Mapping European Economic Integration

A. Verdun, A. Tovias, A. Verdun, A. Tovias

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137317360
• Topic: Politics & International Relations
• Subtopic: Public Policy
• Index: Politics & International Relations

By examining the various policy subfields of European economic integration such as agriculture, trade, banking, economic governance and sustainability this book offers a comprehensive and wide-ranging analysis of developments that have taken place in the past five years aimed at exploring the path of economic integration in Europe.

1

Introduction

Amy Verdun and Alfred Tovias

1.1 The rationale for this book

Economic integration has formed part of the core of the European integration process since the start of the European Communities (EC) in the 1950s. European economic integration has been taught in universities as either a stand-alone course or as part of a more general course, seeking to answer the following major question. For what economic reasons do European member states choose to integrate? These courses also aim to address additional related questions. Why do member states reduce trade barriers among themselves, develop a common external trade policy and create a common market? What are the deemed benefits of fixing exchange rates? Why do member states want to go even further than a fixed exchange rate regime by introducing a single currency? Under what conditions might such a monetary union work? Why have member states created the Common Agricultural Policy (CAP) and what are the pros and cons of the particular agricultural policy? How and why did this policy change over time? These are examples of the many questions asked during courses that focus on teaching European economic integration.

The research on European economic integration covers many of the above questions but also examines others that are not always at the core of the courses on European economic integration. The literature has typically researched questions around the efficiency and effectiveness of European economic integration (in all of its guises). Has it improved welfare and growth, and met its stated goals? If there were imperfections, what could be the reasons behind them, and how might these be remedied? Yet, these questions are not exactly the same in all subfields of European economic integration. In some cases there is more interest in certain of these than in others.

This book is a response to a particular development in economics. Over recent decades the field of economics has become increasingly specialized, adopting ever-more sophisticated methods and approaches to answering economic research questions. The result is that the field is mainly easily accessible to those who are familiar with the subfield but to outsiders it is typically more difficult to understand. This difficulty is not only restricted to non-economists. Professional economists in one subfield of economics often find the publications in another subfield of economics difficult to access. It should come as no surprise, therefore, that scholars in fields other than economics, such as history, international relations, law, political science, public administration and sociology, also typically find the cutting-edge research in economics inaccessible, as their own methods and concepts differ considerably from those in the various subfields of economic integration. Obviously, a more general reader could find him- or herself even more lost.

When scholars of European integration set up interdisciplinary research or wish to include insights from European economic integration research into their teaching, they are often confronted with a lack of publications that cater to their needs. There are few books that address this issue, which may not come as a big surprise because economists as a whole write fewer and fewer books. Instead, scholars of European integration seeking accessible economics reference books could turn to one of two types of source. The first is a classic textbook on European economic integration, used to impart basic economic insights to students (Gros and Thygesen, 1998; McDonald and Dearden, 2005; Pelkmans, 2006; Artis and Nixson, 2007; Neal, 2007; El-Agraa, 2011; Baldwin and Wyplosz, 2012; Senior Nello, 2012). The second option is that the reader could start digging through collections of literature reviews scattered over various journals and books depending on their exact interest (e.g. Fiess and Fugaza, 2002; Dullien and Schwarzer, 2005; Sapir, 2011).

This book aims to fill this gap. Its main aim is to get leading economists with expertise in various subfields of European economic integration to explain to (what we will assume are well-informed) readers what have been major insights in various subfields of European economic integration over recent decades. We expect that academics will be drawn to this volume to obtain a better insight into the developments in the literature of European economic integration. Furthermore, a goal is that this book will be used for courses, by instructors of various disciplines, either as prescribed course material or as a reference manual. Finally, we hope to inform the general public – a readership that is increasingly fascinated (or perhaps even alarmed) by the developments in European economic integration. We have sought to reduce unnecessary jargon, and, wherever possible, to clarify terms when they are used for the first time in each chapter. These contributions spell out insights from the academic literature and also provide an overview of developments in the particular policy field.

We have chosen to focus on topics that we consider to be among the most salient ones in European economic integration: agricultural policy; competition policy; economic and social cohesion and regional policy; enlargement; the environment, sustainability and economic governance; Euro Area governance; financial market integration; pensions policy; the single market; and trade policy. We have selected these so as to cover the range of topics that are typically featured in a general textbook on European economic integration, and to include a few that are perhaps less ‘standard’ (the environment; sustainability and economic governance; and pensions policy) that we felt would make a welcome contribution. Also these topics are those at the heart of the European economic integration process. Obviously, we could have included others of great importance to European economic integration, such as labour market policy or transport policy, but we were faced by space restrictions and had to make some tough choices. Furthermore, some of the chapters touch on a number of those other topics (e.g. Chapter 11 about pensions indirectly discusses cross-cutting issues of economic and monetary integration, social policy and public finance). Nevertheless, we hope that the selection chosen offers a good sample of leading topics.

In terms of the contributors, we invited authors who have made a major contribution to their particular subfield and those who are career economists. As can be seen in the Notes on Contributors (pp. xvi–xxi) and in the References, a number of our authors are among those increasingly rare economists who have contributed to economic textbooks and/or have written their own. In all cases they are active contributors to the academic literature in their subfield.

In the remainder of this chapter we highlight some of the reasons why economic integration occurs, provide insights into how the field of economic integration has changed over the past six decades, and finally offer a summary of the remaining chapters.

1.2 Theories of European economic integration

At the outset the main rationale for European economic integration was to enhance cooperation among countries that had previously been at war with one another. From an economic theory point of departure it was immediately obvious that cooperation would be much more beneficial than isolation. David Ricardo, Adam Smith, John Stuart Mill and others were early scholars who spelled out the advantages of international trade. Gains could be obtained if countries traded with one another. In 1950 Jacob Viner introduced concepts such as ‘trade creation’ and ‘trade diversion’ to clarify how these benefits would occur.¹ European economic integration aimed to obtain those benefits from trade but also left open the door to deeper economic cooperation in the form of a customs union or a common market, possibly with various common policies. Economic cooperation effectively built on insights from economic theory that suggest that economic gains can be made if the market is larger and if economic players can specialize (and buy from and sell to one another). In many cases these gains can be obtained by creating a larger market. Hence the 1957 Treaty of Rome, which created the European Economic Community (EEC), sought to secure the so-called four freedoms: freedom of movement of goods, services, capital and persons. Of course, even if the reliance on market principles is advocated, economists frequently study how much regulation and state intervention would be desirable to ensure the desired outcomes.

To some extent the underlying theoretical debates in European integration can either explicitly or implicitly be summarized by the debate between John Maynard Keynes and Friedrich August Hayek, which has recently attracted more attention (see Maes, 1986; Wapshott, 2011). Keynes advocated an active role for the government that in his view should spend money (exert demand) in an economic downturn to jumpstart the economy. Hayek was of the opinion that the role of the state should be much smaller. Milton Friedman was a later economist who was a free market advocate. He developed theories about exchange rates and money supply. He advocated that the money supply was also able to create an environment that would stimulate the economy (monetarism). Even though most of his seminal writing was published as early as the 1950s and 1960s, his views attracted more attention in the 1980s in Europe through the support of the then British prime minister, Margaret Thatcher. Over the decades the debates moved from more state intervention to relying more on markets. Another influential thinker who put his mark on economic policies was Gunnar Myrdal, who was more of a Keynesian. From his research on the causes of poverty and division of wealth in the world, he became a strong supporter of the welfare state. Except for Keynes, who died before Nobel Prizes were awarded (and they are not awarded posthumously), all of the thinkers mentioned above – Hayek, Friedman and Myrdal – were Nobel Prize laureates, as was Jan Tinbergen, who is mentioned below.

Early scholarship of European economic integration emphasized that European integration would go through stages. The likes of Jan Tinbergen (1954), Bela Balassa (1961), Max Corden (1972a; 1972b), Victoria Curzon Price (1974) and Fritz Machlup (1977) identified stages that started with preferential trade agreements, a free trade area, a customs union through to a common market, a monetary union, a complete economic union and possibly a more deeply integrated political union (see also El-Agraa, 2011, Chapter 2). Tinbergen differentiated between positive and negative integration (Tinbergen, 1954, 79). Positive integration encompassed the creation of new or modified instruments and/or laws, whereas negative integration was defined as the removal of barriers to integration and an adherence to the principle of non-discrimination.

As time went by the idea that integration would necessarily have to pass through all of these stages in sequence became less obvious. First, the actual practice of integration in the European Union (EU) with new member states joining in a ‘big bang’ was one indication. Also, the chequered experiences of the Association of Southeast Asian Nations countries and plans of African nations to create the African Monetary Union demonstrated that there could be different paths to achieving deeper integration. These experiences suggested that exactly what elements of integration would need to be introduced, at what point, depended very much on historical background, institutional experience and regional context. Despite the fact that the different stages may not all necessarily need to be followed in sequence, the original insights about analytically identifying the stages still remained useful. It was also clear that they represented ever-deeper forms of integration (i.e. a customs union represents deeper integration than a free trade area, and a single market is a step further than a customs union, etc,).

It was noticeable that the study of European economic integration was informed by its practice (cf. Maes, 1998). That means that the focus of research was often on those areas in which there was observable integration. In the early years some common policies generated revenue, such as trade policy, and the EC worked on gathering some revenue through indirect taxation (although the exact system varied in those early years and was then harmonized in the late 1960s). Much of the EC budget was spent on agricultural policy, and to a lesser extent on economic and social cohesion, infrastructure and regional policy. Economists also asked questions about how best to develop policies in these areas so that they would generate the best incentives and information to secure the optimal policy outcome (the greatest welfare).

1.3 Overview of European economic integration over the decades

In the 1950s European integration was started in Belgium, the Federal Republic of Germany, France, Italy, Luxembourg and the Netherlands. These were the original six EC member states (EC-6). Early cooperation took place in areas such as coal and steel, and in atomic energy – policy areas that were related to the recent war experience. The EEC, which started in the late 1950s, facilitated integration in many areas of the market, in particular agriculture, transportation, trade of goods within the EC and the creation of a common external commercial policy towards third countries. In the 1960s the EC Customs Union was completed (1968) and the CAP was further developed. In the monetary sphere, proposals were launched in 1969 in The Hague to create an EMU in the EC, and a deadline was even given of 1980 (Commission of the European Communities, 1970). The focus in the EC broadened and became more concentrated in these areas.

The 1970s marked a shift in European economic integration. Since the completion of the customs union in 1968 the idea to develop an Economic and Monetary Union (EMU) gained momentum. The year 1973 witnessed the first enlargement (Denmark, Ireland and the UK joined), thus creating the EC-9.² The result was that regional policy became more important but also the understanding of the CAP changed because of UK membership. That country had not built up a system of price supports for farmers, and it was more accustomed to paying (and receiving) world prices for agricultural products and applying deficiency payments when needed.

Regional policy was developed so as to ensure that the UK, among others, would be able to draw from the common budget funds for what it wanted to develop, namely areas in the UK that were lagging behind. Another theme that played an important role in this decade was the increasing positive and policy-shaping role of the European Court of Justice. Important cases came before the court in the 1960s and 1970s (e.g. van Gend en Loos, 1963; Costa vs ENEL, 1964; Dassonville, 1974; Cassis de Dijon, 1979). These court decisions paved the way for deeper market integration, a larger role for competition policy, and an expectation that deeper integration would occur through law and economics.

In the 1980s the tables turned again. The UK weekly business magazine The Economist published a tombstone on its front cover on the occasion of the 25th anniversary of the EC. The early years marked a period of Eurosclerosis – few people believed that European integration could do much to jumpstart growth or cooperation. In the EC member states, governments were increasingly reflecting on the question of how much state intervention there should be versus how much the market should do. The second half of the 1980s was to become the start of a paradigm shift whereby governments of West European countries would reflect on the need for more deregulation. The mid- and late 1980s saw an increase in Euro-enthusiasm, and a focus on completing the single market by 31 December 1992 (Commission of the European Communities, 1985; Emerson et al., 1988). Competition policy became an increasingly large area of study. Towards the end of the 1980s the EC member states decided to integrate capital markets so that capital could move freely in the EC, marking the potential start of EMU. Indeed, in April 1989 the ‘Delors Report’ was presented (Committee for the Study of Economic and Monetary Union 1989). Its main blueprint was incorporated into the Treaty on European Union, making it an objective to create an EMU that would have various stages.

In the 1990s, with the plan to launch stage three of EMU by 1997 or 1999, it became increasingly clear that public finance needed to be reassessed (Emerson et al., 1992). Pensions had not been considered much when policy-makers and government officials realized that with EMU one needed to become more disciplined in the area of public finance. By the end of the decade the cost of public services, including the role of pensions (and the cost of maintaining affordable pensions) had become part of public discourse, thereby mainstreaming pensions studies. In that decade there was also increased interest in enlargement. After all, in the 1990s and the early 2000s, the EU prepared for the entry of up to 12 new member states. Eventually ten joined at once on 1 May 2004, followed by Bulgaria and Romania in 2007, with Croatia joining on 1 July 2013. As the EU expanded more and more, scholars became interested in how the differences among the EU member states could be overcome, and to what extent one should worry about the stark divergences between them. Of course, to plan to add so many new member states in the 2000s, many of which are relatively poor in terms of per capita gross domestic product (GDP) and with large agricultural sectors (compared with the old member states), created a conundrum for the EU. It in turn realized that it plainly had to reform the CAP if it was to keep its budget under control. At this time the EU had an opportunity to respond to the still vocal criticism that the CAP was no longer in line with contemporary thinking as its incentives were leading to oversupply, affecting the proper economic activity in world markets for agricultural products due to dumping practices. In addition there was the frequently heard concern as to why farmers would be the only group to receive EU income support in an environment in which state intervention is increasingly frowned upon.

In the 2000s the tables turned again. At this point the EU realized that it was facing a change in economic reality – the rise of Brazil, Russia, India and China (the so-called BRIC countries) – while many in the EU noticed that the traditional jobs were no longer viable on European soil, particularly not in the older member states. This insight, coupled with a reflection on the concerns surrounding climate change, led to a reorientation of the EU: the Lisbon Strategy. Its goal was for the EU to become the most competitive economy in the world within a decade. The strategy was to increase the training, know-how and employability of workers. It was soon clear that it was insufficient to secure this goal. When the EU assessed its achievements it realized that the Lisbon Strategy needed updating. In the 20–20–20 doctrine³ the EU sought to balance innovation and building the knowledge economy with an attempt to respond to the crash in the financial markets and the loss of competitiveness to the BRICs and other less developed countries globally. The EU also realized that the single market was not yet complete. It needed deeper integration in the financial sphere but also in the selling of services across borders. All of these observations led to the EU’s increased focus of attention on market integration (completing the single market for goods and services). The 2007–2008 global financial crisis, the subsequent economic crisis and the recent sovereign debt crisis that has held the Euro Area hostage, and has brought to the fore the importance of having the right institutional architecture for EMU. It unearthed the asymmetrical nature of EMU (Verdun, 1996, 2000): deep monetary integration but a lack of overarching European supranational policies in flanking economic areas. The results of recent years have also indicated the problems of relying on market principles to equalize macroeconomic imbalances between EMU member states. They also brought to the fore the challenges related to focusing on rules and targets rather than on supranational governance to manage budgetary deficits and public debts. The past few years have shown the weakness of European integration not only in monetary and financial terms but also with regard to banking supervision. Furthermore, they have exposed the problems of relying on a no-bail-out clause as a disciplinary mechanism when member states find themselves in a situation in which it is difficult to attract funds in capital markets. The rec...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Tables, Figures and Boxes
• Foreword by André Sapir
• Preface
• Acknowledgements
• Notes on Contributors
• List of Abbreviations
• 1. Introduction
• 2. EU Agricultural Policies and European Integration: A Thematic Review of the Literature
• 3. Trade Policy
• 4. EU Competition Policy from an Economic Perspective: Shaping Policy or Shaped by Policy?
• 5. The Economics of Single Market Regulation
• 6. European Financial Market Integration
• 7. Governance in the Euro Area: Approaching an Optimum Currency Area?
• 8. Economic Governance and Sustainability
• 9. EU Enlargement and Theories of Economic Integration
• 10. Economic and Social Cohesion and Regional Policy: A Review of the Literature
• 11. Pensions and European Integration
• References
• Index