European Union Article for SIM Economics Society

Ever since the 1950s, calls for an "integrated body of Europe" had dominated the continent's political agendas. The latest incarnation of this concept, the European Union (EU), was established in 1993 through the Treaty of Maastricht. This is followed by the Treaty of Amsterdam in 1997, the Treaty of Nice in 2001 and the Treaty of Lisbon in 2007.

Before assessing the EU's performance since its inception, it is necessary to first understand how the EU functions with its institutions and key actors. Secondly the economic sphere is seldom isolated from other spheres of security, law, immigration, health and governance. The EU's economic policies, despite their namesake, may not be implemented with purely economic concerns. As nations weigh their stakes, economic policies may therefore go beyond the economic sphere to create "spillovers", positive and negative, in other aspects of the EU. Finally, the world is constantly in flux. It is crucial to identify policies that were once effective but are now inadequate to deliver their functions due to shifts in contexts and circumstances.

The formation of the EU is largely grounded in debates. While most arguments are political, some of them utilize economic sensibilities. In addition, the debates also serve as a framework to help us understand the boundaries within which a policy could take effect.

Minimalism vs Maximalism

At the end of World War Two (WWII), there were opposing views over the scope of European integration. The Minimalist view envisioned a loose union between sovereign states through trade relations. Winston Churchill, in a landmark speech in Zurich in 1946, borrowed heavily from Immanuel Kant's (a German philosopher) work on "Perpetual Peace" to argue that trading nations simply do not go to war with one another because war would have a detrimental effect on profits, and establishing stronger trade relations between Europeans will lead to stronger ties which will ensure long term peace for the continent. Tellingly, Churchill's views did not stem from a purely economic standpoint- he came from the United Kingdom (UK), a country that did not endure fascist occupation and emerged victorious from WWII. In addition, Churchill drew upon the strong democratic traditions of the UK, a powerful Commonwealth and strong political and economic links to the United States to formulate his Minimalist arguments.

Churchill's background, however, contrasted sharply with that of Altiero Spinelli- he endured imprisonment by Mussolini during WWII, and identified with the need to prevent tyrannical dictatorships reflected in the reigns of Stalin, Hitler and Mussolini. Beyond a loose economic union, there must be a merge of economic and political will to keep dictatorship in check and secure long term peace conditions. Spinelli's maximalist convictions largely grew from the resistance movement in Nazi-occupied Europe (where fascism greatly undermined the nation-state), and he believes that integration is essential to rescue the European nation-state after two devastating World Wars and long periods of economic instability (such as the Great Depression of 1930s).

Despite the differences in their political objectives, Minimalists and Maximalists both argue for an integrated Europe. The precision of how the EU should be organized, and in particular the degree of national sovereignty to be surrendered for the sake of integration, remains moot.

Intergovernmentalism vs Supranationalism

Integration remains a rhetoric unless it could be implemented. Supranationalism and intergovernmentalism are the two main concepts used to describe the "mode of implementation" integral to the decision-making processes within the EU. Most EU institutions lean to the extremes of this intergovernmentalism-supranationalism continuum, affecting the speed and efficacy of the policies that they implement.

With supranationalism, institutions and policies supersede the power of their national counterparts. The European Court of Justice (ECJ) for example, could issue verdicts that nullify and supersede verdicts reached by national courts. Supranational policies are political programs that replace their national equivalents- an example found in the Economic and Monetary Union (EMU) where the EU's single currency, the Euro, replaces the member states' national currencies.

Intergovernmentalism is another mode of implementation. Instead of establishing new institutions and policies, European integration proceeds through cooperation between national governments. In the area of foreign policy, the EU does not have a secretary of union or a foreign minister to represent it. Hence there is no EU policy worth speaking of unless all the member state governments agree upon the issue. In the case of the Iraq War, the EU was divided into two camps- one supporting the American invasion of Iraq while the other calling for further inspections by United Nations envoy Hans Blix for more concrete evidences of Weapons of Mass Destruction. In light of this dichotomy, a compromise simply could not be reached- the EU did not have a common foreign policy regarding Iraq. On the other hand, intergovernmental commitments can achieve powerful effects, as seen in the 1980s through the EU's member states working together to impose economic sanctions upon South Africa in condemnation of its apartheid regime.

European Commission, EP, Council of Ministers and ECJ

The European Commission is led by a Commission President, with the assistance of 26 Comissioners. Each Commissioner is equivalent to the Minister of a nation-state. The European Commission is responsible to propose legislation, implement EU policies, manage the EU Budget, conducting external relations, policing the EU law and finally setting the direction for the EU.

The European Parliament (EP) is the only directly elected political body in the EU. Each member state have its allocated number of representatives.An elected Member of [European] Parliament (MEP) is elected by his/her own country's citizens. As with any democratic parliament, there is a wide range of ideologies within the EP, from the extreme right to the far left, and even anti-EU groups. The EP serves a legislative role in the EU. It acts as a consultant to legislative proposals set by the European Commission, and also a conditional agenda setter by amending a bill on which the Council of Ministers gets to vote. It is a co-decision maker with veto power alongside the Council of Ministers to approve the Budget and legislative proposals set by the European Commission. Finally it has a role in Assent: majority of the MEPs have to agree to accession and association agreements, or it could be veto-ed.

The Council of Ministers is formed with the main objective of helping the EU set its mid-term policy goals. It also approves the budget and plays an intergovernmental role in having sole executive power over Common Foreign Policy and Security Policy and Justice and Home Affairs- politically sensitive areas that must be kept safe from supranational ambitions. As mentioned earlier, it also has legislative powers as a co-decision maker alongside the EP. Although termed the "Council of Ministers" it is actually an umbrella for nine sub-councils. The Economic and Financial Affairs Council (ECOFIN) and the Agriculture Council will be of interest in our discussion later.

The European Court of Justice (ECJ) is made up of a judges who represent their individual member states. The judges are assisted by 6 advocates general. Its main role is to interpret and apply EU law.

Benefits of EU Membership

It is myopic to attempt to define the benefits of EU membership on a coherent list. At the heart of EU membership, there are indeed privileges for the European citizenship as a whole. However the policies implemented on such a great level of scale and diversity as the EU will undoubtedly lead to conflicts of national interests. In essence, being part of the EU does not guarantee pure benefits to the member state. Rather, EU membership is largely affected by the specific policies implemented which will have varying outcomes for different member states. Hence it is more practical to observe them from the specific policies involved.

EU Policies

As mentioned earlier, EU policies can be implemented through intergovernmentalism, supranationalism or a compromise of both. There are many policies to be discussed, but to truly observe the EU's progress from the 1990s onwards, the best policies to observe will be those which were in place from at least the early 1990s. Even the famed currency of the EU, the Euro, only entered circulation on 1 January 2002. Hence the best candidate for assessment will be the Single Market program, along with its supporting policies, treaties and strategies. These include the European Competition policy, the EU Merger policy and the Lisbon Strategy.

The Emergence of a Single Market

The earlier incarnation of the EU, the European Economic Community (EEC), consisted of the six core states: France, Luxembourg, Belgium, West Germany, Italy and the Netherlands. Article 2 of the Treaty of Rome, which established the EEC in 1957, stated its purpose was to "promote throughout the Community a harmonious development of economic activities, a continuous and balanced expansion, an increase in stability, an accelerated raising of the standard of living, and closer relations between the states belonging to it". However, this lofty proclamation was not fully realized until 1993, when the EU was officially formed.

A truly Single Market will give EU citizens a wide choice of products and services from both their home country and every other member state. In envisioning a Single market, the ECC planned to create a European sphere of economic activity that would rise above national regulations. However, this did not went according to plan. Although by 1968 all tariffs and custom duties (direct barriers to trade) were abolished, protectionist reactions to the oil crises of 1973 and 1979 caused member states to shield their national markets and industries from global, and even European, competition. Europe was plagued with a wide range of product standards and national regulations governing the service sector. Professional qualifications differ among countries and capital mobility was substantially restricted. It is noteworthy that even when direct barriers to trade were removed, indirect barriers (protectionist oriented policies and inconsistent standards across countries) had continued to keep the European markets highly fragmented.

In 1985, the Commission White Paper was introduced. It called for a Qualified Majority Voting (QMV) in the Council of Ministers, except on tax issues, so that agreements can be brokered more easily as compared to the previous system of unanimity voting. The White Paper planned for the completion of the Single Market by 1 January, 1993. The member states had to implement into law 270 measures distributed over three areas: physical barriers, technical barriers and tax barriers. All these measures contribute towards the Four Freedoms: freedom of movement of goods, services, capital and labour within the EU.

Physical barriers include the holding up of goods and citizens at frontiers. The Commission argued that it should be fully eliminated.

Technical barriers should be removed- goods should be able to move freely across the EU as long as it is produced lawfully within a member state and does not compromise the public health and safety. Financial products (such as insurance policies) and transport and passenger services (largely controlled within their various states) should be liberalized. Currencies should move freely across national borders and professional qualifications should be made uniform across the EU.

However with regards to tax barriers, the Commission did not argue for uniformity in income or corporate taxes because a member state's tax system reflects its moral value system of expressing society's objectives. High-tax societies such as the Scandinavians, have reached consensus to finance public goods (education, transport, healthcare, etc) through state budget. The Commission focuses on indirect taxation in the form of value-added tax (VAT) which differs significantly from state to state. With VAT affecting prices, different VAT rates leads to trade distortion. Hence the Commission proposed a narrow band of VAT across the EU with a 5% difference between the highest and the lowest rate.

To convince its member states that the Single Market is beneficial, a steering group was formed in 1988. It published the Cecchini Report, which states that the GDP across the EU will rise by 5% or more mainly due to the lower business transaction costs in a Single Market. It also claims that 2 million more jobs will be created. Similarly, Price Waterhouse (a consulting firm) was even more optimistic, predicting a rise in 7% of GDP, 5 million more jobs created and fall in prices by 4.5%. The Cecchini Report goes further to warn that failure to implement a Single Market will lead to economic losses (termed the "costs of non-Europe") to all nations up to a combined 200 billion Euros. Against such "evidences", the member states decided to adopt the White Paper measures by 1993.

The Single Market

A decade later in 2003, the European Commission analyzed the effectiveness of the Single Market program. Although the actual results are not as optimistic as the initial estimate, they still justify the massive regulatory program: in 2002, it was estimated that the GDP was 1.8% higher and 2.5 million more jobs created as a result of the Single Market program. However these improvements might not be due to the Single Market alone- the decade was also one of widespread economic boom, with increased global trade occurring in/between Europe and other regions. With these two possible strands of causation, it is hard to determine the significance (or negligibility) of each cause upon the EU's economy.

The EU had benefited from a massive fourfold increase in Foreign Direct Investment (FDI), which indicates that Europe had become an attractive spot for investment in the global business community.

The EU member states continues to maintain a preference for trading with one another; only 32% of the overall EU trade is done with non- EU states, indicating that the removal of intra-trade barriers had been effective.

Finally in 2002, 15 million Europeans had taken advantage of the free movement of people and were living in another state.

The EU had continued to establish new legislations aimed at either new products standards or services (such as harmonizing mobile phone technology) or certain sectors that were not adddressed previously. By 2002, the total number of directives related to the Single Market had risen to 1475, with one-eighth of them agreed on 1995 and 2002.

Competition in the Single Market

Increased competition due to the Single Market had led to increased rationalization and economies of scale, resulting in more choice, higher quality and significantly reduced prices. It had a substantial impact on the liberalization of air transport, triggering an explosion in budget airline services. It also increased the diversity of providers of telecommunications, electricity, gas and railways. National firms were clearly oriented towards a more competitive European and global climate. Companies such as Deutsche Bank, Nokia and Ciba-Geigy could use their European base as a springboard for entering the global market.

Ultimately, the EU aims to develop a system of undistorted competition between economic players by preventing oligopolies and monopolies. Competition policies function by imposing rules that constrain economic actors to ensure fair competition. Exceptions are allowed for natural monopolies, industries that provide essential goods and services (such as agriculture), or to safeguard the public interest (restriction of goods with negative externalities such as alcohol in Sweden). A market dominated by few players tend to lead to inflated prices and discourages innovation. It also reduces the importance of maintaining high standards of production. Overall, it will cause much preventable harm to consumers.

The EU Competition policy was the first supranational policy as member states only serve a limited advisory capacity in the Commission's executive decisions. By 2000, the European Commission's workload had grown so heavy that Regulation 17 had to be reformed to include the application of European law by national authorities and a shift from a before-the-fact notification procedure to an after-the-fact control system.

Mergers in the Single Market

The EU continues to witness large increases in cross-border mergers which indicates the easing of national regulations regarding the movement of capital. It also shows that businesses are embracing a regional outlook of considering Europe as their sphere of economic activity. Established in 1989, the EU Merger Policy is complicated by the fact that different national rules exist for mergers. Hence the European Commission only pursues cases where companies across borders are affected, and it bases its rulings on the EU Competition policy while acknowledging other factors such as technological development or economic progress.

The EU Competition policy is based on a number of treaty and legal provisions. Treaty Articles 81 and 82 prohibit an individual or group of actors from gaining a dominant market share (defined by at least 50% of the market) either through "prevention, restriction, or distortion of competition". Treaty Article 86 also extends this prohibition to public (state-owned) enterprises. The EU Commission is responsible for enforcing the prohibitions through imposing fines. For example in 1991 the EU Commission imposed a fine of 75 million Euros on Tetra Pak (who owns 95% of the EU market at that time) for unfair marketing, contract and pricing policies.

The fall of national barriers as a result of the Single Market program and the introduction of a common currency had caused a rise in the number of mergers. Between 1990 and 2002, the European Commission issued verdicts on 2047 cases, but it only blocked 22 and saw 80 potential mergers abandoned during its review.

Lisbon Strategy

The Lisbon Strategy developed in March 2000 aims to implement economic, social and environmental renewal by 2010, making the EU the "world's most competitive and dynamic knowledge-based economy". In contrast with United States, the EU will focus not just on economic growth but also social and environmental cohesion. By 2007, however, few progress were made. It is therefore essential to examine the Strategy in detail.

The Lisbon Strategy has 12 main objectives. It aims to liberalize telecommunications, gas and electricity industries, as well as postal systems and rail transport. It seeks to establish an EU wide patent, rationalize the road tax system, reduce red tape in the labour market, aim for pension portability and raise the employment rate. In addition, it endeavours to harmonize corporate taxes, promote the use of internet and e-commerce, have a complete Single Market for financial services, open government procurement and reduce state subsidies.

The Complications of a Single Market

Although the Single Market appears to be a potentially viable, it is plagued by many issues, both endogeneous and exogeneous. The policies in question may contain certain flaws and loopholes to be exploited. The decision-making process that leads to the formation of these policies are politically charged- the final agreement reflects not just an altruistic desire for EU's benefit, but also individual and national interests of the Eurocrats. In addtion to that, the difficulties in implementing the ideals of the Single Market is also due to the fact that systems and reality seldom agree. The hidden costs and weak balances, as well as an apathetic social context in which the program operates, are also muffed out amidst the populist endorsements for a Single Market- all these in retrospect makes the Single Market program appear naive and overrated in its prospects.

Politically-charged Decisions

Although fair competition is essential, EU policy makers constantly face the delicate problem of juggling between the EU's need for competition versus the member states' own national business interests. The EU member states are regularly inclined to protectionist stance- protectionism in essence is irrational but it serves as an effective political instrument. In this age of globalization, an insecure public is easily pandered by the images of a politician lambasting foreign rivals and the issues of locals being shortchanged by competition.

With due honesty, the idea of beneficial competition is largely a sacred cow of mainstream economics in academia- it is impossible at a glance to confirm that certain regulations geared to improve competition will automatically lead to widespread benefits. The real world, especially that of the EU with its diversity of nations and industries, does not conform neatly into our simple economic theory. In certain situations, increased competition actually lead to short tem losses.

The problem starts when protectionist politicians fail to examine competition in the detailed context of their national industries; competition is made a public spectacle and thrashed like a pinata to please the crowd. These irresponsible rhectoric is not without effect- it reinforces the public's negative perception of competition without providing a rational explaination for taking a protectionist stance in certain economic issues. In Febuary 2009, UK unions held wildcat strikes protesting a decision by a French-owned oil plant to bring in 300 Italian and Portuguese contract laborers- UK Workers want Prime Minister Gordon Brown to make good on his 2007 pledge that his government would impress upon businesses the need to create "British jobs for British workers.

In March 2000, France insisted on the transfer of “free and undistorted competition” from the list of the EU’s key objectives into a protocol in the Lisbon Treaty (not to be confused with the Lisbon Strategy). This political manuveur is an example of a member state downplaying EU competition by reducing its relative postion. This incidentally coincides with the French proclivity for protectionism since the 1990s. In March 2009, France was embroiled in a protectionism row after it announced it was moving some car production from Slovenia to a site near Paris. This type of decisions, when accumulated, will no doubt endanger the Single Market in the future.

Social Context: EU Apathy

Perhaps, the greatest oversight in implementing the Single Market was in the EU social sphere where this program operates.

Europeans are generally politically engaged within their own countries. However at the EU level, their engagement leaves much to be desired. As mentioned earlier, the EU is made up of several institutions- the only institution which is elected through direct democracy is the European Parliament (EP). As such, the EP elections serve an important role (and possibly the only medium) to directly represent the interests of the EU citizens. Despite its significance, turnouts at the EP polls had been abysmal.

In the 2004 EP elections, the EU had an average of 45.5% going to the polls; in Poland, only 20% voted. There was no significant improvements in the 2009 EP elections, UK voters were among the most apathetic in the EU with just 35% going to the polls; the EU average had reached an historic low of 43%.

In addition, the distortion is stark- voters tend to treat the EP elections as secondary to their national elections, using their EP votes to vent their dissatisfaction with domestic politics of the ruling parties. Analysts had shown that 20% of the voters deviate from their usual electoral behaviour during EP elections- opposition and smaller parties tend to do better during EP elections than within their own nations. Hence, the EP election is often skewed towards domestic affairs rather than EU concerns.

These worrying trends suggest that the EU project may be conceived and continued by the political elites within their member states rather than the will of the general European populace. If this is true, the situation may evolve into one where intense state control is needed to coerce the citizens into an unhappy alliance with one another.

Social Context: Citizen Interest

In essence, the Lisbon Strategy was largely associated with the "anglo-saxon model" of achieving high levels of employment and growth through deregulation and trade liberalization with little emphasis on potential income inequalities. It focused largely on supply-side economic reforms which contrast sharply with the "continental model" of advocating high minimum wages, generous welfare benefits, extensive worker rights and unfortunately also high unemployment rates.

Since most of the EU member state's citizens are already used to the "continental model", few are willing to give up these perks and even actively oppose their government initiatives for change. This is an issue that is even beyond the political and economic system- it is tied intimately to history and the seeds sowed in the past.

The EU had indeed envisioned a Single Market program which symbolises its unity, but there are circumstances beyond even the reach and regulations of the system. Although inroads are made, the EU's future and fragile existence is highly uncertain.

References Made:

http://www.open.ac.uk/platform/news/politics/uk-voters-among-the-most-apathetic-european-elections

http://www.time.com/time/world/article/0,8599,1876944,00.html

http://www.epc.eu/events_rep_details.php?cat_id=6&pub_id=893&year=2008

http://www.global-vision.net/files/downloads/download377.pdf

http://www.skovgaard.org/europolitics/eumarket.htm

http://www.businessspectator.com.au/bs.nsf/Article/protectionism-trade-bloc-market-economic-

euro-euro-pd20100630-6W6K9?OpenDocument&src=rot

Special thanks and credit must be given to Andreas Staab, author of "The European Union Explained". Without his valuable insights and concise explainations, I will still be floundering under the paraphenalia of the European apparatus.