The Economics of the European Integration

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The Economics of the European Integration

• PD Dr. André Schmidt
• University of Goettingen

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The Economics of the European Integration

• Structure
• Introduction History and Institutions of the
  European Union
• The Microeconomics behind the European
  Integration
• Fields of EU-Policies

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1 Introduction History and Institutions

• 1.1 The Different Stages in the Process of the
  European Integration
• Early post-war period
• Market Integration
• Institutional Integration
• 1.2 EU Organizational Structure
• The three Pillars of the EU
• The Institutions of the European Union
• Principles of Decision Making

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References

• Baldwin, R., and Ch. Wyplosz (2006), The
  Economics of European Integration, 2. ed.,
  London.
• Molle, W. (2006), The Economics of European
  Integration Theory, Practice, Policy, 5. ed.,
  Aldershot.
• Swann, D. (1995), Economics of the Common Market
  Integration in the European Union. 8. ed., London.

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1.1.1 Early post war period
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The European Coal and Steel Community

• Article 4
• The following are recognised as incompatible
  with the common market for coal and steel and
  shall accordingly be abolished and prohibited
  witin the Community, as provided in this Treaty
• import and export duties, or charges having
  equivalent effect, and quantitative restrictions
  on the movement of products
• measures practices which discriminate between
  producers, between purchasers or between
  consumers, especially in prices and delivery
  terms of transport or transport rates and
  conditions, and measures or practices which
  interfere with the purchasers free choice of
  supplier
• subsidies or aids granted by States, or special
  charges imposed by States, in any form whatever
• restrictive practices which tend towards the
  sharing or exploiting of markets.

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1.1.2 Market IntegrationThe Treaty of Rome

• The Treaty establishing the EEC affirmed in its
  preamble that signatory states were determined
  to lay foundations of an ever closer union among
  the peoples of Europe.

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The Signatory States
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Core Elements of the Treaty of Rome

• Customs Union
• Common Market
• Common Agricultural Policy
• Prohibition of Monopolies, State Aids and
  Subsidies

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The Common Agricultural Policy of Rome

• Free market of agricultural products inside the
  EEC
• Protectionist policies
• sufficient revenues to European Farmers
• avoiding competition from third countries
• guaranteeing sufficient agriculture prices

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Euro-pessimism, 1966-1986

• Political shocks
• Empty Chair Policy and the Luxembourg
  Compromise
• Failure of Monetary Integration
• Failure of Deeper Trade Integration
• Growing cost of Common Agricultural Policy
  creates frictions over budget
• Phase of Euro-Scleroses !

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The empty chair policy of France

• In 1966 France opposed a range of Comiision
  proposals, which included measures for financing
  the CAP
• France stopped attending the main Community
  meetings and threatened to withdraw from the EEC
• In exchange the Council of Ministers overturned
  the Treaty of Roms majority voting provisions
  whenever a Member State annouced that if felt
  that very important interest were a stake.

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The new Forces The Single Market Program and the
Single European Act

• Delors launches completion of the internal market
  with Single European Act
• create "an area without internal frontiers in
  which the free movement of goods, persons,
  services and capital is ensured".
• Important institutional changes, especially move
  to majority voting on Single Market issues

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Single Market Programme, EC92

• Basic elements
• Goods Trade Liberalisation
• Streamlining or elimination of border
  formalities,
• Harmonisation of VAT rates within wide bands
• Liberalisation of government procurement
• Harmonisation and mutual recognition of technical
  standards in production, packaging and marketing
• Factor Trade Liberalisation
• Removal of all capital controls (!!!), and deeper
  capital market integration
• Liberalisation of cross-border market-entry
  policies

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The European Union 1992
1973
1958
1981
1980
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1.1.3. Institutional IntegrationThe Treaty of
Maastricht 1992

• monetary union by 1999, single currency by 2002,
• creation of the EU citizenship,
• Locked in the free movement of capital,
• strengthened EU cooperation in economic areas
  (macroeconomic policies, fiscal policies,
  research and technological policy, industrial
  policy)
• strengthened EU cooperation in non-economic areas
  (security and defence policy, law enforcement,
  criminal justice, asylum and immigration policy)
• enshrined the principle of subsidiarity to
  control the transfer of the responsibilities from
  Member States to EU
• introduces a social chapter which expanded the EU
  social policy

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The European Union 1994
1994
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The Treaty of Amsterdam 1997

• Failed to reform main institutions
• Tidied up of the Maastricht Treaty
• More social policy, Parliament powers modestly
  boosted,
• Employment Policy
• flexible integration, closer cooperation
  introduced
• Amsterdam leftovers
• voting rules in the Council of Ministers,
• number of Commissioners,
• Extension of issue covered by majority voting

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The Treaty of Nice 2000

• Reforms of main institutions agreed, but poorly
  done
• Council voting rules highly complex and reduce
  EUs ability to act with more members
• No important extension of majority voting
• Make shift solution for Commissioners
• No reform of decision making in ECB
• Generally viewed as a failure
• Main changes re-visited in draft Constitutional
  Treaty, 2003 ?????

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European Union 2004
Cyprus
Malta
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1.2.1 EU Organizational Structure

• The EUs 3-Pillar Structure
• What is the difference between the European
  Community and the European Union?
• 3 Pillar Structure
• 1st Economics
• 2nd Security Foreign
• 3rd Justice
• EC law only applies to 1st pillar.
• EU is roof over the three pillars

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1.2.2 The Institutions of the European Union

• There are dozens of EU institutions
• but only 5 are really important
• European Council
• Council of Ministers
• Commission
• Parliament
• EU Court
• Others matter in specific areas or at particular
  moments

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European Council (I)

• consists of the leader (prime minister or
  president) of each EU member plus the President
  of the European Commission.
• by far the most influential institution
• its members are the leaders of their respective
  nations.
• provides broad guidelines for EU policy
• thrashes out compromises on sensitive issues,
  e.g.
• reforms of the major EU policies,
• the EUs multiyear budget plan,
• Treaty changes,
• final terms of enlargements, etc.

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European Council (II)

• meets at least twice a year (June and December)
• meets more frequently when the EU faces major
  political problems.
• highest profile meetings at the end of each
  six-month term of the EU Presidency.
• These meetings are important political and media
  events
• determine all of the EUs major moves.
• most important decisions of each Presidency are
  contained in a document, known as the
  Conclusions of the Presidency, or just the
  Conclusions

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European Council (III)

• Strangely, European Council has no formal role in
  EU law-making
• Its political decisions must be translated into
  action via Treaty changes or secondary
  legislation.
• Confusingly, the European Council and the Council
  of the EU are often both called the Council
• The 2003 draft Constitution proposes to make the
  European Council a form part of the EU
  institutional structure

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Council of Ministers (I)

• Usually called by old name Council of Ministers
• formal name is now Council of the EU
• Consists representatives at ministerial level
  from each Member State, empowered to commit
  his/her Government
• Typically minister for relevant area
• e.g, Finance ministers on budget issues,
• Confusingly, Council uses different names
  according to the issue discussed.
• Famous ones include EcoFin (for financial and
  budget issues), the Agriculture Council (for CAP
  issues), General Affairs Council (foreign policy
  issues).

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Council of Ministers (II)

• Is EUs main decision-making body
• Almost every EU legislation must be approved by
  it
• main task to adopt new EU laws, e.g.
• measures necessary to implement the Treaties
• also measures concerning the EU budget and
  international agreements involving the EU.
• is also supposed to coordinate the general
  economic policies of the Member States in the
  context of the Economic and Monetary Union (EMU)
• e.g. famous 3 deficit rule

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Council of Ministers (III)

• Council also decides on
• 2nd and 3rd pillar issue, i.e. Common Foreign and
  Security Policies (2nd), police and judicial
  cooperation in criminal matters (3rd).
• two main decision-making rules.
• On the most important issues, unanimity
• e.g. Treaty changes, enlargement, multi-year
  budget plan, Council decisions are by.
• On most issues (about 80 of all Council
  decisions), majority voting
• qualified majority voting (QMV).

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European Commission (I)

• European Commission is at the heart of the EUs
  institutional structure
• driving force behind deeper and wider European
  integration.
• Has three main roles
• propose legislation to the Council and
  Parliament,
• to administer and implement EU policies
• to provide surveillance and enforcement of EU law
• guardian of the Treaties
• ALSO, represents EU at some international
  negotiations

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European Commission (II)

• Before the 2004 enlargement
• one Commissioner from each member
• extra Commissioner from the big-5 (Germany, UK,
  France, Italy and Spain in the EU15).
• This includes the President (Romano Prodi up to
  2005), two Vice-Presidents and 17 other
  Commissioners.
• Under Nice Treaty each member in EU25 has one
  Commissioner
• draft Constitution, only 15 Commissioners
• rotating evenly among all members
• Would have non-voting Commissioners from other
  nations

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European Commission (III)

• Commissioners are chosen by their own national
  governments
• subject to political agreement by other members.
• Commission, the Commission President
  individually, approved by Parliament.
• Commissioners are not national representatives.
• should not accept or seek instruction from their
  country.
• appointed together, serve for five years
• current Commissions term ends in Jan 2005.
• Each Commissioner in charge of a specific area of
  EU policy
• Directorate-Generals or DGs

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European Commission (IV)

• Executive powers
• Commission executive in all of the EUs
  endeavours,
• power most obvious in competition policy and
  trade policy
• Manage the EU budget, subject to EU Court of
  Auditors.
• Decision making
• Decides on basis of a simple majority, if vote
  taken
• almost all decisions on consensus basis

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European Parliament (I)

• two main tasks
• oversees EU institutions, especially Commission
• it shares legislative powers, including budgetary
  power, with the Council and the Commission
• Organisation
• Up till the 2004 enlargement, 626 members (MEPs)
• After 732.
• Directly elected in special elections organized
  by member nation.
• number per nation varies with population but
  rises less than proportionally.

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European Parliament (II)

• MEPs supposed represent local constituencies, but
  generally organised along classic European
  political lines, not national lines as in
  Council.
• Centre left and centre right two main party
  groupings
• Together about 2/3rds of seats
• MEPs seat, physical, left-to-right
• Location
• Parliament is in Strasbourg, in Luxembourg, and
  in Brussels
• Nationalistic struggles to keep an EU institution
  local resulted in this.

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European Parliament (III)

• Democratic control
• Parliament and Council are the primary democratic
  controls over the EUs activities.
• MEPs directly elected so in principle a way for
  Europeans to have a voices
• In practice, however, European Parliamentary
  elections dominated by standard
  left-versus-right, and purely local issues rather
  than by EU issues.
• The 2003 draft Constitutional Treaty proposes few
  changes for the Parliament
• does expand its power, giving it equal standing
  with the Council on almost legislation.

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European Court of Justice (I)

• EU laws and decisions open to interpretation that
  lead to disputes that cannot be settled by
  negotiation.
• Court settle these disputes, especially disputes
  between Member States, between the EU and Member
  States, between EU institutions, and between
  individuals and the EU.
• EU Courts supranational power highly unusual in
  international organisations.
• As a result of this power, the Court has had a
  major impact on European integration. As
  mentioned above, a 1964 judgment established

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European Court of Justice (II)

• Influence
• Court has had a major impact on European
  integration via case-law
• Organisation
• located in Luxembourg
• one judge from each member
• appointed by common for six years
• also eight advocates-general to help judges
• The Court reaches its decisions by majority
  voting.
• Court of First Instance set up 1980s to help with
  ever growing workload.

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1.2.3. Principles of Decision Making

• Key question Which level of government is
  responsible for each task?
• Setting foreign policy
• Speed limits
• Trade policy, Competition Policy etc
• Typical levels
• local
• regional
• national
• EU
• Task allocation competencies in EU jargon

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The Principle of Subsidiarity (I)

• Before looking at the theory, what is the
  practice in EU?
• Task allocation in EU guided by subsidiarity
  principle (Maastricht Treaty)
• Decisions should be made as close to the people
  as possible,
• EU should not take action unless doing so is more
  effective than action taken at national, regional
  or local level.

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The Principle of Subsidiarity (II)

• 3 Pillar structure delimits range of
• Community competencies (tasks allocated to EU)
• Shared competencies (areas were task are split
  between EU and member states)
• National competencies
• 1st pillar is EU competency
• 2nd and 3rd are generally national competencies
• details complex, but basically members pursue
  cooperation but do not transfer sovereignty to EU

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The Principle of Subsidiarity (III)

• Under the principle of subsidiarity, in areas
  which do not fall within its exclusive
  competences, the Union shall act only if and
  insofar as the objectives of the proposed action
  cannot be sufficiently achieved by the Member
  States, either of central level or at regional
  and local level, but can rather, by reason of the
  scale or effects of the proposed action, be
  better achieved at Union level.

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The Principle of Subsidiarity and Fiscal
Federalism

• There is no clear answer from theory !
• Diversity and local informational advantages
• Diversity of preference and local conditions
  argues for setting policy at low level (i.e.
  close to people)
• Scale economies
• Tends to favour centralisation and
  one-size-fits-all to lower costs
• Spillovers
• Negative and positive spillovers argue for
  centralisation
• Local governments tend to underappreciated the
  impact (positive or negative) on other
  jurisdictions. (Passing Parade parable)
• Democracy as a control mechanism
• Favours decentralisation so voters have finer
  choices
• Jurisdictional competition
• Favours decentralisation to allow voters a choice

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The Principle of Subsidiarity and Fiscal
Federalism (II)

• One-size-fits-all policies tend to be inefficient
  since too much for some and too little for others
• central government could set different local
  policies but Local Government likely to have an
  information advantage

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The Principle of Subsidiarity and Fiscal
Federalism (III)

• By producing public good at higher scale, or
  applying to more people may lower average cost
• This ends to favour centralisation
• Hard to think of examples of this in the EU

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The Principle of Subsidiarity and Fiscal
Federalism (IV)

• Example of a positive spillovers
• If decentralised, each region chooses level of
  public good that is too low
• e.g. Qd2 for region 2
• Two-region gain from centralisation is area A
• Similar conclusion if negative spillovers
• Q too high with decentralised

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Jurisdictional Competition

• Voters influence the sort of government they live
  under via
• voice
• Voting, lobbying, etc.
• exit.
• Change jurisdictions (e.g. move between cities).
• While exit is not a option for most voters at the
  national level, it usually is at the sub-national
  level.
• since people can move, politicians must pay
  closer attention to the wishes of the people.
• With centralised policy making, this pressure
  evaporates.

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2. The Microeconomics behind the European
Integration

• Structure
• 2.1 Introductory remarks
• Supply and demand in a open economy
• Economic effects of protectionism
• 2.2 Economic effects of regional integration
• 1. Welfare effects of a customs union
• 2. Market size and scale effects
• 3. Growth effects and factor market integration

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Microeconomic Tools Demand Curve

• Demand curve shows how much consumers would buy
  of a particular good at any particular price.
• Market demand is aggregated over all consumers
  demand curves
• Horizontal sum

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Supply Curve

• Supply curve shows how much firms would offer to
  the market at a given price
• Based on optimisation
• Would selling one more unit at price increase
  profit?
• Market supply is aggregated over all firms
• Horizontal sum

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Welfare Analysis Consumer Surplus (I)

• Since demand curve based on marginal utility, it
  can be used to show how consumers well-being
  (welfare) is affected by changes in the price.
• Gap between marginal utility of a unit and price
  paid shows surplus from being able to buy c at
  p

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Welfare Analysis Consumer Surplus (II)

• If the price falls
• Consumers obviously better off
• Consumer surplus change quantifies this intuition
• consumer surplus rise, 2 parts
• Pay less for units consumed at old price measure
  of this area A
• Price drop times old consumption
• Gain surplus on the new units consumed (those
  from c to c)
• measure of this area B
• sum of all new gaps between marginal utility
  and price

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Welfare Analysis Producer Surplus (I)

• Since supply curve based on marginal cost, it can
  be used to show how producers well-being
  (welfare) is affected by changes in the price.
• Gap between marginal cost of a unit and price
  received shows surplus from being able to sell
  q at p

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Welfare Analysis Producer Surplus (II)

• If the price rises
• producers obviously better off
• Producer surplus change quantifies this intuition
• producer surplus rise, 2 parts
• Get more for units sold at old price measure of
  this area A
• Price rise times old production
• Gain surplus on the new units sold (those from q
  to q)
• measure of this area B
• sum of all new gaps between marginal cost and
  price

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Supply and Demand in a open Economy (I)

• Start with Import Demand Curve
• This tells us how much a nation would import for
  any given domestic price
• Presumes imports and domestic production are
  perfect substitutes
• Imports equal gap between domestic consumption
  and domestic production

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Import Demand Curve
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Import Supply Curve
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Welfare Effects of Imports
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Welfare Effects of Exports
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Summarizing Illustration of Supply and Demand in
an open Economy

• MD-MS diagram can be usefully teamed with open
  economy supply and demand diagram
• Permits tracking domestic international
  consequences of a trade policy change

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Economic Effects of Protectionism