The Political Economy of the European Union
Mandatory course of the minor European Union Studies, Leiden University
Semester 2
5 EC
Catalog number: 5770M063
Lectures by Dr. Vera Scepanovic
Lecture 1
The political economy of the EU introduction
Dr. Vera Scepanovic
Today:
- What is ‘political economy’?
- What is the EU?
- Case study - the Banana Wars
- This course
- Stages of International Economic Integration (IEI)
- The ECSC
- The EC and the Common Market
- The Treaty of Maastricht and the Common Market
- Between Maastricht and Lisbon
- The Lisbon Treaty
Block 1: What is ‘political economy’?
'Classical political economy'
- Typically, the field is associated with the following men:
› Karl Marx: journalist
› John Stuart Mill: upright citizen, worked for the EIC, part of the Parliament
› Jean Jacques Rousseau: philosopher, poet
› Adam Smith: academic
- They set the foundations for this field of research in the 19th century
- All very different men, and had different responses to the societal & economic effects of
the industrial revolution, but they were all concerned more or less with the same
questions:
› What makes something valuable?
› Does the state have any responsibility / duty / right to intervene in the economic
activity of its citizens?
› How can we in a society in which resources are vastly differently distributed
peacefully coexist? What institutions do we need for this?
What does 'economy' mean?
- Comes from the Greek word for house 'econ' and management -> the management of the
household
- Management of the houshold of the polity -> how can we manage a state at the state-
level?
Classical political economy (19th century) -> economics (20th century) -> neoclassical
economics (late 20th century - 21st century)
- Economics is many things. What we normally think about when we mention it, is a
distillation of late 20th century economic thought -> neoclassical economics
, - Neoclassical economics = paradigm (late 70s - now), a pattern of thinking; a set of
assumptions that you internalise so that you look at the world in a certain way, so you
have certain expectations & ideas of what makes for a good research question
- The neoclassial paradigm:
› Grounded in micro-economics: concerned with the decisions of firms and
individuals
› There should not be lots of differences between macro- (state-level) and
micro-economics; same assumptions
› A highly refined set of shared assumptions:
› Utility maximization: everyone wants more of things that make them
happy
› Rational choice
› Perfect information
So, all in all, decisions are made by independent individuals who
have the capacity to make a decision & have sufficiently enough
information to decide rationally over what they are doing
› Methodological individualism: look at the behaviour of firms and individuals and
expect that large bodies act in the same way, not very interested in the behaviour
of groups
› It is the individual level that drives the economy
› Social-science based (predictive): we produce theories that are valid at the
widest possible level -> predictive theories, general principle
› In order to get to predictive theories, we need lots of data -> statistics
› Econometric modelling
What is ‘political economy’?
- The evolution of the political economy as it is now: classical political economy (19th
century) -> economics (20th century) -> neoclassical economics (late 20th century -
21st century)
- But there were other paradigms: classical political economy -> economics -> ...
› (Keynesian) Macro-economics
At the macro level, things work differently
› Development economics
› Institutional economics
› Behavioural economics
› Economic anthropology
› Economic sociology
› Comparative politics (CPE)
› International relations (IPE)
- Economics vs. political economy
Economics Political economy
Ontologically positivist Predominantly positivist, but open to
- Believes that the world is external interpretivist/constructivist approaches
and that there is a single objective - Also understands that the way we
reality to any research phenomenon understand the world shapes the
or situation regardless of the world
researcher's perspective or belief (so
not postmodernist)
- So, believes that there are facts that
can be proven, that reality is the
same for each person if (s)he looks at
reality objectively
, - Observation in 'reality' =
measurement in 'reality'
Empiricist, focused on generalization and Empiricist, but highly sensitive to context
abstraction, universalist in its assumptions (emphasis on bounded rationality)
Methodologically unified (quantative, data- Methodologically omnivorous: quantative and
driven), methodological individualism qualitative, but also textual interpretation,
hermeneutics (the theory and practice of
interpretation), discourse analysis, emphasis
on collective actors
Disciplinary cohesion Multi-disciplinary
The Eurozone Crisis
- From 2009 onwards
- Contagion-effect: poor performance of some Eurozone states suddenly started to
unbalance the others
› Most Eurozone countries are severely endebted, but for most this is a non-issue:
these are big, wealthy economies, they can bankroll their debtors
› Debtors like to put their money in these economies, because where else
can they safely store their money?
› But then, in the course of the Eurozone crisis, these countries start having
difficulties with borrowing -> the interest rates at which people are willing to
lend to these countries are going up
› So not a realist problem, but more so how these debts are perceived by the
capital markets
› Constructivist approach -> this should not happen, their economies are sound,
but interest rates are going up
- How do we stop this?
› Lots of European countries come together and create the European Stability
Mechanism in 2010 -> create a fund from which they will bail out / rescue
countries with too much debt
› Consequently, interest rates go up -> people don't understand why
European countries did this, now everybody knows they cannot borrow
easily anymore
› Confidence goes down even more -> it gets even harder to borrow
- 2012: Mario Draghi, President of ECB, says 'we will do whatever it takes to rescue the
Eurozone countries, and trust me, it will be enough'
› ECB constitutionally is forbidden from buying bonds from EU states by the
Treaties
› It is not clear what Draghi could or will do, but suddenly interest rates start going
down -> this is the turning point
› More constructivist, and less positivist -> clear that money is a made-up
thing
What is 'political economy' in this course?
- ''Political economy research investigates the integration between politics and economics.
That is, how political factors influence economic outcomes such as trade or economic
growth and how economic outcomes affect politics.'' - Definition from Dür, Moser and
Spilker (2020)
- The way that law, history, the international context, national-level institutions and
political competition among organised interest groups shape the institutions of market
, governance at the EU level, and consequently the economic outcomes such as trade,
growth, and the distribution of wealth among different actors
Block 2: What is the EU?
What is the EU?
- The EU is a very diverse polity
› Diverse in levels of development, size of the economy, languages, political and
social systems, institutional and administrative traditions
- Combines supranational (federal) and intergovernmental features, and the balance
between them is not fully settled, not 100% clearly divided
› Intergovernmental in social and welfare policies
- Asymmetric integration: more integrated in some policy areas than others
- Variegated integration: the growing integration of world markets, which make it
especially inappropriate to study varieties of capitalism in isolation
- Not a positive, but a regulatory state
› A regulatory state: the expansion in the use of rulemaking, monitoring and
enforcement techniques and institutions by the state; a state pursuing an
economic policy priviledging the regulation of market exchanges over direct
intervention
› The role of the state in both the economy and society is shifting from
positive intervention to arm's-length regulation and arbitration
› When a state is regulatory, it signals a formal end of Keynesian demand
management as the dominant economic policy paradigm and highlights
the creation of new administrative tools to steer market dynamics
- Primary of integration through law
- Primacy of market integration
Block 3: Case study - The Banana Wars
The Banana Wars
- A trade conflict between the EU and the US that lasted for 20 years - neither of which
produced bananas
› The EU and US treated certain banana-producing countries differently
- EU is the biggest supporter of WTO but grossly violates its rules
- Estimated 2,3 billion USD per year additional costs to European customers
- More than 200 million USD costs to companies due to US sanctions
- Intra-EU conflict between North and South
› In order to solve this problem, the EU external trade policies had to be changed
completely -> doesn't make sense economically
- In 1990, the EEC still had 3 parallel banana trade regimes
› FR, IT, UK, GR, PT, ES (most of these countries used to have colonies in this
region) offered duty-free access to ACP states and imposed stiff tariffs on
everyone else
› Supported a preferential system essentially for the former colonies
› BE, NL, LUX, DK, IE 20% tariff on all banana imports
› DE duty-free access for Central American /Latin American bananas (still protocol
to the Treaty of Rome!)
- In 1992 the EU was established
- In 1993 the Common Market Organisation for Bananas was established
› A separate institution for the import of bananas!
› Mix of tariffs and differential quotas for all imports
› This was immediately challenged by Central American countries, US
- In 1995 the WTO was established
