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Economics of the European Union: INTENSIVE Lecture notes
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LECTURE 1: HISTORY OF THE EUI. Early Post War Period, 1945-50: death, destruction and upheaval
● Europe has experienced horrifying wars and was in ruins after WWII:
○ Millions of people died, enormous damage to infrastructure and economic
capacity
○ Pictures show London in late 1940 (left) and Dresden in 1945 (right)
II. Early Post War Period, 1945-50: A climate for radical change and the prime
question
● Prime concern: ‘How can Europe avoid another war?’
○ What caused the war? - Three schools of thought, implying three different
solutions
■ blame Germany → ‘Neuter’ Germany to avoid any future
aggression;
■ blame capitalism → adopt communism;
■ blame nationalism → pursue European integration.
● European integration ultimately prevailed, but this was far from clear in the late
1940s.
III. Early Post War Period, 1945-50: The beginning of the cold war
● Wartime alliance among the US, UK and USSR rapidly unravelled.
● Germany was divided into the US, UK, French, and Soviet zones in 1945.
● Communism spread in Eastern Europe: in Estonia, Latvia, Lithunia during the
war, in Albania, East Germany and Romania in 1945, Bulgaria in 1946, Poland in
1947, and Hungary and Czechoslovakia in 1948.
● America and Britain rejected the Soviet vision and this confrontation lead to the
‘Cold War’. The division ruled European realities for a half century.
● The US suggests a Marshall plan for economic recovery.
● 1948: US, UK and France merged its zones, plans for a new nation – West
Germany – began to take shape.
● Moscow reacted by blocking land traffic to Berlin in June 1948, countered by the
air bridge known as the Berlin Airlift.
● The Federal Republic of Germany and the German Democratic Republic were
established in 1949.
IV. Early Post War Period, 1945-50: Marshall Plan
, ● Marshall Plan (1948)
○ The USA offered financial assistance if countries agreed on a joint
programme for economic reconstruction.
● Marshall Plan aid amounted to $12 billion, with half of this going to the UK,
France and West Germany.
● The Organisation for European Economic Cooperation (OEEC) administered this
aid and prompted trade liberalization:
● The OEEC (which in 1961 became the OECD) started in 1948 with 13 western
members of today’s EU plus Norway, Iceland, Switzerland and Turkey.
○ It advanced European integration, i.e. by removing quotas on intra-OEEC
trade and establishing the European Payments Union.
V. Make Europe not war: ECSC, EEC and EFTA, 1951-60
● The German Question: The formation of West Germany was hoped to help with
an economic recovery of post-war Europe ...
● ... but need to embed Germany in a European supranational structure
● European Coal and Steel Community (ECSC, 1951): Belgium, France, Germany,
Italy, Netherlands, and Luxembourg (the ‘Six’) place their coal and steel sectors
under the control of a supranational authority (Schuman Plan)
● Failed attempts to create the European Defence Community (EDC) and the
European Political Community (EPC)
● European Economic Community (EEC, 1957): riding on the success of the
ECSC, the ‘Six’ committed to form a customs union, promise free labour mobility,
capital market integration, free trade in services, and a range of common policies
● EEC meant discrimination against non-EEC Europeans, including OEEC
members like Britain
VI. Make Europe not war: ECSC, EEC and EFTA, 1951-60
● European Free Trade Association (EFTA, 1960): tariff reduction without
harmonizing external tariffs – a free trade area (FTA) as opposed to EEC, a
customs union (CU)
● Two non-overlapping circles by the late 1960s:
● The Federalism vs intergovernmentalism schism
, ○ EEC vs. EFTA - two concepts about the depth of European integration
○ Intergovernmentalism: nations retain all sovereignty, (economic)
cooperation only when necessary and agreed upon
○ OEEC and EFTA, but also the Council of Europe (1949) and the Court of
Human Rights (1950), unrelated to the European Union
● Federalism: embed nations in a supranational structure (EEC, EDC, EPC),
embodied with some of the powers that had traditionally been exercised
exclusively by nations
● European integration gains economic motivations
○ New view: (trade) liberalization is pro-growth , pro-industrialization
○ Confirmed by spectacular growth in manufacturing, exports and incomes,
beginning in the 1950s („Wirtschaftswunder“, „Les Trente Glorieuses“)
VII. Evolution to two concentric circles
● While the first years of European Integration had a lot to do with geo-strategic
thinking after WWII, this changed with the formation of EEC and EFTA.
● Falling trade barriers within the EEC and within EFTA (but not between) led to
discrimination.
● The GDP (i.e., potential market size) of the EEC was much larger than that of
EFTA (and EEC incomes were growing twice as fast).
● Thus, the EEC club was far more attractive to exporters and this led to new
political pressure for EFTA nations to join the EEC.
● The UK applied for membership in 1961 and Denmark, Ireland, and Norway also
followed.
● Charles De Gaulle stopped UK membership twice. Denmark, Ireland, and the UK
joined in 1973 while Norwegians said no in a referendum
VIII. Evolution to two concentric circles: First enlargement, EEC–EFTA FTAs and the
domino effect 1
● Firms based in the remaining EFTA states would suffer a disadvantage
● EFTA industries pushed their governments to address this situation;
● Resulted in a set of bilateral free trade agreements (FTAs) between each
remaining EFTA nation and the EEC.
, IX. Delayed trade integration, accelerated monetary integration: the 1970s
Euro-pessimism 1.0: the 1970s
○ Political shocks:
■ ‘Luxembourg Compromise’ + enlargement = decision-making jam;
■ unanimity was the typical rule in EEC decision-making procedures: the
insistence on consensus radically reduced the EEC’s ability to make
decisions.
○ Economic shocks:
■ Bretton Woods falls apart, 1971-1973; EEC failed to establish monetary
union (Werner Plan was put on hold);
■ 1973 and 1979 oil price shocks with stagflation;
■ New trade frictions: ‘technical barriers to trade’
○ However, also some bright spots:
■ democracy in Spain, Portugal and Greece lead to their accession;
■ EMS set up in 1978 works well. Special role for the Bundesbank.
■ Budget Treaties (1970 and 1975) and direct election of EU Parliament
(1979).
X. Deeper circles and the domino effect part II: the Single Market Programme
The Single European Market (SMP) was a powerful boost to European
economic integration:
● Jacques Delors launched completion of the internal market;
● The Single European Act (SEA, 1987) aimed to create ‘an area without internal
frontiers in which the free movement of goods, persons, services, and capital is
ensured’ (i.e., the four freedoms already promised by the Treaty of Rome);
● It also implemented important institutional changes: EEC was renamed the
European Community (EC) and European Union (EU) after monetary union was
agreed upon in the 1990s
● majority voting instead on unanimity on issues related to the Single European
Market;
● This change in voting procedures unleashed a massive wave of TBT
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