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Economic Policy in the EU - Lecture 1 (2020)
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Economic Policy in the EU - Lecture 1, 2020.
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The story of economic integration in the EUThe European continent had lived through 2 world wars in the twentieth century. De second
world war devastated the economy of the European countries. Germany in particular
devastated and slow in rebuilding. The Americans supported the EU with the Marshall aid. It
was about 15bln US$ (200-250bln USD today). The US support was a help in recovering. It
also provided liquidity. Some part of the aid was credits. The Americans insisted on the
European countries cooporating with the spending of this Marshall aid. The OEEC (today:
Organisation for European Economic Co-operation – OECD) was created.
It is an intergovernmental institution where countries would coordinate and decide together
how money would be spent. A second means of cooperation created after the world war
was the European Payment Union. This was also important for liquidity. After wars it is
pretty common to restructure a monetary system. Inflation goes up, because governments
keep printing money. So after wars it is common to restructure. But this means there is little
money around. This lack of many makes it hard to pay for imports. The European Payment
Union is a means to settle accounts in a special way. This Union makes it easier to trade. A
third way of cooperation emerged after WWII. The creation of the European Community for
Coals and Steel (six countries). They decide on production and pricing of coal and steel. The
organization is supdragovernmental. The countries sit together and decide. Whether you
agreed or not, you had to obide by the rules (decisions). Coal and steel were also very
important materials for war. The community might prevent more steel going to the arms
industry. This community for coal and steel is the direct predecessor of the European
Economic Community. It consists of the same six members, but the cooperation goes
further. The European Economic community is actually the predecessor of the European
Union.
In the Treaty of Rome (1957), the 6 original members (Benelux, Germany, Italy and France)
created the European Economic Community. A political union was not in the books, it was
better to focus on economic integration. Economic integration (as written in the treaty)
consisted of four freedoms. These were the free flow of goods, services, people, and capital
across the countries of the community. Initially there was a focus on free flow of goods. The
European Economic Community was meant to become a supranational community (like the
European community for Coals and Steel). The European Commission was created to be the
guard of the treaty and impose the measures on the member states. Measures were taken
by the Council of Ministers of the European Union and after these were taken, the European
Commission was to execute these measures in a supranational way. What is decided in
Brussels by the members of the community is the new rule to be followed. This means part
of the sovereignty of a country is submitted to a European level. The British had not wanted
to join for this reason. The other member states were careful however, to not give away too
much of their sovereignty. The principle of subsidiarity means that measures should be
executed at the lowest possible level. This means that whatever can be done by the
countries themselves on a national level, should not be done on a European level.
The ambition to create the four freedoms is actually the ambition to integrate economically.
This can’ t be done in one day. From a theoretical point of view, different stages of economic
integration are distinguished. The first stage is a mild form of integration. It is the creation of
, a Free Trade Area. In a free trade area, the participating countries agree not to levy any
import tariffs on one another. The most famous one is NAFTA (North America Free Trade
Agreement). Countries can have their own national regimes toward non-participating
countries. A step further is the Customs Union. It is similar to the Free Trade Area in the
sense that it does not levy any import tariffs between the participating member states, but
in a Customs Union the member states also agree to adopt a common external tariff. This
means that only 1 regime is used for the entire union. This leads to an increase of trade, but
there is still room for progress. There are still many other trade barriers in place such as
administrative procedures, qualifications of products etc. If you want to eliminate those
barriers, you move towards a Common Market. In a Common Market, non-tariff barriers are
also tackled. The next step in economic integration would be an Economic Union. In an
Economic Union (macro-) economic policies will be aligned. This could mean taxing systems
or government policies toward social security. We will see that differences in this kind of
policies could also obstruct free trade. A Monetary Union is the final stage. Very often
Economic and Monetary Union are taken together. However, we will assume that the
Monetary Union is the final step of economic integration. Policies are aligned to such an
extent that you can also work with one single currency. In this case a single monetary policy
(which is different from fiscal policy) can be implemented.
After the Treaty of Rome was concluded in 1957, the member states first started to work on
creating a customs union. So, a free trade agreement with a common external tariff. The
countries have to work on this. Products that should be valued the same in each country.
But also, you need to make sure that products are of the same quality in each of the
member states. Also, an external tariff needs to be determined. That can be difficult because
the different countries start out with different tariffs. A lot of administrative harmonization
needs to take place before you can complete the Customs Union. It took the European
Union about twelve years to complete (1969), which was actually ahead of schedule (1970).
The creation of the Customs Union was a consequence of an explicit decision in the treaty of
Rome. Once a Customs Union is completed, other trade barriers become important. The
remaining trade barriers need to be removed as well, gradually. This will be the transition
from Customs Union to Common Market. In the creation of the Common Market, the
European Court of Justice plays an important role. It interprets the agreement of Rome in
terms of real policies. In that sense a lot of integration is implied. It is an implicit
consequence of what you have explicitly decided in the Treaty. This can be seen as
‘consequential’ integration. The terms in the treaty of Rome on which politicians agreed are
interpreted or explained by the European Court of justice.
Three landmark cases are important for the economic integration and for the creation of the
Customs Union and for the creation of the Common Market.
• Van Gend & Loos
This ruling was requested by Germany because the Netherlands had introduced new
import duties for products that were transported by the company Van Gend & Loos.
The court ruled: since in the Treaty of Rome you were working towards a Customs
Union, which was all about eliminating import duties, you could not start introducing
new import duties while you were in that process of eliminating them. The Dutch
were not allowed to introduce new import duties.
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