EU 911, European Integration

1. EU 911, European Integration • Lecture 1: Economic Integration in Europe The dimension of Economic Integration

2. Chronology • 1951 Treaty of Paris • European Cold and Steel Community (1952) • members: Belgium, France, the Federal Republic of Germany, Italy, Luxembourg, the Netherlands • 1957 Treaty of Rome • European Economic Community& European Atomic Energy Community • 1965 Merger Treaty • European Community • 1973 Denmark, the Irish Republic, the UK join EC • 1981 Greece joins EC • 1986 Spain and Portugal join EC Single European Act has been signed • 1992 - Treaty of European Union (Nov. 1993) Maastricht • 1995 - Sweden, Finland and Austria join the EU • 1997 - the treaty of Amsterdam

3. The key problems facing Europe in the 1940th • The experience of repeated war • New mechanism were needed to prevent and resolve future conflicts the wish to avoid a repeat of the nationalism • The economic dislocation caused by war time destruction • the need of the development of economic base • German recovery • But there should be safe guard against Germany becoming to powerful • The emergence of global superpowers • The beginning of cold war • the division of Europe and the wish in the West for the security from the Soviet threat Franco-German reconciliation as the bedrock of stability within Western Europe

4. The international organisation of the West European economies in 50th International Co-operation • 1944- Bretton Woods conference (IMF, and The World Bank) • 1947 -the Economic Commission for Europe (ECE) created under the auspices of UN • 1947- the General Agreement on Tariffs and Trades (GATT) • 1948 Benelux

5. Cold War • 1947- Marshall Plan was in fact accepted only in the Western Europe • “the delay in providing aid to the war-impoverished countries of Europe put them in danger of Soviet domination, represented in the drawing by the Russian bear.“ The library of congress information bulletin • Soviet government "rejects this plan as totally unsatisfactory." • 1948-Organisation for European Economic Co-operation (OEES) created to implement Marshall Plan. • Key government body , the council of Ministries • 1949- Atlantic Chapter created NATO • 1949-Soviet-led Council for Mutual Economic Assistance (CMEA)

6. The further integration • 1948-Organisation for European Economic Co-operation (OEES) • Key government body, the council of Ministries • reconstruction should be co-ordinated • tariff reduction should be implemented • 1950 -European Payment Union (EUP) • facilitate multilateral system of payments for trade, to solve liquidity problem. This allowed the O.E.E.C. members to settle their trade accounts (debts and credits) on a multilateral basis rather than by bilateral agreements between individual countries. Since the trade balances of the 16 members of the O.E.E.C. were settled together, the pressure on the scarce money resources between European countries was much reduced • 1951- Treaty of Paris • European Cold and Steel Community • 1955 -Messina conference • proposed to create common transport policy and integration in energy sector • 1960 -Stockholm convention created EFTA European Free Trade Association UK, Norway, Denmark, Sweden, Austria, Portugal and Switzerland • 1973- The reduction of tariff barriers on industrial trade between two groupings • 1994- bilateral agreement between EFTA and EU

7. European Coal and Steel Community • ECSC (July 1952) was the starting point of the Community method of supranational integration • France, Germany (FRG), Italy, Belgium, the Netherlands and Luxembourg (E6). • 100 articles • Purpose: Free trade area for coal, steel and related sectors. • ECSC sought to restrict Member States’ use of discriminatory state subsidies and provided a common external commercial policy relating to the two sectors • remove of quotas and custom duties over a five-year transitional period • the rational expansion and modernisation of the industries • provision of a mechanisms for managing serious shortage or gluts ECSC’s activities were financed by levies on coal and steel production • Political goal: providing a framework for Franco-German reconciliation

8. ECSC political institutions • The High Authority • the executive equivalent to European Commission • independent from national governments • The Council of Ministers • comprising representatives of the member governments • control the High Authority, preventing domination of French and German interests • The Consultative Committee • consisting of representatives of employers/industry, trade unions, and consumers concerned with the ECSC’s activities • The Assembly • composed of a total of sixty-eight delegates from six national parliaments • The European Court of Justice • It was responsible for adjudicating on disputes relating to the ECSC’s activities Location: Luxembourg

9. ECSC evaluation • Increase in trade and production in early 60th • the other reasons may explain this • High Authority was not able to solve the Coal crisis in 1959 because it could not obtain the necessary majority • the ECSC was not so supranational in practice as it designed to be.

10. EEC and Euroatom • The treaty of Rome 1958 • Euroatom • The product of French pressure • France saw Euroatom as a way to extend and develop a market for French technology • Difference between members was too large, Euroatom had no power in production regulation. • Health and Safety in nuclear industry • Joint research • European Economic Community • the purpose: the creation of the common market • complete customs union • movement towards economic union, with integrated policy in important areas (initially agriculture), and co-ordination in macroeconomic policy

11. Contents of EEC treaty Preamble Part One. Basic Principles Part Two. Foundation of the Community. Title 1. Free movement of Goods, including creation of Custom Union, elimination of quantitative restrictions Title II. Agriculture Title III. Free movement of Persons, Services and Capital Title IV. Transport Part Three. Policy of the Community Title I. Common Rules, including on competition policy, states aids, tax provisions, and the harmonisation of laws Title II. Economic Policy, principally the commercial policy Title III. Social Policy Title IV. The European Investment Bank Part Four. Association of Overseas Countries and Territories Part Five. Institutions of the Community Title 1. Provision Governing the institution Title II. Financial Provision (concerning the EES budget) Part Six.. General and Final Provision

12. 1960s: consolidation and challenge • 1960 The European Free Trade Association EFTA is Established • Britain, Spain, Portugal, Switzerland, Finland, Sweden, Norway, Denmark, Ireland, Iceland and Liechtenstein • The Merger treaty (1965) • brings together ECSC, EEC and Euroatom with the effect from 1967 and naming the merger grope EC • The Luxembourg Compromise (1966) • The treaty of Rome provided for decision-making by majority vote in the Council of Ministries. But in 1965, France under General de Gaulle objected to the Commission’s arrogation of some powers that he felt ought to remain with the French government. He boycotted sessions under what was known as “the empty chair policy”. • Each nations received a veto right • this was apolitical agreement, not a treaty amendment • As a result the pace of integration was slowed down • Other reasons: • new members: Britain, Ireland and Denmark (1972) • recession in 70th • Unemployment

13. UK and European Integration Economic disadvantage • special relationship with commonwealth • UK imported cheap food • Cheap food caused low wage in industrial sector • EFTA was more suitable because: • No price protection in agriculture • free trade for industrial goods only • independent tariff policy The E.F.T.A. was basically a trading organization. They planned to remove all tariffs against each other in ten years; but unlike the E.E.C. they were not obliged to adopt common tariffs against non-members. • EFTA disadvantages EFTA could not compete with the EEC in terms of economic production and growth. EFTA had just a population of 92 million people, while EEC had about 170 million people. Thus EEC had a larger market for the sale of their goods than EFTA. EEC were industrially advanced nations, while the EFTA, except Britain and Switzerland, were industrially quite backward. EFTA were separated from one another by long distance, thus creating artificial barriers to the growth of trade. • 1967 de Gaulle rejection • Balance of payment deficit • Capital restrictions (1957)

14. The 1985 White Paper The 1985 White Paper, “Completing the Internal Market”, produced under Jacques, identified three main barriers to achieving a single market: • Physical barriers such as frontier controls and customs formalities. • Technical barriers to the free movement of goods, services and factors that arise from national rules and regulations. • Fiscal barriers caused by differing tax systems and the need to adjust VAT and excise duties when goods cross frontiers. Three features of the White Paper made it an effective spur to political action. • it listed 282 specific measures needed for completion of the internal market. • It set a tight timetable for their implementation - 31st December, 1992. • Non-tariff barriers to be eliminated by mutual recognition of national governments’ regulations rather than harmonisation (this bypassed the need for negotiation on every individual).

15. The Single European Act • The single European Act (1986) was intend to renewed purpose of the new large community and to enable it to tackle “Euro-sclerosis” • the commitment to complete the single internal market by the end of December 1992 • mutual recognition of national product standards and creating new European Standards from the Council to standard-setting agencies • the widening of Community responsibilities to include the environment, R&D, regional development and foreign policy • reform and streaming of the Community’s decision-making processes • the principle of qualified majority voting • a Reveal of interest in European Monetary Union (EMU)

16. The Treaty of Maastricht 1992 • External environment • the end of cold war • Collapse of soviet Union • Three pillars • economic integration • a common foreign and security policy • a common interior and justice policy

17. Institutions • Supranational • European Commission-executive civil service • European Parliament (EP) • consultative body • can block the decision of the Council of Ministers • monitors European Commission • European Court of Justice (ECJ) • The representatives of the national governments • European Council • 15 heads of states and 15 foreign ministers • the Council of Ministers • consist of the ministers of the Member States ( takes decisions by qualified majority)

18. European Commission • The commissioner are appointed by the national governments but are then expected to detach themselves form national loyalty • key functions • the proposal of legislation; • mediating between governments to achieve agreement in legislation • management of technical details of policy • representing the EU, particularly in commercial policy negotiations • acting as a defender of collective EU interests • acting as a guardian of the treaties by ensuring that EC law is upheld

19. The European Parliament • Is directly elected by voters in the EU • has rather limited powers; it does not make a laws like a national parliament • It can advise the Council but in general its options are not binding except • parliament has powers of joint decision with CM over a range of topics covering single market measures, consumer protection, environment, health, education and R&D • the Control of Commission • it can pass a vote of censure on the Commission forcing its complete resignation • the Commission and its President has to be approved by the parliament at the start of their mandate • EU budget • it can accept or reject the complete budget • it can amend the draft budget with respect to non-obligatory expenditure

20. the Council of Ministersthe weights of votes Belgium 5 Denmark 3 Germany 10 Greece 5 Spain 8 France 10 Ireland 3 Italy 10 Luxembourg 2 The Netherlands 5 Portugal 5 Britain 10 Total 76

21. Fields in the area of social and economics affairs in which the EC has policy-making competence • Free movement of goods • agriculture • monetary policy with British and Danish opt-out • social policy-with British opt-out • free movement of factors, mutual recognition of qualification • transport • competition policy and tax harmonisation • commercial policy • culture • public health • consumer protection • Trans-European networks in transport, energy and telecommunications • R&D, technology • setting up Cohesion Fund to help integration of “poorer” states with income per capita less than 90percent of EU average • environment

22. Monetary Union • Monetary integration was to be approached in three phases • Phase 1. The pre-Maastricht situation with the Exchange rate mechanism • Phase II. The establishment of the European Central Bank • Phase III. Monetary Union • which will commence when at least three member states meet the convergence criteria or on 1 January 1999, whichever occurred sooner • the Convergence criteria were • inflation no higher than 1.5% above the average of the lowest three EU economies • government budget deficit sustainable less than 3% of GDP • exchange rate within the narrow ERM bands for at least two years • long term interest rate no higher than 2 percentage points above the average of the lowest three EU 3economies

23. The expected effects of 1992 • The outcomes • trade volumes • Patterns of products and Specialisation • factor prices • GDP • The reasons • increased exploitation of scale economies • increase in competition • reduction of transaction costs • the possibility of specialisation

25. The Treaty of Amsterdam (1997).

26. The purpose of integration: • Political • Economic • Security • Eliminating of negative externalities • Environmental policy • Provision of public goods • Common defence • International law • R&D • Reduction of transaction costs • Free trade area • Free movement of labour and capital • Standardisation • Coordination • crime • combating terrorism • Federalists- superseding of national state with a larger democratic structure • Functionalists -economic co-operation should be a starting point for achieving political goals • Nationalists - do not need to participate in a new political order

27. Efficiency (Pareto - efficiency): • An economic arrangement is said to be efficient if it is impossible to implement an alternative arrangement under which all parties are at least as well off, and some are strictly better off. Pareto-efficient frontier U2 disagreement U1

28. Gains from competitive markets Market the interaction of one or more buyers with one or more sellers Basic competitive model - many buyers and sellers. Each firm and each household is a price taker. Because they can not influence the market price. Demand is the quantity of a good and services that customers are willing and able to purchase over a given period of time. Supply is the relationship between amounts of commodity that seller would be willing and able to make available for sale and alternative prices during a giving period, all other things remaining the same. Consumer surplus is the difference between what a consumer is willing to pay for a good and what she actually pays Producer surplus is the difference between what a producer receives for his production and what he is willing to receive A S Competitive market O B C D

29. Comparative Statics Static theory compare different equilibrium points, assumes prompt adjustments to changes in the economic environment Increase in Demand B p A q Increase in Supply p A B q

30. Market failure: Monopoly Producer sets price A S F B O G C D

31. Externalities Externality a cost or benefit imposed involuntary on another party. Positive externality- benefit bee-keeper and apple grower, music Negative externality - cost (detrimental) traffic congestion, environment pollution, music (chemical and brewery, railroad and farm, new plant attracting workers§) Private costs are the total costs borne by the initiator of some activities Social costs are the total borne by all members of society. Social benefits the total benefits to all members of society.

32. Social Costs and Benefits C´s Brewery and chemicals C´p B´p Xm Xs Bees and apples C´p B´p B´s Xm Xs

33. Externalities and Coase Theorem • Coase theorem: if there are no transaction costs (including legal, strategic or informational barriers) and if property right are clearly defined, then people can always negotiate to an efficient outcome • Examples: • non-smoking right • brewery and chemicals • railroad owner and farmer • When Coase theorem do not works? • Transaction costs • undefined property rights

34. Press and Café example There are café and noisy press machine in one neighbourhood. The press machine can work 25 minutes, then it should take a rest for another 35 minutes. For each 5 minutes the press machine generates a profit of 25£. But café owner lost a client because of huge noise created by press machine. No noise law: If there were agreement, press would operate 25 min Café loss =-105, Press profit =125 The maximum gain from trade 13=33-20 Café owner can ask press owner to run the press for only 15 min, promising to compensate the loss of 50= 125-75 But press owner an bargain for higher compensation,which however can not exceed the decline in café loss. 63=105-42, Press owner would have 75+63=125+13=138 Noise pollution law: If there were agreement, press would be stopped: time=0 min; Café loss =0, Press profit =0 Press owner can buy the right to produce noise pollution during 15 min, and he should at least compensate café owner for his loss=-42. In this case Press profit will be 33=75-42; 33 is a total gain from agreement in this case Café owner can ask higher compensation, but his claim should not exceed press owner’s profit =75 the total profit café profit would be 75-42=33 in this case

35. No noise law: Noise pollution law: 138 33 Press Press 105-42-50=13 125 33 -92 0 0 -105 cafe cafe But the outcome in terms of quantity does not depend on the allocation of property rights: 15 min of press work and the same outcome would be if both café and printing press belonged to one owner. The Cost of negotiation shifts Pareto- frontier down <13 - the same outcome, but less social profit 13<cost<33. Negotiation will take place only if the Noise-pollution law is imposed this is the example when Coase theorem does not work, the outcome depends on the allocation of property rights >=33- no negotiation

36. Other examples • The tragedy of the common • “There is a small town, where herdsmen graze cattle. There is a large pasture, or commons, freely available for grazing. When population grew pasture became overgrazed. “ • Envinronment: • freon and ozone surrounding • greenhouse effect: burning carbon raises the temperature • acid rains,water shortage, oil spills in oceans, cod overfishing • A Public goodis a goodthat can be consumed by one person without diminishing the amount the other people consume of it and from which no individual can be barred from consumption. • Nonrivalous consumption - without diminishing. • Nonexcludability- impossibility to exclude others. • Examples: Firework, legal system, defense, environment, TV programs • Free-rider problem-the ability to consume for free provides no incentives for investment

37. Solutions for the externality problems • Public goods: • Government collect the tax and provide them • Externalities: to Define the ownership • Cooperation and Grope Ownership • negotiation problems • Regulatory responds • set the quantity of pollution • allow to purchase a permit to emit pollution • Taxes and subsidies B´p C´s C´p C´p t B´p Xm Xs Xs Xm