Economic Integration, structural crisis and Single market
Historical and Political Context
Europe in International Economy 2017




•The integration of Western Europe
•
•In 15 years from a total war to the creation of unprecedented transnational entity;
•
•France: ECSC – ensure a reliable supply of coal from the Ruhr – to enhance its own and to limit
GER‘s armaments industry (Verdier);
•Euroatom – achieving energy security and control of European A. bomb;
•Charles de Gaulle: never again be France threatened by Germany + promised foreign policy
independence from US;
•
•Germany – integration for regaining international respectability;
•rebranding Germany as a country of committed Europeanists;
•
•Economic inheritance: complementary economic structures;
•Germany - capital goods, France - consumer goods, Benelux provided food, finance and transshipment
services;
•1930s Balkanized European economies –> unity (nationalism, protectionsims, EoS);
•
•US – extraordinary imbalance of power – generally supportive on both political and economic
grounds –> united against Soviet threat <– stability and prosperity;
•
•Three main actors FRA, GER, US + GB;
•
•GB ambiguous – strong interests and ties to the Commonwealth – reluctant to reorient;
•sceptical about integration – but aspiration to shape the integrationist project;

•ECSC
•economic initiative – designed to facilitate the recovery and rationalization of Europe’s steel
industry by coordination national of production and investment plans;
•political aspect – Schuman Plan for ECSC (French foreign minister) drafted by Jean Monnet – first
step in political integration;
•ECSC governed by a supranational High Authority checked by a Special Council of Ministers, Common
Assembly (78 advisers) and High Court (7 judges);
•
•Political Integration:
•no consensus of elite, much less popular support - conducted in secret;
•in 1954 the French Assembly rejected proposal for a European Defense Community (EDC) and a
European Political Community;
•designed to integrate GER military force into European army -> since then collective security as a
group of sovereign states in the US led NATO;
•
•The advocates of deeper integration responded by focusing on specific objective – to create a
custom union:
•capitalize on concerns about the competitiveness of Europe (small size of national markets as a
handicap);
•
•Opposing position: FTA is enough…




•Proposal for re-launching integration came from Benelux 1953 and 1955:
•France explored other options: economic union with the UK;
•UK refused – France was left with no alternative to a custom union of the Six– attempted to
extract as many concessions as possible (import taxes and subsidies, safeguards commission);
•
•Scepticism of the merits of political integration:
•Benelux – threat to independence;
•FRA – accepts only as tool to enhance power –> qualified majority only on issues on which was
confident of forming a majority;
•UK – even less enthusiastic – looking for alternatives – Europe-wide FTA;
•German - industry highly competitive – positively disposed towards British proposal;
•
•FTA (country with lowest tariffs set the pace for liberalization) was not acceptable for FRA;
•Rules of origin being hard to enforce – tariffs would tend to be forced down;
•France preferred CU – to control the common external tariff and liberalize more gradually;
•opening to six safer than to whole Europe;
•
•GER – either way – inclined toward the UK proposal:
•Erhard worried that small community tilted toward France would discriminate against nonmembers and
protect inefficient producers;
•Adenauer – favored an Europe of the six that promised to be more than a free trade area;




•British Dilemma
•
•UK insisted on the maintenance of imperial preference and exclusion of agricultural goods (to
continue import foodstuff from Commonwealth) – that drove GER into FRA‘s arms;
•
•FRA and GER insisted on equal access for their farmers, although with price supports and
protection from extra-European supplies;
•de Gaulle prime minister 1958 – announced that discussions of the FTA (GB) were at end;
•
•New communities will be modeled on the ECSC – governed by a Commission, a Parliament and a Court
of Justice (uncomfortable supranational aspect);
•
•Two conflicting visions:
•EC as upgraded FTA vs. step towards political integration;
•tension between those preferring open regionalism and those preferring exclusive club;
•
•UK and six smaller (AUT, DEN, NOR, POR, SWE, SWI) agreed in 1960 to establish EFTA;
•all but POR traded more with EC than with EFTA members;
•even UK exports to the Six grew faster than to EFTA – as a rival trade area little sense + no say
in EC;
•UK applied for EEC in 1961;
•
•FRA (de Gaulle) feared that another large member would complicate the control of the agenda – more
difficult for FRA to use EC as a platform for great-power status;
•goal of a tripartite directorate for the West: US, UK, French-led EC;
•definitive „non“ 1963 (UK entered no sooner than 1973);








1913
1929
1950
1973
1992
1998
France
7,8
8,6
7,6
15,2
22,9
28,7
Germany
16,1
12,8
6,2
23,8
32,6
38,9
Netherlands
17,3
17,2
12,2
40,7
55,3
61,2
GB
17,5
13,3
11,3
14,0
21,4
25,0
Spain
8,1
5,0
3,0
5,0
13,4
23,5
SSSR/Russia
2,9
1,6
1,3
3,8
5,1
10,6
Canada
12,2
15,8
13,0
19,9
27,2
-
USA
3,7
3,6
3,0
4,9
8,2
10,1
Argentina
6,8
6,1
2,4
2,1
4,3
7,0
Brazil
9,8
6,9
3,9
2,5
4,7
5,4
Mexico
9,1
12,5
3,0
1,9
6,4
10,7
China
1,7
1,8
2,6
1,5
2,3
4,9
India
4,6
3,7
2,9
2,0
1,7
2,4
Japan
2,4
3,5
2,2
7,7
12,4
13,4
Korea
1,2
4,5
0,7
8,2
17,8
36,3
World
7,9
9,0
5,5
10,5
13,5
17,2
•Manufactured exports as a share of GDP (%)

•The Luxembourg Compromise
•
•Battle over majority voting - efficiency of decision vs. risk of being overrided  (de
Gaulle)(unanimity-simple majority);
•Independent resources for Commission + the Parliament say over EC´s budget (FRA interest - room to
maneuver);
•
•1965: Commission proposed permanent income (duties) + greater power over use;
•France suggested that a permanent decision be put off for four years ensuring continuing for the
CAP financing without any concessions;
•Coolly received in the Council – France withdrew from negotiations – 1965 presiding Council –
crisis of “the empty chair”;
•de Gaulle: EC was more important to others -> to force concessions;
•importance of the EC to his own constituents – opposition: farmers (jeopardizing CAP);
industrialist (Common Market at risk);
•reelected 1965 in second round and by slim majority;
•
•Compromise – meeting in Luxembourg (instead of Brusells):
•EC received permanent source of income; CAP ensured; powers of Commission and Parliament not
enhanced to the extent foreseen in original package;
•The extension of majority voting was accepted in principle – no vote in matter unless all members
prepared to abide (vital interest at stake);
•EC would remain an intergovernmental institution;
•Incentive for FRA and GER to negotiate bilaterally (fait accompli);

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•Although first oil shock seen as a principal factor in terminating the long boom – preceded by
number of worrying developments:
•collapse of B-W and return to free floating currencies;
•labor market constraints;
•exhaustion of catch up effect;
•competitive newly industrialized countries (JAP, Korea, Taiwan, LATAM);
•
•Eichengreen: Oil shocks cannot explain why growth failed to recover subsequently:
•no evidence of larger falls in energy intensive industries;
•real price of energy not significantly higher after 1985 than before 1973;
•
•Wages explosion - major destabilizing factor:
•rising income as a norm and expectation – labor markets tightened as AGRI reserves depleted ->
shorter hours, more holidays, higher pay + requests of unions (labor no longer willing to bear the
consequences of downturn);
•Narrowing technological gap Europe – US: limited scope for substituting capital for labor –> rise
in real wages ran ahead of productivity increases –> falling profit levels –> employers responded
by rising prices (inflation);
•Problems of European Economy
















•Explanation of Problems of European Economy (Eichengreen)
•
•Just as this inheritance of economic and social institutions contributed to the extraordinarily
successful performance of European economy after 1950 – it was equally part of the explanation for
European less satisfactory performance in the subsequent 25 years;
•
•As the early opportunities for catch-up and convergence were exhausted, the continent had to find
other ways of sustaining its growth;
•
•Had to switch form growth based on brute force capital accumulation and the acquisition of known
technologies to growth based on increase in efficiency and internally generated innovation;
•
•Shift from extensive to intensive growth
•Extensive: based on capital formation and the existing stock of technological knowledge – raising
output by putting more people to work at familiar tasks and raising labor productivity by building
more factories along the lines of existing factories;
•Intensive growth – through innovation - more of the increase in output is accounted for by
technical change and less by the growth of factor inputs;
•
•Europe had no choice but to switch to intensive growth from the 70s on;

•Bank-based financial systems had been effective at mobilizing resources for investment by existing
enterprises using known technologies – less conductive to growth in a period of heightened
technological uncertainty;
•The role of finance was to take bets on competing technologies  something for which financial
markets were better adapted;
•
•Generous employment protections and welfare – given labor the security to accept the installation
of mass-production technologies – now become an obstacle to growth as new firms seeking to explore
the viability of unfamiliar technologies…;
•
•System of worker co-determination: union representative on big firms supervisory boards – ideal
for helping labor to verify that owners were investing the profits resulting from wage restraint -
but now discouraged bosses form taking the tough measures needed to reconstruct in preparation for
adoption of radical new technologies;
•
•State holding companies that had been engines of investment and technical progress were no longer
efficient mechanisms for allocating resources;
•They were increasingly captured by special interests and used to bail out loss-making firms and
prop up declining industries;
•
•This explains how the average annual rate of growth GDP/C in WE could have fallen by more than
half between the 1950-1973 and the 1973-2000 period.

•Monetarism in Great Britain
•
•M. Thatcher: 1979 announced four-year declining path for the growth of money supply;
•Fight against inflation linked to the goal of reducing the role of the government in the economy;
•Moved to eliminate labor involvement in the design of industrial policies;
•More flexible labor markets: easier hiring and firing, reduced unemployment benefits;
•Attacked the union movements and crushed the strikes;
•
•Adjustment slow:
•Inflation came down only to 11%;
•Main effect of higher interest rates was a appreciation of sterling – recession from loss of
competitiveness;
•GDP fell by 5% and unemployment doubled to 10,4%;
•
•1981 move towards a looser monetary policy and a tighter fiscal policy to continue disinflate;
•Failing petroleum prices unhelpful (GBs - North Sea oil);
•Exchange rate slid from 2,45 towards 1,04 (USD/GBP) 1985 – interest rates up to 14%;
•British industry another blow…
•
•Thatcher reduced taxes and privatized Airlines, BP, Telecom, Gas, sold council houses;
•Finally - deregulation delivered significant raise in productivity…
•Non transplantable to other countries – GB elected „economic radical“ because of three decades of
disappointing economic performance…
•

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1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
GDP Growth
2,8
-2,0
-1,2
1,7
3,8
1,8
3,8
3,6
4,4
4,7
2,1
Inflation
13,4
18,0
11,9
8,6
4,5
5,0
6,0
3,4
4,2
4,9
7,8
Unemployment
4,0
4,8
7,9
9,5
10,5
10,7
10,9
11,8
10,3
8,3
6,4
•Economic development in Great Britain


1951–
1960
1961–1970
1971–1980
1981–1990
1992–2000
USA
GDP growth
3,4
4,2
3,3
3,2
3,6
Inflation
2,1
2,8
7,9
4,7
2,6
EU-15
GDP growth
4,8
4,8
3,0
2,4
2,1
Inflation
3,6
3,9
10,8
6,7
2,4

•Single market
•
•1980s Europe stagnated, while US and Japan surged ahead (losing market share in cars, electronics)
- deeper integration seen as a tonic for these ills; (Vs. 1995-2005)
•
•Governments such as FRA and UK were using the institutions of the EC to advance their national
agendas – delegating to the Commission and the Court responsibility for implementing painful
economic reforms;
•
•Founding document – White Paper by team of experts 1985 the Cockfield Report (UK civil servant) –
summarized dissatisfaction with progress (Delorse commison);
•Reinvigorating growth and accelerating the integration – portrayed as synonymous;
•Goal: market free not just of internal tariffs, but also of regulatory barriers to the movement of
goods and services (Common -> Single);
•
•Intergovernmental conference 1986 -> Single European Act (SEA):
•commitment to establish a single market free of barriers to the movement of goods and factors of
production;
•greater use of qualified majority and cooperative procedure (first direct elections to Parliament
1979);
•SEA provided expansion of the structural Funds – program for funding of infrastructure investment
in its poorer member states – side payment;
•SEA emphasized the need for cooperation in the conduct of economic and monetary policies –
progressive realization of monetary union;




•Context of Maastrich Treaty
•
•1 January 1993 – single market complete;
–The share of intra-EC imports in consumption rose from 22,6% to 25% (1986-1992); EU attracted 45%
US and 21% JAP FDI, intra-EU trade share from 31% to 51%;
•
•Bundesbank set the tone for monetary policy:
–inflation in GER low, DM had tendency to appreciate;
–other central bank were forced to follow to prevent excessive depreciation;
•
•FRA:
–unfairly bearing a disproportionate share of the adjustment burden;
–EMS would create a collective policy space + more expansionary thrust for macroeconomic policies;
•
•GER:
–skepticism of monetary union but advocating elimination of capital controls (monetary union as
quid pro quo);
–committed Europeanists saw foreign (FRA, ITA) criticism of Bundesbank as destructive to goal of
FRA-GER partnership (H. Kohl);
–
•Business formed Association for Monetary Union in Europe:
–voicing support (exchange-rate risks and transparency);
–financial institutions saw single currency as economy of scale opportunity;

•Economic and monetary convergence
•
•Delors report (1989) recommended empowering ECOFIN Council and Parliament to impose binding
ceilings on fiscal deficits + proposed that record of sound fiscal policies should be a
precondition for joining monetary union;
•
•It was compromise between GER insistence on stability (central bank independence) and operation of
market forces and the more politicized approach of the FRA;
•
•New ECB organized along Bundesbank lines – politically independent and price stability as its
primary objective;
•
•Presumption that only a small subset of member states with impeccably strong and stable policies
would qualify for participation;
•
•Set of macroeconomic preconditions – convergence criteria:
–Inflation within 1.5 percent of three lowest;
–Long term interest rates within 2 percent of three lowest;
–National debt no more than 60 percent of GDP;
–Budget deficit no more than 3 percent;
–Exchange rate within 2.25 percent bands of the Exchange-Rate Mechanism;
•
•Stages of monetary integration: independence of central banks -> removing remaining capital
controls 1990-1993 -> creation of European monetary Institute 1994 -> monetary union itself no
later than 1999;




•Key Issues in EU
•
•Mutual recognition – acceptance of the regulations and standards of other EU countries (activities
lawful in one member to be pursued throughout the EC);
–Mutual recognition of professional credentials;
•
•Government procurement – to reduce the bias of governments towards domestic producers;
•Since 1990 control of mergers – restraining the tendency of states to grant legal monopolies
(telecom, transport, post, gas, electricity);
•
•Services (insurance, financial and business services) - foreign firms establishing subsidiaries
being required to undergo lengthy (often discriminatory) authorization;
–2005 Services Directive – right to provide services in all member states as long as they follow
the laws of their home states (opposition by high-income countries);
–financial services: elimination of capital controls 1988 by EC directive:
•rapid process> frustrated industrial policy –> removed barriers for foreign banks  (for 40 years
was governments directing credit towards industry - now financial sector privatized and domestic
bank competed with foreign);
•
•Integration increasingly came to be identified with liberalization + Commission perceived itself
as an agent of deregulation;
•
•Increased mobility of tax base – pressure for reductions in rates of taxation (to limit the danger
that high taxes would cause capital to migrate abroad – states with large public sectors pushed for
tax harmonization);