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Summary European Economic Integration
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Summary of European Economic Integration for BA3 Business Economics at the VUB.
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EUROPEAN ECONOMIC INTERGRATIONChapter 1: History of European Economic Integration
“Yet all the while there is a remedy . . . It is to re-create the European Family, or as much of it as we
can, and to provide it with a structure under which it can dwell in peace, in safety and in freedom. We
must build a kind of United States of Europe.”
Winston Churchill (Zurich, 19/09/1946)
1.1. Early post war period: climate for radical change
Europe has experienced horrifying wars and was in ruins after WWII:
- Mainly as an effect of governmental failures
- London in late 1940 (left) and Dresden in 1945 (right)
- During the Second World War, millions of people died.
- The war also caused enormous economic damage.
The war also caused enormous economic damage. Figures are difficult to find for central and
eastern Europe, but the estimates for western Europe are staggering. The war cost Germany and
Italy four decades or more of growth and put Austrian and French GDPs back to nineteenth-
century levels.
1.2. The prime question in 1945
Prime concern: “How can Europe avoid another war?”
- What caused the war? --> Three schools of thought were in evidence
- Blame Germany
- Blame capitalism: Marxism-Leninism blamed capitalism for most of the world's evils,
including both world wars. This belief suggested that communism was the solution.
- Blame nationalism: solution suggested was a tighter integration of all European
nations.
- These answers implied 3 vary different solutions
- ‘Neuter’ Germany to avoid any future aggression
- Adopt communism
- Pursue European integration
--> European integration ultimately prevailed, but this war far from clean in the late 1940s
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1.3. Winston Churchill and the United States of Europe
- 1874-1965
- British statesman
- Prime minister
- Speech at the University of Zurich on September 19, 1946
- He called on European countries, including Germany, to
form a regional organization for security and cooperation
on the continent.
1.4. Emergence of a divided Europe
The economic, political and military situation in Europe after WWII.
- Germany was divided into the US, UK, French, and Soviet zones.
- The Soviet Union led communism spread in East Europe quite aggressively.
- 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, UK, and French zones merged in 1947/8.
- ‘Berlin Blockade’ and ‘Berlin air bridge’ in 1948.
- The Federal Republic of Germany established in 1949.
→ The merger of the French, US and UK zones was a defining moment in Europe and a precursor
of European integration.
1.5. First steps in European Integration
Marshall Plan (1948)
- The USA offered financial assistance if countries agreed on a joint program for economic
reconstruction.
- $12 billion, with half of this going to the UK, France and West Germany.
- The Organization 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.
- The European Payment Union (EPU) facilitated payments and fostered trade
liberalization.
→ New view: trade liberalization could be pro-growth and pro-industrialization.
1.6. The drive for deeper European Integration
The OEEC was an economic success boosting income,
- but would it prevent another war between France and Germany?
- Booming imports and exports, and rising incomes.
- But some OEEC members felt that European integration would have to be much deeper
to make a new war unthinkable.
- The problem was that European nations disagreed on how European integration should
move beyond the OEEC and EPU.
- Disagreement about the ‘depth’ of European integration.
- This debate has been going on since the 1950s until today.
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1.7. Two strands of European Integration
Federalism vs Intergovernmentalism
- They describe the trade-off between European integration and national sovereignty.
- Intergovernmentalism: nations retain all sovereignty with only international cooperation
- OEEC (1948), Council of Europe (1949), Court of Human Rights (1950), and EFTA
(1960).
- Federalism: supranational institutions
- 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);
- EEC (1957): riding on the success of the ECSC, the ‘Six’ committed to form a customs
union, promise free labor mobility, capital market integration, free trade in services,
and a range of common policies;
- but also failures: EDC and EPC.
1.8. Two non-overlapping circles
Situation by the late 1960s: European countries either joined the EEC or the EFTA with economic
discrimination between the two groups:
The trade liberalization promised by the
Treaty of Rome and the Stockholm
Convention (EFI'A's founding document)
rapidly came into effect in the 1960s. By
the late 1960s, trade arrangements in
western Europe could be described as
two non-overlapping circles (Figure 1.4).
The lowering of intra-EEC trade barriers
had an immediate and dramatic impact
on trade patterns. During the formation
of the customs union (CU), the EEC's
share in its own trade rose from about
30 per cent to almost 50 per cent. At the
same time, the share of EEC imports
coming from six other major European
nations remained almost unchanged,
falling from 8 to 7 per cent.
1.9. Evolution to two concentric circles: domino effect I
At the beginning of the 1960s, EFTA-based and EEC-based firms had roughly eq,ual access to one
another's marke:s ~s the preferential tariff cutting had only just begun. As the barriers began to
fall within the EEC and within EFTA (but not between the groups), discrimination appeared. This
discrimination meant lost profit opportunities for exporters in both groups.
- 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.
- Other EFTA nations did not apply because of political reasons such as neutrality
(Switzerland), lack of democracy (Portugal) or relative independence from EEC market
(Iceland).
- Charles De Gaulle stopped UK membership twice. Denmark, Ireland, and the UK joined in
1973 while Norwegians said no in a referendum.
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Firms based in the remaining EFTA states would suffer a disadvantage (trade diversion effects):
- 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.
1.10. Euro-pessimism (1973-1986)
Although the EEC's economic integration proceeded smoothly, European integration stagnated
soon after the trade liberalization was completed. The Community was rocked by a series of
political crises in the 1960s, soon to be followed by economic shocks in the early 1970s. The
political and economic shocks together created a period known as 'Euro-pessimism' (1973-86).
Political shocks:
The spectacularly good economic performance of Europe's economies in the 1950s and 1960s -
teamed with the manifest success of European economic integration - went a long way to
restoring the confidence of Europeans in their governments' ability to govern. So much so that
some nations began to regret the promises of deep integration they had made in the Treaty of
Rome. Leading this charge for national sovereignty was French President Charles de Gaulle.
The issue came to a head as the final stage in the Treaty of Rome's transition period approached.
The voting procedures in the EEC's key decision-making body, the Council of Ministers, were
scheduled to switch to majority voting. For the President of France, Charles de Gaulle, it was
unacceptable. Majority voting would mean that France might be forced to accept a policy it had
voted against if most of the other members wanted the policy. De Gaulle was not a federalist and
he rejected the supranationality that majority voting implied.
In the end, de Gaulle forced the other EEC members to accept his point of view in the so-called
Luxembourg Compromise. Unanimity was the typical rule in EEC decision-making procedures. The
insistence on consensus radically reduced the EEC's ability to make decisions and the problem
only got worse as the EEC expanded to nine in 1973.
- ‘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;
The late 1960s saw the USA running a monetary policy that was irresponsibly inflationary. It was basically
printing money to pay for the Vietnam War without raising taxes. Since all major currencies were linked to
the dollar at the time (via the global fixed exchange rate system called Bretton Woods), US inflation was
transmitted into inflation in Europe and elsewhere.
- EEC failed to establish monetary union (Werner Plan was put on hold);
Since exchange rate stability was viewed as critical to European economic integration, the EEC searched for
ways of restoring intra-European exchange rate stability. To this end, it established the Werner Committee,
which designed a step-by-step plan for European monetary union. EU leaders adopted the Werner Plan in
1971 with a goal of implementing a monetary union (like the one the Eurozone nations share today) by 1980.
- 1973 and 1979 oil price shocks with stagflation;
- introduction of ‘technical barriers to trade’ as substitute for tariffs brought back trade
frictions.
However, also some bright spots:
- democracy in Spain, Portugal and Greece lead to their accession;
- EMS set up in 1978 works well;
- Budget Treaties (1970 and 1975) and direct election of EU Parliament (1979).
1.11. Deeper Circles: Single Market Program
In 1985, EU firms enjoyed duty-free access to one another's markets because they were all inside the
Customs Union. This meant that there were no tariffs or q,uotes imposed on any trade between EEC
members. The lack of tariffs, however, did not mean that there was fully free trade.
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