The European Union: Economics and Policies: Ninth Edition Ali M

Cambridge University Press 978-1-107-00796-3 - The European Union: Economics and Policies: Ninth edition Ali M. El-Agraa Frontmatter More information

The European Union

Th e European Union has established itself as a leading text that provides readers from all disciplines with a sound understanding of the economics and policies of the EU. Its wealth of information, detail and analysis has ensured that previous editions have been read by a generation of students, researchers and policy- makers. It covers all major EU policy areas, as well as theories of economic integration, the theory of economic and monetary union (EMU), the measurement of the economic eff ects of European integration and the legal dimension of EU integration. It also includes an explanation and analysis of all recent developments aff ecting the EU, such as enlargement, the ratifi cation of the Nice Treaty and the Convention for the Future of Europe. Th is edition has been thoroughly revised and updated and includes new resources to help students and teachers, including summaries, review questions, suggestions for essay titles and further reading lists.

Ali M. El-Agraa is Emeritus Professor of International Economic Integration at Fukuoka University, Japan. He has extensive teaching experience at universities in the UK and North America.

© in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-1-107-00796-3 - The European Union: Economics and Policies: Ninth edition Ali M. El-Agraa Frontmatter More information

NINTH The European Union EDITION Economics and Policies

Ali M. El-Agraa

With invited edited contributions

University Printing House, Cambridge CB2 8BS, United Kingdom

Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence.

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First published under the Philip Allan imprint in 1980 Second edition published 1983 Th ird edition published 1990 Fourth edition published under the Harvester Wheatsheaf imprint in 1994 Fifth edition published under the Prentice Hall Europe imprint in 1998 Sixth edition published under the Financial Times Prentice Hall imprint in 2001 Seventh edition published 2004 Eighth edition published by Cambridge University Press 2007 Ninth edition published 2011 5th printing 2015

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ISBN-13 978-1-107-00796-3 hardback ISBN-13 978-1-107-40011-5 paperback

To Diana, Mark and Frances and those who believe in and actively support an ever closer unity for Europe

Contents

List of fi gures [page xi] 3.6 Th e courts [47] List of tables [xiii] 3.7 Th e Ombudsman [50] List of boxes [xv] 3.8 Th e European Economic and Social List of contributors [xvi] Committee [50] Preface [xvii] 3.9 Th e Committee of the Regions [51] A reader’s guide [xx] 3.10 Th e European Central Bank [52] List of abbreviations [xxi] 3.11 Th e European Investment Bank [52] 3.12 Conclusion [53] 1 General introduction: the EU within the context of regional integration worldwide [1] 4 Th e legal dimension in EU integration [56] Ali El-Agraa Imelda Maher 1.1 Introduction [1] 4.1 Introduction [56] 1.2 What is economic integration? [1] 4.2 Background [56] 1.3 Economic integration and WTO rules [2] 4.3 Th e rule of law and the EU [57] 1.4 Economic integration worldwide [4] 4.4 Th e European Court of Justice [59] 1.5 Th e possible gains from economic 4.5 Th e framing function of EU law [61] integration [14] 4.6 Rule- making [62] 1.6 Conclusion [15] 4.7 Implementation and enforcement [63] 4.8 Interpretation and dispute resolution [65] Part I EU history, institutions and legal 4.9 Conclusion: the nature of EU law [67] dimension 5 Th e EU economy: bare essentials [70] 2 A history of European integration and the Ali El-Agraa evolution of the EU [19] 5.1 Introduction [70] Ali El-Agraa 5.2 Area and population concerns [70] 2.1 Introduction [19] 5.3 GNI, per capita GNI and growth of GDP [72] 2.2 A short history of European unity [19] 5.4 Demand [73] 2.3 Th e evolution of the EU [26] 5.5 Price indices and real interest and exchange 2.4 Conclusion [34] rates [75] 5.6 Direction of trade [75] 3 EU institutions [38] 5.7 Tariff barriers [76] Ali El-Agraa 3.1 Introduction [38] 3.2 Important actors [38] 3.3 Th e Commission [39] 3.4 Th e Council of the European Union [43] 3.5 Th e European Parliament [45]

vii

viii Contents

Part II EU market integration: theory and 9.5 Th e dynamic eff ects [128] practice 9.6 Th e pioneering studies [128] 9.7 A taste of the latest estimates [136] 6 Th e theory of economic integration [83] 9.8 Estimating the income eff ects [139] Ali El-Agraa 9.9 Economic growth eff ects [141] 6.1 Introduction [83] 9.10 Conclusion [142] 6.2 Th e customs union aspects [83] 6.3 Customs unions versus free trade areas [96] Part III EU monetary integration 6.4 Economic unions [96] 6.5 Macroeconomics of integration [98] 10 Th e theory of monetary integration [147] 6.6 Economic integration in developing Ali El-Agraa countries [98] 10.1 Introduction [147] 6.7 Economic integration among communist 10.2 Disentangling the concepts [147] countries [98] 10.3 What is monetary integration? [148] 6.8 New theoretical developments [99] 10.4 Th e gains and losses [149] 6.9 Conclusion [99] 10.5 A ‘popular’ cost approach [156] 10.6 Fiscal policy in monetary unions [159] 7 Th e economics of the single market [102] 10.7 Conclusion [160] Brian Ardy and Ali El- Agraa 7.1 Introduction [102] 11 Th e development of EU economic and 7.2 Why ‘the single market’? [102] monetary integration [163] 7.3 Th e economics of non- tariff barriers [104] David Mayes and Ali El- Agraa 7.4 An evolving programme [105] 11.1 Introduction [163] 7.5 Assessment of the single market [109] 11.2 Th e Werner Report [163] 7.6 Conclusion [111] 11.3 Th e European Monetary System [164] 11.4 Th e Delors Report and the Maastricht 8 Factor mobility [114] Treaty [167] David Mayes 11.5 Th e transition to EMU [170] 8.1 Introduction114 11.6 Th e decision over membership of 8.2 Th e mobility of capital and labour in the EMU [176] EU [114] 11.7 Conclusion [179] 8.3 Capital movements [116] 8.4 On the determinants of direct 12 Th e operation of EMU [182] investment [117] David Mayes 8.5 Capital movements in Europe [119] 12.1 Introduction [182] 8.6 Labour movements [120] 12.2 Th e Eurosystem and the euro [182] 8.7 Labour fl ows in the EU [121] 12.3 Th e coordination of fi scal and other 8.8 Agglomeration considerations [124] macroeconomic policies [186] 8.9 Conclusion [124] 12.4 Completing EMU [191] 12.5 Conclusion: enlargement [192] 9 Measuring the economic impact of European integration [126] Part IV The single European market: policy Ali El-Agraa integration 9.1 Introduction [126] 9.2 It is a tough real world [126] 13 Competition policy [197] 9.3 How/what to measure? [127] Wolf Sauter 9.4 Th e eff ects on trade [127] 13.1 Introduction [197]

Contents ix

13.2 Th e rationale for EU competition 17.3 Oil shocks and afterwards [258] policy [197] 17.4 Demand and supply: the status 13.3 Th e role of economics [198] quo [259] 13.4 General overview of the legal 17.5 Current energy policy agenda: framework [199] sustainability, security, 13.5 Th e substantive norms [201] competitiveness [260] 13.6 Enforcement [205] 17.6 Conclusion [267] 13.7 Th e public turn [207] 13.8 Rationalization [208] 18 Environmental policy [270] 13.9 Modernization [209] Ian Barnes 13.10 Conclusion [211] 18.1 Introduction [270] 18.2 Th e nature of EU environmental 14 Industrial and competitiveness policy: the policy [207] Lisbon Strategy [214] 18.3 Th e rationale for intervention [271] Brian Ardy 18.4 Standards and thresholds [274] 14.1 Introduction [214] 18.5 Th e legislative approach [275] 14.2 ICP instruments [214] 18.6 Th e Single European Market and 14.3 ICP: theory and evidence [214] environmental controls [276] 14.4 Th e control of state aid [217] 18.7 Th e polluter pays principle [277] 14.5 Research and development policy [220] 18.8 Market- based instruments [277] 14.6 EU economic reform and 18.9 Th e EU’s developing environmental competitiveness [223] perspective [278] 14.7 Conclusion [226] 18.10 Global warming strategy [281] 18.11 Th e carbon tax [282] 15 Tax harmonization [229] 18.12 Th e EU’s Emissions Trading System [283] Brian Ardy and Ali El- Agraa 18.13 Conclusion [285] 15.1 Introduction [229] 15.2 Why is tax harmonization necessary? [229] Part V EU budget and structural policies 15.3 Th e principles of tax harmonization [230] 15.4 Value added tax [230] 19 Th e general budget [289] 15.5 Excise duties [234] Brian Ardy and Ali El- Agraa 15.6 Corporation tax [238] 19.1 Introduction [289] 15.7 Conclusion [241] 19.2 Th e economic theory of the state [289] 19.3 Fiscal federalism [290] 16 Transport policy [244] 19.4 Th e EU and fi scal federalism [292] Kenneth Button 19.5 Budget rules and procedure [293] 16.1 Introduction [244] 19.6 EU budget revenue [294] 16.2 Th e European transport system [244] 19.7 EU budget expenditure [296] 16.3 Th e initial development of a CTP [246] 19.8 Operating budgetary balances [300] 16.4 Th e Single European Market eff ect [248] 19.9 Th e EU budget and enlargement [301] 16.5 Th e 2004 and 2007 enlargements [252] 19.10 Conclusion [302] 16.6 Conclusion [255] 20 Th e Common Agricultural Policy [306] 17 Energy policy and energy markets [257] Ulrich Koester and Ali El- Agraa Stephen Martin and Ali El- Agraa 20.1 Introduction [306] 17.1 Introduction [257] 20.2 General background [306] 17.2 Th e golden years (mostly) [257] 20.3 Th e problems of agriculture [307]

x Contents

20.4 Th e birth of CAP and the institutional 23.6 Th e EES and EU employment setting [311] performance [373] 20.5 Th e market organizations of CAP [318] 23.7 Conclusion [378] 20.6 Rural development policy [328] 20.7 Th e future of CAP [329] Part VI EU external relations 20.8 Conclusion [331] 24 External trade policy [383] 21 Th e Common Fisheries Policy [335] Miriam Manchin and Ali El- Agraa Ali El-Agraa 24.1 Introduction [383] 21.1 Introduction [335] 24.2 EU trade patterns [384] 21.2 Understanding the fi sheries industry [336] 24.3 EU trade decision- making 21.3 Policy objectives [339] procedures [386] 21.4 Policy process [342] 24.4 Instruments of the external trade 21.5 Reform of the CFP? [344] policy [388] 21.6 Conclusion [345] 24.5 EU trade relations [390] 24.6 Conclusion [398] 22 Regional policy [348] Harvey Armstrong 25 Th e EU and the developing world [401] 22.1 Introduction [348] Ali El-Agraa 22.2 Th e case for an EU regional policy [348] 25.1 Introduction [401] 22.3 Th e eff ects of integration on EU regional 25.2 Essential background [401] disparities [350] 25.3 Trade policy [403] 22.4 Current and future EU regional 25.4 Development cooperation [410] policy [356] 25.5 Conclusion [419] 22.5 Some key issues for the future [360] 22.6 Conclusion: regional policy after Part VII The future of the EU 2013 [362] 26 Th e future of the EU [423] 23 Social policies: the employment Ali El-Agraa dimension [364] 26.1 Introduction [423] Brian Ardy and Ali El- Agraa 26.2 Th e vision of the founding fathers [423] 23.1 Introduction [364] 26.3 Th e vision of contemporary 23.2 Th e development of social and employment politicians [424] policy [364] 26.4 Conclusion [430] 23.3 Th e development of the European Employment Strategy [365] 23.4 Employment performance: economic Bibliography [431] theory and evidence [367] Author index [471] 23.5 Th e European Employment Strategy [370] Subject index [477]

Figures

3.1 Th e co- decision procedure [46] 10.2 Th e expectations- augmented Phillips 5.1 Female life expectancy at birth, curve [152] 1960–2008 [71] 10.3 Monetary integration with expectations- 5.2 Male life expectancy at birth, 1960–2008 [71] augmented Phillips curves [153] 5.3 Per capita GNI, 2008 [72] 10.4 Shifts in EMU partners’ aggregate supply and 5.4 Budget defi cits, 2009 [74] demand [155] 5.5 Net public borrowing, 2008 [75] 10.5 Krugman’s (1990) cost–benefi ts of 5.6 Long- term interest rates, 2007 [75] EMU [158] 5.7 Harmonized index of consumer prices 12.1 Structure of the European System of Central (HICP), 2009 (2005 = 100) [75] Banks [183] 5.8 Exports to and imports from the EU, 14.1 EU15 state aid, 2008 [219] 2009 [76] 14.2 NMS state aid, 2008 [219] 6.1 Trade creation and trade diversion [84] 17.1 Indices of EC6 GDP, primary energy 6.2 Marginal ‘degree of preference’ for industrial consumption and coal consumption, 1953–79 production [86] (1953 = 100) [258] 6.3 General equilibrium of the Cooper–Massell 18.1 Market versus social equilibrium [272] argument [88] 18.2 Th e optimum level of pollution 6.4 Internal economies of scale [89] abatement [272] 6.5 Social costs and economies of scale [90] 18.3 Pollution threshold [274] 6.6 Customs unions and the terms of trade [91] 19.1 GDP per capita in the EU27 and US states, 6.7 UTR versus customs unions [93] 2008 [292] 6.8 Vindicating the Cooper–Massell criticism 19.2 EU budgetary revenue resources, when dominant W has no tariff s/transport 1971–2008 [295] costs [94] 19.3 EU27 ‘own resource’ contributions and GNI 6.9 Dominant W has no tariff s/transport costs – per head, 2008 [296] non-discriminatory tariff s by H and P and a 19.4 Real EU expenditure, 1965–2008 [297] CET consistent with WTO rules: case I [95] 19.5 EU15 CAP and structural expenditure, 6.10 Dominant W has no tariff s/transport costs – 2008 [298] non-discriminatory tariff s by H and P and a 19.6 Operating budgetary balances and GNI per CET consistent with WTO rules: case II [95] head, EU27, 2008 [300] 6.11 Capital mobility [97] 20.1 Th e decision- making process: a stylized 7.1 Th e eff ects of tariff s and non- tariff model [313] barriers [105] 20.2 Development of EU and world market prices 7.2 Intra- and extra- exports’ share of GVA [107] for agricultural products [315] 7.3 Price dispersion in the EU [109] 20.3 Th e development of the EU trading 7.4 EU15 foreign direct investment [110] situation [318] 10.1 Th e Fleming–Corden analysis of monetary 20.4 Th e impact of variable levies on domestic integration [152] prices [319]

xii List of fi gures

20.5 Th e eff ect of variable levies or fi xed tariff 22.2 Regional unemployment rates (males plus rates [320] females), 2004 [352] 20.6 Th e impact of preferential access to EU 22.3 Cohesion policy eligible areas, 2007–13 [358] markets [322] 23.1 Unemployment in the EU and the USA, 20.7 Th e impact of subsidized export 1960–2010 [366] constraints [323] 23.2 Employment rates in the EU15 and the USA, 20.8 Th e importance of intervention prices [324] 1961–2007 [374] 20.9 Th e eff ect of export subsidies on domestic 23.3 Employment rates in the EU15, prices [324] 1992–2008 [374] 20.10 Price cuts and direct payments: the case of 23.4 NMS employment rates, 2000–2009 [375] grains [324] 24.1 Main traders (value in $ million) and share of 20.11 Support levels in the OECD and member trade (exports + imports) in goods of the eight countries in % PSE [325] most important trading nations, 2008 [384] 20.12 Average costs in milk production and milk 24.2 Share of imports/exports by partner countries prices [326] in total extra- EU imports/exports of goods, 20.13 Budget eff ects of EU demand for domestic 2009 [385] consumption as compared to export 24.3 Trade in goods and commercial services, subsidization [327] 2008 [386] 20.14 Welfare eff ects of consumer subsidies [328] 24.4 Trade in commercial services, 2008 [386] 20.15 Breakdown of EU expenditure for 24.5 Main product categories in extra- EU exports agriculture [330] and imports of goods, 2009 [387] 20.16 Market support and direct payments [330] 24.6 Composition of EU exports and imports in 20.17 Th e eff ect of price support on services, 2008 [387] productivity [332] 24.7 EU tariff structure, 2008 [389] 21.1 EU fi sh catches [336] 24.8 EU’s PTAs [391] 21.2 Extra- EU trade in fi sh and fi shery products, 25.1 Total DAC ODA and EU- DAC ODA 1988–2007 [337] disbursements, 2004–9 [411] 21.3 EU fi sheries: exports, 2008 [337] 25.2 EU external assistance commitments, 21.4 EU fi sheries: imports, 2008 [337] 2001–9 [412] 21.5 Evolution of the number of vessels in EU 25.3 EU external assistance disbursements, fi shing fl eet, 1992–2009 [340] 2001–9 [412] 21.6 Evolution of EU fi shing fl eet capacity, 25.4 EU ODA sectoral breakdown commitments 1992–2009 [341] (in € million; per cent), 2009 [413] 21.7 Financial assistance to the fi sheries sector, 25.5 Regional distribution of EU ODA (€ million; 2007–13 [341] per cent), 2009 [413] 22.1 Regional gross domestic product per head, at purchasing power parities, 2003 [351]

Tables

Tables in Chapters 5 and 21 can be found online at www.cambridge.org/el-agraa

1.1 Schematic presentation of economic 5.14 Tariff barriers, 2008 integration schemes [2] II.1 Beef illustrating trade creation [79] 1.2 Economic integration in Europe [5] II.2 Butter illustrating trade diversion [80] 1.3 A comparison of the EU and NAFTA, II.3 Beef illustrating unilateral tariff 2008 [6] reduction [80] 1.4 Economic integration in Africa [8] II.4 Butter illustrating unilateral tariff 1.5 Economic integration in the Americas [10] reduction [80] 1.6 Economic integration in Asia- Pacifi c and the 7.1 Measures of protection by country and Middle East [12] industry [106] 3.1 EU Departments ( Directorates General) and 8.1 Direct investment fl ows of EU countries, services [42] 1987–2009 [118] 3.2 Members of the European Parliament elected 8.2 Mergers and acquisitions involving EU in June 2009 [48] fi rms [120] 4.1 Jurisdiction of the courts [61] 9.1 Predictions of trade creation (TC) and trade 5.1a Area, population and life expectancy diversion (TD) in the EEC [130] 5.1b Life expectancy at birth, selected countries, 9.2 Changes in ex post income elasticities of 1960–2008 import demand in the EEC [131] 5.2 Health expenditure, mortality and fertility 9.3 Comparing the 1974 Resnick and Truman 5.3 Labour force, employment and (R&T) estimates of trade creation and trade unemployment rates, 2008 diversion in the EEC and EFTA with the 1972 5.4 Employment by basic economic sector, Verdoorn and Schwartz (V&S) estimates 2004–8 ($ million) [133] 5.5 Gross national income (GNI Atlas method) 9.4 A comparison of the eff ects of diff erent anti- and gross domestic product (GDP), 2008 mondes on the imports of the EEC and EFTA 5.6 Average annual percentage growth of GDP in 1969 ($ million) [133] and its components, 1990–2008 9.5 Estimated impact of SEM on market 5.7 Distribution of income or consumption, 2008 shares [138] 5.8 Structure of demand (% of GDP), 2008 9.6 Changes in trade patterns in manufactures 5.9 Central government fi nances (% of GDP), resulting from SEM: an ex post 2008 simulation [139] 5.10 Merchandise exports/imports, current 9.7 Share of inter- industry and intra- industry account, reserves, ODA and FDI, 2008 trade in intra- EC trade (% change), 5.11 Consumer/wholesale price indices and real 1987–94 [140] interest/exchange rates 9.8 Th e eff ects of economic integration on the 5.12 Share of trade with EU countries: exports growth rate of member states, 1961–72 and 5.13 Share of trade with EU countries: imports 1974–81 [141]

xiii

xiv List of tables

11.1 EU member states’ performance with regard 19.1 Expenditure at diff erent levels of government to the convergence criteria [172] in federal states (% of GDP), 2007 [291] 14.1 Productivity and employment in the EU15 and 19.2 Federal government expenditure by main the USA, 2009 [223] function (% of GDP), 2008 [292] 14.2 Growth of real GDP in the EU15, the USA, 19.3 Tax revenue of diff erent levels of government Japan and ACNZS, 1978–2009 [225] in federal states (% of GDP), 2008 [294] 15.1 EU27 tax structure, 2008 (% of GDP) [231] 19.4 Tax systems: federal states and the EU (% of 15.2 VAT in EU member states, 2008 [233] GDP), 2008 [295] 15.3 Cigarette taxation in EU member states, 19.5 Sources of EU revenue, 2008 [296] 2010 [235] 19.6 EU expenditure, 2008 [297] 15.4 Alcohol taxation in EU member states, 2010 19.7 EU fi nancial perspective for 2007–13 [303] (per litre) [236] 21A.1 EU catches in all fi shing regions (tonnes live 15.5 Taxes on petrol and diesel fuel, 2010 [237] weight), 1997–2008 15.6 EU25 corporation tax, 2010 [239] 21A.2 EU fi sh catch, 1993 and 2008 17.1 Composition of primary energy supply 21A.3 EU exports and imports of fi shery and (millions of tonnes of oil equivalent), EU27, aquaculture products, 2008 2008 [260] 21A.4 EU assistance to the fi sheries sector, 2007–13 17.2 Projected oil and gas consumption, share of 22.1 Priority objectives in the 2007–13 budget imported energy in EU energy consumption, period [357] 1998–2030 [260] 22.2 Regional policy in 2007–13: indicative 17.3 World proven production, crude oil reserves, allocations (€ million, current prices) [359] by region, 2008 [262] 23.1 EU15 employment and GDP growth, 17.4 World proven natural gas reserves and 1980–2008 [376] marketed production, by region, 2008 [263] 23.2 Non- accelerating wage rate of unemployment, 17.5 Natural gas imports, of selected EU member 1991–2009 [379] states from the Russian Federation, 2009 25.1 Overview of expenditure within heading ‘EU (billion cubic metres) [263] as a global partner’ in the 2007–13 fi nancial 18.1 Main sources of greenhouse gases by sector perspective (€ billions at 2004 prices) [416] for the EU27, 2008 [281]

Boxes

1.1 GATT’s Article XXIV.5 [3] 18.1 Externalities [272] 2.1 Monnet, Father of Europe [23] 18.2 Th e European Environment Agency 3.1 Th e need to reform the Commission [40] (EEA) [275] 3.2 Th e EP forces a vital decision [41] 21.1 EU fi nancial assistance to the fi sheries 11.1 Provisions of the EMS (OJ C 1971) [165] sector [342] 12.1 Revisions to the Stability and Growth Pact 25.1 EU ODA: fi nancing sources and political agreed in March 2005 [189] responsibility [411]

Contributors

Brian Ardy is Reader in Economics and Head of the Miriam Manchin is Lecturer in the Political Economy European Institute, the Business School at London of European Union Integration, School of Slavonic and South Bank University, UK. Eastern European Studies, University College London, UK. Harvey W. Armstrong is Emeritus Professor of Economic Geography, Department of Geography, Stephen Martin is Professor of Economics and Faculty University of Sheffi eld, UK. Director of the Technology Transfer Initiative at the Krannert School of Management, Purdue University, Ian Barnes is Professor Emeritus, Jean Monnet USA, and is co-managing editor of the International Professor of European Integration, Faculty of Business Journal of Industrial Organization. and Law, University of Lincoln, UK. David G. Mayes is Professor of International Finance, Kenneth Button is University Professor of Public Policy, the University of Canterbury, New Zealand, and School of Public Policy, George Mason University, USA, Director of its National Centre for Research on Europe, and is also director of both the University’s Aerospace and was Adviser to the Board of the Bank of Finland. Research Center and the Center for Transportation, Policy, Operations and Logistics. Wolf Sauter is with the Financial Markets Directorate, Ministry of Finance, the Netherlands, and was Ulrich Koester is Professor at the Institute of National Expert with the EU’s Directorate General Agricultural Economics, University of Kiel, Germany. for Competition, Policy Adviser to the Independent Imelda Maher is Sutherland Professor in European Authority for Telecommunications and Posts (OPTA), Law, School of Law, University College, Dublin, Th e Hague, and Professor of Economic Law, Groningen Republic of Ireland. University, the Netherlands.

xvi

Preface

Th e European Union (EU) is the most signifi cant and a foreign policy chief who controls a vast diplomatic infl uential of international economic integration (IEI) corps, now being established. schemes. Th ere are three reasons, the sum of which Th at is why the EU is fascinating to study, and this explains this signifi cance: book attempts to guide those who care about an ‘ever 1. Of the six EU founding states, (West) Germany, closer union’ for the people of Europe. But it is not France and Italy were top ten world economies. confi ned to ‘Europeans’, since the EU off ers lessons for Since then, two such economies have joined: the all countries that try to learn from it or even emulate it. UK and Spain. Hence today the EU includes half Th is is not to suggest that the EU is heaven – far from it; of the world’s top ten economies. Th e EU has also it has always had its serious problems, some bringing proved a magnet for new members: in addition it close to complete collapse: witness the fi nancial and to the founding member nations, known as the economic crises it has been experiencing since 2007, Original Six, there are now an additional twenty- which prompted many to speculate on the imminent one. Th e EU of twenty- seven continues to receive demise of the euro. But this is inevitable, given the applications for membership; hence it is set to diversity of EU peoples and economies. include practically the whole of Europe, and may Th is book is unique, and in more ways than one. go beyond the geographic area if Turkey succeeds First, when the fi rst edition was published in 1980 there in joining in 2015. No other scheme matches this was no such text on the market; there were a few books economic size and diversity. for the layperson and the expert, which were naturally 2. From a voluntary viewpoint, the EU is the oldest IEI limited in scope. Second, this is the only text that covers scheme in operation; voluntary in the sense that every single major EU policy, but is inevitably slanted countries are not coerced into joining, due to their towards the economic, given the way the EU has devel- being dominated by a foreign country or captured oped. Th ird, although I am personally responsible for by war. Th is longevity is part of the EU’s attraction. ten chapters of the book and co-author of another 3. Most vitally, the EU has the deepest scheme of IEI. It eight, the rest of the chapters are contributed by lead- is almost a complete economic union: (a) it is prac- ing authorities in their particular area of EU expertise, tically a complete ‘common market’, where people, but I have edited their contributions in such a way as to goods, services and capital move freely – the four make the book read as a consistent whole. Naturally, freedoms; (b) sixteen of its twenty-seven member in doing so, I have tried my best not to make them lose states have the same currency (euro), with the their unique style. European Central Bank in charge of Eurozone mon- Th e book, together with its website, off ers compre- etary policy; (c) it has a system for monitoring and hensive coverage of all the major EU policy areas. It is infl uencing fi scal policy – the Stability and Growth written in such a way that the theoretical aspects are Pact; and (d) it has its own budget, fi nancing a range covered in separate chapters, so that those not com- of policies. Also, since the entry into force of the fortable with theory, either because they are averse Treaty on European Union (TEU), popularly known to it or simply do not want to be diverted by it, can go as the Lisbon Treaty, on 1 December 2009, it has: (e) straight to their chosen delight. a single president of the European Council; and (f) Th e book is in seven parts:

xvii

xviii Preface

Part I EU history, institutions and legal dimension demanding element of integration, monetary unifi - Chapter 2 A history of European integration and the cation, including the adoption of a single currency. evolution of the EU Th e three chapters cover, respectively: the theoretical Chapter 3 EU institutions analysis of the gains and losses from economic and Chapter 4 Th e legal dimension in EU integration monetary union (EMU); the EU developments that Chapter 5 Th e European economy: bare essentials have led to the present situation, where twelve of the fi fteen pre-2004 EU member nations are using the euro Th e aim of this part of the book is to provide a gen- as their only currency, and where all countries acced- eral background to the EU. Chapter 2 gives a short ing after that are obliged to join them when deemed account of the history of European integration and the fi t, with fi ve of them already having done so; and the development of the EU. Chapter 3 provides a general management of the euro by the European Central Bank description of EU institutions and their functioning. (ECB) and how the euro is operated. Chapter 4 explores the legal dimension in EU integration. Chapter 5 is a general survey of the bare essentials Part IV Th e single European market: policy of the EU economy, using mainly charts, with the full integration statistical tables available on the website; it covers the Chapter 13 Competition policy major economic indicators for the present EU twenty- Chapter 14 Industrial and competitiveness policy: the seven member states (MSs), as well as those involved Lisbon Strategy in imminent enlargements and, to enable comparison, Chapter 15 Tax harmonization also for the rest of those in the group of eight (G8, now Chapter 16 Transport policy G20). Chapter 17 Energy policy and energy markets Chapter 18 Environmental policy Part II EU market integration: theory and practice Part IV of the book covers areas that constitute the Chapter 6 Th e theory of economic integration very foundations needed to facilitate a properly oper- Chapter 7 Th e economics of the single market ating SEM. Hence it tackles in six chapters: competi- Chapter 8 Factor mobility tion rules; industrial and competitiveness policy; tax Chapter 9 Measuring the impact of economic harmonization; transport policy; energy policy; and integration environmental policy. Industrial policy is included Part II of this book is devoted to a discussion of the theo- because variations in it would be tantamount to aff ord- retical and practical aspects of EU market integration. ing diff ering protection to national domestic industry. Chapter 6 covers the theory of economic integration, Th e absence of tax harmonization would have conse- providing an overall picture of the analysis of the eco- quences equivalent to those of disparate industrial pol- nomic implications of the creation of a single market on icies. Similar considerations apply to transport, energy both the partner nations and the rest of the world. It is and the environment. Of course, transport and energy followed by a consideration of these aspects in terms of are also dealt with as industries in their own right, as the EU’s Single European Market (SEM) in Chapter 7, well as providers of social services, and the environ- with Chapter 8 dealing entirely with the question of the ment is treated in terms of tackling pollution and the free movement of capital, labour and enterprise within consequent health benefi ts. the EU. Chapter 9 then deals with the nature and prob- Part V EU budget and structural policies lems of the measurement of the impact of the formation Chapter 19 Th e general budget of the EU on trade, production and factor mobility. Chapter 20 Th e Common Agricultural Policy Part III EU monetary integration Chapter 21 Th e Common Fisheries Policy Chapter 10 Th e theory of monetary integration Chapter 22 Regional policy Chapter 11 Th e development of EU economic and Chapter 23 Social policies: the employment monetary integration dimension Chapter 12 Th e operation of EMU Part V of this book covers all EU policies that address Part III covers all aspects of that far- reaching and most certain structural aspects of the EU economy and

Preface xix

society. Th e EU aff ords special treatment to those in Part VII Th e future of the EU the agricultural sector, fi shing industry and depressed Chapter 26 Th e future of the EU regions, as well as dealing with EU-wide social prob- Part VII of the book is naturally concerned with the lems, especially unemployment, hence employment. future of the EU: where it is heading. It examines the Th ese areas are not only fi nanced by the EU general views of all those who play infl uential roles in the drive budget, but also claim the bulk of its general budgetary behind European integration and sets them against the resources. Th us this part of the book begins with the vision of the founding fathers. chapter on the budget and follows on with chapters on each of the mentioned areas. Finally, I would like to thank all those who have con- Part VI EU external relations tributed to this book over the years, especially those Chapter 24 External trade policy who are still with me since its inception, and to wel- Chapter 25 Th e EU and the developing world come Professors Ian Barnes and Imelda Maher and Dr Miriam Manchin to my team. Th anks are also due Part VI of the book deals with the external relations of the to Chris Harrison, Publishing Director for the Social EU. Chapter 24 covers EU trade relations with its major Sciences at Cambridge University Press, for his encour- partners within the context of the Common Commercial agement and support, and to all his production teams Policy (CCP) run by the European Commission on for their excellent work. behalf of all EU member nations. Chapter 25 tackles EU Ali M. El- Agraa relations with the developing world, in terms of trade, Fukuoka University, Japan aid and preferential trading arrangements. October 2010

A reader’s guide

Th e book is written in such a way that pure theory and measurement considerations which pertain to all and measurement techniques are confi ned to separate schemes. Th ose interested only in the EU policy areas chapters. Th is means that the policy chapters should can drop Chapters 2–6 and 9, although Chapter 2 is be accessible to all readers. However, it also means that important for a proper understanding. Th ose interested those who seek a rigorous, yet brief, background on only in the EU economic policies can drop Chapters international economic integration can fi nd it handily 2–4 and 23 and, if not interested in the future of the in the same book. Moreover, as my contributors will EU, can also drop Chapter 26. Th ose interested only in no doubt attest, my editing style has been to ensure EMU and the euro can confi ne themselves to Chapters that the book reads as a whole, not as a collection of 7, 8 and 10–12, but are advised to read Chapters 2 and independent articles, each contributed for its own sake. 26 for a proper understanding; those interested in this Th is has been ensured through thorough editing and area with an emphasis on the UK will fi nd my book Th e consultation with the contributors, cross-referencing, Euro and Britain: Implications of Moving into EMU allowing repetition only where absolutely necessary, (2002) more appropriate. Also various combinations logical sequencing and a setting which begins with of chapters can be made, depending on what the user/ an introductory chapter and fi nishes with one on the reader has in mind – for example, those interested in a future of the EU. In the process, I have tried my best very basic understanding of the EU can use Chapters 2, not to distract from any contributor’s own writing style. 3, 5 and 26. Th erefore the reader has a unique product which off ers Finally, the entire book is written with those who a truly single entity, yet is authored by several acknowl- want to pursue further study in mind. Th us, within edged authorities in the various fi elds. every chapter the reader is referred to the most rel- As to the reader’s guide, for those truly interested evant research publications in the fi eld and these are in the EU as a whole, you will of course have to read fully set out in the Bibliography at the end of the book. the entire book, if you really want to understand it Nevertheless, there are also guides to further reading as a most successful scheme of international eco- at the end of each chapter, but no guides to other texts, nomic integration, with aspirations going beyond that. since it is not our task to supply them, especially when However, those who are simply interested in the EU this book is a pioneer in its fi eld and covers more than itself without the global context can skip Chapters one fi eld of study – it is not confi ned to economics. 6, 9 and 10, since these are devoted to theoretical

Abbreviations

AAMS Association of African and BEP biomolecular engineering Malagasy States programme AAU Arab- African Union BEST Business Environment ACC Arab Cooperation Council Simplifi cation Task Force ACM Arab Common Market BLEU Belgium–Luxembourg Economic ACP African, Caribbean and Pacifi c Union countries party to the Lomé BRAIN basic research in adaptive Convention (now the Cotonou intelligence and neurocomputing Agreement) BRIDGE Biotechnological Research for ADAPT Community initiative concerning Innovation, Development and the adaptation of the workforce to Growth in Europe industrial change BRITE/EURAM basic research in industrial AEC African Economic Community technologies for Europe/raw AIM advanced informatics in medicine materials and advanced AL Arab League materials ALADI Association for Latin American BSE bovine spongiform Integration encephalopathy ALTENER specifi c actions to promote greater BU Benin Union penetration of renewable energy CAA Civil Aviation Authority sources CACM Central American Common AMU Arab Maghreb Union Market ANZCERTA Australia and New Zealand Closer CADDIA cooperation in automation of data Economic Relations and Trade and documentation for imports/ Agreement (also CER) exports and agriculture ARION programme of study visits for CAEU Council for Arab Economic Unity decision- makers in education CAP Common Agricultural Policy ASEAN Association of South East Asian CARICOM Caribbean Community Nations CARIFTA Caribbean Free Trade Association ASEM Asia–Europe meeting CCP Common Commercial Policy AU African Union CCT Common Customs Tariff BAP biotechnology action CEAO Communauté Économique de programme l’Afrique de l’Ouest BATNEEC best available technology not CEC Commission of the European entailing excessive cost Communities BC-NET Business Cooperation Network CEDB component event data bank BCR Community Bureau of References CEDEFOP European Centre for BENELUX Belgium, the Netherlands and Development of Vocational Luxembourg Economic Union Training

xxi

xxii List of abbreviations

CEEC Countries of Central and Eastern CSF Community support framework Europe CSTID Committee for Scientifi c and CEEP European Centre for Population Technical Information and Studies Documentation CEN European Committee for CTP Common Transport Policy Standardization CTS conformance testing services CENELEC European Committee for CU customs union Electrotechnical Standardization DAC Development Assistance CEP common energy policy Committee (OECD) CEPGL Economic Community of the DDR German Democratic Republic Countries of the Great Lakes (now part of Germany) CER closer economic relations DELTA developing European learning CERN European Organization for through technological Nuclear Research advance CET common external tariff DG IV Directorate General Four CFP Common Fisheries Policy DI divergence indicator CFSP common foreign and security DRIVE dedicated road infrastructure for policy vehicle safety in Europe CI Community initiative DV dummy variable CIS Commonwealth of Independent EAC East African Community States EAGGF European Agricultural Guidance CM Common Market and Guarantee Fund CMEA Council for Mutual Economic EBA ‘Everything But Arms’ Assistance EBRD European Bank for Reconstruction CN combined nomenclature and Development CODEST Committee for the European EC European Community Development of Science and ECB European Central Bank Technology ECAA European Common Aviation Area COMECON see CMEA ECHO European Community COMETT Community programme in Humanitarian Offi ce education and training for ECIP European Community Investment technology Partners CORDIS Community research and ECJ European Court of Justice development information service ECLAIR European collaborative linkage of COREPER Committee of Permanent agriculture and industry through Representatives research CORINE coordination of information on ECMT European Conference of Ministers the environment in Europe of Transport COSINE cooperation for open systems ECOFIN European Council of Ministers for interconnection networking in Financial Aff airs Europe ECOSOC Economic and Social Committee COST European cooperation on (also ESC) scientifi c and technical research ECOWAS Economic Community of West CREST Scientifi c and Technical Research African States Committee ECPE European Centre of Public CRS computerized reservation system Enterprises CSCE Conference on Security and ECSC European Coal and Steel Cooperation in Europe Community

List of abbreviations xxiii

ECU European Currency Unit EUROCONTROL European organization for the EDC European Defence Community safety of air navigation EDF European Development Fund EURONET- DIANE direct information access network EDIFACT electronic data interchange for for Europe administration, commerce and EUROSTAT statistical offi ce of the EC/EU transport EVCA European Venture Capital EEA European Economic Area Association EEC European Economic Community FADN EEC farm accountancy data EEZ Exclusive Economic Zone network EFTA European Free Trade Association FAO Food and Agriculture Organization EGE European Group on Ethics in of the United Nations Science and New Technologies FAST forecasting and assessment in the EIB European Investment Bank fi eld of science and technology EIF European Investment Fund FCO Foreign and Commonwealth EMCF European Monetary Cooperation Offi ce Fund FEER Fundamental Equilibrium EMF European Monetary Fund Exchange Rate EMI European Monetary Institute FEOGA European Agricultural Guidance EMS European Monetary System and Guarantee Fund EMU European monetary union or FIFG Financial Instrument for Fisheries economic and monetary union Guidance EP European Parliament FLAIR food- linked agro-industrial EPC European political cooperation research EPOCH European programme on FSAP Financial Services Action Plan climatology and natural hazards FSU Former Soviet Union EQS environmental quality standard FTA free trade area Erasmus European Community action GATS General Agreement on Trade in scheme for the mobility of Services university students GATT General Agreement on Tariff s and ERDF European Regional Development Trade (UN) Fund GCC Gulf Cooperation Council ERM Exchange Rate Mechanism GDP gross domestic product ESA European Space Agency GFCM General Fisheries Council for the ESCB European System of Central Banks Mediterranean ESF European Social Fund GNI gross national income ESI electricity supply industry GNP gross national product ESPRIT European strategic programme GSM global system for mobile for research and development in communication information technology GSP generalized system of preferences ETUC European Trade Union HDTV high- defi nition television Confederation HELIOS action programme to promote EU European Union social and economic integration EUA European Unit of Account and an independent way of life for Euratom European Atomic Energy disabled people Commission HS Harmonized Commodity Eureka European Research Coordinating Description and Coding System Agency IAEA International Atomic Energy EURES European Employment Services Agency (UN)

xxiv List of abbreviations

IATA International Air Transport JOP joint venture programme Association PHARE-TACIS IBRD International Bank for JOULE joint opportunities for Reconstruction and Development unconventional or long- term (World Bank) (UN) energy supply ICES International Council for the JRC Joint Research Centre Exploration of the Seas KALEIDOSCOPE programme to support artistic ICONE comparative index of national and and cultural activities having a European standards European dimension IDA International Development LAFTA Latin American Free Trade Area Association (UN) LDC less- developed country IDB Inter- American Development LEDA local employment development Bank action programme IDO integrated development operation LIFE Financial Instrument for the IEA International Energy Agency Environment (OECD) M&A mergers and acquisitions IEM internal energy market MAGP multi- annual guidance IGC intergovernmental conference programme IIT intra- industry trade MARIE mass transit rail initiative for ILO International Labour Organization Europe IMF International Monetary Fund MAST marine science and technology (UN) MB marginal benefi t IMP integrated Mediterranean MC marginal cost programme MCA monetary compensatory amount IMPACT information market policy actions MEDIA measures to encourage the INSIS inter- institutional system of development of the audiovisual integrated services industry INTERREG Community initiative concerning MEP Member of the European border areas Parliament IPR intellectual property rights MERCOSOR Southern Cone Common Market IRCC International Radio Consultative MERM multilateral exchange rate Committee model IRIS network of demonstration projects MFA Multifi bre Arrangement on vocational training for women (arrangement regarding IRTE integrated road transport international trade in textiles) environment MFN most favoured nation ISIS integrated standards information MFP multi- annual framework system programme ISPA instrument for structural policies MFT multilateral free trade for pre- accession MISEP mutual information system on ITA information technology employment policies agreement MNE multinational enterprise ITER international thermonuclear MONITOR research programme on experimental reactor strategic analysis, forecasting JESSI Joint European Submicron Silicon and assessment in research and Initiative technology JET Joint European Torus MP marginal productivity JHA judicial and home aff airs MRU Mano River Union

List of abbreviations xxv

MS member state OSCE Organization for Security and NAFTA North Atlantic Free Trade Cooperation in Europe Agreement; New Zealand OSI open systems interconnection Australia Free Trade Area PAFTAD Pacifi c Trade and Development NAIRU non- accelerating infl ation rate of Conference unemployment PBEC Pacifi c Basin Economic NATO North Atlantic Treaty Organization Council NCB National Central Bank PECC Pacifi c Economic Cooperation NCI new Community instrument Conference NEAFC North- East Atlantic Fisheries PEDIP programme to modernize Commission Portuguese industry NET Next European Torus PETRA action programme for the NETT network for environmental vocational training of young technology transfer people and their preparation for NGO non- governmental adult and working life organization PHARE programme of community aid for NIC newly industrializing country Central and Eastern European NIE newly industrializing economy countries NIEO New International Economic PO producer organization Order POSEIDOM programme of options specifi c to NIESR National Institute of Economic the remote and insular nature of and Social Research the overseas departments NiGEM National Institute Global PPP polluter pays principle Econometric Model PPP purchasing power parity NIS Newly Independent States (of the PTA preferential trade area former USSR) PTC Pacifi c Telecommunications NMS new member states Conference NOHA Network on Humanitarian PTT Posts, Telegraphs and Assistance Telecommunications NPCI national programme of QMV qualifi ed majority voting Community interest RACE research and development NPT Treaty on Non- proliferation of in advanced communication Nuclear Weapons technologies for Europe NTB non- tariff barrier RARE réseaux associés pour la recherche NTM non- tariff measure européenne NUTS Nomenclature of Territorial Units R&TD research and technological for Statistics development OAPEC Organization of Arab Petroleum RCD Regional Cooperation for Exporting Countries Development OAU Organization for African Unity REGIS Community initiative concerning OCTs overseas countries and territories the most remote regions ODA overseas development aid REIMEP regular European interlaboratory OECD Organization for Economic measurements evaluation Cooperation and Development programme OEEC Organization for European RENAVAL programme to assist the Economic Cooperation conversion of shipbuilding areas OPEC Organization of Petroleum REPAs regional economic partnership Exporting Countries agreements

xxvi List of abbreviations

RESIDER programme to assist the to advanced telecommunications conversion of steel areas services RIA regional impact assessment STEP science and technology for RoO rules of origin environmental protection RTA regional trade agreement SVER structural vector autoregression RTD research and technological SYNERGY multinational programme development to promote international SACU Southern African Customs cooperation in the energy Union sector SAP social action programme SYSMIN special fi nancing facility for ACP SAST strategic analysis in the fi eld of and OCT mining products science and technology TAC total allowable catch SAVE Specifi c Actions for Vigorous TACIS Technical Aid to the Energy Effi ciency Commonwealth of Independent SCENT system for a customs enforcement States network TARIC integrated Community tariff SCIENCE plan to stimulate the international TBT WTO’s agreement on technical cooperation and interchange barriers to trade necessary for European TEDIS trade electronic data interchange researchers systems SDR special drawing rights TELEMAN research and training programme SEA Single European Act on remote handling in nuclear SEDOC inter- state notifi cation of job hazardous and disordered vacancies environments SEM Single European Market TEMPUS trans- European cooperation SEM 2000 sound and effi cient management scheme for higher education SFOR multinational stabilization force TENs trans- European networks SLIM simpler legislation for the internal TESS modernization of the exchange market of information between national SMEs small and medium- sized social security institutions enterprises TEU Treaty on European Union SPD single programme documents TFEU Treaty of the Functioning of the SPEAR support programme for a European Union European assessment of research TRIPs trade- related aspects of SPES stimulation plan for economic intellectual property rights science TSEs transmissible spongiform SPRINT strategic programme for encephalopathies innovation and technology t/t terms of trade transfer TUC Trades Union Congress SPS WTO’s agreement on the TVA taxe à la valeur ajoutée application of sanitary and UDEAC Union Douanière et Économique phytosanitary measures de l’Afrique Centrale STABEX system for the stabilization of ACP UEMOA West African Economic and and OCT export earnings Monetary Union STAR Community programme for UES uniform emission standards the development of certain UN United Nations less- favoured regions of the UNCLOS United Nations Conference on the Community by improving access Law of the Sea

List of abbreviations xxvii

UNCTAD United Nations Conference on UTR unilateral tariff reduction Trade and Development VALOREN Community programme for UNECA United Nations Economic the development of certain Commission for Africa less- favoured regions of the UNEP United Nations Environment Community by exploiting Programme endogenous energy potential UNESCO United Nations Educational, VALUE programme for the dissemination Scientifi c and Cultural and utilization of research results Organization VAT value added tax UNHCR United Nations High VEIS VAT information exchange system Commissioner for Refugees VER voluntary export restraint UNICE Union of Industries of the VSTF very short-term fi nancing facility European Community WEU Western European Union UNIDO United Nations Industrial WFC World Food Council (UN) Development Organization WFP World Food Programme (UN) UNRWA United Nations Relief and Works WIPO World Intellectual Property Agency for Palestine Refugees in Organization (UN) the Near East WTO World Trade Organization URAA Uruguay Round Agreement on YES ‘Youth for Europe’ programme Agriculture (youth exchange scheme) URBAN Community initiative for urban areas