European Economic Relations Prof Dr Dirk Wentzel Jean

European Economic Relations Prof. Dr. Dirk Wentzel Jean Monnet Chair in European Economic Relations Summer Semester 2016 1

Agenda n Part 1: Foundations and Basics of European Integration n n 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 n Part 2: n Monetary Integration in Europe: The EMS European Central Bank (ECB) The Evolution of a Stability Culture in Europe n n n 2

“United in Diversity!” 3

Eight questions about Europe A systematic economic introduction n What is Europe? a) Europe is a Community of Values n n n 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 n n n 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 n n n 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 n Europe is “politically a dwarf” (Henry Kissinger) n The basic consensus of democracy binds the nations n But: the political willingness to act is restricted (Balkan crisis, Kosovo conflict, currently Crimea crisis) n 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 n n n 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 8

What is Europe? f) Europe is a Cultural Entity n n n 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) 9

What is Europe? n Europe is much more of an open dynamic process in which the outcome is not clearly foreseeable 10

Eight questions about Europe A systematic economic introduction n 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 Denmark) In 1981, the EC 10 (+ Greece), “Cradle of Democracy” In 1986, the EC 12 (+ Portugal and Spain) 11

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 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

Eight questions about Europe A systematic economic introduction n 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 A 380 14

Eight questions about Europe A systematic economic introduction n Which integrations steps were fundamental? 15

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) 16

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 17

Which integrations steps were 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 18

Which integrations steps were 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 19

Which integrations steps were 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 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 20

Which integrations steps were 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 21

Which integrations steps were 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 Sweden 1996: Customs union between the EU and Turkey 1997: Treaty of Amsterdam 22

Which integrations steps were fundamental? 23

Which integrations steps were 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 24

Which integrations steps were 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: 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

Eight questions about Europe A systematic economic introduction n 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 27

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 28

Eight questions about Europe A systematic economic introduction n 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 29

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

Eight questions about Europe A systematic economic introduction n 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 31

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 32

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 33

Eight questions about Europe A systematic economic introduction n 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 34

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 35

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 36

Theories and Strategies of Economic Integration n 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

Global vs. regional integration § 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

Global vs. regional integration Institutions of global integration 1. 2. 3. 4. World Trade Organization (WTO) (1995) General Agreement on Tariffs and Trade (GATT) General Agreement on Trade and Services (GATS) Trade Related Aspects of International Property Rights (TRIPS) 40

Global vs. regional integration 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

Global vs. regional integration 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

Global vs. regional integration § 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 43

Theories and Strategies of Economic Integration n Development scheme of regional integration Alternatives for regional integration § Functional integration (1 st 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 2 nd 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 1 st degree: incomplete economic union with coordinated economic policy § Institutional integration of the 2 nd degree: economic and monetary union with common trade policy-making body in the shape of supranational administration 45

Options of regional integration Institutional Option Free Trade Among Members Common Free Factor Customs to Mobility Third Parties Common Economic Policy Complete Monetary Integration (Single Currency) Free Trade Area X Customs Union X X Common Market X X X Economic Union X X Monetary Union X X X 46

Development scheme of regional 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

Development scheme of regional 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

Development scheme of regional 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) 49

Development scheme of regional 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) 50

Theories and Strategies of Economic Integration n 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 53

Theories and Strategies of Economic Integration n 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 n 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

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Where does Europe come from? - The historical perspective n Common History, common Traditions: the roots of the European Union § During the 17 th and 18 th 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 19 th century; protectionism and no free trade § Competition for leadership and power on the European continent as well as resources in Europe and elsewhere 59

Where does Europe come from? - The historical perspective n Common History, common Traditions: the roots of 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

Where does Europe come from? - The historical perspective n Common History, common Traditions: the roots of 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

Where does Europe come from? - The historical perspective n Common History, common Traditions: the roots of 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? - The historical perspective n 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

The Marshall Plan and connection to the 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

The Marshall Plan and connection to the 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

The Marshall Plan and connection to the 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

The Marshall Plan and connection to the 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

The Marshall Plan and connection to the 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 historical perspective n 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 European Coal and Steel Community § The treaty of Paris, 18 April 1951 (came in force in July 1952) § The founding members: France Germany, Italy, and the Benelux States (the UK was since 1954 associated with the ECSC) 72

The European Coal and Steel Community 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

The European Coal and Steel Community 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 European Coal and Steel Community § 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

The European Coal and Steel Community 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 (socalled “friendly society”) § Financing of the ECSC through assessment on all products within the community at a maximum of 1% of the value creation 77

The European Coal and Steel Community 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

The European Coal and Steel Community § 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

The European Coal and Steel Community 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

The European Coal and Steel Community § 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

Institutions and bodies of the European 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

Institutions and bodies of the European 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

Institutions and bodies of the European 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 § European Commission § European Court of Justice (ECJ) § European Court of Auditors Institutional Triangle 85

Institutions and bodies of the European Union Institutions § 3) Consultative Bodies § European Economic and Social Committee (EESC) § Committee of the Regions (Co. R) § 4) Financial Bodies § European Central Bank (ECB) § European Investment Bank § European Investment Fund 86

Institutions and bodies of the European 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

Institutions and bodies of the European Union Institutions of the European Union: 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

Institutions and bodies of the European Union Institutions of the European Union: European Council § 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

Institutions and bodies of the European Union Institutions of the European Union: European Council 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

Institutions and bodies of the European Union Institutions of the European Union: European Council : 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

Institutions and bodies of the European Union Institutions of the European Union: European Council : 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

Institutions and bodies of the European 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

Institutions and bodies of the European Union Institutions of the European Union: The European 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

Institutions and bodies of the European Union Institutions of the European Union: The European Parliament Works in all 24 official EU languages 96

Institutions and bodies of the European 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

Institutions and bodies of the European Union 98

Institutions and bodies of the European Union Institutions of the European Union : The European 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

Institutions and bodies of the European Union Institutions of the European Union : The European 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

Institutions and bodies of the European 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

Institutions and bodies of the European 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

Institutions and bodies of the European 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

Institutions and bodies of the European 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

Institutions and bodies of the European 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

Institutions and bodies of the European 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

Institutions and bodies of the European 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 Location: Luxembourg Term of office: renewable term of 6 years 107

Institutions and bodies of the European 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

Institutions and bodies of the European Union The European Economic and Social Committee (EESC): Voice of civil society § § 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

Institutions and bodies of the European Union The European Economic and Social Committee (EESC): Voice of civil society § § § 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

Institutions and bodies of the European Union The Committee of the Regions (Co. R): 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

Institutions and bodies of the European Union The Committee of the Regions (Co. R): 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, Co. Rmembers represent the different facets of the member countries § Location: Brussels § Term of Office: 4 years 112

Institutions and bodies of the European 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

Institutions and bodies of the European 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 Location: Luxembourg Ownership: EU Governments Created by Treaty of Rome 1957 European Investment Fund (EIF) as suborganization 114

Institutions and bodies of the European 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

Institutions and bodies of the European 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

Institutions and bodies of the European 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

Institutions and bodies of the European Union The European Constitution : Results of the Constitution for the single institutions 118

Institutions and bodies of the European Union The European Constitution : Results of the Constitution for the single institutions § 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

Institutions and bodies of the European Union The European Constitution : Results of the Constitution for the single institutions § 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

Institutions and bodies of the European 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

Monetary Integration in Europe Exchange Rate Regimes § 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

Monetary Integration in Europe Exchange Rate Regimes § (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

Monetary Integration in Europe 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

Monetary Integration in Europe 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

Monetary Integration in Europe 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

Monetary Integration in Europe 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 4 alignments between 1983 – 1987 0 alignments between 1987 – 1992 – 1993 temporary suspension of the entire 128

Monetary Integration in Europe § 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

Monetary Integration in Europe 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

Monetary Integration in Europe 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 1 st, 1999 § In his physical form the EURO was introduced on January 1 st, 2002 131

Monetary Integration in Europe 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

Monetary Integration in Europe 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

Monetary Integration in Europe The European Central Bank § 1971 Werner Plan § 1989 Delors Plan § 1992: The European Central Bank was founded by the Treaty of Maastricht 134

Monetary Integration in Europe § 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

Monetary Integration in Europe § 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

Monetary Integration in Europe § 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

Monetary Integration in Europe § 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

Monetary Integration in Europe § 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

Monetary Integration in Europe 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 1 st draft Stability and Growth Pact § Agreed Dublin 1996 § Adopted Amsterdam 1997 140