1
Chapter 5: The European Union (latest revision June 2006)
1. Development of the European Union
The first half of the 20th century saw two World Wars in Europe, fueled by the hostilities between France and Germany. At the end of World War II, there was a new “dream” on the part of many Europeans --- a united Europe. It was hoped that a united Europe would never again see the scourge of war. This dream of unity got its initial impetus when the United States embarked on the Marshall Plan (named for Secretary of State George Marshall). The Marshall Plan was a very large aid plan for Europe, given to both the victorious countries such as France and to the defeated countries such as Germany. This large aid plan required an organization to administer the distribution of the aid money. So in 1948, the Organization for European Economic Cooperation (OEEC) was created and headquartered in Paris.
A more significant step in the creation of a European Union came in 1951 with the creation of the European Coal and Steel Community (ECSC). This was created because of the fear that the recovery of the German economy might lead to the revival of German militarism. The European Coal and Steel Community created a common market in coal and steel. This means that coal (the main fuel of the time) and steel could be sold without restriction in any of the member countries and that there was a central authority (not controlled by the member countries) to make all decisions regarding coal and steel. Originally, the members of the ECSC were France, Germany, Belgium, the Netherlands, Luxembourg, and Italy.
The next major step in the creation of a European Union came in 1955 with the Treaty of Rome. This treaty established the European Economic Community (the EEC). To understand the EEC, we need to explain the various levels of economic integration. The lowest level of economic integration is called a Free Trade Area. In a Free Trade Area, goods and services can move freely between the countries with no tariffs or quotas. We will see other examples of free trade areas in this course. The next higher level of economic integration is called a customs union. A customs union is a Free Trade Area in which the member countries agree to have a common external tariff against the products of countries that are not members. So, for example, France and Germany would have the same tariff on products made in the United States. The next higher level of economic integration is called a common market. A common market is a customs union in which workers can move without restriction between the member countries and in which businesses can operate production facilities in any of the member countries. The highest level of economic integration is called an economic union. An economic union is a common market that also has a common currency. The United States is therefore an economic union of the 50 states. In Europe, the six original members of the ECSC completed the creation of a customs union by 1968 but did not complete the creation of a common market until 1993.
Notice that the European Economic Community (EEC) did not include Britain. Originally, Britain chose not to become a member. Instead, it led a rival organization, the European Free Trade Area (EFTA) that included itself, Sweden, Norway, Denmark, Austria, Switzerland, and Portugal. When Britain changed its mind and tried to join the EEC in 1961, it was vetoed by France. Finally, Britain was admitted in 1969. At that time, Ireland and Denmark also became members. In 1981, Greece became a member. And in 1986, Spain and Portugal were added as members. So by the early 1990s, there were 12 member countries to the European Economic Community. This means that there were no tariffs or quotas among these 12 countries and that the tariff for each of these countries against products from non-members would be identical.
The next major step in the creation of the European Union was the Single European Act of 1987. This created a project to move to a full common market. As noted above, a common market requires the free movement of all goods and services, workers, and capital goods between the member countries. The Single European Act took until 1993 to implement. It brought about the elimination of all customs barriers at the borders of each member country. As of 1993, citizens of member countries would no longer need passports to enter other member countries, much as citizens of California do not need passports to enter Nevada. And goods could move between the countries without being stopped at the border. The Single European Act also brought some standardization of technical regulations between the member countries. Differences in these regulations had made it difficult to sell products outside one’s own country. Finally, the Single European Act brought about controls on the purchases of national and local governments. In the past, the national and local governments had tended to give preference to local companies in their purchases (only 2% of all government purchases had been made from companies in a different country.) This could no longer occur.
The creation of a common market has expanded trade between the member countries considerably. But it has not led to much internal migration. Most migration into the original 12 countries has come from Eastern Europe, Turkey, Pakistan, and North Africa. On the other hand, the creation of a common market did lead to a large amount of foreign direct investment within these 12 countries. Foreign direct investment is the owning and controlling of a company in another country. It has also led to a large number of mergers. Companies have merged to become larger in order to take advantage of the larger European market (see below)
In December, 1989, the European Union established the Social Charter, designed to create consistent labor laws in all member countries. Labor unions were protected by law and their right to engage in collective bargaining was guaranteed. (See Chapter 4 for a discussion of European labor unions.) Workers were given the right to be represented on the board of directors of companies and therefore to participate in decisions regarding the operation of the company. (For this reason, Britain did not sign the Social Charter.) This is called co-determination and was also discussed in Chapter 4. And finally, equal rights were guaranteed for men and women, including comparable pay for comparable work.
In 1991, the members signed the Treaty on European Union, known as the Maastricht Treaty (Maastricht is a small town in the Netherlands, near both Belgium and Germany). At that time, the name was changed from the European Economic Community to the European Union. The Maastricht Treaty created the conditions by which the member countries could move to a full Economic Union. An economic union is a common market in which there is also a common currency. We will discuss these conditions below. In the matter of political integration, it was determined that all issues were to be handled by the lowest level of government that can effectively handle them. This was a very general statement. It was not specific in resolving a main political question: how much authority should go to the European Union and how much should be retained by the member countries? Europe is still wrestling with this question. (This question has also been a major one in the United States: how much authority should go to the federal government and how much should be reserved for the various states?)
In 1993, the European Union was expanded to 15 members as Austria, Sweden, and Finland joined. Then, in 2002, it was decided to expand the European Union again. Ten new members were admitted in 2004 --- Hungary, Poland, Estonia, the Czech Republic, Slovenia, Latvia, Lithuania, Slovakia, Cyprus, and Malta --- bringing the total to 25. Two more members are to be admitted in 2007 – Bulgaria and Rumania. There is still a debate about admitting Turkey. As of now, both the population and the land area of the European Union are considerably greater than those of the United States. The new European Union has 455 million citizens compared to 300 million for the United States. And the total Gross Domestic Product of the European Union is similar to that of the United States at about $12 trillion.
2. The Institutions of the European Union
Before analyzing the economic effects of the integration of Europe, let us describe the basic institutions of the European Union. The main bureaucracy of the European Union is the European Commission. (For the United States, this would be the executive branch of government.) The Commission meets every Wednesday in Brussels Belgium. The Commission is the only body that can draft proposals for the Council and the Parliament to vote upon. Other tasks of the Commission include seeing that the policies of the Council and the Parliament are implemented, managing the common policies of the European Union (in agriculture, fishing, energy, the environment, competition policy, and so forth – see below), controlling the European Union’s budget (collecting and spending the funds – see below), enforcing European Union law, and negotiating agreements on behalf of the entire European Union. Despite being sent by the member nations, the Commissioners are supposed to act independently of the governments of their nations. The Commission is answerable to the Parliament who can dismiss the whole Commission by a vote of censure. Commissioners attend Parliamentary sessions and answer questions.
A new commission is appointed every five years. The member governments determine whom to designate as the Commission President (approved by the Parliament). There are currently 25 member governments – soon to be 27. The new President, together with the governments of the member countries, chooses the other 24 members of the new commission. There is one commissioner from each member country. (The proposed Constitution tried to reduce this number to 15. But the Constitution was not ratified.) This list of nominees is then adopted by the Council and sent to the Parliament. Once the Parliament approves, the nominees are appointed by the Council. (The Parliament can also force the Commissioners to resign as it did in 1998. 20 Commissioners were forced to resign amid charges of corruption.) The President is presently Jose Manuel Barrosa of Portugal. His term (and the terms of the other current commissioners) runs until October 31, 2009. (The previous President, Romano Prodi, is now the Prime Minister of Italy.) The 25,000 other people who work for the European Commission are permanent officials (bureaucrats -- but called functionaries).
The overall agenda of the European Union are determined by the European Council. This is composed of the President of the European Commission and the heads of government of the member nations, with each member country presiding as for a six month period. They meet up to four times a year. One might consider this analogous to a Board of Directors! In the new Constitution that was proposed, the six month rotation was to be eliminated. Instead, the 25 heads of state were to choose a “president of Europe” who would serve a 2 1/2 year term. But this Constitution was not ratified.
Most day to day decisions are made by The Council of the European Union. This is the de facto legislature. Each member government sends one minister to Brussels Belgium. The Minister chosen will be different depending on the issue to be discussed. This Minister has the authority to commit his or her home government. Much of the legislation must be approved by both the Council and the Parliament. But the Council of Ministers can issue some regulations and directives that are binding on all citizens within the European Union. There are 321 votes possible in the council. Countries with larger populations are accorded more votes. On some matters, 232 votes are required for a vote to be passed (72.3%). As this is constituted now, winning 232 votes requires at least 12 countries (and at least 62% of the population of the European Union). On other matters, votes must be unanimous. The Council of Ministers has been set up so that the small countries have a disproportionate influence. The Presidency of the Council rotates every six months. (In the second half of 2006, the Presidency is held by Finland.)
The European Union has a directly elected parliament called the European Parliament (in Strasbourg France, Brussels, and Luxembourg). With expansion, there are 732 elected members of the European Parliament. They are directly elected in elections held every five years. This has been a symbolic group in the past. But more recently, this has become more of a legislative body as is the United States Congress. At present, there are nearly 100 different political parties represented in the European Parliament. The European People’s Party – Christian Democrats and the European Democrats hold 267 seats (they would be considered the “center-right” but are probably more liberal than the American Democratic Party) while the Socialist Group holds 201 of the 732 seats. The Parliament is involved in legislation along with the Council (on an equal basis). This is called “co-decision”. The Parliament approves the European Union’s budget (and can make some modifications – see below) and provides supervision of the Commission and the Council of Ministers.
It is typical that proposals will begin with the European Commission. These will then be discussed with the European Parliament before being referred to the Council of Ministers. The Council of Ministers can then adopt the proposals, amend them, or defeat them according to the voting scheme mentioned above.