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LESSONLESSON 2 TheThe EEuropeanuropean UUnionnion

QuickQuick WriteWrite erdun: It was ’s longest single battle. It lasted nearly 10 months, which is longer than Vsome entire wars. Verdun-sur-Meuse lay about 150 miles northeast of Paris. It had been an important fortress since Roman times. The French had reinforced it since the previous war with , in 1870–71. It would be an important objective psychologically, the What do you think Kohl Germans reasoned. and Mitterrand might have been thinking about as they The German commander’s plan was to subject Verdun to stood before the crowd? intense bombing. This would pull French troops in from all along the Western Front to the eight-mile-wide front around Verdun to defend the ancient fortress. All those troops would be easy targets for his big artillery guns. He would “bleed white,” he said. It began with a German artillery barrage at 7:15 a.m. on LearnLearn AboutAbout 21 February 1916. It didn’t end until 16 December. Nobody really knows how many soldiers died there, but estimates • the origins of the run into the hundreds of thousands. The Germans lost very nearly as many soldiers as the French did. And when it was • the countries that all over, neither side had gained any tactical or strategic are members of the advantage. European Union • the political and Nearly 70 years later, on 22 September 1984, West German economic structure Chancellor Helmut Kohl went to Verdun. There he met of the European Union French President François Mitterrand for a ceremony to • the importance of the honor the dead —of both world wars. As their national as a world currency anthems played, the two leaders clasped hands. The two men side by side, hands joined, became a living symbol of reconciliation between France and Germany.

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The European Union, or EU, is a union of 27 democratic • countries, ranging from Germany (with 82 million people) •referendum to tiny (with 400,000). •Euroskeptics It is not the • of Europe. Nor is it an empire. It started small— •reserve currency with only six members. And it has changed names as its missions and functions have changed. The basic idea of the EU was political union through . The reasoning behind postwar efforts to unite Europe was that democratic, law-abiding countries whose people traded freely with one another would be unlikely to go to war against each other. The fi rst steps toward union began with some of the same industries that had fueled the war machine: and steel.

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75162_C6L2_p630-647_AFJROTC_FINAL.indd 631 11/14/09 10:50 AM The Goal of the European Union: to End Wars Among European Nations World War I was supposed to be “the war to end all wars.” That’s what US President Woodrow Wilson called it. He also called it “a war to make the world safe for .” But it didn’t work out that way. Barely a generation after the confl ict killed millions of people, Europe was at war again. Germany, , and —three pillars of modern European civilization—were under fascist rule. In fact, Germany and Italy had elected fascist governments. In Austria, parliamentary democracy had literally “switched itself off” when Austrian Chancellor Engelbert Dollfuss seized power after several prominent members of parliament resigned over a vote in chambers. And the Nazi war machine was rumbling across the continent. When World War II ended, Europeans said, “Never again!” As they dug out of the rubble and began to rebuild in the years after 1945, they sought creative but practical ways to keep the peace that had been so hard won.

The Infl uence of the European Coal and Steel Treaty in Creating the EU The European Union began on 9 1950 with the publication of the Schuman Plan. In it French Foreign Minister proposed that France and Germany’s coal and steel industries be put under joint control. These two industries were essential for producing war materiel. A modern state cannot go to war without them. If the two countries’ defense industries were merged, they presumably couldn’t go to war with each other. As Schuman put it, “The solidarity in production thus established will make it plain that any war between France and Germany becomes not merely unthinkable, but materially impossible.” He reached out to , chancellor of the new Federal Republic of Germany (or ). Adenauer agreed to his idea. Schuman also wanted an organization that would be open to other countries as well. On 18 April 1951, six countries—France, Germany, and Italy, plus , the , and (the so-called Benelux countries)—signed a treaty based on the Schuman Plan. This written agreement between the countries put the coal and steel sectors in all six under common management. This would keep them from making weapons to turn against each other. The treaty created the European Coal and Steel Community (ECSC). The ECSC established free trade among its six members in iron ore, coal, coke (a form of coal), and steel. It did this by: • removing tariffs (import taxes) and other trade barriers • regulating production and sales • establishing a common external tariff on imports from other nations • aiding investments in coal and steel in member states.

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The Treaty of and the Development of the Common Market in 1957 The coal and steel experiment was a success. It confounded the pessimism of critics who were sure it would fail. Today Europeans mark 9 May, the anniversary of Schuman’s presentation of his plan, as “,” the EU’s “birthday.” Soon “the Six” decided to take another step toward a united Europe. On 25 March 1957 they signed the . It took effect on 1 January 1958. It established the European Economic Community (EEC) or Common Market. The Common Market was essentially a customs fastfastFACTFACT union—an association of nations to promote free trade within the union and set common tariffs for nations that are not members. The idea was that increased trade among the members would help integrate their economies. It was an early step in weaving such a tight web of connections among these six countries that war would become more and more unthinkable.

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75162_C6L2_p630-647_AFJROTC_FINAL.indd 633 11/14/09 10:50 AM The Countries That Are Members of the European Union

The European Union has grown in two main ways, since the signing of its earliest treaties. It has acquired new members. And it has taken on new missions and functions.

The European Union’s Six Founding Nations The Common Market began with the same six members as the coal and steel group. Britain’s wartime leader, Winston Churchill, was a great advocate of a united Europe as a way to prevent further wars. But the Common Market sidelined Britain at fi rst. This had partly to do with resistance from French President . It also had to do with Britain seeing itself as not exactly part of “Europe,” since Britain is an island nation.

The EU’s 27 Current Members The Common Market fi rst expanded in 1973. France by then had a new president, Georges Pompidou. He came to terms with Edward Heath, the very pro-European British prime minister, to bring Britain into the European Community (EC), as the Common Market was renamed. Two other new members joined at this time— and . The 1980s saw another three new members. , already a NATO member, joined the EC in 1981. and joined in 1986, after both had thrown off right-wing dictatorships and established democratic rule. That was a requirement for joining the EC.

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In 1990 the EC expanded again, not because it took a new member, but because an existing member had itself expanded. West Germany reunifi ed with the former communist East Germany after the fall of the . In 1993 the Treaty of Maastricht came into effect, changing the EC to the European Union. The next expansion came on New Year’s Day 1995, when Austria, , and joined. The year 2004 was one of big expansion for the EU. It added 10 new members. These included the four central European states seen as strong candidates for membership as soon as the communist era ended: the , , , fastfastFACTFACT and . They also included the three Baltic states (, , and ); two Mediterranean island republics, Malta and ; and , the most progressive and Westernized of the former Yugoslav republics. Two more countries, and , joined the EU in 2007. At this writing the EU has three candidate members—, , and the Former Yugoslav Republic of Macedonia.

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75162_C6L2_p630-647_AFJROTC_FINAL.indd 635 11/14/09 10:51 AM The EU’s Member States The Political and Economic Structure of the European Union • Austria Have you ever tried to organize a couple • Belgium of friends to go to the movies, but then found • Bulgaria the group had suddenly grown to half a dozen— • Cyprus so you had to take two cars and see a later • Czech Republic showing? Then you have some idea what the • Denmark European Union has experienced since its modest beginnings. The following sections • Estonia will give you an overview of the rules and • Finland institutions that help manage the union, • France and how they work together. • Germany • Greece The “Rule of Law” and the Importance • Hungary of Treaties for the EU • Ireland The EU member states have negotiated and signed • Italy many treaties over the years. They are generally • Latvia named for the city where they were signed. • Lithuania • Luxembourg • Malta • Netherlands • Poland • Portugal • Romania • Slovakia • Slovenia • Spain • Sweden •

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There’s a particular reason treaties loom so large within the EU. In the United States, u r

the Congress passes laws for the entire country. But the EU is still a collection o of sovereign states. So, for the EU, a treaty is often the correct mechanism through p e which to work. Beyond that, though, treaties are an expression of the rule of law. Through much of Europe’s history, the principle of “Might makes right” had reigned. That’s the kind of thinking the EU was created to overcome. Thus if Germany wants Belgium to do something (to cite a not totally random example), there has to be discussion and agreement, rather than just one-sided action—especially military action. Besides the Treaty of Rome, the EU’s founding document, other important EU treaties include: • The Treaty of Maastricht, which created a structure with three “pillars”: • the European Community—including the customs union, economic and monetary union, and other forms of European economic cooperation • a Common Foreign and Security Policy—covering defense and international relations • joint action in Justice and Home Affairs—to foster international cooperation on police and criminal matters. This new three-pillared structure is the European Union. • The , signed on 26 February 2001, reformed the EU’s institutions to help it function smoothly after growing to 25 states. • The , signed on 13 December 2007, aims to further streamline EU institutions and make the EU more democratic. Its other purposes are to improve the Union’s accountability, openness, transparency, and participation. At this writing the parliaments of all 27 member states have approved the treaty. While the parliaments have OK’d the treaty, however, the president of the Czech Republic had not given fi nal approval as of mid-2009. Ireland, which voted the treaty down in a referendum—a vote by the people—in 2008, passed it during a second referendum in late 2009. To become law, the treaty must be approved by all 27 EU members. The Treaty of Lisbon followed an attempt to pass an EU constitution a few years earlier. A treaty establishing such a constitution was adopted by heads of state and government in June 2004, and signed later that year. But it was never ratifi ed, as French and Dutch voters defeated the constitution in referendums in 2005.

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75162_C6L2_p630-647_AFJROTC_FINAL.indd 637 11/14/09 10:51 AM The ’s Role Europeans elect representatives to the European Parliament every fi ve years. The number of representatives that each country votes into offi ce depends on that country’s population. Parliament’s job is to pass laws based on proposals from the , which is the executive of the EU (more on that later). Parliament shares this responsibility with the Council of the European Union (more on that later, too). Parliament and the Council also share joint budget authority for the EU. Parliament also has the power to dismiss the European Commission. This corresponds to the way a national parliament can “bring down” the government of a prime minister, as with a vote of no confi dence. The Parliament also elects the , who investigates citizens’ complaints about bad conduct by EU institutions. The European Parliament meets mainly in , France, and occasionally in Brussels, Belgium.

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The Parliament is organized by party rather than national delegations. The u r

European People’s Party, for instance, is a mainstream conservative party allied o with the Christian Democratic parties on the Continent. The European People’s p e Party in the European Parliament includes representatives from across the different member nations. The Parliament as a whole includes the usual spectrum of views from left to right. It has socialists, liberals, greens, and others. The Parliament also includes a range of views on . Some members are strongly pro-federalist. In European terms, this means stronger integration and closer ties among members. At the other end of the spectrum are the Euroskeptics—or Eurosceptics, as they often spell it—people who oppose further EU integration. They are happy with the EU as a customs union. But they feel that closer integration limits their own national sovereignty. Over the years, the British have been the leading Euroskeptics. Many Euroskeptics worry about too much European-wide regulation from offi cials at EU headquarters in Brussels—many of them unelected. They note that their countries have their own sturdy traditions of parliamentary democracy and rule of law. Moreover, the Euroskeptics complain, the EU has become more cumbersome as it has expanded. For example, it continues to have a large number of offi cial languages—currently 23. This requires armies of translators and interpreters.

The Council’s Role The Council is the EU’s main decision-making body. It consists of government ministers from member governments—rather like Cabinet secretaries in the United States. The actual makeup of the Council varies according to the issue or issues on the table at any given time. For example, if the EU is trying to settle an environmental issue, each member state will send its minister responsible for the environment. If there is a fi nancial issue to decide, the Council will consist of fi nance ministers, and so on. Every six months, a different member state holds the so-called presidency of the EU. The state with the presidency chairs the meetings and sets the overall agenda. Each state’s turn at the presidency is an opportunity to “show its stuff.” It’s a time to demonstrate leadership and good management. This time in the spotlight has been especially important for newer and smaller members. Each country’s number of votes within the Council refl ects its population. But the system gives some weighting in favor of smaller countries. (Does this remind you of something about the way the US Congress is organized?) The council decides most issues by majority vote. But the really sensitive ones require everyone to agree. Several times a year the presidents and/or prime ministers of the member states meet as the . These so-called summit meetings set overall policy.

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75162_C6L2_p630-647_AFJROTC_FINAL.indd 639 11/14/09 10:51 AM The European Commission’s Function The European Commission is the EU’s executive organ. It corresponds very roughly to the departments of the US executive branch, just as the European Parliament corresponds very roughly to the US Congress. It drafts proposals for new laws. It also manages the day-to-day business of carrying out policies and spending money. The Commission ensures that everyone follows European treaties and laws. And it can take rule-breakers to the European Court of Justice if necessary. Twenty-seven men and women, one from each member state, make up the Commission. An army of some 24,000 civil servants, most of them in Brussels, supports them. The Commission also has a president, chosen by the governments of the EU members.

The Role of the EU Courts As you can imagine, within a community that so emphasizes the rule of law, courts are very important. The Court of Justice of the EU ensures that EU law is interpreted and applied the same way in all countries. That is, the court makes sure that a German court doesn’t interpret a given law differently from a Belgian court. The court also ensures that member states and institutions meet their legal commitments. The Court of Justice has its headquarters in Luxembourg. It has one judge from each member country.

The ’s Role A central bank is a government body that issues currency, regulates the supply of credit, and holds the reserves of other banks. It isn’t a commercial bank, or the kind of bank where you or your family—or even very rich people or big corporations—would have an account. Rather, it’s a “bankers’ bank.” It’s the bank where commercial banks go to get money. The central bank of the United States is the Federal Reserve Bank. Its counterpart in Europe is the European Central Bank, or ECB. The ECB has its headquarters in Frankfurt, Germany. Its chief job is managing the euro—the new common European currency. It does that mainly by setting interest rates. Its biggest concern is ensuring stable prices—fi ghting infl ation. During the early twentieth century Germany suffered a terrible bout of hyperinfl ation. Prices skyrocketed. The banknotes in people’s wallets lost value even on the streetcar ride into town to shop. Almost no Germans alive today remember that from personal experience. But the episode stamped itself on collective memory. Germans today remain strong infl ation fi ghters. And they’ve brought that attitude to the management of the euro.

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The u r

Another EU bank makes for many different kinds of projects within the o p

EU and EU candidate members. It is especially active in poorer areas. It fi nances e rail and road-building projects and other infrastructure projects, as well. It also supports programs to protect or clean up the environment. EU governments own the bank, and so it can raise capital and provide loans at attractive rates. A particular focus of the bank right now is projects that will help the EU become the world’s leading knowledge-based economy.

The Importance of the Euro as a World Currency

The idea behind the European Union was, in simplest terms, “trade not war.” If Europe’s national economies were integrated closely enough with one another, no one would go to war. After all, what business wants to bomb its customers? Or attack its suppliers? The introduction of a common currency has been one of the crowning achievements of this integration. The euro has succeeded not only as Europe’s common coin, but also as an important world currency—to the point that some observers say it may take over the role the US dollar has played in the global economy.

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75162_C6L2_p630-647_AFJROTC_FINAL.indd 641 11/14/09 10:51 AM So just what’s meant by “common currency,” and what are some of the basics of currency exchange? In the United States, people use dollars to buy things. Printed on each bill is the line: “This Note Is Legal Tender for All Debts, Public and Private.” No matter where a person travels in the United States, the dollar is accepted all across the country. The accents are different, the scenery is different, and the weather is different. But the dollar is everywhere. That’s because the United States is one vast sovereign nation. The nations of Europe, though, are much smaller. Until the euro came in, each had its own currency, with a few exceptions. This meant tourists were always having to change money—from dollars to francs to marks to fl orins. They had to pay for this service. For tourists on a bus tour, this was a minor inconvenience. For European companies trying to expand across national frontiers, it was a major problem. But what if they shared a currency? What if there were a European coin as universally accepted in Europe as the dollar is in America? Those were the questions behind the development of Europe’s common currency, the euro.

The Countries That Use the Euro as a Currency At this writing, 16 countries use the euro as their currency. Its symbol looks like this: €. People often refer to this group of countries, with about 330 million citizens, as the “euro zone.” (The offi cial term is “euro area.”) It started out in 1999 with a group of 11 countries: the original “Six” of the EU, plus Ireland, Finland, Austria, and the Iberian duo, Spain and Portugal. All these countries had to meet certain “convergence criteria” to join the euro zone—more on that later. Greece joined in 2001, Slovenia in 2007, the island republics of Cyprus and Malta in 2008, and Slovakia in 2009. Additionally, Poland, Estonia, and Romania have national target dates for joining.

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The launch of the euro took place in two phases. On 1 January 1999 Europeans u r

began using the euro as “virtual money” or “book money” before there were actual o coins and banknotes. Banks and other businesses would enter sums into ledgers p e in the national currency and also in . On 1 January 2002 banknotes and coins began to circulate.

The Euro’s Advantages for EU Members Using the common currency means people and businesses don’t have to pay the cost of exchanging money. Currency exchange is a service, and it has to be paid for. It’s somewhat like the interest someone pays on a . But there’s more to it than that. Currency exchange rates go up and down over time. Let’s take the case of a manufacturer who contracts to deliver a container full of fi nished goods to an international customer. The manufacturer may pay his employee and his suppliers in one currency but be paid by the customer in another. When the manufacturer and the customer fi rst agree to the contract, including prices, they can fi gure in the price of currency exchange. But over the life of the contract, as the factory produces the goods and then the shippers deliver them, the exchange rate may shift. It may be enough to give the customer an unexpected bargain—and to wipe out all of the manufacturer’s profi t. Currency fl uctuations occur for reasons beyond the control of people such as this hypothetical manufacturer and customer. A government may “print money,” as the expression goes, to cover a budget defi cit. When supply increases, the price falls. That is, the value of that currency will fall on international markets. On the other hand, the value of the US dollar often goes up in times of turmoil in the world. People who lose confi dence in their own national currency go to the bank to buy dollars. As the demand rises, the price—the value of the dollar—rises. This “fl ight to security,” by the way, is ultimately a vote of confi dence by world markets in the United States, both as an economy and as a free country. But in the near term it can wreak havoc as buyers and sellers try to come to terms. Is it any wonder that much of Europe has been glad to put these problems behind it?

Why Some EU Countries Don’t Use the Euro On the other hand, not all the EU is within the euro zone. Why not? Some countries remain outside because they haven’t yet met the criteria to join. Several EU members outside the euro zone are former communist countries. They are making the transition from centrally planned economies to free markets. This is a big change. But all are keen to make the transition. As small, “open” economies (with lots of imports and exports) already doing a lot of trade with euro countries, they should benefi t greatly from adopting the common currency.

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75162_C6L2_p630-647_AFJROTC_FINAL.indd 643 11/14/09 10:51 AM But the euro-zone criteria, known as “convergence criteria,” are fairly tough. They weren’t easy for even longtime EU members to meet at fi rst. To enter the euro zone, a country must show that it has: • Price stability. A country’s infl ation rate must be low. • Sound public nances.fi Government budget defi cits and national debt must be under control. • Exchange-rate stability. The value of the national currency the prospective new member is about to give up should not swing wildly in the markets. • Low long-term interest rates. Long-term rates are the markets’ way of predicting the future. Low rates are a sign that a member wanting to join the euro zone will be able to continue to meet the criteria over the long term, and not for a short time only, just to get in. Any close relationship involves some tradeoffs between freedom and fl exibility, on one hand, and support and strength, on the other. If you take a friend along on a trip, you’ll have to pay attention to his or her preferences on how early to start out and where to stop for lunch. That may cramp your style somewhat. But if your car breaks down, or you get lost in the woods, you may be glad to have company. That basic principle comes into play in the euro zone as well. The biggest EU member outside the euro area is Britain. The British, whose pound sterling was once the world’s dominant currency, have not wanted to give up their ability to steer their own economy independently. Their economy is big enough that they can do this. They have been allowed to “opt out” of the euro zone. So have the Swedes. Their situation is similar, although their currency was never so dominant, nor is their economy so big. Denmark is the other country outside the euro zone. The Danes have twice voted down referendums on joining. Their currency is pegged to the euro, however. This means that the Danes have to keep pace with euro standards but don’t get the benefi t of a common currency—the worst of both worlds.

How the Euro Compares With the Dollar as a World Currency If you were to visit the mythical Republic of Bananaland, for instance, you might have to exchange some of your dollars for Bananalandish money. But you wouldn’t want to exchange any more than you really needed on your visit. When you got ready to leave, you might try to change any unspent Bananalandish money back into dollars. Or you might just give the taxi driver who takes you to the airport a really big tip. After all, what are you going to do with Bananalandish money? There’s no place to spend it except Bananaland.

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Not all currencies are like this. The dollar, for instance, is a currency people accept u r

widely outside the United States—even where it’s not the offi cial legal tender. o In the mid-1990s research by offi cials of the Federal Reserve found that between p e 55 percent and 70 percent of all dollars circulating were doing so outside the United States. Some of these dollars go into dubious transactions—drug deals, for instance. But in other cases, people just need a safe store of value. Dollars represent people’s emergency reserves—stashes of cash under the mattress of someone living in a war zone, or under a repressive government. There’s evidence that euro notes are beginning to fi ll that role of emergency cash reserve, too. And the euro is available in €500 notes. The biggest dollar note widely available is the $100 bill. That means that the euro has become an even better way to pack a lot of value into a single suitcase. In sum, both the dollar and the euro are currencies that individuals, banks, and governments are willing to hold on to. In technical terms, the dollar and the euro are both examples of reserve currencies. A reserve currency is a currency that governments keep on hand to pay international debts. The US dollar is the most widely traded currency in the world, and the euro is in second place. The euro is also the No. 2 reserve currency after the dollar. At its launch, the euro accounted for 18.1 percent of global foreign exchange reserves. By the summer of 2009 that had risen to 25.9 percent. At the end of 2006 the combined value of euro notes in circulation surpassed that of US dollars.

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75162_C6L2_p630-647_AFJROTC_FINAL.indd 645 11/14/09 10:51 AM To date, it appears that the EU has been a smashing success. First, there have been no wars between its members. France and Germany, for example, have been at peace for decades after centuries of confl ict. The EU has increased Europe’s economic importance on the world scene. Free trade between its members has helped bring economic growth to some of the continent’s poorer corners. It has advanced the causes of freedom, democracy, and human rights, since countries wanting to join must agree to protect and promote them. But the process of adding new members has brought growing pains. The defeat of recent referendums may indicate that Europeans have reached the limit of how much national sovereignty they are willing to give up—for now, at least. This was a problem for the early United States, as well. In that case, Americans were willing to give up some state authority to the federal government, exchanging the Articles of Confederation for the Constitution. But the 13 original American states shared a common English language and British heritage. For the multilingual European nations, with different cultures, religions, and histories, the process is proving much more diffi cult. How much further European unity develops will determine much about the continent’s future.

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CHECKCHECK POINTSPOINTS p

✔ e Lesson 2 Review Using complete sentences, answer the following questions on a sheet of paper. 1. What did the Schuman Plan propose? 2. What did the Treaty of Rome establish? 3. What did Spain and Portugal have to do before joining the European Community? 4. Why did the EC expand in 1990? 5. What are the three pillars of the European Union? 6. Which people have been the leading Euroskeptics, and what do they worry about? 7. Why should entering the euro zone be good for the EU’s formerly communist new members? 8. Why has Britain remained outside the euro zone?

Applying Your Learning 9. Compare and contrast the governments of the United States and the European Union.

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