community
Flag of the ECSC
 The first step in European integration was the European Coal and
Steel Community through the formation of the “Montanunion”
 The initiative for the ECSC came from French foreign minister
Robert Schuman as well as from Jean Monnet
 Suggestion for the ECSC allowed the steel and coal industries to
stand under one collective administration (the Monnet plan) 70
The European Coal and Steel Community
 The arguments were numerous:

 The peace argument: Through the collective use of central
resources in the postwar period, the beginning of an
economic common ground could be established
 The German argument: Germany should be restricted in a
peaceful manner from the possibility of rearming
 The economic argument: because political cooperation in the
postwar period wasn’t yet feasible, a common interest was
attempted, namely the economy
71
 The treaty of Paris, 18 April 1951 (came in force in July 1952)

 The founding members: France Germany, Italy, and the Bene-
lux States (the UK was since 1954 associated with the ECSC)
72
Organization of the ECSC
 The ECCS was organized according to the concept of

supranationality (the first time!!! Today: ECB)
 The authority had legislative power and thus priority over
national law (the beginning of European Law)
 For the first time in European history, the rule of power was
replaced by the rule of law!
 The ECSC was (according to Hallstein):
 Creation of Law (peaceful, voluntary)
 Source of Law (European Case Law)
 Legal system (levels of jurisdiction)
73
Institutions of the community

 High Authority, which exercised executive actions with nine
independent members (precursor of today’s Commission)
 Consultative Committee, with 51 members made up of
employers, employees and consumer organizations
 Special Council of Ministers: the most important component
of the ECSC, which consisted of the appropriate department
ministers from the individual countries (precursor of today’s
Council of the European Union)
74
The European Coal and Steel
Community
 Germany and France had a large “blocking minority” due to

size (veto rights)
 Common Assembly: 142 members and the precursor of the
European Parliament – its task lay in the control of the High
Authority, and it had the option of a vote of no confidence
 The Common Assembly also served as a quasi-legislative
body
 Court of Justice: consisted of seven members (appointed for
six years) with supranational jurisdiction. The judiciary
element of the ECSC was designated as the instrument of
peaceful conflict resolution
75
 The idea of a common market was realized for the first

time in a central economic region
 Begin of Anti-Trust-Policy
 Ban of import and export duties:
 Quantitative import and export quotas were forbidden
 Aids and subsidies on coal and steel operations were
forbidden
 Ban on trade discrimination
 Fundamental ban on cartels
76
Financing and Tasks of the ECSC
 Elimination of national protection measures

 Ban on subsidies
 To ameliorate the possible social difficulties and adjustment
costs of economic structural changes, funds were created (so-
called “friendly society”)
 Financing of the ECSC through assessment on all products
within the community at a maximum of 1% of the value creation
77
Evaluation of the ECSC
 Advantages
 For the first time a peaceful development and organization of
economic co-operation between former enemies
 Competitive behavior of the participants
 An increase in productivity for all participants
 The internal trade of the common market increased
 Note: One of the biggest obstacles for a further integration
proved to be the existence of the different national currencies.
Changes of the currency rate led inevitably to distortions of
competition
78
 Disadvantages
 Large demand for protection measures towards third
countries: “Fortress Europe” was implied for the first time in
relation to the outside world
 Regulation of price ceilings and floors
 Direct quality control
 In connection to the ECSC arose the debate for a vision of a
planned economy to standardize each branch “little by little”
 It involves the basic question of vertical or horizontal integration
79
Digression: Vertical vs. horizontal integration

 With vertical integration (one sector after other), each
individual industry will try “step by step” to develop market
regulations
 Vertical integration is connected with a sacrifice of flexibility,
which had an overall trade-restraining effect rather than
encouraging trade
 The costs of vertical integration would be primarily paid by
consumers, who would experience higher prices and sacrifice
quality and who are generally unable to organize themselves
(Mancur Olson: “The Logic of Collective Action”)
80
 Through horizontal integration, all trade barriers are

simultaneously eliminated
 It can be counted on that through the simultaneous lowing of
tariffs and removal of trade barriers, a strong increase in trade
takes place, which leads to more trade creation
 Politically, horizontal integration is preferable to vertical
integration since this can lead to economic-political stagnation
 The treaty of Paris was made for 50 years. It expired on 22

July 2002
81
Institutions and bodies of the European
Union
Authority and competences
 Distribution of authority is based on the central principle of

limited scope of authority
 Exclusive EU competence (customs union, competition policy,
common market, Euro, fishery, international agreements)
 Shared competence (internal markets, social policy,
environmental policy, Trans-European Networks, energy, freedom
– security and justice)
 Supporting competence (Tourism, education, youth, sport)
82
Union
Voting mechanisms and problems
 Voting mechanism – basic problem in all organizations

 Voting theory/election activity – highly complex research area
 Principle of unanimity: every country has veto rights - unanimity
ensures Pareto optimum, a high cost
 Majority vote: the costs are lower. But: Danger of “minimum
winning coalition”
 A qualified majority overcomes this problem
 Sensitive areas remain in which nobody likes to be outvoted
 Decision costs
 Frustration costs
83
Union
 Fundamental political question is mirrored in the conflict between
consensus and efficiency
 Institutions need rules
 The minority should not block the majority
 The largest consensus possible is desirable
 A long-lasting search for consensus always works against the
efficiency of the decision-making processes
 Two competing principles of justice:
1. One Man (Woman) – one vote
2. One Country – one vote
 Principle of Double Majority
84
Union
Overview of the political integration alternatives
Institutions
 1) Special Institution
 European Council (not: Council of European Union or
Council of Europe)
 2) Institutions of the European Union
 European Parliament
 Council of the European Union Institutional
 European Commission Triangle
 European Court of Justice (ECJ)
 European Court of Auditors
85
Institutions and bodies of the
European Union
Institutions
 3) Consultative Bodies
 European Economic and Social Committee (EESC)
 Committee of the Regions (CoR)
 4) Financial Bodies
 European Central Bank (ECB)
 European Investment Bank
 European Investment Fund
86
Union
Additional institutions
 5) Inter-institutional bodies
 The Publications Office
 European Personnel Selection Office (EPSO)
 European Administrative School (EAS)
 6) Other specialized bodies
 European Ombudsman
 European Data Protection Supervisor
87
Union
Institutions of the European Union: European Council
European Council (Brussels): 21 and 22 June 2007
The European Council also called the European Summit is

a meeting of the heads of state or governments of the
European Union, the President of the European Commission.
88
Union
 Establishment of the Council December 1974

 The inaugural Council was held in Dublin 1975
 Council meets twice a year and – if necessary – for specials
purposes (see current list on the internet)
 Discussion and decisions take place on matters of key issues and
the direction of the EU
 This institution is different from the Council of the European
Union!
89
Union
Venues
 Traditionally the summits have been held in the country holding

the Presidency, but since 2004 it moved permanently to Brussels
 Four meeting per year (two per presidency)
 Rotating presidency
 Exploding security costs for rotating meetings caused the decision
to move to Brussels
90
Institutions and bodies of the
European Union
Institutions of the European Union: European Council :
Venues : Other factors
 Belgian government had more experience dealing with anti-EU
protests
 Critizism received from smaller states
 Fulfill functions of the presidency in Brussels?
 Govern effectively in their own states?
 Suspicion to reduce the practical control?
 New members of EU particularly opposed to the Nice decision
91
Union
Council Presidents
 Rotating presidency to a 2½-year chair

 The name: Herman van Rompoy
 The role of president is a primus inter pares
 The President is primarily responsible for preparing and chairing
Council meetings and has no executive powers
92
Union

Composition of the European Council
 Leaders of each member state belong to political parties at

national level
 No formal political groups or alliances in the Council
 Countries led by similar political parties are often not in
agreement
93
Union
Institutions of the European Union: The European

Parliament
 The European Parliament (EP) is elected every 5 yrs
 EP elected in June 2014, has 750 members, 96 from Germany, 28
EU countries, represent 508 million citizens
 EP represents the citizens of the union = democratic community
 EP largest multinational parliament in the world
 EP 3 main responsibilities
 1. legislative powers
 2. authority to control
 3. capital budgetary authority
94
Union

Parliament
 EP has power of appointment for the Commission and its

president.
 EP has involvement in the appointment of members to the Court
of Auditors and Board of Directors of the Central Bank
 The Treaty of Amsterdam established a two-chamber system with
the EP being more important than before
95
Union

Parliament
Works in all 24 official EU

languages
96
Union
Institutions of the European Union : The European

Parliament
 MEPs from 150 different national political parties do not sit in
national blocks but 7 Europe wide political groups
 The largest European People’s Party (Christian Democrats)
 Main meetings in Strasbourg and others in Brussels
97
Union
98
Union
Parliament : Strategic Interests
 Authority & Centralization
 To recover its own tax and debt sovereignty
 Creating a community of national interests
 Is the EP democratically deficient?
 Elections
 Referendums in Switzerland
 Decisions are made
 Treaty of Amsterdam – EP position strengthened
99
Union
Parliament: Digression
 Is Europe a federal state or a confederation of independent states?
 Federal – pass a large part of their rights to the common
government
 Republic – legally and economically independent states are
connected in a close relationship
 Europeans value independence
100
Union
The Council of the European Union: Voice of the Member
States (formerly, Council of Ministers)
 Shares with Parliament the responsibility for laws and policies
 Main responsibility – common foreign and security policy
 The Council consists of ministers from the national governments
 Responsible for: foreign ministers, ministers of the economy
 No of votes = size of population - weighted smaller countries
 Voting rules
 Default, simple majority rules
 Qualified majority
 Unanimity in “sensitive” questions
 Summit meeting 4 times per year to set overall policy 101
Union
The European Commission: Promoting the common interest
 EU Commission is the “heart and lungs of Europe”

 Represents and upholds the interests of Europe as a whole
 Independent of national governments
 EU Commission is the executive of the Union
 Drafts proposals for new European laws
 Manages the day-to-day business of implementing EU policies
 Manages spending EU funds
 Oversees that treaties and laws are being followed
102
Union
The European Commission: Promoting the common interest
 The president of the Commission is elected for 5 years

 Election of commissioners – are appointed by national
governments, not elected democratically
 Commission = 28 members – change with enlargement
103
Union
The European Court of Justice (ECJ): The rule of law
 One judge from each member country (28)

 8 advocates general
 Appointed by common accord by national governments
 Time in office 6 yrs.
 Can sit/act as a full court (13 judges) or smaller chambers (3 or 5
judges)
104
Union
The European Court of Justice (ECJ): The rule of law
 Location: Luxembourg
 Role:
 EU law is interpreted and applied same way
 Law to be equal in all EU countries
 Uphold laws
 Important role for further integration due to it’s law-setting
role: standardization, harmonization, …
105
Union
The European Court of Auditors: Getting value for your
money
 Role: contributes to improving EU financial management, acts as

the independent guardian of the financial interests of the citizens
of the Union
 Assists the Parliament and the Council overseeing the
implementation of EU budget
 Annual report after the close of each financial year
106
Union
The European Court of Auditors: Getting value for your
money
 Set up in 1975, gained importance through Maastricht Treaty

 Members: One from each EU country
 Term of office: renewable term of 6 years
107
Union
The European Economic and Social Committee (EESC):
Voice of civil society
"Our strength lies in our role as representatives of civil

society, in the breadth of our mission, in the experience and
skills of our members who are an integral part of economic
and social life, and in the quality of our opinions. This
strength will enable us to contribute with renewed
enthusiasm to a most ambitious and exciting project: building
a united Europe."
108
Union
 Role: Advisory body on proposed EU decisions
 Consultation can be mandatory or optional
 May adopt opinions on own it’s own initiative
 The Committee has six sections:
 Agriculture, Rural Development and the Environment
 Economic and Monetary Union and Economic and Social Cohesion
 Employment, Social Affairs and Citizenship
 External Relations
 The Single Market, Production and Consumption
 Transport, Energy, Infrastructure and the Information Society
109
Union
 Set up with the Treaty of Rome in 1957

 Members: 344
 Members have 24 (Germany, France) to 5 (Malta) votes
 President and Vice-President as official representatives
 Location: Brussels
 Term of Office: 4 years
110
Union
The Committee of the Regions (CoR): The local perspective
 Role: Represents regional and local authorities

 Consultation (mandatory/optional) in specific areas:
 Economic and social cohesion
 Trans-European infrastructure networks
 Health
 Education
 Culture
 Employment policy
 Social policy,
 The environment
 Vocational training
 Transport
 adopts resolutions on topical political issues.
111
Union
The Committee of the Regions (CoR): The local perspective
 Set up in 1994 to bring “Europe closer to the public”

 Members: 344
 Members chosen by member states on their own duty, CoR-
members represent the different facets of the member countries
 Location: Brussels
 Term of Office: 4 years
112
Union
The European Central Bank (ECB): A stable currency
 Role: Price stability,conduct monetary policy,setting interest

rates
 Members: Governing Council, General Council, Executive
Board
 Location: Frankfurt, Germany
113
Union
The European Investment Bank: Lending a helping hand
 Role: Lending of money to support project of EU interest,

infrastructure projects, provides credit to SME’s
 Members/Shareholders: EU member states, Board of Governors:
composed of members ministers of finance
 Ownership: EU Governments
 Created by Treaty of Rome 1957
 European Investment Fund (EIF) as suborganization
114
Union
The European Constitution : Starting point
 Started in Nice
 December 15, 2001 in Laeken; June 13, 2003 draft Constitution
was handed over to the European Council; Stability pact –
deferred until 2004
 Reform convention with 105 members, European citizens were
asked to contribute ideas
 The European Constitution comprehends 4 parts and 467 articles
 All countries must agree on the European Constitution
 Defeated by France and the Netherlands (Referenda)
115
Union
The European Constitution : Fundamental problems
 After the denial of France and the Netherlands the EU stepped

into a paralyzing crisis
 Two years were necessary to come to a new arrangement: the
Lisboa-Treaty is the direct “replacement” of the Constitution with
content being almost the same, only another name
116
Union
The European Constitution and the treaty of Lisbon:

Fundamental problems
 Do we need a European Constitution???
 What and who does it affect?
 How will the European Constitution be accomplished if one
country votes against it?
 Is the European population a Demos or not?
117
Union
The European Constitution : Results of the Constitution for
the single institutions
118
Union
 European Council president who is elected by European Council
(qualified majority, 2.5 year in office, “give Europe a face”)
 President European Council & external representative
 With full time commitment
 Unified office
 Decrease in voting members
 Ministry Council divided into two parts
 Foreign affairs
 General and Economic Policy
119
Union
 2009 – new majority rule in the Council of the European Union
 “one country – one vote”
 Equality for each individual EU citizen
 Double majority – supported by 60% of the population
 Presidents should be double head of the Council of the European
Union
120
Union
The European Constitution : withdrawal right
 Succession right / right to resign was included as a form of

protection to stable countries
 Exit option has strong disciplinary effect
 Secure autonomy of EU Central Bank
 Price level stability
 Basic principle of subsidiary principle
121
Monetary Integration in Europe
Exchange Rate Regimes
 Free floating: Rate is freely determined by the market and can

fluctuate at any moment; the monetary authorities do not have any
responsibility for the exchange rate
 Managed floating (“Dirty floating”): Monetary authorities can
intervene on the exchange market from time to time
 Target zones: A range is fixed within the exchange rate is allowed
to move; the wider the range is, the closer this system is to free
floating
122
 Crawling pegs: The monetary authority declares a central parity

and a band of fluctuation around it; the central parity and the
associated max./min. are allowed to slide regularly
 Fixed and adjustable: Charaterized by a central parity vis-à-vis an
anchor currency and a narrow band of fluctuation
123
 (Dis-)Advantages of fixed and flexible exchange rates

 Arguments for fixed exchange rates: Destabilizing speculation
can not occur; uncertainty is avoided; introduction of
discipline
 Arguments for flexible exchange rates: Provide the fast way to
adjust relative domestic and foreign costs and prices; removes
the exchange rate from political considerations; correction of
market-intrinsic overreactions
124
Is Europe an optimal currency area?
 Production factor mobility & institutional structure of an economy

as crucial points
 Theory of Mundell and Fleming
 Detailed model of production factors and endowments
 If heterogeneous, stay with two currencies; if homogeneous,
implement a common currency
► Not easy to say whether the EU is an optimal currency area or not
125
The Road to the EMU
 1957 monetary integration excluded - Treaties of Rome

 Bretton Woods regime still valid in this time
 Risk of fixed exchange = “bail out”
 1968: Completed Customs Union of the European Community
 1971: Werner plan was passed
 1972: European exchange rate pact (Wechselkursverbund)
 1972: “Snake in the tunnel”
126
The Road to the EMU
 1973: Collapse of Bretton Woods

 Free floating of European currencies against each other
 Spontaneous development of a stability anchor
 DM Block – DM “Anchor”
 EMS established in 1979 included as a form of protection to stable
countries
127
The Road to the EMU
 Newly built European Monetary System (EMS)

 currency basket
 ECU and parity grid (example)
 Basket parts – the exchange rates were specified
 Discrepancy indicator – banks were forced to intervene
 Definition of upper and lower intervention points
 7 alignments between 1979 – 1983
 1992 – 1993 temporary suspension of the entire
128
 3 tasks of EMS
 Co-ordination effect
 Stability effect
 Investment effect
 1989 – freedom in Eastern Europe / Fall of Berlin Wall
 Central debate: pacemaker vs. convergence (Krönungstheorie)
 Monetary union only makes sense if internal stability demands?
 Economic fear that the financial/political stability in the political
process is by no means ensured in the long run
129
The Road to the EMU
 Stabilizing effect
 Evaluation for price level stability
 EMS crisis – limited effect of fixing monetary exchange rates
 Stabilization success – currencies were “forced” into stability
 Euro needs a long term culture of stability to succeed
 National inflation rates cannot be determined from exchange rates
 Domestic economy – inflation rate is kept low
 Fixing exchange rates – no direct effect on internal currency
stability
130
The Road to the EMU
 17 member states adopted the EURO until now (“Eurozone”)

 On January 1, 2011, Estonia joined the EU
 On January 1, 2013, Latvia joined the EU
 The EURO was introduced in non-physical form (travellers'
cheques, electronic transfers, banking, …) at midnight on January
1st, 1999
 In his physical form the EURO was introduced on January 1st,
2002
131
Convergence criteria (aka Maastricht criteria)
 Average inflation rate should not exceed the average of the three
best performing countries plus 1.5%
 Long-term interest rate must not exceed the average of the three
best performing countries plus 2%
 Conflict-free participation in the EMS
 Budgetary discipline has to be observable
 New debt must not be more than 3% of GDP
 Public debt level must not be more than 60% of GDP
132
Convergence criteria
 Path to convergence between 1992 and 1999

 1.1.99 – all countries tested to see if they meet with criteria
 Italy & Belgium did not meet indebtedness – but accepted
 Greece were placed in waiting zone
 After the deadline, the convergence has declined
 Present convergence situation gives the greatest cause for concern
133
The European Central Bank
 1971 Werner Plan

 1989 Delors Plan
 1992: The European Central Bank was founded by the Treaty of
Maastricht
134
 Securing price and currency stability : Single issue CB

 The primary objective of the Eurosystem is tomaintain price stability, as defined in
Article 105 of the Treaty. Without prejudice to the primary objective of price stability,
the Eurosystem has to support the general economic policies in the European
Community.
 Working together with the national central banks
 Creating and organizing the EURO system
 Exclusive right to decide upon a monetary policy
 Monitors important functions in national banking supervision
135
 The Executive Board

 Executive body and responsible for execution of the monetary
policy
 The Governing Council
 Legislative body deals with resolution of monetary policy
 The General Council
 Non-Euro countries are included with advisory function
136
 Politically independent monetary bank is an important prerequisite

for currency stability
 The dimensions of independence are:
 1. Personnel independence
 2. Instrumental independence
 3. Financial independence
 4. Functional independence
137
 ECB follows the strategy of controlling the supply of money
 Monetary policy instruments of the ECB are
 Open market transactions
 Five types of instruments are available to the Eurosystem for the
conduct of open market operations
1. Reverse transaction (applicable on the basis of repurchase
agreements or collateralised loans).
2. Outright transactions
3. debt certificates,
4. foreign exchange swaps
5. collection of fixed-term deposits.
138
 Standing facilities
 Minimum reserve requirements
 ECB is modeled after Deutsche Bundesbank (Independence,
stability orientation)
 ECB stands for integrity, transparency and competence
 ECB performance is quite strong in the first ten years
139
Convergence criteria
 Monetary convergence forced less by political influence but by

market forces
 Two sanction mechanisms
 “threat” of the convergence test
 Competition and control mechanism devalue of currencies
 Euro - convergence criteria ceased to exist
 Different fiscal policy options exist
 1995 Theo Waigel 1st draft Stability and Growth Pact
 Agreed Dublin 1996
 Adopted Amsterdam 1997
140

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European Economic Relations Vorlesung SS 2016

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European Economic

Prof. Dr. Dirk Wentzel

 Part 1: Foundations and Basics of European Integration

 Europe is “economically a giant” (Henry Kissinger)

 Europe is surely a geographical entity

e) Europe as a Religious and/or an Ethnic Community

 Is Europe a “Christian community”?

f) Europe is a Cultural Entity

 Europe is defined by its common cultural heritage (Greece,

 Europe is much more of an open dynamic process in which

 Who belongs to the European Union?

 Which integrations steps were fundamental?

 In 1951, the European Coal and Steel Community (ECSC) was

 In 1957, Treaty of Rome led to the establishment of the European

 1957: The founding of the European Free Trade Association

 1967: The Merger Treaty fused the 3 main institutions (EEC,

 1981: Admittance of Greece

 The complete liberalization of capital flows in Europe

 1998: The eastern expansion of the EU was agreed

 Is there an optimal integration depth?

 Danger: wrong standards can be applied or that the standards will

 Note: “Standardization” is always a restriction to competition

 Is there an ideal integration speed?

 Politically, it may be argued that advantages of a faster

 How should Europe design its economic foreign

 Economically speaking: It is impractical to only think in a few

 What freedoms does Europe need?

 Economically speaking, Europe is built on the basic principle

 Cassis de Dijon Case (1979)

Central feature: freedom of opinion, ideas and the press

 Europe relies on the free exchange of ideas and opinions in a

 Global vs. regional integration

 General rule: “to whom it may concern”

 Idea of free trade: promotion of international trade through

1. World Trade Organization (WTO) (1995)

 Ex ante restricted to a limited number of nations

 Functional integration (1st degree): free trade zone or

 Differences: complete customs union vs. preference union

 Standard currency with a supranational central bank

Note: The last three integration forms are characterized by an

 Increasing interdependence triggers externalities

 Expansion or deepening within the European Union

 Important: until the fall of the wall, the Europeans used

 Domestic integration predetermines common values and legal

 Max Weber and the role of administration

 Effectiveness: Political bureaucratic concept has to be carefully

 Common History, common Traditions: the roots of

 The Roman Empire as a first “European Empire”: A single

 Common History, common Traditions: the roots of

 Common History, common Traditions: the roots of

 Common History, common Traditions: the roots of

 After the war: The Marshall Plan and connection

 The economies of Europe were to a great extent devastated after

 The US had become an economic and military world power

(in $m.) Total Per Capita

Great Britain 3,641 72

 In order to prevent starvation and epidemic plagues, the Federal

Flag of the ECSC

 The arguments were numerous:

 The treaty of Paris, 18 April 1951 (came in force in July 1952)

 The ECCS was organized according to the concept of

Institutions of the community

 Germany and France had a large “blocking minority” due to

 The idea of a common market was realized for the first