Economic Integration


1. The European Union

 

 European Community's homepage is Europa.

Londinium was established as a town by the Romans immediately after the invasion (AD 43)

After the revolt in 52 BC, Romans built roads to Lutetia (Paris).

 How large is EU?

In 2005, 10 countries of Central and Eastern Europe joined.

EU 27 has a population of 502 million people and its territory stretches from Crete to the arctic circle. (NAFTA has a population of 457 million.)

GDP of EU is about $16 trillion (as of 2012), slightly more than US ($16 trillion), due to the rising euro in recent years. Per capita GDP of EU is about $31,000. ($38,000, NAFTA)

Future: Eventually, the EU could grow to include some Islamic countries such as Turkey.

Croatia joined EU on July 1, 2013. Population = 4 million.

 History

 


 World War II timeline

The Allies divide up Berlin and Germany in June 1945 before Japan surrenders.

Winston Churchill

"We must build a kind of United States of Europe. In this way only will hundreds of millions of toilers be able to regain the simple joys and hopes which make life worth living." (September 19, 1946), University of Zurich

University of Zurich

 Marshall Plan

 Postwar European economic cooperation began with the establishment of the OEEC (Organization for European Economic Cooperation) in 1948 to allocate the Marshall Plan aid (named after George Marshall who was the Secretary of State, US). Initially $16.5 billion (by 1950, it rose to $44 billion)

With OEEC, quotas and payments restrictions were dismantled among member countries.

The MP (a) allowed Europeans to purchase capital goods and raw materials to start up industries, (b) helped Europeans to acquire more reserves ($ and Gold).

 ECSC, 1952

The Treaty of Paris established the ECSC (European Coal and Steel Community) in 1952 which created a common market for coal, steel and iron ore, covering France, Italy, West Germany, Belgium, Netherlands, Luxembourg.

EEC and Euratom, 1957  The Treaty of Rome (1957) establishing the EEC was signed by the same countries and ratified. The treaty set the time table for a progressive development of a customs union. Also a separate Euratom treaty was signed to create European Atomic Energy Community.
EFTA, 1960

  EFTA (European Free Trade Association) was formed in 1960 by UK, the three Scandinavian countries (Norway, Sweden and Denmark), Switzerland, Austria and Portugal.

map of Europe, courtesy of Nations Online

European Community, 1967   Fusion of the three communities (EEC, Euratom, ECSC) into a single European Community was established in 1967.
   Great Britain, Denmark and Ireland entered in 1973, Greece (1981), Spain and Portugal (1986).
European Union, 1992   signed the Treaty on European Union (1992). a.k.a. Maastricht Treaty. Common Foreign and Security Policy (CFSP) and Justice and Home Affairs were included. Together with the European Community, they form three pillars of EU.
  Austria, Finland and Sweden joined the European Union (1995). Norway declined.
euro, 2002  On January 1, 2002, euro is circulated in 11 countries.
 Eastern and Central Europe  On May 1, 2004, 10 additional members join the EU (The Czech Republic, Estonia, Latvia, Lithuania, Cyprus, Malta, Hungary, Poland, Slovania and Slovakia
 

On January 1, 2007, Bulgaria and Romania joined the union.

On July 1, 2013, Croatia became the 28th member. (pop = 4.4 million)

   Financial crisis in Greece, followed by similar debt problems in other European countries.

 
2. Methods of Economic Integration

 1. Military Conquest

alex

Medallion of Alexander the Great

(i) Alexander the Great started the first European integration. As a result, the Mediterranean world became one integrated area, and Greek become the universal language adopted by traders.

Free trade was the result of military conquests.

Economic integration cannot occur unless transportation and communication systems are well developed. In the East, the Chinese established the Han Empire in 206 BC.

In the West, King Philip II of Macedonia began to conquer the neighboring city states, uniting Greece in 358 BC. Alexander the Great finished the work, conquering most states in the Mediterranean world before his death in 323 BC. However, because of his premature death, actual integration of the Meditrannean world had to wait until the Romans reconquered the Mediterranean world. The Romans built roads and knew how to govern the people, but the Europeans spoke Greek throughout the Roman Empire.

(ii) Romans also followed the same tactic.

(iii) Even in the 20th century, Mussolini tried to create a new empire in Europe

(e.g., Mare Nostra = Our Sea = Mediterranean Sea)

(Imperial War Museum)

Similarly, Japan made a similar attempt in Asia in the 1940s.

Hitler's idea of integration


Imperial War Museum, London

Frank Haushofer (1869 - 1946) advances the theory of geopolitics, "Lebensraum," (living space) that a race has the right conquer neighboring regions. His student Rudolf Hess introduces him to Adolf Hitler while he was serving in Landsberg prison. Haushofer later becomes Hitler's adviser. Haushofer goes to Japan and learns about a secret society of warriors called Black Dragon, and creates a secret, copycat society "Thule Society," which uses Hackenkreuz (swastica) and later creates German Workers Party. Hitler joins and later changes its name to "National Socialist German Workers Party (NSDAP), known later as the Nazi party.

Haushofer introduces the idea of axis, and persuades Hitler to form the axis with Japan.

2. Free Trade Agreement

(i) In the 21st century, military conquests are no longer feasible, due to the presence of the Nuclear Club.

(ii) Free trade agreements are the only possible means to achieve economic integration in the modern world.

Gradually, counries become more interconnected through free trade, eventually becoming an economic union.

Examples: NAFTA, European Union.

   

 

3. Stages of International Economic Integration

Autarky: before integration
(0) Preferential Trade Agreements  lower tariffs on trade among member countries. e.g. British Commonwealth established tariff preference scheme in 1932.
 First Stage: FTA

FTA (Free Trade Area): is a group of countries without any trade restrictions within the area, but each member country retains its own tariff and quota system on trade with third countries (EFTA).

Industrial FTA: EFTA (exclude agriculture)

Full FTA  

Problem: Nonmembers take advantage of different trade policies among members. Member countries with lower tariffs get more trade.

Second Stage: Customs Union

CU = FTA + common tariffs and quotas.

CU (Customs Union) is created when a group of countries removes all restrictions on mutual trade and also adopt a common system of tariffs and quotas with respect to trade with third countries (EEC became one in 1968).  

FTA →CU: inevitable (otherwise, nonmembers take advantage of differing tarffs among member countries)

Problem: Member countries with low wages attract more capital.

Third Stage: Common Market

Common Market: A CU becomes a common market with the removal of all restrictions on the movement of factors.

CM = CU + free factor mobility.

(EEC became a common market in 1992).

CU →Common Market (slow. Common heritage, language and culture will expedite this process.)

FPE also facilitates the formation of a common market. This transition to a common market is desirable in order to prevent nonmember countries from taking advantage of different wages and taxes. Nonmember countries invest in the countries where taxes and wages are lowest. E.g., Japan builds TV factories in Mexico, rather than in the US.

Problem: More difficult to achieve than previous forms of integration. Common languages, culture and business practices facilitate the formation of a common market.

 

3' Monetary Union: adopts a single currency together with a single central bank.  

Fourth Stage: Economic Union

supernational authorities coordinate economic policies.

EU = CM + a single currency, a central bank, a unified fiscal system.

E.g., US, Belgium + Luxembourg, 1921.

CM → Economic Union (relatively easy, because of economic gains from a single currency)

political union

(Single constitution. No diplomatic rights for individual states.)

 Remark At any point in these stages, an FTA or a CU could expand its membership. It remains to be seen if two FTAs or CUs will form one large group. If the current continues, the world will consist of several large FTAs or CUs. Given enough time, however, they will further integrate to form large FTAs or CUs, until they form one world FTA.
   

3. Long Run Effects of Free Trade

Conjecture: Free Trade and One World.

autarky

 

4. Institutions of EC

 US vs EU

US government consists of three branches: legistilative, executive and judicial branches. In principle, they share equal power and provide checks and balance.

In contrast, EU has four branches. The legislative and executive powers are split among three branches of EU, excluding the European Court. As more members join, institutions of EC will inevitably evolve.

Western Europe learned democracy from the Greeks, who initiated it around 500 BC, but Amerian women gained the voting right only 1920s.

The governing institutions were modeled after the Roman model, although Roman's Republic was replaced by an empire subsequently.

 European Union

1. European Commission

2. Council of Ministers

3. European Parliament

4. Court of Justice 

   

 

5. European Commission

Commissioners

The Commission has the executive power of the EU, subject to change. The Council appoints commissioners (Treaty of Lisbon 2009, which modifies the Maastricht Treaty, 1992)

 Organization of Commission

Number of members = Initially, 20. As EU expands, the number of commissioners increased, especially due to accession of 10 central and easter Europen countries.

Rule (2000): Each nation should have a commissioner until the 27th member joins, in which case there will be fewer commissionsers than member states.

Today, there are 27 Commissioners plus the President (28 in total).
Each member specializes in some areas (e.g., energy, employment, agriculture, etc.)

F, G, I, Sp, UK = 2

others = 1

terms = 5 years
its staff = 15,000
Must be independent of their national governments.

It now has a President. Other Commissioners act like the Secretaries in the US. Each commissoner specializes in one area (e.g., agriculture and reral development)

Some suggest the name should be changed to European Government. The council appoints Commissioners.

 Language

must reach all of the citizens of the union in their own languages.

1/5 of the work is in the translation and interpretation services.

 Function

The function of the European Commission roughly corresponds to one half of US Congress.

The Commission's Role

It initiates proposals for legislation--3 objectives European interest = what is best for the Union as a whole, rather than for individual sectors or countries.

Consultation = consult as widely as is necessary

Subsidiarity = the Union takes action only if it becomes more effective than if left to individual member states.

  Guardian of the Treaty of Rome

(i) ensures that Union legislation is correctly applied by member states.

(ii) The commission can fine individuals, firms, and organizations for infringing the Treaty law. One group of firms was fined ECU 248 million.

Manager and Negotiator of Union policies
(i) manages EC's finances and budgets (about €140 billion in 2010)

(ii) negotiate trade and cooperation agreements with other countries or group of countries.

 Accountability

The full Commission has to be approved by the European Parliament. Commission represents EC, not member countries. Commission reports to Parliament annually.

It is not clear who makes executive decisions.

Needs to be restructured into upper and lower houses in lieu of Senate and the House of Representatives.

 Remark

The Organization should be simple.

Simplicity determines the function of the organization.

If a mistake occurs, it is not clear who is resonsible, or how to correct it. 

 

6. Council of Ministers

 aka Consilium

Each minister represents his/her own national government + President + President of the Commission.

In this sense, United Nations, as currently organized, is like EU's council of ministers.

(In the future, if it is to be properly run, United Nations should be supported by World Court and World Parliament. Without these two organizations, there are no checks and balance in the United Nations, which was established as the political complement to GATT and IMF after WWII.)  

Presidency: from July 1, 1995, rotates every six months in a sequence (not alphabetically). arrange and preside over all meetings.

 

Loosely speaking, Council has the legislative power. (It is neither the Senate nor the House of Representatives.)

Council makes final decisions, but can do so only on proposals made by Commission.

Decisions are made by unanimous vote for some, and others by a qualified majority vote rule.

Decision Making is based on three pillars.

 Pillar One Pillar One covers a wide range of Community policies (such as agriculture, transport, environment, energy, R&D) which begin with a Commission proposal.

Countries votes current votes
G, F, I, UK 10 29
Spain 10 27
Poland   27
Romania   14
Netherlands   13
Greece, Belgium, Portugal, Czech, Hungary   12
Austria, Sweden 5 10
Bulgaria   10
Ireland, Denmark, Finland 3 7
Slovakia, Croatia, Lithuania   7
Luxembourg 2 4
Estonia, Cyprus, Latvia, Slovenia   4
Malta   3
Total 87 352

Messy voting (evolutionary): Currently, qualified majority voting rule must be satisfied from 2014 (Treaty of Lisbon):

(i) majority of countries: 55% (at least 15 countries, if proposal was made by the Commission) or 72% of votes in other cases, and

(ii) majority of population : 65% of the EU population.

A blocking minority requires at least 4 countries representing >35% of the population.

Pillar Two Common Foreign and Security Policy: unanimity
Pillar Three - Justice and Home Affairs: unanimity
 Legislation Community law may take the following forms:
  • regulations: are directly applied without the need for national measures.
  • directives: bind member states as to the objectives, but permit national authorities to choose the form and the means.
  • decisions: binding upon those to whom these are addressed, including all member states or individuals.
  • recommendations and opinions: nonbinding.
 Remark

Unanimity rule should be revised.

Unanimity rule: each nation has veto power. In case a country invades another, there is no way to punish the rogue country. No sanctions can be imposed.

This is one reason why EU will not accept Turkey.

7. European Parliament

 Members

Current MEPs(Members of the European Parliament) = 766 seats elected every 5 years.

Germany = 99, .... Luxembourg = 6.

Meeting places = meeting alternates in three cities (Strassbourg, Luxembourg, Brussels)

Turnout in 2009 was about 43%.

 Legislative Power

Originally, the Treaty of Rome of 1957 gave the Parliament only a consulting role. But its role has gradually expanded. Today the legislative power is equally shared by the Council and the Parliament.

consultation procedure: requires an opinion from the Parliament before a proposal can be adopted.

cooperation procedure: allows Parliament to improve a proposed legislation by amendment.

co-decision procedure: shares decision making power equally between the Parliament and the Council.

 Budgetary power

The European Parliament approvess the Union's budget each year. It sometimes rejects a budget, when its wishes are not adequately respected. It also monitors spending.

draws members from individual countries.

  Parliament has the right to remove the Commission, (which requires 2/3 majority).
   

 

8. European Court of Justice

European Court of Justice

It started as a court for ECSC (in 1952).
the Highest court of EU regarding Union law, not national laws.

consists of 28 judges and 9 advocates general, who are appointed by member states.

term = 6 years

Advocates General provide the judges with impartial opinion on assigned cases.

They are independent of member states.

Grand Chamber of 15 judges (very rare now),

or Chamber of 3 or 5 judges, depending on cases.

   The judges elect the President of the Court (3 years).
 Duty

The law correctly interprets Treaties of the European Union (Maastricht treaty). Court of Justice worked alone until 1988, now focuses on the task of interpreting Community law.

e.g., Union law supersedes national laws. (e.g., Van Gend en Loos case)

Court of First Instance (with 28 judges)

aka General Court.

Created in 1988.  Its work is limited to the competition rules and to hearing cases against the community institutions. It also has its President.

Procedure

direct actions are brought by the Commission, other Community institutions or by a member state. Cases brought by individuals or companies challenging the legality of a Community act are taken to the Court of First Instance.

preliminary rulings by courts in the member states. Court of Justice is not a court of appeal. National courts decide the case while observing the principles of Community law.

After the hearing, the advocate general delivers an independent opinion in open court. But it is not binding, and is not always followed by the Court.

The judges arrive at their view in closed discussion, and then delivers their judgment in open court.

The Court has the sole power to decide whether the actions of the Commissions and Council are constitutional. The court's judgments are binding throughout the community upon all individuals, business firms, national governments and other Community institutions.

For more information, see Europa document on Institutions of the European Union.This page provides direct links to various institutions of the European Union.

   Effects of Economic Integration