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Chapter 14
The European
Union: Many
Markets into
One
Copyright © 2011 Pearson Addison-Wesley. All rights reserved.
Chapter Objectives
• Explore the history of economic integration
in Western Europe
• Analyze the impact of European economic
integration
• Discuss the various institutions of the
European Union (EU)
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Introduction:
The European Union
• The European Union (EU) is an economic
union of twenty-seven nations— It is the
largest, oldest, and most integrated of regional
agreements
• In 1979 the nine members of what was then
called the European Economic Community
(EEC) linked their exchange rates in a system
designed to eliminate wide fluctuations among
currencies
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Introduction:
The European Union (cont.)
• In 1987, EEC members signed the Single European
Act (SEA) aimed at completion of the single market
envisioned by the Treaty of Rome
• In 1992, the Treaty on European Union was signed,
paving the way for
– A common currency, the euro (1999)
– A European Union Constitution (2004)
– Future EU expansion (2004)
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The Size of the European Market
• The EU is the largest integrated market in
the world
• Few countries will be able to grow and
prosper without selling their goods in the
European market, which is a powerful
incentive to accept European leadership on
international issues
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Table 14.1 Population and Income in the
European Union, 2007
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Table 14.1 (continued) Population and
Income in the European Union, 2007
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Table 14.1 (continued) Population and
Income in the European Union, 2007
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Before the Union:
The Treaty of Rome
• The European Coal and Steel Community (ECSC)
signed in 1951 was the first step in European
integration
-Goals: to rebuild European economies after World War II;
to foster political cooperation through economic integration
• The European Economic Community (EEC) (or
European Community, EC) was launched in 1958
from the Treaty of Rome as a free trade area with
the goal to create a single, integrated market for
goods, services, labor, and capital
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Before the Union:
The Treaty of Rome (cont.)
• In 1955 the European Atomic Energy
Community (EAEC or Euratom) was created
• The goal was to jointly develop nuclear energy for
peaceful purposes
• Two separate treaties were signed in 1957 in
Rome, creating the EEC and the Euratom
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Institutional Structure of the EEC
• The EU is based on subsidiarity: The relationship
between national and EU areas of authority, and
between national and EU institutions
– EU can tackle only issues that are better handled
through international action than individual nations
– EU’s responsibility includes trade, competition, and
environmental policies, regional development, research
and technology development, economic and monetary
union
– Less clear areas of authority are the labor market,
social safety net, health care policies
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Institutional Structure of the EEC:
Main Governing Bodies
– European Commission: An executive body; each country
has one vote; acts as guardian of the treaties
– Council of the European Union: A legislative branch;
enacts into law Commission’s proposals; composed of
ministers from each EU nation; requires qualified majority
– European Parliament: Is representative of popular
interests in the EU with 785 members; three
responsibilities- passing laws, supervising institutions,
passing final EU budget
-Provides democratic legitimacy to EU
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Institutional Structure of the EEC:
Other Institutions
– Court of Justice: EU’s supreme court
– Court of Auditors: Monitors EU finances and
regulations
– Committee on Regions: Defender of the interests of
specific regions in the EU
– Economic and Social Committee: Focuses on broad
economic and social issues
– European Investment Bank: Focuses on investment
– European Central Bank: Conducts monetary policy of
the EU
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TABLE 14.2
Votes in the Main EU Institutions
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Financing the European Union
• The total budget of EU for 2008 was 129.1
billion Euros ($190 billion)
• The EU institutions and programs are
funded by:
– Tariffs and goods entering the European Union
– An EU share of national value added taxes
– Payment from each member country based on
size of its economy
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Financing the European Union
(cont.)
• The two largest EU expenditure categories
are:
-Agricultural support, both direct payments
in subsidies and indirect payments
-Cohesion funds, which are used to
support less developed regions within the
EU
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Deepening and Widening the
Community in the 1970’s and 1980’s
• EU’s deepening came from increasing the
level of cooperation between member
countries
• EU’s widening came from including new
members in the union
• Let’s analyze these in greater detail…
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Before the Euro
• In 1979, EEC members linked their currencies
through the European Monetary System (EMS)
with an exchange rate mechanism (ERM)
– Each currency was fixed to the European Currency
Unit (ECU)- the weighted average of the other
currencies
– Goals: To avoid competitive devaluations—trade and
investment determined by comparative advantages and
efficient allocation of resources, not exchange rate
disparities
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The Second Wave of Deepening:
The Single European Act (SEA)
• In the 1980s, Europe was hit by a recession and
the EC seemed to decline
• However, the EC was reshaped by the Delors
Report adopted as the Single European Act
(SEA) in 1987
– SEA aimed at the freedom of movement for goods,
services, capital, labor
– SEA was implemented through the elimination of
physical, technical, and fiscal barriers between EC
nations
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Forecasts of the Gains from the
Single European Act
• SEA created gains in economic efficiency
– Removal of customs and passport checks at internal national
borders
– Greater economies of scale
– Increased competitiveness of European firms
– Overall increase in GDP growth across Europe
• However, four issues hampered the achievements of the
four freedoms: concerns over the effects of economic
restructuring, harmonization of technical standards, valueadded taxes, public procurement
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Problems in the Implementation
of the SEA
• Four issues hampered the achievements of
the four freedoms:
-concerns over the effects of economic
restructuring
-harmonization of technical standards
-value-added taxes
-public procurement
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The Third Wave of Deepening:
The Maastricht Treaty
• In 1991, EC members reached the
Maastricht Treaty, which aimed at:
– Uniform labor laws and worked rights
– Defines rights of all residents to vote regardless of
nationality
– Health, education, cultural, and consumer safety issues
in hands of European Commission
– Common defense and security policies
– Creation of a monetary union and a common currency
under control of a European Central Bank
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Monetary Union and the Euro
• There were three stages of the monetary union:
– 1990 lifting of controls on the movement of financial
capital within the EU
– 1994 creation of the European Monetary Institute in
Frankfurt
– 1999 introduction of the common currency, the Euro,
and the creation of the European Central Bank
• To qualify, members had to meet convergence
criteria: Monetary and fiscal requirements
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TABLE 14.3
Convergence Criteria for Monetary Union
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Costs and Benefits
of Monetary Union
• Benefits
– Eliminates the costs of currency conversions
– Reduces the effects of exchange rate uncertainty
on trade and investment
• Costs
– Eliminates monetary policy independence
– If labor is not fully mobile and business cycles
synchronised between nations, the same monetary
policy may not suit all nations
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The Political Economy
of a Single Currency
• 11 EU members adopted the single currency on 1
January 1999
• Euro coins and notes start circulating in 2002,
replacing the national currencies of 12 EU
members
• Although the euro declined in value shortly after
its introduction, it has since stabilised and
facilitated price convergence across Europe
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FIGURE 14.1
The U.S. Dollar-EU Euro Exchange Rate, 2000-July,
2009
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Implementation of the
Single Currency
• The inability of the EU to maintain a set of
fixed rates, coupled with the political
undesirability of floating rates, made the
single-currency option an attractive choice
• Membership in the monetary union, however,
is a subset of the EU
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Widening the European Union
• Ten countries joined the EU in 2004 and two more
joined in 2007— Ten are from central Europe having
undergone profound economic and political
transformations as they abandoned relatively closed
socialist economies in favor of democratic and
capitalist systems
• There are three criteria for a country to gain
membership in the EU: democracy, market economy,
adoption of EU-wide rules (aquis communautaire)
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Challenges of Widening the EU
• EU’s Common Agricultural Policy (CAP): The world's most
extensive agricultural support program; subsidizing the
applicants’ agricultural sectors would be unfeasible
• Immigration and an aging population base
• EU’s governance structure: allocation of voting rights and
seats in governing bodies upon expansion is politically
contentious
• Income gaps between EU members and applicants: spending
on new members would stretch budget
• The relationship between the new members and other Eastern
European nations: many have historical and economic ties to
Russia
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The Demographic Challenge
of the Future
• A number of future challenges are visible for the EU:
- In the short-to-medium run, it must continue to
create convergence in income and living standards
between its poorest and its most well- off members
- It must also prepare for further widening
- Finally, in the long run, it must adapt its economies
and social support systems to prepare for a much
older population
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Table 14.4 Population Forecast, 2010–2040:
Twenty-Seven Members of the
European Union
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