European Integration: Sharing of Experiences 9789812307781

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European Integration

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The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued almost 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

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European Integration Sharing of Experiences Jørgen Ørstrøm Møller

Institute of Southeast Asian Studies Singapore

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First published in Singapore in 2008 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 E-mail: [email protected] Website: http://bookshop.iseas.edu.sg All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2008 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views of the policy of the publishers or their supporters. ISEAS Library Cataloguing-in-Publication Data Møller, J. Ørstrøm. European integration : sharing of experiences. 1. European Union. 2. Regionalism—Europe. 3. Europe—Economic integration. I. Title JN34.5 M69 2008 ISBN 978-981-230-777-4 (hard cover) ISBN 978-981-230-778-1 (PDF) Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Seng Lee Press Pte Ltd

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CONTENTS

Foreword by Pascal Lamy

ix

Foreword by Holger Standertskjöld

xi

Preface

xiii

Acknowledgements

xvii

A Technical Note

xx

Introduction

xxi

1. Basic Principles Positive Sum Game Step by Step Clear Political Objectives The Role of Problem Grinder Links to Domestic Political System Impose Discipline/Self-discipline on Member States Balance between Small and Large/Powerful Member States Political Will to Compromise and Accommodate Other Member States Demonstrate in Practice What the Integration is Doing Avoid Blurring the Distinction between What the Member States are Doing and What Falls under the Competence of the Integration There Must be One or More Member States Assuming the Role of Driver for the Integration Annex I. The Franco-German Reconciliation

1 1 4 5 9 13 16 19

2. Institutions The Basic Model: Supranational or Intergovernmental The Role of the Nation State The Concept of Sovereignty in Today’s World EU Institutions How the EU Treaties Work

39 39 41 44 48 77

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21 26

30 33 35

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Majority Voting Legal Principles Exclusive Competence, Mixed Competence Common Financing Linked to Common Policies Openness Enhanced Cooperation Respect for National Identities Languages Religion Duration, Amendments and Membership

80 83 91 93 96 98 101 103 103 105

3. Grand Designs Deepening of the Integration versus Enlargement Institutional Approach versus Substance Institutional Imbalances First Batch of Common Policies: Customs Union, Common Agricultural Policy, and Common External Trade Policy Regional and Social Balance, Regional Fund, European Investment Bank, Cohesion Fund, Social Fund, Guidance Section of the Agricultural Fund Single Market Anti-trust Policy State Aid/Subsidies Economic and Monetary Union — Single Currency (Euro) Relations to Developing Countries — the Lomé Conventions Relations to Mediterranean Countries — Maghreb, Machrek Common Foreign and Security Policy (CFSP) Justice and Home Affairs European Citizenship — Free Passage of Borders — Schengen Agreement Improving the European Union’s Competitiveness and Technological Performance — the Lisbon Programme Research and Development Erasmus, Socrates, Lifelong Learning Energy Policy Transport Policy Environment Common Fisheries Policy Telecommunication

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113 113 115 116 120

124 128 132 135 136 184 187 190 198 204 206 213 218 221 225 230 234 238

Contents

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4. The Mechanics General Observations Freedom for Goods Freedom for Services Freedom for Capital Freedom for Persons Freedom for Payments The Common Agricultural Policy State Aid/Subsidies Enhanced Cooperation Budget/Financial Perspectives Tax Company Law Slower Decision-making/Delays in Implementation The Role of the European Court of Justice

260 260 262 266 270 273 275 276 279 282 283 287 295 299 304

5. The European Union’s Role in the World Introduction EU’s Foreign and Security Policy The Transatlantic Relationship Meetings/Summits with Other Partners Human Rights Clause in Agreements Development and Humanitarian Assistance Global Trade Policy International Monetary Policy Energy Policy Environmental Policy Fisheries Policy Diplomatic Relations Conclusion

316 316 320 329 336 350 353 355 359 360 364 365 367 368

6. The Rationale Behind the Enlargements — Why it Worked? Central Issues in the Debate on Enlargement from the 1960s to 2006 The First Enlargement: the UK, Denmark, and Ireland The Second Enlargement: Greece in 1980; Spain and Portugal, 1986 The Fourth Enlargement: The EFTA Countries, 1995 The Fifth Enlargement: Central and Eastern Europe

382

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382 385 388 391 392

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Romania and Bulgaria Early Benefits of EU Membership The Next One? Conclusion about Enlargement Neighbourhood Policy

402 402 404 409 410

7. Constraints — Risks — Challenge Clash between Growth and Identities Alienation from Decision Making Transnational Mergers & Acquisitions (M&As) Barriers to Transnational Mergers & Acquisitions Labour Mobility Where do We Stop Integration? Unknown Destination Subsidiarity Bureaucracy Can a Member State Leave? Integration by the Market

417 417 419 421 426 431 433 435 437 439 440

8. Building Trust Social Capital Negotiating Position of Member States Linkages Negotiating Alliances Facts and Documentation Consistent, Coherent, Credible Keeping Objective Divided from Instruments Prepare for Compromise Prepare Public Opinion The Role of Bilateral Diplomacy The Presidency Must Earn Trust, How?

445 445 447 448 451 453 454 456 457 458 459 462

9. Conclusion

466

Bibliography

477

Index

481

About the Author

513

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FOREWORD

World politics and economics are increasingly being shaped by the drive towards “institutionalization” on a global or regional scale. For years, nation states have searched for answers to the challenges of globalization. But reality has shown that economic forces such as capital movements, foreign direct investment, trade flows or even currency movements can dwarf the power of the national economies. Even large economies such as the United States of America have come to realize their dependence on economic globalization. This has led nation states to develop close coalitions or even cooperative frameworks. They choose partners pursuing analogous objectives. This bodes well for the future of the world and the solidity of economic globalization, which has provided the world with robust and persistently high economic growth for several decades. Efforts towards greater international cooperation point in the direction of a political desire to harness economic globalization, rather than leaving it solely in the hands of the market. This is what inspired the creation of the World Trade Organization sixty years ago. This is also at the heart of the project of greater European integration, which has now celebrated its fifty years of existence. The European Union is certainly not the first historical experiment of greater economic integration, but it is definitely one of its most successful and far-reaching illustrations. Europe may today harbour questions about the future of its integration, nevertheless there is among Europeans an overwhelming endorsement of its achievements since its first steps in 1952 with the creation of the European Coal and Steel Community, which preceded the Treaty of Rome. Today Europeans benefit from a single market that has boosted European economic growth. A Common Foreign and Security Policy is the platform for a global presence of the European Union in the world. Europeans have created a common currency, the Euro. Even the sensitive questions of immigration, human security or the fight against international crimes, just to name a few, have found their place in the European treaties. The Europeans took a quantum leap in pooling their sovereignty to exercise it in common. That was not easy for old European nation states, many of which had fought each other for centuries. They did it because they ix

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realized that in a globalized world, economic integration is the best way to safeguard domestic political preferences, to ensure human security and a rising living standard for its people. Mr Møller’s book uses the experience of European integration as a platform to illustrate how greater integration between nation states can work, its advantages, principles, and mechanisms. It also addresses many of its challenges and uncertainties. With his more than twenty-five years of experience in European integration matters and having lived in Asia in the last ten years, Mr Møller is well placed to put the European experience at the service of Asia’s current endeavours to move towards greater integration. I believe that this book can inspire Asia in its efforts to shape its integration process to deliver solutions for Asia, Asian nation states, and above all Asia’s population. Asia will find its own way, but some of the methods, tools, and instruments used by the Europeans may provide valuable experience in the Asian context. Recently the Eminent Persons Group put forward ideas for a stronger ASEAN. The recommendations outlined in this report seek to strike a balance between preserving ASEAN’s fundamentals and putting a stronger basis for ASEAN’s cooperation and future integration. The report is both bold and visionary. Ambition and vision will pave the way for improvements in the rules guiding the cooperation. The European experience indicates that rules and trust go hand in hand. Trust between the nations opens the door for clear and specific rules. Such rules introduce aspects of a legal system among member states reflecting common interests, but also a sense of common destiny. The key words are a vision of the way forward, a political will to make it happen despite temporary disappointments and setbacks, and trust among the participating nations are the indispensable common denominator. Pascal Lamy Director-General of the World Trade Organization, and former Member of the European Commission, responsible for Trade

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FOREWORD

I am delighted to support the publication of this excellent book. Professor Jørgen Ørstrøm Møller is an astute scholar and experienced diplomat who showcases the stunning successes of the European Union (EU) as well as the challenges it has faced. A vast number of books have been written about the EU, examining all aspects of its history and architecture, but very few have looked at the EU from an Asian perspective. Professor Jørgen Ørstrøm Møller is in a remarkable position to do so. As a Danish diplomat and academic who has lived and worked in Asia for a number of years, he has used his first-hand experience and extensive knowledge of both regions to portray the EU from a new angle. He has been able to concentrate in this book on aspects of the EU that are of special relevance to an Asian audience. I believe this work will be of great interest to readers within Europe, but even more so to those in regions outside Europe who are concerned about the development of their own future integration. The experience of European integration has been a unique one. The EU does not purport to be a model for any other region. However its evolution holds lessons that may interest countries that are engaging in regional integration and wish to continue to thrive in an increasingly globalized world. It has to be recognized that the EU is not perfect. Almost by definition, its policies and decisions cannot please everyone because they are necessarily a compromise between the interests of twenty-seven national governments and a wide range of political viewpoints. The EU is also a very new experiment in transnational democracy. Ways have to be found to make it work better — and better again. A Union of twenty-seven cannot be run with machinery designed for a Community of six. The challenges of the twenty-first century cannot be met using methods designed for the 1950s. After much introspection and debate following the rejection of the Constitutional Treaty in 2005, the leaders of the twenty-seven member states of the EU signed the Lisbon Treaty in December 2007. It is another step in the evolution of the EU. I feel privileged to have been able to follow the gestation of this book here in Singapore. It is appropriate that it is launched in a country that is a regional hub for so many activities, and an active proponent of integration. xi

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Singapore and ISEAS can be proud of supporting this publication, and Dr Møller is to be congratulated for his comprehensive and imaginative opus on the EU. Holger Standertskjöld Ambassador and Head of Delegation Delegation of the European Commission to Singapore

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PREFACE

October 1992 was the fiftieth anniversary of the battle of El Alamein where the British, the Germans, and the Italians fought each other. It was also a few months after a majority of Danish voters had rejected the Treaty of Maastricht, designed as a quantum leap for the European integration. The outcome of the Danish referendum led to an abrupt stop for the ratification procedure in the House of Commons, bringing the government under John Major into severe political difficulties, casting doubts over not only the Treaty, but also the survival of the government. As I recollect it, BBC was reporting from El Alamein where war veterans had assembled to commemorate the battle. As the camera glided over the war graves, one of the veterans offered the following comment in a low but serene voice: “If you want an argument for ratifying the Treaty of Maastricht, you find it here”. Almost at the same time, I was deputizing1 for the Minister for Foreign Affairs of Denmark at an informal ministerial meeting under British EU presidency, taking place at Brocket Hall. While sitting and pondering about which course the EU would take in the months to come after my own country had chosen to jeopardize the future of the integration, I heard one minister saying, “looking at the splendid portraits of the British noblemen having lived here I cannot help thinking that they probably spent most of their time in the low countries, commanding German and Irish troops fighting the French”. In December 1994, I was again deputizing when the then German presidency hosted a working luncheon for the Central and Eastern European countries on their way towards full membership of the European Union. The German presidency had chosen Villa Hügel as the venue. This used to be the residence of the Krupp family, owners of Krupp Works, which for decades produced guns for, first, the imperial German army, and then, the Wehrmacht of Nazi Germany. When guests walked pass the gallery to the dining room, portraits of the Krupp family looked at them. The symbolism was clear. In this house and these rooms, where political and military leaders of the Imperial and Nazi Germany had planned weapons production to subdue Central and Eastern European countries, we were going to talk about these xiii

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countries’ adherence to a union, on an equal footing with Germany — the new Germany. During the luncheon I was sitting opposite Gyula Horn, now Prime Minister of Hungary, who in 1989 as Minister for Foreign Affairs, made the decision to allow citizens of East Germany to camp in front of the embassy of the Federal Republic of Germany in Budapest — a pivotal decision that set the ball rolling towards the events in October/November 1989 when the wall separating the two Germanies was torn down. These three events illustrate my deep and sincere feelings about the European integration. It is the only way ahead to avoid a repetition of disasters that plunged humanity into strife and conflict, to put behind us nationalism and rivalries, and to substitute conflict, confrontation, and crisis with cooperation, consensus, and compromise. The ambition is to transfer the basic principles of legitimacy, accountability, and transparency from the national political system to an international political system. As Sir Winston Churchill once wrote in another context, “don’t argue the matter, the difficulties speak for themselves”. So it is with international integration, which at least in the European context is no longer confined to economic questions. It is obviously more difficult to cooperate than to rally the population behind a nationalistic course. But true statesmanship consists of securing lasting security and stability for the population, and that can only be achieved by living in peace and harmony with adjacent countries. There are those who reject integration, wanting to pursue national economic policies. But how can nations pursue national economic policies when the world is driven by trade, investment and transfer of technology — all of them taking place internationally or globally? History gives so many examples of how national economic policies and, indeed, nationalism has taken the world down the road to conflict and ultimately war. At the end of the day, integration is not about economics, trade, investment, or currency rates. It is about whether we choose to live in peace or face the ugly prospect of war that modern technology will make more sinister, devastating and deadly than ever seen before. I have never understood the reasoning of people who are against economic integration. They have the right to take this view, but I don’t understand it. The whole history of mankind can be written around armed conflicts.2 Isn’t it high time we devote our intellectual resources to map out how to cooperate and integrate to share benefits and burdens? My uncle, who joined the

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Danish resistance movement, freedom fighters, was arrested in 1944 by the Gestapo3 and spent the last year of World War II in a Nazi concentration camp (Sachsenhausen). You would expect my uncle to reject integration with Germany, but he chose this view: “Economic integration is the only way to prevent things like that from happening again.” But we should not forget the other side of the coin. Economic integration is about negotiations among member states. And they are tough ones. Concessions are not given freely; every penny is fought for and sometimes with tooth and nail. But isn’t it the same in the domestic political game, where all groups manoeuvre to get their share of the gross domestic product? Fundamentally, I see economic integration as projecting the rules-based domestic system on to the international level to let the law rule instead of letting force determine the outcome. Therefore, I rejoiced at the opportunity so graciously offered to me by the Ministry of Foreign Affairs of Singapore and the Institute of Southeast Asian Studies to write a book about European integration. The idea was not to deliver a European blueprint for integration, which Asia or Southeast Asia could emulate. Every integration builds upon its own and singular history, tradition, circumstances, experience, challenges, and political preferences. What Europe has done since 1950 is unique and European. What Asia hopefully will do in the years to come will be unique and Asian. If all goes well, the world may see an Asian version of economic integration. But the European experience offers principles, instruments, and methods, which can serve as a toolbox for Asia and Southeast Asia. The experiences are available, and other areas around the world can look at what worked and what did not work, successes and failures in a European context.4 It is my hope that the book will be used to that effect. I have dedicated it to the young people of Asia, tomorrow’s decision makers. A few words about the book and myself. I am a Dane, who has served in the Royal Danish Foreign Ministry from 1968 to 2005. For twenty-six years — 1971 to 1997 — I was closely involved in the European integration. From 1989 to 1997, I was State-Secretary and thus had the privilege to participate in Danish and EU policy making to handle the unravelling of the Soviet and Russian empire; a unique opportunity bestowed upon the few by luck and circumstances. Admittedly, the book and its outlook on Europe and European integration are coloured by my background, what I have seen, what I have experienced, and how I perceived events. In that respect it is biased, but hopefully this is counterbalanced by a coherent presentation. In short, what

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lies before the reader is my interpretation of the European integration as I have seen it. The spelling of my name may pose problems for non-Danish speaking readers; therefore I frequently spell it Joergen Oerstroem Moeller, replacing the Danish ø with oe. Jørgen Ørstrøm Møller

Notes 1. 2. 3. 4.

Bearing the rank of State-Secretary, which broadly speaking, means a civil servant acting abroad as Deputy Foreign Minister. President Charles de Gaulle of France once said, “The sword is the axis of the world and its power is absolute.” Geheime Staatspolizei, the secret police of Nazi Germany. The philosopher George Santayana once stated, “Those who cannot remember the past are condemned to repeat it.”

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ACKNOWLEDGEMENTS

My first thanks should go to the Ministry of Foreign Affairs, Singapore, and in particular, Minister for Foreign Affairs, Brigadier-General (NS) George Yeo, and 2nd Permanent Secretary Bilahari Kausikan, for endorsing my fellowship at ISEAS and supporting me in many ways. When changing status from Ambassador of Denmark to Singapore to permanent resident, many hiccups emerged — some of them known, others quite unexpected — but they were smoothly sorted out, not the least, thanks to the help offered by Chief of Protocol Lim Cheng Hoe. ISEAS is in every respect an attractive intellectual powerhouse. Over the years I have benefited from numerous conversations with its chairman Professor Wang Gungwu. The guidance by its director, Ambassador K. Kesavapany is priceless, the administration headed by Mrs Y. L. Lee runs like clockwork, and the Publications Unit under Mrs Triena Ong, is internationally recognized for its books and journals. The atmosphere is so good and friendly that people are drawn to one another to exchange ideas, discuss and offer help, suggestions, and guidance in many respects. I have so many friends at ISEAS that it is difficult to single out individual persons, but nonetheless I would like to thank former Chief of Protocol of the Ministry of Foreign Affairs and now Head of Public Affairs Unit at ISEAS, Tan Keng Jin, who first guided me when I was presenting credentials to the President of Singapore in 1997 and has since offered advice, help, and friendship, without which I might easily have been lost. The book could not have been written without a life-long involvement in the European Union. Special thanks go to my friend over many years, Pascal Lamy, now Director-General of the World Trade Organisation (WTO), who agreed to write the Foreword. We met each other when he was Chef de Cabinet of then President of the Commission Jacques Delors. I came to admire both of them and have since maintained friendship and contact with Pascal Lamy, now serving the whole international community. Lord Kerr, Professor Helen Wallace, Professor Moravcsik, and Executive Director of ASEF Ambassador Wonil Cho offered words of endorsement that appear on the back cover of this book. I met Lord Kerr when he was John Kerr and holding more or less the same kind of job in the Foreign Office in London as I had in Copenhagen — both of us trying to keep a European policy for our xvii

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respective countries on an even keel (toiling in the same stony vineyard!). Helen Wallace and Andrew Moravcsik have written excellent books on the European Union — actually what may be termed the best ones ever written about the European Union. I have learned from them and profited from contact with them over the years. Wonil Cho has put in effort to promote Asia-Europe cooperation as Executive Director of ASEF. I am truly grateful to all of them for helping me so willingly with the Foreword and words of endorsement. Three lifelong friends took upon themselves the tedious task of reading the whole book or substantial parts of it to offer advice, and not the least, point out mistakes and tell me what I had got wrong or forgotten. Poul Skytte Christoffersen has served as Chief of Cabinet to the Secretary-General of the Secretariat of the EU Council of Ministers, Permanent Representative of Denmark to the EU, and is now Chief of Cabinet to Denmark’s member of the European Commission in charge of agriculture. He is definitely one of a handful of persons whose knowledge of how the European Union functions are second to none. Per Lachmann has, for many years, been chief legal adviser in EU law to the Danish government. Jens Thomsen was Permanent Secretary in the Ministry of Economics when the Treaty of Maastricht was negotiated and went on to become Governor of Denmark’s National Bank. I was lucky to meet Etienne Reuter who is an old hand in European affairs, having served in the cabinet of Gaston Thorn, President of the European Commission (1980–85), and later Chief of Cabinet to Jean Dondelinger, Commissioner for Luxembourg. Etienne Reuter was in Singapore for a year at the Lee Kuan Yew School for Public Policy and was kind enough to read and comment on the manuscript. Andrew Symon read the chapter on energy, Mogens Berg, Research and Development plus Socrates programmes, Louis-François Pau, telecommunication, Henrik Toft-Jensen, the Lisbon programme and research activities. Jørgen Molde and Kaare Linde helped with specific information about legal matters, and Lars Juhl Frandsen provided assistance in putting the text together according to the rules for submitting manuscripts. All these contributions and comments have made the book much, much better. What may remain of mistakes or misinterpretations are solely the author’s responsibility. A wise man once said, “we all stand on the shoulders of each other”. It is as true as it is said. I have met so many persons working with the European Union over the years that it is impossible to mention all of them. We sat together in the Danish delegation (or we worked together in the Ministry of Foreign Affairs in Copenhagen). Or they were members of delegations from

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other countries or EU institutions during acrimonious negotiations, stretching over hours and hours, putting a heavy strain on the nervous system. That explains why I still feel attached to many of them even when we have not met for many years or decades. These kinds of negotiations where you know you have to agree at the end create a special bond among the participants, never to be forgotten or erased. Sometimes I felt like I belonged to a band of brothers, striving to build a better Europe and in the end — but only in the end — willing to subordinate national interests to the objective of strengthening the integration. We are grateful to the European Union for its financial support in publishing this book. The European Union is a hard taskmaster. It does not leave much time for leisure and family activities. Sometimes, you feel like you are running in front of a steamroller with agendas, deadlines, meetings, need for instructions, public opinion, domestic political procedures, and much else. You may not even have time to cast a glance over your shoulder to find out whether the steamroller gets nearer, you just run! In these circumstances you only survive with a family ready to live with this. They bear a large part of the burden even if you are not always aware of it. They may not always show it, but the strain on family life is immense. I wish to thank my wife, Thanh Kieu Møller for all her love, encouragement, and understanding — always cheering me up and helping me when I needed this — and our children Huy and Ai Vy for their forbearance. And lastly, thanks go to my parents. They associated themselves 100 per cent with all my work for the EU. The rejection in 1992 of the Treaty of Maastricht by a majority of Danish voters affected them deeply. I can never repay the debt I owe them.

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A TECHNICAL NOTE

When writing a book like this you can go on and on, never finishing. There are always aspects or observations you would like to include. In picking the EU’s common policies, I have selected, what in my opinion, are of most interest to Asia, as reflected in the number of pages dedicated to the Single Currency, and the lesser space given to some of the EU’s internal policies, judged to be of less interest to non-member countries. The cut-off date is set at 1 January 2007. What happened before that date is, in principle, included, what happened afterwards is not. The European Union started as “the European Coal and Steel Community”, to be gradually changed into what was called “the European Economic Community”, then “the European Community”, and from 1 November 1993, “the European Union”.1 To simplify, I have chosen to use the name European Union throughout. I have also chosen to use the name, Treaty of Maastricht, instead of the official name, Treaty on European Union, as the treaty is better known under the former, than the latter name. One of the baffling things for an outsider trying to work his or her way into the treaty text is that the EU has worked with amendments to the treaties instead of agreeing on a consolidated text every time the treaties were changed. Trying to make cross-references between the treaty texts at various stages can be difficult. It would have been too cumbersome to make cross-references all the time, but to a large extent I have mentioned former article numbers in the notes.

Note 1.

An overview of these changes and the name of various treaties can be found at http://europa.eu/abc/treaties/index_en.htm.

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INTRODUCTION

Most of us take globalization for granted. It is the only economic model we have known. The Anglo-Saxons introduced it after 1945,1 shaped by the wisdom of the British, in particular John Maynard Keynes, and supported by the might of the United States of America. Since then it has been a one-way traffic. More and more of the same. More trade liberalization, more abolishment of restrictions for capital movements, removal of barriers for services, followed by a whole string of measures designed to open the global economy. Concurrently efforts to design and implement an international, political decision-making machine have emerged. The substance (trade, capital movements, and services) jumped from the nation state to the international level. The steering mechanism to ensure some kind of political control followed. Politicians, whether they liked it or not, have been forced to move some, and for some countries (primarily the member states of the European Union), an overwhelming part, of political control out of the national context, to be exerted at the international level. Ingenuity has characterized this process, that is, by introducing the pooling of sovereignty to be exercised in common instead of leaving it the exclusive prerogative of the nation state. And yet this model is not the only one. Back in the 1890s, the world saw globalization that was so strong, so manifest, so deeply rooted in nation states as well as internationally, that it was regarded as untouchable. Trade was basically free and so were capital movements. The rich and well-established industrial countries such as the United Kingdom invested heavily abroad and stood as the undisputed creditors, sponsoring industry and infrastructure all over the globe. There was an international currency — gold and/or Pound sterling; it had the same validity. War or conflict among the major powers was regarded as impossible, an affront to humanity, incompatible with an enlightened humanity. Just thirty years later — half a lifetime — the world went through a mass slaughter that ripped the mask off what was supposed to be humanity and civilization. A decade after World War I, the whole world, under the leadership of the very nation states that labelled themselves the standard bearers of globalization, plunged into the Great Depression that was dominated by contraction, falling trade, trade restrictions, and the virtual removal of xxi

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international capital movements. Between January 1930 and February 1933 global trade fell every month, for 49 consecutive months — from US$2,998,000,000 to US$992,000,000.2 The scene was set for a new mass slaughter. This time ugly dictatorships with genocide on their published political agenda challenged civilized nation states proud of their democracy and ready to defend it. It started in 1939 with World War II, even if it had already been underway in the 1930s, with the Japanese military aggression against China, the Spanish Civil War, and the Italian annexation of Ethiopia as omens of what the world was going to suffer. We can, if we wish, take comfort in the belief that the present version of globalization is different — not exposed to the dangers, risks, and pitfalls that brought earlier types of globalization down. Wishful thinking! The world faces the challenge of securing globalization as the model delivering the highest economic growth, and even more importantly, the model forcing nation states to work together, instead of contemplating confrontation, conflict, and ultimately, wars. As history so unequivocally demonstrates, peace and cooperation do not come by themselves. We have to strive for such a world order, to convince populations that it is the better one, to respond to all kinds of demagogues marketing egoistic theories, to mobilize politicians and business leaders to conserve and improve the model. Globalization is definitely the model producing the highest economic growth compared with the alternatives, but it has two snags. First, available statistics show that production, income, and wealth are increasing, but more and more unevenly distributed. Internationally the gap between the richer nation states and the poorer ones is widening. Inside nation states, primarily the ones most devoted to globalization, such as the United States and China, the inequitable distribution of the fruit of globalization becomes more and more visible. Indeed the Chinese government has recently made it one of its most important political objectives to achieve a more equitable distribution of income and wealth.3 Politically this triggers the basic question of whether the majority of the population can and will continue to support a model not really favouring them. Traditional welfare economics states that a policy increases welfare if those who are better off can compensate those who are worse off and still reap a benefit. If — what seems more and more likely — globalization works in a way that those better off keep the benefits for themselves, a whole string of political, economic, and ethical questions arises that need answering. Those not benefiting from it cannot be counted on to support the model and we risk moving towards dichotomized societies.

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Second, layers of populations in nation states start to diverge instead of converging towards some kind of common understanding — a common denominator — of values for the societies they live in. The elite become globalized and communicate increasingly with the elite in other nation states, disregarding the need for communicating with the population inside their own nation state. The majority of the population therefore risks being left aside or outside by the strong drive towards globalization, and moves instead towards a more nationalistic or secluded stance, rejecting or questioning some of the advantages and benefits of globalization. As long as globalization delivers high growth, wealth, and increasing welfare, people do not question whether they need to sacrifice some of their identity to participate in globalization. The equation provides a satisfactory solution. They realize that they cannot remain within the national shell. But when economic growth falters or splutters and economic and tangible advantages disappear or become minimal, a part of the population starts to ask the basic question of whether they are willing to sideline part of their traditional lifestyle, and let us call it, self-determination. There is probably some kind of threshold whereby the majority of the people would accept globalization and push the preservation of their traditional lifestyle (identity) downwards on the list of priorities. The main threat to globalization occurs when the downgrading of national identity, traditional lifestyle, and self-determination is accompanied by a tumble of economic growth that had hitherto been producing a higher living standard. If this happens, an increasing number of the population may find it worthwhile to look at another model. This is why it is not the only model, why it is not uncontested, and why we cannot take for granted that globalization will continue without political and economic efforts to promote it. Globalization or internationalization is about economics, logistics, transport, and communication. It is primarily, almost exclusively, an economic concept. It touches the daily life of almost all citizens, but only the part of their daily life driven by economic considerations. Our mindset, our mentality, is still very much controlled by concepts of nationality, ethnicity and religion, or other factors not necessarily running against globalization, but strictly speaking, not part of globalization either, and as far as many are concerned, questioning globalization. The idea of a mondoculture has been floated and discussed widely for many years. As a rule of thumb we can divide culture into three broad categories. Work culture is globalized to a certain degree in the sense that the large and powerful multinational companies put their mark on the way people live

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and work at the workplace. Notions such as corporate culture, corporate social responsibility, corporate citizenship, corporate compliance, and corporate governance become more and more globalized and uniform; many of them are shaped by what has emerged in the United States. The culture of leisure has moved in the same direction and is perceived to refer to what people do to relax, how they organize their leisure, their holidays, and other activities in this vein. Today’s global audio-visual culture has become the dominant driving factor behind what a large part of the global population chooses as leisure and entertainment. Basic culture, however, which moulds how most people relate to their families, their friends, and other human beings — who they marry, how they bring up their children, how much weight they place on religion, broadly speaking, how they distinguish between good and bad — is still firmly rooted in the national, regional, or local framework. We can talk about globalization and internationalization as notions reflecting economic decisions. We cannot however, speak about internationalism as a notion disclosing that an overwhelming part of the global population thinks and acts like they were living inside the same cultural framework, providing the same answers to basic questions of what is good and bad, and how to relate to other people. One of the most sensitive issues for nation states all over the globe is whether minorities, be they ethnic, religion, or language based, feel comfortable or not inside the nation states. Professor Huntington’s book4 “The Clash of Civilizations and the Remaking of World Order” was correct in pointing to the increasing importance of culture, religion, and ethnicity for the global political and economic game, but wrong in classifying and looking at it as a conflict between civilizations. Instead, it is a potential conflict between various groups taking place inside nation states. In an article in 2007, I have discussed and analysed how the minorities inside traditional European societies and Muslim societies living in Europe try to dominate the debate about Islam and Muslims who have immigrated to Europe. My conclusion is that extremists have monopolized the debate to the detriment of the large majority. The problem is not Europe versus the Arab World, Christians versus Muslims, but minorities inside the two camps versus the majority actually wanting to be left in peace to manage their daily lives.5 And this is where the question of economic integration enters the picture. When the history of European integration is written many years from now, I am convinced that historians will say many good things about how the Europeans integrated and overcame obvious difficulties and obstacles. But I guess that the main and lasting political legacy will be how Europe solved the

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potential conflicts inside almost all nation states between dominant majority and subdued minority groups. In the aftermath of World War II, a looming conflict of this kind could be detected in most Western European nation states. After the downfall of the Soviet and Russian empire in 1990 most observers took the view that Central and Eastern Europe would explode in conflicts and confrontations, ripping apart the more or less artificial nation states, and opening the floodgate to some kind of ugly scenarios. Most people have forgotten — conveniently so –– that the old and wellestablished European nation states such as the United Kingdom, France, Germany, Spain, and Italy are far from homogeneous entities. Instead a majority has exercised some kind of cultural yoke for centuries over minorities — cultural imperialism inside a nation state. In the United Kingdom we find the Scots and the Welsh, in France the Bretons, in Germany, the various Länder, in Spain, the Catalans and the Basques, and in Italy, Lombardy, just to mention a few. What the European Union offers and what has materialized in practice is a model that we may call “Economic Internationalization and Cultural Decentralization”.6 The European Union provides the vehicle for the minorities to maintain their own culture, while at the same time joining the international division of labour. The same has happened with Central and Eastern Europe. The prospect of membership in the European Union forced upon their governments a policy of respect for the cultures of the minorities, thus avoiding what might have broken up nation states or forced a redrawing of borders in Central and Eastern Europe. The European Union or economic integration as introduced by the Europeans in 1950 reconciled two essential and hitherto contradictory political and economic objectives: participation of the whole nation state in the international division of labour and preservation of cultural identity for the peoples inside the nation state belonging to different cultural groups. The minorities were no longer forced to choose between these two objectives. Europe was spared a drive for greater autonomy or even a demand for outright independence that was certain to trigger a clash between the nation states and the minorities.7 Economic integration moved the decision centre for access to the international economy from the national capital to an international — European — institution, established to mastermind economic integration. Take France as an example: the French national government ceded some instruments, some of its powers for regulating French participation in the

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international economy, to the European Economic Community. The minorities and the regions inside France saw their links to the capital weaken and gradually realized that power had moved to the European Economic Community (EEC). The EEC did not impose the same political and/or cultural conditions on the regions or local political entities, as the French government had done. The fundamental lessons from the interplay between European integration and globalization are: First, European economic integration was vital in creating and maintaining the conditions for strong, vibrant, and sustainable growth in Europe over a number of years. It thus established the springboard from which Europe launched its participation in economic globalization. Europe as a whole and the individual member states became stronger and more confident in their abilities to participate in the global competitive game. To a certain extent it became the training ground for Europe to jump from autarchy to regional economic internationalization to economic globalization. Second, European integration fended off a potential clash between majority groups and minorities inside nation states first in Western Europe, and later, in Central and Eastern Europe. It opened the door for simultaneous participation in the international division of labour and the preservation of regional and/or local identities for minorities inside the nation states. In summary: European integration secured a new role for European nation states after the carnage during the two World Wars, the Depression in the 1930s, and the immediate post-World War II period. The European nation states were still players in economic internationalization, but as partners in European integration, which could serve as the established framework for heterogeneous ethnic and religious entities, albeit in a much weakened role. The calamities in the first half of the twentieth century explain why this could take place and expose three essential factors behind European integration and the European nation states: The first factor was that the special model of European integration, based on the pooling of sovereignty of the various nation states in an international institution (to be The European Union in due course), could only take place because the nation states had failed in the eyes of their citizens to provide human security, peace, stability, and economic progress. Two World Wars had led to catastrophic loss of lives, falling living standards for a long period, unstable democracies, and worst of all, totalitarian regimes persecuting a part of the nation states’ citizens, leaving many others in fear. The second one was that the political systems in the European nation states had lost their legitimacy vis-à-vis their citizens. The ground was propitious

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for putting forward an alternative, another institution, not disfigured and tainted by the past. The Europeans were ready, maybe even eager, to throw in their lot with something else other than the nation states that had abused their loyalty. These two factors taken together constitute a third factor explaining not only the start of European integration, but also the background for opposing views on the integration process among various member states. The various populations in the nation states having suffered, or worse, been on the losing side, and in some cases, seduced by regimes aiming to wipe out centuries of the culture of civilization, were eager to shift their loyalty to an international institution. The people of Germany, having lost two wars, hard hit by the Depression and having lived through the Nazi regime, looked for a way to re-enter the European political scene. Italy was more or less in the same boat. France, The Netherlands, Belgium, and Luxembourg had suffered much, seen their nation states dissolve, and were shamed by their collaborators during the Nazi occupation. In all six nation states — founding fathers of European integration — the populations did not trust the discredited nation states and the national political systems. This picture was found neither in the United Kingdom,8 which had won two World Wars, nor in a number of smaller European nation states, which had managed to stand outside one or both wars, or at least, not suffered anything comparable to the six nation states mentioned above. The populations in these nation states looked with confidence to their governments to provide stability, security, and economic progress. They did not see much reason for pooling the sovereignty of their nation states in an international institution. Their reason for joining at a later stage was determined more by the inevitability than an actual desire to be part of a new European construction. This dichotomy still exists and is key to the attitude vis-à-vis European integration, with the six founding fathers pushing for integration, while most of the other nation states are more reluctant. It is worthwhile to reflect that while the founding of the European Union among the original six was based upon the loss of legitimacy of the nation state and its institutions, the trust in the nation state in the United Kingdom and Denmark constituted a barrier for these two nation states in their endeavours to join “the heart of Europe”. The governments of the United Kingdom and Denmark argued strongly, with support from a majority (in Denmark almost 80 per cent) in their national parliaments, for approval of the path-breaking Treaty of Maastricht in 1992. This was reinforced by overwhelming support from the elite (business and academic) in both nation states. Nevertheless, in the Danish referendum,

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a small majority of the electorate casts their vote against it, while the British government had to acquiesce with an agonizing and long, drawn out debate in the United Kingdom before ratification was achieved. It is thought provoking to recall that a part, and probably a majority, of the population in these two nation states had greater faith in the institutions, sovereignty in whichever term this is defined, and the strength of their nation state, than in the political system and the political leaders they had elected. The political leaders tried very hard to convince the population that ratifying the Treaty of Maastricht would be good for the country, would cement social welfare, and lead to higher growth and employment. Despite this, a majority of the population chose to believe that it would lead to the opposite. They felt secure inside the national cocoon and apparently preferred to trust in the political leaders’ ability to manage the well-being of the nation state within a national framework, even if the same political leaders repeatedly stated that this could best be done outside the national framework and within a stronger European integration. It may not necessarily be the case in other geographical areas, but in Europe, the attitude towards economic integration flowed from the credibility of the nation state and its institutions in the eyes of the population, rather than the position taken by the political leadership. The citizens formed their own opinion on whether the nation state or the European integration would be best placed to take care of them. And the foundation for making this judgement was the historical scoreboard of the nation state and the strength of its institutions. Externally, all of Western Europe, including even the United Kingdom as one of the victors, emerged after World War II under threat from the Soviet Union and the socialist/communist ideology. We know today that the Soviet Union, after four years of merciless war with Nazi Germany, was totally exhausted in 1945, but it did not look this way in the immediate postwar period. On the contrary, the Soviet Union had appeared almost almighty, having in its possession an enormous war machine under competent military commanders who had proven themselves during the war, and a ruthless political leader and supreme commander in Joseph Stalin. Furthermore the Soviet Union offered a way ahead for weary Western Europeans: Socialism or Communism. As was the case a couple of years later for the initiative leading to European integration, socialism/communism played on the European nation state’s loss of credibility vis-à-vis its citizens. Interestingly enough, it too offered an international model advocating the replacing of the national identity with adherence to an international ideology.

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This constituted a double threat. A traditional one in the form of the Soviet Union’s ambitions to extend its empire — almost a Russian empire — into Western Europe, and a new one, dangling the idea of an ideological empire before the Western Europeans that emphasized its potential virtues. The threat was quickly perceived by politicians in Western Europe, and even more importantly, by the political leaders in the United States. The conclusion reached was fast and unanimous: Western Europe had to be launched on an economic growth pattern diminishing the lure of socialism/ communism and demonstrating that traditional European political philosophies and parties were able to deliver what socialism/communism promised. The method chosen was a combination of domestic policies, financial assistance from the United States in the form of the Marshall Aid,9 and steps towards trade liberalization in Western Europe. The U.S. engagement was the flywheel without which Western Europe would probably have glided into some kind of disorder.10 The Americans conditioned financial assistance to trade liberalization between the Western European countries, pushing them hard and fast towards this course. The crucial observation to make here is that the United States supported the idea of Western European nation states working together; not only that, it insisted on such a political course, exercising immense pressure on the Europeans. This policy turned gradually into American support for Western European integration as it emerged during the 1950s. It may be too soon to make a final judgement, but it seems highly unlikely that integration would have succeeded without the American stance of seeing Western Europe as a partner, albeit not one on totally equal terms, even if that was frequently the essence of political statements. Geopolitically one item loomed above all others: yes or no to German11 rearmament. Today this question may seem strange, but five to ten years after the end of World War II, it was, simply speaking, the all-important question. For obvious reasons, Germany found it difficult to take a stance. Many of the European nation states having been occupied by Nazi Germany, were appalled by the idea of German soldiers, and resisted vigorously any idea pointing towards a German army. Again the U.S. attitude was decisive. For the United States, the revitalization of Western Europe had many virtues and only a few drawbacks. Even the powerful U.S. economy found the burden of shouldering the military build-up to counteract the Soviet threat a heavy, maybe too heavy,

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one — at least the American taxpayer choosing whom to send to Congress and elect as President was afraid to take that position. Hence the United States turned up the heat on the Western Europeans and insisted on the rearmament of Germany, leaving the Western Europeans no choice, except the choice of how to do this. The Western Europeans could choose between seeing Germany rearm with American support, in the traditional concert of European nation states playing to the tune of rivalry and mutual suspicion; or they could invent a new political vehicle allowing German rearmament under some kind of European control. They chose the second alternative. The geopolitical environment thus pushed the Europeans towards the same course as their own deliberations have led them to conclude — integration. It is interesting to note that at the next stage of European integration in 1990–1992, with the Treaty of Maastricht introducing European Economic and Monetary Union, a Common Foreign — and Security Policy, and Justice and Home Affairs, Germany was again the flywheel, this time with the German reunification. This short introduction explains why European integration started, the diverging attitudes to the integration by different European nation states, and the geo-political environment. European integration was born out of four exceptional circumstances. Economic globalization had shown that the traditional European nation state was too weak or too small to safeguard its economic interests on the international scene. The minorities inside the European nation states sensed the growing impotence of the nation states and wished to exploit this window of opportunity to loosen the grip of the centralized government. The nation state’s loss of legitimacy in the eyes of its population in the six founding countries of integration removed its grip on the loyalty of its citizens. The Cold War setting and the impotence of the Europeans to control their own destiny when confronted with two superpowers: the United States and the Soviet Union. These special circumstances are worth bearing in mind when analysing the development of the integration with an eye to whether it has valuable lessons for other parts of the world. The European construction as such can hardly be copied. Circumstances, history, experience, politics, ethnic and religious conditions are different and call for tailor-made blueprints.

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But the European integration produced some principles and mechanisms — a toolbox — illustrating how integration works, how to do things, how to make an integration function as smoothly as possible. It is a story of successes and failures, each one revealing secrets. The experience of the European integration comes in when other regions around the world try to square their circle of participating in the global economy, solve the problems of majority groups versus minorities inside nation states, and strike the right balance between nation state and international institutions responsible for human security, stability, and economic progress in the eyes of the population. A French think tank — Notre Europe12 — published in 2005 a report on Asian integration, produced by a person with inside knowledge of the European integration and illustrating the value of the European experience in integration.13

Notes 1. The system is generally called the Bretton Woods system, after a hotel in New Hampshire where a conference was held in July 1944 with the participation of 44 Allied Nations to sketch a postwar economic system built around three institutions: The International Monetary Fund (IMF), The World Bank (WB) or International Bank for Reconstruction and Development (IBRD), and the International Trade Organization (ITO), which was replaced by the General Agreement on Tariffs and Trade (GATT). 2. Charles Kindleberger, The World in Depression 1929–1933 (Berkeley, 1986). 3. See for example, Premier Wen Jiabao’s speech to the National People’s Congress, 5 March 2007, available at http://news.xinhuanet.com/english/2007-03/05/ content_5800547.htm. 4. Samuel Huntington, The Clash of Civilizations and the Remaking of World Order (New York: Simon & Schuster, 1996). 5. Joergen Oerstroem, Moeller, “The Prophet Muhammad Cartoon Episode and Implications for Europe-Muslim Relations: A Danish Perspective”, Chapter Nine, in Religious Pluralism in Democratic Societies, edited by Nathan, K. S. (Singapore, 2007). 6. Jørgen Ørstrøm Møller, The Future European Model: Economic Internationalisation and Cultural Decentralisation (Westport: Greenwood Publishing House, 1995). 7. Suffice to recall the Basque conflict in Spain and Northern Ireland in the United Kingdom. 8. Prime Minister Harold MacMillan is reported to have said that the United Kingdom did not want to join what was the so-called “The Six” as it was composed of “six nations, four of whom we had to rescue from the other two”. 9. See for example, http://en.wikipedia.org/wiki/Marshall_Plan.

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10. The comparison is sometimes made of the U.S. support to Western Europe in the immediate postwar period and the EU’s support of Central and Eastern Europe in the 1990s. The comparison is not totally correct. It nevertheless focuses on the essential point of support from outside by nation states offering economic assistance, trade, and political support. 11. Strictly speaking, Western Germany or the Federal Republic of Germany with Eastern Germany or the German Democratic Republic belonging to the Soviet empire. 12. http://www.notreeurope.com/. 13. The exact reference can be found in the bibliography.

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1 BASIC PRINCIPLES

Some basic, very basic principles, determine the success or failure of an economic integration: positive sum game, step by step, clear political objectives, the role of problem grinder, links to the domestic political system, impose discipline/self-discipline on member states, balance between small and large/ powerful member states, political will to compromise and accommodate other member states, demonstrate in practice what the integration is doing and why it cannot be done without integration, avoid blurring the distinction between what the member states are doing and what falls under the competence of the integration, one or more member states as driver for the integration.1

POSITIVE SUM GAME The result on the scoreboard drawn up by each member state must show that it is at ease, better off, more comfortable, inside compared with the alternative of staying outside as a non-member.2 Politically and economically it must feel stronger, more powerful, and more capable of tackling challenges and problems. The integration should enlarge its room for manoeuvre to shape and guarantee domestic political preferences. Living standard, accumulation of wealth, and economic growth must be judged sustainable at a higher level inside rather than outside. 1

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If or when a member state doubts or questions whether this is the case, the political understanding and links holding the integration together start to unravel. Superficially the integration may go on, but it will soon dawn upon the member states that the climate has soured. In 1965 France took the view that the transition from unanimity to qualified majority voting on issues deemed to be crucial for France (aspects of the Common Agricultural Policy and its financing) was detrimental to its interest. France insisted on maintaining unanimity even if the transition to qualified majority voting was written into the Treaty of Rome. The other member states failed to perceive the depth of the French attitude and wanted to proceed. After a six-month French boycott of the institutions of the then European Economic Community, the impasse was broken. A political compromise was reached. If a member state deemed a question to be of vital importance, unanimity should be sought within a reasonable time span, even if the Treaty stipulated qualified majority voting. The text, known as The Luxembourg Compromise, adds that in the opinion of one member state (France), negotiations should continue until unanimity is achieved. Translated into plain language, the other member states pledged that if France invoked a vital interest, it would not be overruled by a vote, regardless of treaty provisions. France for its part let it be understood that before invoking unanimity, a thorough scrutiny would be made to ensure that a vital interest was really vital. Both sides gave way; both sides gave implicit, unwritten, and unsaid — but in diplomatic language — firm assurances of respect for each other’s point of view. This is a spectacular illustration of the political fact that integration cannot survive if one member state fears being overruled on matters it defines as vital. The Luxembourg Compromise influenced decision making in European integration for several decades. A hint from a member state that a vital interest could be at stake almost always led to arduous and sometimes tiresome negotiations to rally all members around a solution. If the other original five members states had tried to steamroll France, it is likely that the integration would have been halted in its tracks or, even worse, fallen apart. In 1979 the then newly elected Conservative government in the United Kingdom raised the issue of payments to and from the EU budget (the socalled net contribution). In the eyes of the British government, Britain’s net contribution could not be sustained and was unacceptable. Most of the other member states pointed out that payments to and from the budget reflected the basic structure of the agreed common policies.

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The revenue side was linked to customs duties (the Custom Union) plus agricultural levies (the Common Agricultural Policy)3 and the expenditure side was linked to common policies and common measures agreed in the Council and flows of funds as a consequence thereof. Financing and expenditure were part of a coherent system and did not each lead its own life. They found the solution to the problem by adopting and implementing new common policies to supplement the Common Agricultural Policy — in reality the only common policy giving rise to payments via the EU budget. It was quickly realized, however, that this solution was not viable. It was difficult to adopt new common policies. Even if it could be done, to reverse the imbalance pointed out by Britain, would take time. The European Union gradually faced some sort of stalemate engineered by the British dissatisfaction. That was not acceptable to the majority of member states wishing to push strongly for deeper and more far-reaching integration. A special arrangement was eventually agreed, channeling some, but not all, of the British net contribution back to Britain. These two cases illustrate one plain fact about integration — treaties and negotiations. Integration is based upon a treaty, a legal text. But its strength hinges not upon legalistic considerations or eventual enforcement in case of noncompliance. It depends upon and solely upon member states’ cool and measured conclusion that it is in their basic interests. The treaty is negotiated by nation states prepared and willing to cooperate. That is what keeps the integration together, that is what makes member states respect the word, and even more importantly, the spirit of the treaties. If or when a situation arises where one or more of the member states take the view that this is no longer the case, the treaty loses its raison d’être and nothing can prevent the member state(s) in question to break the rules and decisions. The teeth, so to speak, consist of discipline and self-discipline. The member states have decided so and have done so, because they feel it is in their interests. They are not forced to comply, they want to do so themselves — this is the ultimate strength of an economic integration such as the European Union. Ensuring that the treaty is in their basic interests explains why the Treaty of Rome was amended in 1967 (the Merger Treaty fusing the executive arms of the European Communities — the ECSC,4 the EEC5 and Euratom6 — into one), 1986 (the Single Act), 1993 (the European Union, also called the Treaty of Maastricht), 1999 (the Treaty of Amsterdam), 2003 (the Treaty of Nice), and 2005 (the proposed European Constitution). All these amendments had one driving force, namely, the need to update and maintain their relevance

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as the framework for integration, reflecting the basic interests of all member states. Otherwise they would have failed to deliver a response to the challenges that arose, and brought the very survival of the integration into question. The framework would have not only been lopsided, but out of touch, risking to put one or more member states in a position where they would see the benefits accruing in an inequitable way. For the record, it can be stated that if we include the accession treaties, the EU treaties have been amended fifteen times since the first treaty in 1952. The key words associated with the successful European integration are Coherence, Continuity, and Consistency. This applies to the integration, its objective(s) and instruments/mechanisms, and the political posture by member states over a number of years. The important factor is not necessarily the position of a member state, but that the other member states and the institution have a clear and correct perception of the line it takes. Transparency of policies combined with mutual recognition and knowledge allow the integration to move on to the next key words: compromise and consensus, instead of conflict and confrontations. EU members have never sat down around a table without the indispensible, almost mandatory, attitude that they have come together on the day in question, despite all disagreements, to achieve a common position. And with very few exceptions, the meetings have always led to some agreed text or document, however superficial and empty it might have looked at first glance. The political point is that the member states, at the end of the day, even after having quarrelled around the table, preferred to announce some kind of agreement instead of showing disagreement. Invariably the first text with all its sins of omission formed the foundation for a renewed draft where the agreement will be taken one step further.

STEP BY STEP Looked at from the outside, European integration has run a smooth course following a master plan. Except for the first twelve years from 1958 to 1970, where the original Treaty of Rome laid down such a road map, this is, however, far from the case. The Europeans adopted a combination of vision and a cautious step-bystep process, testing the water before moving ahead and preparing the ground for new initiatives. The Economic and Monetary Union started in 2002,7 but this objective was mentioned for the first time in 1969, so conceptualization of the idea to full implementation took the European Union thirty-three years.

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Before the European Single Act in 1986 — the first major treaty revision since the original Treaty of Rome — at least five groups of wise men or eminent persons or specially nominated persons worked on it, with the first report submitted in 1976, putting forward ideas and drafts of the Act. Cooperation on foreign and security policy started timidly in 1971 as intergovernmental cooperation, outside the treaties. Its foundation was a report adopted by the foreign ministers, which had no legal status. It was first mentioned in the treaties when the Single Act came into force in 1987. Despite amendments to the treaties in 1993, 1999, and 2003, the foreign and security policy has maintained its character as an intergovernmental cooperation outside the supranational principle. Disappointments and stalemates will inevitable arise. The main lesson is that if the drive for integration is sufficiently strong, these disappointments will be temporary; they may slow the movement ahead, but will not stop the process.

CLEAR POLITICAL OBJECTIVE No international integration comes about by itself and survives by itself. It has to earn its spurs, to show — unequivocally because of widespread scepticism — why it is here. In brief, it has to communicate that it serves objectives that conform with the political mainstream in member states, how it does this, and most important of all, why this cannot be done without integration, or alternatively, how this could, but less effectively so. Over time, the content of this integration has changed. In the first phases, until around 1980, the objective was to remove barriers for trade, that is, to open the doors for free trade in order to obtain the obvious economic benefits from economies of scale. Industry and services stepped into this process and spread their wings, enjoying new opportunities, thus fulfilling the political promises of higher growth and welfare as a consequence of integration. The first phase operated within clear and well-defined borders easily understood also by the general public. After that, the integration entered a more difficult — second — stage where the objective was to create something new to replace many of the national policies. The most striking example is the Economic and Monetary Union, but many other common policies and/or common activities fall under the same heading. Taking the jump from dismantling barriers to creating, forging, and shaping common policies, hitherto the prerogative of the nation state, proved to be much more difficult, despite the obvious intellectual appeal. As late as the end of 2006, opinion polls showed that 58 per cent of

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German and 52 per cent of French voters preferred their national currency back or alternatively, saw the introduction of the Euro as a bad thing.8 The emotional, sentimental, and psychological feeling among a large part of the population does not favour international institutions, which are looked upon as large bureaucratic organizations. They are not part of a political national system that has grown up as an integral part of a nation’s culture. They have to fight for their place in the awareness of the population. The European Union was born out of the wish to reconcile France and Germany after three civil European wars in seventy years (The FrancoGerman war in 1870/71, World War I from 1914 to 1918, and World War II from 1939 to 1945). By putting their coal and steel industries under supranational control, it became impossible for France and/or Germany to embark upon a national programme of rearming. This solid foundation for European integration started with the Coal and Steel Community (ECSC) coming into force in 1952 and received further backing through the efforts to boost European economic growth and stand up not only to the military, but also political, challenge of choosing either the free market or the centrally planned economies posed by the Soviet empire. The Europeans got together to protect themselves against a threat. They learned to cooperate with regard to security. That spilled over to economics and trade, starting a virtuous growth cycle. As more money was available, the welfare systems could be supported, making the societies worthwhile to live in and mobilizing a strong commitment inside the nation states to the model chosen by the political leaders. The integration emerged as an important vehicle in this construction. It all fitted nicely together. Very few Europeans inside the six original member countries of the European Union questioned the necessity and validity of the integration. The objective was clear, the instruments were known and accepted, the results visible, significant, almost overwhelming. In the eyes of the Europeans, economic integration became intertwined with growth, the welfare society, the defence of the nation states against the Soviet Union, and the goodbye kiss to the communist/socialist/ centrally planned economic model. After these two decades came a dry spell in the 1970s. The run-in of the model was successfully completed. The next question was: what now? No obvious reply was at hand. The original model to form a customs union and a common agricultural policy worked well enough, but it did not give much clue to what is next. The threat from the Soviet Union had been contained. On top of that came the two oil price crises (1973/74 and 1979) undermining Europe’s economic power. The European Union was not able to react to the oil price increases and the political problems Europe faced in

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the aftermath of these changed conditions. The European economies went through a painful recession, draining Europe of economic power and political determination. European integration slipped down the list of priorities in these circumstances. The political leaders of the generation sensed that. And they also sensed that the answer was to be found in improving Europe’s economy. The 1980s saw the Single Market as a counter attack to reconquer market share lost primarily to American high-tech companies. It was followed by the single currency (Euro). The integration was back on track with a clear and visible political goal, with which a large majority of the Europeans agreed: improve the economy and show us how it can be done. Instrumental in this turnaround was the backing of the business sector won over by the single market and the lure of the Euro. After the fall of the Soviet and Russian empire in 1989/1991, the future of the Central and Eastern European countries became the destiny of the European Union. American engagement could be counted upon, but for obvious geographical and political reasons, Europe had to rise to the challenge — and so it did. The origin of the Treaty of Maastricht negotiated in 1990–1991 was a follow-up to the Single Act and deepened the integration further. When the initiative to this treaty revision was taken, the political and economic architecture of Europe was still frozen in the Cold War image. When developments started to unravel in 1989 the reaction of most member states was initially scepticism towards an extension, not to say, membership, of the European Union to, and for, the Central and Eastern European countries. The treaty amendments designed from the start to tackle enlargement came with the Treaty of Amsterdam in 1999, and the Treaty of Nice in 2003. However, the Treaty of Maastricht, with the Economic and Monetary Union, the Common Foreign and Security Policy, and Justice and Home Affairs pillar provided the Union with the muscle and power to shoulder new tasks. Even more important was the confidence and belief this new treaty gave the Europeans in their ability to rise to the challenge. The Treaty of Maastricht became in substance a necessary foundation for the enlargement, even if that was not the original purpose. Obviously the challenges were politically, difficult and tricky; financially, visible, but manageable; and economically, opening up new markets, which would not take long to appear as competitors. In short: the European Union had to cement the newborn democracies and support their transition to market economies. That process was completed and crowned by an agreement of the terms for accession to the European Union at the end of 2002 and the Central and

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Eastern European countries then joined the European Union as full members on 1 May 2004. Since then the European Union has more or less been like a rudderless ship. Apart from holding on to what has been achieved, it is difficult for it to see where to go, pinpoint new objectives, and allocate appropriate measures to get there. The EU political leaders diagnosed the sombre economic outlook, saddled as it was with high unemployment, as the main challenge and put forward an ambitious programme called the Lisbon Programme after the meeting of the European Council in the Portuguese capital in March 2000. EU Heads of States and Governments agreed to make the European Union “the most competitive and dynamic knowledge-driven economy by 2010”. This was ambitious and indeed a tall agenda for the European Union, bearing in mind the actual state of the European economies. It was more, much more, than the European Union and its member states could deliver. Most observers and many people shared this objective and thought it was the right thing to do, but sensed a certain hollowness. The member states were not willing to put the necessary financial means at the disposal of the European Union. There were good plans drawn up, but nothing, which could really trigger enthusiasm. All in all, this admirable objective did not look likely to take off, much less succeed, but served more to illustrate that the European Union was powerless when confronted with problems that really matter for the ordinary citizen. While it had been possible in the 1950s to link economics to a political goal, the same was apparently beyond the reach of the European Union and its political leaders in the first years of the new century. It has become an example and illustration of how dangerous it is to set lofty goals that look good, sound nice, and are actually the right ones, if they do not get off the ground, but taxi up and down the runway. The populations are used to failures in domestic policies without really blaming their politicians and their political system. Economic integration does not have this luxury. It has to prove itself and demonstrate that it can deliver what nobody else can deliver. Every failure prompts the question of whether the integration is worthwhile or not. One of the lessons learned is thus not only to fix clear and visible objectives, but also to be careful not to map out goals, especially lofty ones, that come to nothing. One remark should be added. The European Union has never fallen for the temptation to design a policy or declare an objective directed against

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the United States. Some political observers, especially in the United States may feel so, but this is not correct. The European Union has always understood that it can do something alone, it can do something with the Americans, but it can do very little against the United States. There may or may not be an undercurrent of anti-Americanism in some of the member states, but this has never been allowed to enter EU politics. The European Union has pursued and defended its own interests, and done so regardless of the implications for the United States, which is, however, quite another matter. It would be wrong to finish this section without mentioning that some observers take the view that European Union cannot survive without an “enemy” or adversary. If you do not have a common enemy, it is difficult to find the will to compromise when negotiating with partners. After the downfall of the Soviet empire, runs the reasoning, the European Union is doomed to complacency, immobilizing every attempt to deepen its integration. It would be wrong to ignore that there are three potential candidates for an adversary: the United States, the Islamic world and the cost-effective producers in Asia. So far both the European Union and its member states have managed to keep the tendency to look for an enemy/ adversary under control.

THE ROLE OF PROBLEM GRINDER The member states and their populations look to integration as a framework or an institution capable of providing answers and solutions to problems they face and cannot solve in a national context. With the progression of globalization and its impact not only on economic and industrial life, but everyday life in the nation states, the number of problems requiring an international solution is growing and rapidly so. The attitude of the institutions and the member states must be to welcome any member state finding itself exposed to problems and/or challenges going beyond the national framework. Fast, quick, and adequate reaction is called for. And the most important thing is to get the message through to the citizens that integration improves their daily life, and is thus relevant for them. The role of problem grinder has four aspects. First, that any member state should feel welcome to approach the integration with its special problem. Second, that the integration must tackle swiftly and convincingly, problems for all or some member states.

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Third, to detect potential negative developments and establish measures to prevent them from arising. Fourth, to rally all member states behind broader international agreements and stand ready to alleviate negative repercussions for one or a couple of member states to avoid the feeling that they pay the price for benefits accruing to other member states. In the 1970s, and at the beginning of the 1980s, the European Union was trying to establish fixed exchange rates under what was then rather turbulent external monetary conditions. The United States left the Gold Exchange Standard in August 1971. Concomitantly exchange rates between the member states of the European Union did not reflect their respective competitiveness. Both events forced the European Union to take swift action, which for some member states would have acrimonious consequences. The weaker member states wished to maintain their link to an anchor currency, that for obvious reasons, could only be the Deutsch Mark (DM). This called for adjustments to the agreed exchange rates from time to time, frequently throwing up difficult economic and technical problems for the European Union, as in the case of the Common Agricultural Policy which was designed around fixed exchange rates. A core group of member states managed to keep together by courtesy of Germany and The Netherlands, as the economically stronger members. They accommodated the weaker member states, in particular, Denmark,9 and to a certain extent, Belgium and France. The stronger member states could have managed on their own, and some say, they could have managed better supporting the EMS (European Monetary System). Political will and readiness to help weaker partners carried the day and ultimately paved the way to what became the Euro. The political will to assist weaker member states found expression through somewhat artificial presentations and explanations of the currency rate adjustments. Even if everybody knew as a fact that the weaker member states had asked for a depreciation of their currencies vis-à-vis the stronger currencies, the official communiqué always stated that some currencies — typically the Deutsch Mark (D-Mark or DM) and the Dutch Guilder–– had been appreciated, while the weaker currencies had been depreciated, thus allowing for the perception of something like a symmetrical adjustment, and avoiding exposing the difficulties and vulnerability of the weaker member states and their currencies. This was a splendid illustration of solidarity. It was not without real economic burdens for the economically stronger members. The implementation of the Common Agricultural Policy meant that the appreciation of a currency was translated into lower prices in domestic currency for agricultural producers, raising domestic political

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problems in the countries with appreciating currencies — problems they could have avoided by insisting on a formula where the currency rate adjustment was asymmetrical, with the weaker currencies depreciated, and the stronger currencies kept stable. The problem grinder handled those problems. What was termed the Monetary Compensatory Amount (MCAs) was introduced to guarantee uniform prices inside the European Union for agricultural products as demanded by the Common Agricultural Policy. They can be described as a devious road to square the circle by fairly technical mechanisms understood only by a few, but that are highly efficient, politically as well as economically. The EU reaction to the catastrophe at the Chernobyl nuclear power station in what was then the Soviet Union (now Ukraine) in 1986, illustrates the need for fast action to safeguard the health of the population. Large parts of Europe, including parts of EU member states, were hit by contamination. There was an urgent need for the European Union to step forward and implement measures to secure the health of the population without jeopardizing the free market. Immediately after the accident, when it was clear that agricultural products from a number of European countries would show levels of contamination above what was classified as dangerous, the European Union introduced temporary measures more or less stopping all imports from third countries hit by contamination. These extremely strict and urgent measures were replaced by permanent measures a month later (30 May 1986),10 specifying the threshold for the import to the European Union of agricultural products from these third countries. In 1976 an accident happened at a chemical plant in Northern Italy manufacturing pesticides and herbicides. A cloud of dioxin (tetrachlorodibenzoparadioxin [TCDD]) — a poisonous and carcinogenic by-product — was released into the atmosphere. About ten square miles were contaminated, 600 people had to be removed from their homes, and 2000 were treated for poisoning. This accident, which was not the only one in the chemical industry worldwide, led the European Union to draft and approve a directive with two aims. First, to introduce control measures to prevent another accident from happening. This was a matter for the European Union because it was felt that for moral reasons such controls should apply to the whole European Union. On top of that, distortion of competition among enterprises, depending on whether the host country applied lax or strict control measures, had to be avoided and that was clearly an EU task. Second, to minimize the impact not only on human beings, but also on the environment, should accidents

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happen despite all efforts to prevent them by various control measures. The Seveso directive,11 named after the town in Northern Italy where the accident took place, has been updated several times. The European Union concludes many international negotiations, in particular, inside what was GATT (General Agreement of Tariffs and Trade) and now WTO (World Trade Organisation), where it has exclusive competence, for example, negotiating on behalf of member states. The international agreements have to be implemented by member states in their national legislations, and in some cases, it entails painful adjustments. Benefits and costs can rarely be distributed evenly inside the European Union. International trade negotiations traditionally put a heavier burden of adjustment on its poorer member states than on the richer ones. Portugal, having a large textile sector competing on costs, is evidently more vulnerable to further liberalization of international trade in textiles than countries with a smaller, and in some cases, more sophisticated textile sector. In these cases member states come to the European Union to ask for help in the form of, among other things, support from the regional and/or social fund to help restructure the industry and retrain the labour force. By guaranteeing such assistance, the European Union is not only taking individual member states’ problems seriously and producing a solution, but is also distributing the benefits and costs from liberalization more evenly inside the Union. This removes the threat that internal dissatisfaction might have in blocking the European Union from emerging as a major force in international trade liberalization — first in GATT, later in WTO. Perhaps the finest hour for the European Union as a problem grinder came in 1989 with the German reunification. Politically it was a sensitive issue, economically, it posed considerable problems, and technically, the European Union had to mastermind an exercise of frightening dimension, and all under enormous pressure. The problem grinder delivered on all issues. The same attitude has been seen when the European Union negotiates its enlargement. It goes without saying that new member states are joining the European Union with the implied full acceptance of its objectives and rules — what is called the Acquis Communautaire. But the European Union has shown overwhelming and magnanimous understanding of the eccentricities of new member states. Denmark joining in 1973 received a three-year transitional period with stricter rules for the import of liquor and cigarettes from other member states. The transitional arrangement granted in the Treaty of Accession for three years has been extended time after time. Sweden when joining in 2004 wished to maintain its very special arrangement for buying

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liquor (Systembolaget12) and was accommodated. In both cases the European Union could have, but did not, say: “Do you want to join? Yes or no?” The mass media often focus on the long and arduous meetings, the socalled marathons, forcing night sessions on member states, but the same mass media overlook, sometimes conveniently so, that the meetings are drawn out, because the European Union in its role as a problem grinder, tries hard to steer the negotiations through to a solution that all member states can support.

LINKS TO DOMESTIC POLITICAL SYSTEM Despite strenuous efforts the European Union has not succeeded in coming up with an appropriate formula to link the domestic political system to the EU political system. For most people, the EU decision-making process is seen as something remote, something more or less artificial, and most important of all, something that cannot be fully trusted. The image depicts a political system that is neither an outright extension of the domestic system nor a selfsustaining international one. The political system in member states is the product of decades, and in some cases, centuries of development where the population, despite failures and misgivings, has trust in the system and looks upon it as “ours”. There are several reasons for that. One of them, and probably the most important one, is that most people have had direct contact with the domestic political system, maybe on the local community level. They have seen it and felt it; they know how it works for good or bad. When they read about it they compare what they read to their own experiences and these do not always correspond with criticisms or disparaging stories. The domestic system has earned credibility because the citizens know it and have been in contact with it. They do not believe everything they hear. This is not the case with the EU political system. Almost all contact with the EU system takes the form of a paper mill of applications and/or letters going back and forth. People have no personal contact, so they cannot relate personally to the system. If they try to do so, they are either unimpressed or may even draw negative conclusions. The door is wide open for all kinds of horror stories about silly or superfluous proposals blown up by the mass media, in some cases, openly critical, and in other cases, just pursuing what is regarded as a “good” story. To give an idea of what the lack of an effective link between the domestic political system and the EU decision making/political system can produce by

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way of false allegations that have to be refuted, the following list compiled by the British member of the European parliament Andrew Duff13 may suffice although it is by no means exhaustive. •

•

•

•

•

Brussels regulations oblige fishermen to wear hairnets when on board their fishing boats. This is untrue. European hygiene agreements covering fish-processing plants and all staff who process and package fish mention that dockside staff who cut fish should wear suitable clothing, including head cover, to avoid contaminating the processed fish. This does not, however, mean wearing a hairnet, does not cover ordinary fishermen, and does help to minimize the risks to consumers of food poisoning from unhygienic fish. Decimalization was forced upon us by Europe. This is untrue. The sovereign British Parliament agreed to adopt the decimal currency under the Decimal Currency Act 1969, before the Heath government that took Britain into Europe was even in office. Metric measures were imposed on Britain by Brussels. This is untrue. The decision to introduce metrication in Britain was taken by Parliament many years before Britain joined Europe, under the Weights and Measures Act of 1963. Cucumbers have to be straight and must not arch more than 10mm for every 10mm of their length. This is not true. No cucumbers are banned by the European Union. Square gin bottles are to be compulsorily replaced by round ones to ensure a level playing field under the Single Market. This is untrue. The European Commission has no, and has never had any, intention of proposing any such thing.

The Commission has produced a similar list of almost preposterous allegations and comparisons of myths and realities:14 •

• •

The European Union says eggs must carry details of the hens that laid them. This is not true. It is mandatory to have a code designating the producer’s distinguishing number and permitting the farming method to be identified. Europe says playground swings are too high. Not true, the European Union is not involved at all. Yogurt is to be banned. This is not true. The Commission wants consumers to be better informed about what kind of yogurt they eat, but nothing such as banning the word yogurt has ever been contemplated.

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The mere fact that such allegations have to be refuted awards a point to the Anti-Europeans, as many people tend to believe, or at least recall, contentions — true or false — they have often heard under the vague label “there may be something in it anyway”. The complicated structure of the EU decision-making process does not help either. The Commission is the institution responsible for making proposals to the Council and the Parliament, but its members (in principle all member states are represented in the Commission) are nominated without any kind of recourse for the population. The people do not feel that the said country’s member of the Commission is part of some kind of interlinkage. The Council is the institution with the competence to decide. It is composed of a minister from each member state, but takes its decisions during meetings in Brussels albeit under heavy media coverage. These meetings are not really felt to be a part of the domestic political scene. The ministers representing their national governments do relate to the national population, primarily in their national capacity, and rarely, if at all, as members of the Council in Brussels. The Parliament with co-decision making powers meets in Strasbourg or Brussels producing the feeling that it is a long way from home. Given that it has 785 members from twenty-seven member states (for example, ninety-nine German members and fourteen Danish members), the various populations do not look upon it as representative democracy in the same way as a national parliament. The turnout of voters for direct elections to the European Parliament normally hovers around 50 per cent — much lower than that for national elections. The advisory bodies such as the Economic and Social Committee and the Regional Committee do not reverberate with ordinary people in the member states. Some observers call this a democratic deficit. This is not true. All decisions in the European Union are taken under democratic control. This is evident as every member state is represented in the Council and has representatives in the European Parliament. Every government has to answer in the national parliament on how it voted or how it represented itself during EU meetings. Without a doubt, the EU decision-making process has passed the test of legitimacy and accountability theoretically and analytically. It also looks favourably transparent after almost fifteen years of industrious efforts to open up the European Union and making it in many respects as open, and in some cases, more open than domestic political decision making. The problem is that this is not how most people see it. Here we encounter one of those sensitive issues whereby reality differs from perception. As we live in a audio-visual world, perception will often be more important than reality. The European Union has actually tried to get across its message of

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openness and has experimented with how to do this in an era where audiovisual communication is gradually taking over. In June 2006 the member states decided that the open sessions of the Council of Ministers’ meetings should be transmitted live on the Internet. The Economic and Financial Affairs Council (ECOFIN) that convened on 11 July was the first Council Meeting that was webcast. This procedure has been repeated since, but regrettably, despite outcries about the lack of openness, reports indicate that only a limited number of persons visited the site.15 On the domestic front, the voter will know where to go if he/she wants to complain. This is not as obvious with regard to the European Union, as the decision making is complicated, tortuous, and seldom points to one person or one body as being responsible. The voter may complain to the Commission, but is then told that the Council and/or the Parliament decided on the matter and changed the proposal in the course of the process. The minister representing the said country in the Council may excuse himself/herself by saying that a decision was taken by majority voting and he/she actually voted against it. The member of the European Parliament from the voter’s constituency may say that he/she took this or that stand during the debate; the Parliament, however, decided otherwise. All too easily, this turns into arguing in a circle where the complainant is incessantly referred to somebody else or another institution, or is given an explanation, which for him/her is irrelevant, of the intricate decision-making procedure. So while the decision-making procedure may be theoretically impeccable and beyond reproach when talking about accountability and legitimacy — you can always tell who made the decision — this may often point to institutions, while the complainant wants to meet and/or talk with a person. In the domestic political scene the voter may pin down a politician and refer to a decision, saying, “I will not vote for you next time.” In the European Union he/she may look at a faceless institution. The challenge and its sensitivity have, of course, not gone unnoticed in the European Union. Numerous attempts have been made to bridge the gulf. There is a clear understanding and acceptance that unless a bridging device can be found the integration may run into popular opposition fuelled by a feeling of alienation.

IMPOSE DISCIPLINE/SELF-DISCIPLINE ON MEMBER STATES In the globalized world very few national decisions are truly national in the sense that they exclusively affect the nation state itself and its citizens. Almost

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all decisions or lack of decisions will have repercussions on adjacent nation states and/or the global community. In Europe the various economies became so interwoven several decades ago that national economic policies had to be abandoned, maybe not in rhetoric, but in practice. This was seen most clearly at the end of 1970s and the beginning of the 1980s. At the end of the 1970s, the majority of the member states gradually adopted the German economic model/policy, labelled the policy for stability. In 1981 the leader of the socialist party in France, François Mitterrand, was elected president of the Republic. He introduced a new economic policy focusing on heavy state interventionism. Barely two years later, that policy was abandoned in favour of an economic policy comparable to the German one. A member state that does not observe discipline and/or does not follow policies congruous with the rest of the pack, risks being left out in the cold. The single market means that no barriers exist for trading goods and services and investing/disinvesting. A member state that is out of step, regarded as irresponsible or not exercising discipline in, for example, economic policies, will see foreign and, gradually, also domestic investors, move to other member states, resulting in an inevitable loss of growth and employment. One of the lessons, highly disputed from time to time, is that economic integration promotes fiscal and monetary discipline. In Europe it can be clearly seen how EU member states formerly applying a lax economic policy have had to toe the line and have done so with great success for their economic scoreboards. Take the examples of the following countries16 that ran deficits on the current account of their balance of payments — their highest figures as a percentage of their Gross National Products between 1975 and 1989 are in parentheses: Denmark (9.5 per cent for 1986), Greece (9.8 per cent for 1985), and Ireland (14.7 per cent for 1981). The same countries also ran deficits on public finances — the highest figures are again in parentheses: Denmark (9.1 per cent in 1982), Greece (14.5 per cent in 1985) and Ireland (14.1 per cent in 1982). Italy and Belgium were running surpluses on their current account, but deficits in their public finances. The highest figure for Italy was 12.9 per cent in 1975; and for Belgium, 13.1 per cent in 1981. Some of the above mentioned deficits were running above 10 per cent year after year, exposing fundamental political and economic weaknesses. Italy had a double-digit deficit in its public finances running for nine consecutive years from 1981 to 1989. Ireland had a double-digit deficit on its current account for four consecutive years from1979 to 1982. In the 1990s, however, they each managed to bring about a much better balanced economy. In year 2003, Italy, Greece, and Ireland were still running deficits on their current balances, with Greece having the highest figure of 6.5 per cent.

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Greece and Italy (highest figure 4.6 per cent) still had deficits in the public finances. Denmark had turned both deficits around to surpluses and Ireland had a surplus in public finances and a deficit of only 1.4 per cent on its current account. Belgium had got rid of its deficit in its public finances. In Foreign and Security Policy the jury is still out on the EU performance at the time of the dissolution of the former Yugoslavia. One day history will tell us whether the Europeans got it right or wrong, even if many observers have already taken their stand saying it was a dismal failure. Whatever the final verdict, the fact that the Europeans had to coordinate their positions instilled discipline in each and every member state. Seen in a historic context, it seemed likely that Germany would side with the Croats, and France with the Serbs. Even if direct intervention had not taken place, some kind of German-French rivalry or scheming behind the scene, playing out a repetition of traditional European foreign policy, would undoubtedly have made the situation much worse. A common EU position was agreed upon and the discipline inherent in being members of the integration prevented unilateral action in the form of intervention. We can go one step further and talk about self-discipline in the sense that member states know and recognize that steps taken by them will influence other member states, and if it is going to be negatively so, they may refrain for taking such steps. The sheer fact of the integration means that repercussions on other member states will be a built-in factor when considering policy steps. The European Union has from time to time served as a pretext for explaining steps regarded as unpopular. Not all countries enjoy the luxury of a strong majority government capable of taking what it regards as necessary decisions without fearing a backlash from the population. Many governments, indeed most governments, have to explain to their public why this or that policy has been decided on and implemented. This is particularly true when it hurts the purse of the people or runs against the grain. In these situations, governments often resort to referring to international obligations, commitments, or the necessity to conform to international rules in one way or another. This increases the likelihood of acceptance by, or acquiescence from, the public, if the case can be made that this or that step is indispensable and indeed follows from the fulfillment of international commitments undertaken on earlier occasions. In Europe this, let us call it the fallback method, has often been used when the tightening of economic policies or the removal of existing measures that protect domestic producers against foreign competition has been put on the table.

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The combined effect of discipline and self-discipline is to keep a member state away from flirting with, or worse, introducing measures taking it away from mainstream politics, thereby jeopardizing its role in the international community and converting its own problem to a problem for adjacent countries. One trap has to be avoided. Governments have sometimes sought refuge in the European Union by postulating that unpopular measures were unavoidable to comply with EU commitments. The European Union has been put in the somewhat repulsive role of an accomplice and has had to bear the blame for measures that national governments would have, and have had, to take anyway. This is politically convenient and has worked as intended, easing the strain on the national government. There is, however, a price to pay for resorting to putting the blame on somebody else. Unfortunately, that price has fallen on the European Union to pay. The reference to the European Union has been instrumental in painting a less than flattering picture of it among ordinary people. The offloading of political responsibility has generated a considerable amount of animosity vis-à-vis the European Union and probably contributed to the wariness about further integration identified on the European political scene in 2005. It is indeed sad that an international integration shaped to cope with the challenge of exercising political control over globalization is subject to such improper use, and sometimes, squarely put in the role of scapegoat.

BALANCE BETWEEN SMALL AND LARGE/POWERFUL MEMBER STATES It is difficult, but imperative to square the circle between the interests and fears of the smaller member states, and the ambitions and political drive of the larger ones. The smaller member states joined the integration because they hoped to “multilateralize” their hitherto bilateral relations with larger neighbours and have a stronger influence on the international state. This ambition was accompanied by the fear of being sidelined or overlooked in a forum with many members — being one of many may be good if you wish to hide, but not if you wish to participate in a rule-based international organization. Almost all the smaller member states have hard-earned experiences from bilateral dealings with a larger neighbour (Denmark vis-à-vis Germany, the Netherlands also, Belgium vis-à-vis France and Germany, Portugal vis-à-vis Spain, and Ireland vis-à-vis the United Kingdom). They know how difficult

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it is to stand their ground during negotiations on a bilateral basis with a big and powerful neighbour, often having the impression that they were being summoned to the capital of the big neighbour. They see the integration as almost a seminal shift, transforming bilateral relations with the big neighbour into a multilateral context. Allies could be hoped for and a transparent decision-making procedure in strict accordance with applicable rules and rules applicable to all was at hand. For almost all small nation states this political consideration carried weight when membership was discussed. The other side of the coin is that being small, the risk of anonymity increases. France, Germany and the United Kingdom will be listened to, regardless of what they say because of their size, power, and influence. As a rule of thumb, it can be said that the smaller member states need to argue their case better to be listened to. This confirms an old lesson from diplomacy as well as other spheres of life: there is no substitute for quality. The larger member states know very well why the smaller ones joined and how they think. They realize that if they overplay their size and power, the smaller member states may feel that the positive sum game is not operating for them. The larger member states still play the game because integration gives them influence in the outside world, and stronger and more powerful influence with, than without, the smaller member states on board. The large member states are traditional players on the grand international scene and see the integration as a vehicle for maintaining or even enhancing influence vis-à-vis other large powers. For various reasons and different political purposes, France, Germany, and the United Kingdom have seen the European Union as a platform for their foreign- and security policy in a broader context. The accommodation of smaller member states is a price worth paying for enhancing their posture abroad. This simultaneous equation can only be solved with restraint (self-discipline) exercised by the smaller members states when broader foreign and security policy questions are on the agenda. Politically the European Union has worked in a way that made the smaller and larger member states feel that it was, in fact, a positive sum game, even if they both had to pay a certain price. This also explains why some of the most arduous and perplex negotiations revolved around the position of members states falling somewhere in between small and large member states, such as Spain when joining in 1986 and Poland in 2004. How the circle was squared can be read from the member states’ incorporation in the EU institutions. Broadly speaking, the weight in decision making carried by the smaller member states exceeds what would normally be regarded as their fair share, for example, share of the population or of the

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Gross Domestic Product (GDP). For many years Denmark had three votes and Germany ten votes when the Council decided with qualified majority. This is despite the fact that the German population was about twelve times the Danish one and the proportion between the two countries’ GDPs was approximately the same. But both countries felt that a mutually acceptable compromise was found.

POLITICAL WILL TO COMPROMISE AND ACCOMMODATE OTHER MEMBER STATES The EU political system uses the same building blocks as the national political system. This will presumably be the case for any international integration embodied with the power to set rules applicable for the member states that replace national rules. Some member states, primarily, but not exclusively, the United Kingdom, operates a domestic voting system that almost always leads to a majority for one of the two major political parties. The British political culture is thus based on a tradition of the ruling party carrying through its policy and policies fleshed out in its election manifesto, even if in most cases, you suspect the political parties did not mind a short memory. In other European countries (for example, The Netherlands, Belgium, Denmark and, in some cases, France and Germany), the election system rarely produces a majority for one party, thus forcing a coalition government down the throat of politicians. The implication is that they have to negotiate and compromise both inside the government and in the national parliament. The art, and even more, the necessity, of finding a compromise and nurturing this special political art during EU negotiations is imperative. When member states assemble around the table for decision making in the Council, they have to compromise. No member state can force its own will or position through. It needs to build coalitions and work for compromises, to look for common ground, to find allies and partners in the game of rallying a qualified majority behind the proposal. An uncompromising attitude is fine for blocking agreements, but the whole idea of integration is to do the opposite, that is, to get agreement, and for that, compromises are indispensable. Unanimity is often regarded as the small nation states’ saviour or fallback position — the ultimate threat-to-be — to the chagrin of larger member states. This is not the case. It works the other way round. Unanimity compels the nation state to choose between clear-cut approval or rejection, ruling out a compromise. The powerful nation states may have the stamina, power, and experience from participating in the great international game to do this and

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stay the course regardless of the heat building up. The smaller member states may try, and if circumstances are favourable, they may succeed, but in the large majority of cases, the pressure will overcome them. Majority voting has been instrumental in bringing a political culture to the forefront that highlights compromise instead of either blocking decisions or steamrolling decisions against some members states. First, all member states are smoked out of a position of repeating platitudes to speaking in earnest. Knowing that their vote could be dispensable, even expendable, a recalcitrant mood does not carry much weight. They are better served taking a seat at the negotiation table clarifying their position, offering concessions, and asking for something in return. As the art of political compromise, political negotiations have been elevated to the international level — for the first time in political history. It reflects a degree of enviable political maturity. It has gradually — perhaps grudgingly — become good behaviour to seek unanimity even if a majority-backed solution was at hand at an earlier stage. Accommodating the preoccupations of all member states and having unanimously agreed texts are preferable to a clinical, qualified majority decision that leaves some members out in the cold. The connecting thread in all this is to push everybody to the negotiation table to negotiate — what else? Second, having negotiated a solution and having voted yes, member states feel themselves to be stakeholders, sharing the responsibility and shouldering the burden of making it work. The compromise shows that everybody’s position and arguments have been considered and incorporated in the final text. It has not been forced down the throat of more or less willing nation states. They do not return home to explain why they tried to block something, but why in the end they had to give in, sometimes losing some pride in the process. And it has forced them to the painful, but sometimes propitious process of making up their minds about their own priorities. If they cannot get everything, they need to find out what they want and what they can let go. It is sometimes overlooked in political and academic debates that there is a strong need for making all member states stakeholders when approving a proposal. For an obvious and unavoidable reason: the legal acts decided by the European Union are legally binding. Either they are directly applicable (regulations) or they are transformed into, or transposed onto national legislation (directives). The collaboration of the national parliament may thus be required. And it is by no means a rubber stamping process. A directive will normally

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lead to a national law or change of existing laws and a proposal submitted to parliament by the government to that effect. If it is not approved, the said member state would be in breach of EU obligations and ultimately taken to court. If the national government is a majority government, the risk of rejection of the proposed law is negligible. There are few exceptions to this rule. One of the most well-known ones is the Conservative government in the United Kingdom in the 1990s with a strong wing of the party turning against Europe. It was constantly forced to walk a tightrope, which became most conspicuous during the arduous and painful ratification process of the Treaty of Maastricht in 1992 and 1993. It was touch and go whether parliament would follow the Prime Minister and the government, but in the end, the treaty was ratified. The risk of running into difficulties when transposing EU legislation onto national legislation is much more common for minority governments and/or coalition governments, than for majority governments. It goes without saying that if the transformation/transposition necessary to implement what has been agreed did not work properly and smoothly, the whole integration would be in grave danger. First, all member states take it for granted that the other member states master this process. Basic trust and confidence would break down if a member state, after having agreed to a compromise, asked for a renegotiation, pointing to domestic political troubles. The other member states would take the view that their colleague, when negotiating, should have known better and done homework to have a clear picture of how far his/her parliamentary majority could be stretched. Second, the integration would start to look like a half-baked cake with a whole string of agreed texts not implemented in national legislations and, consequently, having no legal validity. Politically, it would undermine the credibility of the integration among the population who are unable to understand why the government agreed to a proposal in the European Union that was later rejected by the national parliament. Legally it would force the Court of Justice into frequent action, which under such political conditions, would put member states in an untenable position. That is why it is so important that member states see themselves as stakeholders and feel that their problems have been taken into account. The transformation/transposition of the EU legislation into national legislation then becomes a natural process where the national government and the national parliaments do it, not because they have to, but because they want to. The whole negotiation process must reflect this political imperative. Even

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in the case of an EU legislative act agreed by qualified majority voting, member states that have voted against it must feel that the process has been such that they had a fair hearing. They must be able to explain to the national parliament why they were voted down — the reasons that it came to that stage — and why the majority of the other member states did not feel that their problems should be taken into account. At the end of the day, the heart of an international political system must be mutual trust. And that leads us back to the question of political negotiations, compromise, and political maturity. You are on the same side of the net and not playing against each other. And unless all nation states feel that legitimate problems, which they bring to the attention of the others, will be taken seriously and dealt with in the spirit of mutual accommodation, any international system will start to crack. There is one more explanation — a crucial one — for shaping a political process based upon what has been mentioned: the European Union, and that will probably also be the case for other economic integrations, does not have any means to enforce decisions. In theory, a member state may fail deliberately, or because of a stalemate in the national parliament, to implement a legal act approved by the council. In such cases a political problem would arise and as a start, pressure against the said member state will be exercised by EU institutions and other member states. But the pressure would be political, for example, suggesting that it would be difficult to accommodate the said member state’s wishes in the future. If that fails the matter would be referred to the Court of Justice, which would rule that the member state has not fulfilled its obligations and has to take appropriate steps to do so. But suppose the member state does not, or is unable to, follow the decision by the Court of Justice, what then? The member state in question may be fined and this actually happens. The size of the fines has increased considerably, even if it is still doubtful whether they have in general reached a level that scares member states. This is not the case in two specific cases where the size of fines is almost terrifying. According to the rules governing the Economic and Monetary Union (the Euro), a member state can be fined for not holding its deficit in public finances below the agreed ceiling (3 per cent of Gross Domestic Product), and the Commission may impose fines on enterprises (but not member states) in breach of the EU’s rules concerning monopoly and competition that really hurts. The European Union does impose fines that may hurt, but as stated, not as an element in a normal procedure for having breached an EU law.

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The message is clear and unequivocal: the foundation of an economic integration is political will, discipline, self-discipline, trust, confidence, and accommodation of one other. No other arrows are to be found in the quiver. Member states come to an agreement because they want to agree. No one dares, no one wants, to put the integration at risk. The stakes are simply too high. The combination of political will to compromise and the imperative of sticking together proved itself at the end of 2005. 2005 was a bad year for the European Union. In late spring/early summer, first France, and then The Netherlands, rejected the proposed constitution. When the political leaders gathered at the meeting of the European Council in June 2005, the Luxembourg presidency tried to push through an agreement on the European Union’s long-term financial perspective (a financial framework for EU expenditure for a seven-year period and in this case covering 2007– 2013 and replacing the 2000–2006 financial framework agreed in 1999 under the German presidency). The presidency thought, with some justification, that if the member states rallied around this long-term financial framework, which, among other things, proposed putting more money (almost double) to Research & Development to increase the European Union’s competitiveness, it would alleviate the wounds inflicted by the French and the Dutch rejection of the constitution. However things worsened because not only did the twenty-five members fail to rally around the proposed financial framework, but they also openly disagreed. The discussion among the political leaders went beyond haggling, which is not unfamiliar, but turned into quarrels and mutual accusations that were taken public, much to the delight of all those against the European integration. It was now up to the British presidency during the second half of 2005 to have a go at the problem, as the deadline for an agreement was March 2006. Not to criticize the Luxembourg presidency, but EU experience tells us that important, crucial, and for some member states, difficult and costly decisions are rarely taken before the deadline. It is difficult for a national government to explain to its domestic audience that it compromised at an early stage, not using the whole time span available to negotiate as hard as it could and fight for its interests. Regardless of the good intentions behind the attempt of the Luxembourg presidency, the omens were not good. There is no need to go into details. What matters here is that on 17 December 2005, at a meeting of the European Council in Brussels and after acrimonious negotiations, all twenty-five member states said yes to a compromise proposal, which had been through the laborious process of being redrafted at least four times during the meeting.

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There was no clear winner. Almost everybody had to give in on some of his or her wishes and preferences. The British had to sacrifice a part of their so-called rebate. The French was hanging on to the level of agricultural spending, but only just. Several other member states had to accept a lower level of spending, that is, from the Regional Fund and other EU funds compared with what they had hoped. And some of those already net payers could look forward to a rising bill from the European Union. The compromise was achieved for one reason and one reason only: the political leaders wanted to agree. After the failure of the proposed constitution and a first — unsuccessful — attempt at adopting the financial framework, another failure would have spelled gloom around the future of the European Union because it would have questioned its very core: the will to compromise and agree.17 The compromise also showed the strength of another proven method. Step by step. Although the financial framework covers seven years, a review clause to look at, among other things, agricultural expenditure in 2008– 2009, was incorporated. This is what makes the European Union tick. Longterm plans combined with a readiness to review them, and if necessary, adapt them to new circumstances. Seen from the outside, the rules, structure, and substance of the European Union may look like they are carved in stone. This is not the case. They are constantly modified, albeit the modifications rarely attract much attention.

DEMONSTRATE IN PRACTICE WHAT THE INTEGRATION IS DOING, AND WHY IT CANNOT BE DONE WITHOUT INTEGRATION Many things can be done and have been done on the European scene to bring the integration across to the people. Symbols such as a flag, a hymn, and other solemn expressions of the integration have been mobilized. They may help tell the people that the integration exists, but not much more. Support for the integration depends on its ability to demonstrate what it is doing and why it cannot do so, or at least, do it less effectively, without the integration. This is the heart of the matter. If the integration confines itself to symbols and formalities, it may well be counterproductive, as people will compare the solemn symbols with the results achieved. They may come to the conclusion that the integration is a hollow shell, or even worse, serves a purpose other than that published. That will make public support dwindle away.

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Politicians, businessmen, and academics may all look at the integration from their angle and forward fine theories about its objectives. In the eyes of the people, most of these objectives will be lofty ones. People quite simply want improvements in their daily life from the integration. When judging their stance for or against it, they do the sum up after having asked the simple question, “What does the integration do for me in my daily life?” The history of the European integration can be written along two axes. The first one comprises political objectives such as the Franco-German reconciliation, a common stance against the Soviet Union, an attempt to form a European position in the Transatlantic partnership, etc. This is what takes up page after page in learned journals and doctoral dissertations. And this is what the textbooks for political scientists deal with mostly. The second one is the one that really counts. The impact on living costs and real wages, facilitating restructuring of the labour market, creating new jobs, fighting to avoid a recession in the slipstream of higher oil prices. This is the battleground for the mindset of the person who decides the future of the integration: the voter. Academics look at European integration from different angles. It is difficult or even impossible to get around the conclusion that for the voter, it is about economics, or to be rather blunt, about real income. Many attempts have been made — so far without success — to find examples where political or strategic considerations have overruled pure economics. France did not leave the European Union in 1967 after having boycotted the institutions for six months, the United Kingdom did not leave after Labour came into power in 1974 having voted against accession in 1972, nor did Britain do so in 1980 when dissatisfied with its budget contributions, and the hesitation about enlargement with the Central and Eastern European countries was overcome in mid 90s. The controlling factor was, and is, that the integration is indispensable for the economic life of the member states. The politicians will not dare meet the voter if, after severing links with the other member states, there is a decline in real income. It is correct to see the European Union as a strategic venture that in many ways has been path-breaking, but for the citizen, the nuts and bolts matter. No politician has dared to throw grit into the machinery. All the successfully implemented grand designs for the European Union run along the two combined axes of grand strategy and economics. First came the original common policies (Common Agricultural Policy, Customs Union, Common External Trade Policy) established in the 1950s and 1960s when industry and agriculture were preponderant in national

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economies. Then came the first attempt to establish an economic and monetary union — temporarily put on the shelf in 1971 to be invoked again in the late 1980s. It was followed by the harmonization of the rules for value added taxation as a fundamental issue for dismantling barriers. The Single Market was the next step to be launched after national economies had become more sophisticated, influenced as they were by the service sector and high technology. The Euro single currency falls into the same category and followed when national economies had converged sufficiently to make this step viable. The Lisbon programme to revitalize the European Union was added at the beginning of the twenty-first century when globalization exposed the European Union and its member states to much harsher competition. It has proved difficult for the European Union to bring the message across to the population that without the European Union, the living standard of the overwhelming majority of the people would suffer. The European Union is not alone in having this problem. It reflects the classic paradox of small pressure groups suffering from trade liberalization with a negative impact on jobs in selective industries, and the large majority seeing a small increase in their living standards, as competition forces prices of daily goods down. Another reason is that a large part of the mass media in Europe, or at least, in some parts of Europe, has found it attractive to produce negative stories about the European Union. Apparently these kinds of stories sell better than stories setting out success. A French hunter fearing that his game licence might be in danger from what he has heard about the European Union, may well overlook the fact that thanks to the European Union, his living standard is perceptibly higher than would otherwise be the case. Although integration started more than fifty years ago, it has not been possible for the European Union to link its people with the decision-making process, nor has it convincingly made its case, although it cannot be questioned that it has improved living standards. Again and again we come back to one of the most precious lessons from politics: there is a problem if what is presented by politicians differs from the public’s perception. A recent example of how the European Union works illustrating precisely what can and cannot be done is the adoption on 13 December 2005, by the European Union’s Council, of a directive to protect the public from toxic chemicals. It also highlights the interplay between EU institutions and domestic political systems.

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In the awful jargon of abbreviations and technical wording ruling much of the EU daily life, the directive is known as REACH (Registration, Evaluation, and Authorization of Chemicals).18 Companies will have to register the manufacture of all chemicals of which more than 10 tonnes per year are produced across the European Union. This prevents companies from skirting rules by moving production from one member state to another. Imports are also covered to prevent companies shifting from EU production to production outside the European Union and then importing back into the European Union. Complete data records are required for chemicals produced in quantities of between one and ten tonnes if they are cancerous, show high levels of toxicity, or are particularly hazardous in other respects. The burden of proof of whether a substance is damaging or not will lie with the industry. In all, some 30,000 different chemicals are produced in quantities of one tonne or more per year, and some 10,000, in quantities exceeding 10 tonnes. The implementation of the new laws will be monitored by a new agency based in Finland and staffed by representatives from each country. This falls in line with an emerging EU practice to set up agencies to supervise the implementation of many of the EU laws and regulations. Looked at from the perspective of institutional interplay, it is noteworthy that the breakthrough did not occur in the Council with ministers from each country, but in the European Parliament. When a compromise was adopted by the Parliament, it was submitted to the Council, and after some hard bargaining, approved unanimously. The European Parliament managed to assert itself as an important institution and to bring the message across to member states that this matter was simply too important to let slide into political stalemate or oblivion. It can rightly be regarded as a victory for the Parliament and thus for the influence of the populations — the people. In that respect it is a step telling the citizens of Europe that the Parliament actually works as a true parliament. It acts in conformity with the interests of the people, and not as either some kind of puppet for national governments, or under influence of the chemical industry’s pressure groups. Unanimity was achieved because negotiations were pursued until all legitimate interests were taken into account. Thus all member states are stakeholders respecting not only the legal wording, but also the spirit of the directive and what it is designed to achieve. This could be done because the procedure was stopped for some time. The rules did not require this, but Germany, as the European Union’s largest

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and most important producer of chemicals, asked for a pause to reflect on the matter. An unwise presidency might have forced the issue through and obtained qualified majority in the council without the vote of Germany, but it would have alienated the European Union’s most important country in this area at the same time. Instead all endeavours were made to accommodate Germany without jeopardizing the directive itself, thus opening the door for subsequent German approval and consequently leading to unanimity. As in most cases like this one, both industry and consumer protection groups would have liked the directive to tilt more towards their respective positions. However few will dispute that both industry and the consumer will benefit from the directive. The European Union’s chemical industry will now be able to work and invest on the basis of well-known rules instead of operating under uncertainty — an extremely important consideration when faced with investment decisions that run into billions of Euros. Europe’s consumers will see their protection improved and strengthened even if they would have liked more. The main point in this context is that individually no country would have been able to take this step. Cries of distortion of competition would have stopped national attempts. Experience indicates that when the first step is taken, others will follow, so this directive will in all likelihood not be the first and only one, but the first in a series of revisions and amendments increasing safety for the European consumer, and reducing uncertainty for European producers.

AVOID BLURRING THE DISTINCTION BETWEEN WHAT THE MEMBER STATES ARE DOING AND WHAT FALLS UNDER THE COMPETENCE OF THE INTEGRATION Inside nation states there may be some blurring of competences between the local authorities and the central government or federal authorities. In Europe it can clearly been seen in the Federal Republic of Germany where a common theme in the domestic political debate is the distribution of competences between the federal government and the Länder (the German states). In this context two questions come to the forefront. The first one bears directly upon domestic problems, asking whether the distribution of competences and the potential lack of clarity influence the room for manoeuvre when the government negotiates in the European Union. The

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second is to be found where the blurring of competences between the European Union itself and its member states poses problems for the daily work of the EU institutions. Germany, which has to cope with a federal structure, has actually encountered problems when negotiating in the European Union. These problems have arisen if, or when, themes have been on the agenda for which the German Constitution19 has vested competences in the federal government as well as in the Länder. The normal way to proceed in such cases has been to include representatives for the German Länder in the German delegation, presumably after domestic negotiations to shape a “German” position. This procedure provides a preliminary solution, but rarely goes beyond. It does have an answer in cases where a majority of the other member states advocates a decision falling outside what the German federal government and the Länder have agreed as acceptable for Germany. When negotiating issues where the legal basis is qualified majority instead of unanimity, it has been clear to outsiders that the federal government and the Länder did not see eye to eye. The German federal government has for years advocated qualified majority voting, considering unanimity a roadblock for further integration. The Länder, however, were sceptical or outright opposed to qualified majority not because of problems vis-à-vis the European Union, but because they feared being sidelined — not by the European Union — but by the federal government. The argument runs that in the case of unanimity the German federal government is forced to argue the position of the Länder, which in some cases, may not be the same as the one preferred by the federal government itself. If dissatisfied, and if the German Grundgesetz invests them with competences, the Länder can force the federal government to vote no and the proposal is rejected. Qualified majority voting could make the competence and/or position of the Länder irrelevant, as a legal act can be passed against the vote of Germany, thus forcing the Länder governments to transpose it onto German legislation. Looked at from the perspective of the European Union, this is at first glance a problem between the federal government of Germany and the Länder, but to the extent that it influences Germany’s room for manoeuvre making Germany less inclined to accommodate other member states, it becomes a problem for the European Union. The blurring of competences between the European Union and its member states is both a legal and a political problem. It is a legal problem in the sense that uncertainty may arise about the extent of EU competence. As a last resort some member states may be inclined to take the matter to the

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Court of Justice to find out where the line between EU competence and national competence actually lies. Those problems can be solved legally. The political problem is more sensitive. Again the feelings of the citizens vis-à-vis the Union pop up. The citizens cannot understand it if or when the distribution of powers is not a clear-cut issue. It creates not only confusion, but becomes an irritant, if the European Union interferes in areas with which it is felt it has nothing to do. The real political problem is that while the blurring creates uncertainties among the population and is exploited — often in a ruthless manner by those opposed to the integration — it is unavoidable to some degree if the treaties are supposed to work over time. The Treaty of Rome’s Article 235 opened the door for new activities even if they are not directly mentioned in the treaties, provided unanimity among the member states could be reached. Without this article, the European Union before amendments to the Treaty of Rome started with the Single Act in 1987 — would not have been able to embark on an environmental policy, just to mention an example. There have been several attempts to deal with these problems which are also known in the United States of America. In the 1990s the subsidiarity principle was very much in the forefront as a principle, stating that the European Union shall only deal with problems if member states cannot achieve the objective.20 This was a legal solution and it suffered from one of the traditional weaknesses of legal solutions namely, that theoretically it is very clear what it means, but in practice much less so. Despite strenuous efforts, political will, and considerable public focus on this issue, the European Union has not really cut through and unearthed a realistic solution. It is no wonder, considering how federal states such as the United States of America and the Federal Republic of Germany struggle with the same problem, but it does not make the European Union more attractive in the eyes of the population. One of the barriers for solving it, or at least providing a better platform than the existing one, is greater progress towards a federal structure for the European Union by introducing more supranationality for the institutions. But this is precisely what some of the most sceptical and most critical member states do not want. The lesson seems clear enough. In the first phases of the integration, the issue of blurred competences does not arise, but as the integration goes deeper, involving more and more areas, the issue pops up, asking for a solution, which, in an international context, is difficult to provide as long as member states do not wish to set a course towards a federal state.

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THERE MUST BE ONE OR MORE MEMBER STATES ASSUMING THE ROLE OF DRIVER FOR THE INTEGRATION The European integration is built around the Franco-German reconciliation, which gave birth to the so-called Franco-German axis.21 This has often irritated some of the other member states, even if it is an undeniable fact. The British have tried time after time to divide France from Germany, especially during the Thatcher government (1979–1990) when Margaret Thatcher felt she could have a political, maybe even spiritual, companion in Germany’s Federal Chancellor Helmut Kohl, but he never fell for her overtures. The smaller member states including, and in particular, The Netherlands and Denmark, have often voiced their irritation and opposition, but to no avail. France and Germany have hatched all the initiatives put forward since the European Coal and Steel Community came into force in 1952 in common. Other member states, for example, the United Kingdom and Italy, have been temporary members of the “drafting committee”, but never made it as genuine members or partners at an equal footing. During the 1960s the two countries signed the Elysée Treaty as the foundation for the cooperation between France and Germany. After that, they tabled ideas for an economic and monetary union, which ran aground in 1973–74 after the enlargement with the United Kingdom, Denmark, and Ireland, and in the aftermath of the oil shock which threw European economies into recession. During the 1970s and at the beginning of the 1980s, no fewer than four attempts were made to put the integration back on track and to fast track it after the brutal economic downturn in the second half of the 1970s. It succeeded in 1985–86 with the Single Act mapping out the road towards a single market and pointing towards an economic and monetary union with a single currency. One of the reasons — far from the only one — that the European Union after the late 1990s lost steam is the difficulty for the Franco-German axis. Many observers take the view that the tandem worked in a way in which the French Cartesian spirit analysed where to go, and after some persuasion, Germany followed. This is not true; they have always been genuine partners, albeit with the implicit understanding that World War II and Germany’s Occupation of most of Europe dictated that France assumed a higher profile than Germany. As new leaders came on board who have not suffered from the aftermath of having lived during the Second World War, and in many cases, served in the Wehrmacht, this balance has been swept away with the wind.

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During the chancellorship of Helmut Schmidt (1974–1982), Germany started to let its economic preponderance be felt. Since then there has not been any doubt who is the real economic heavyweight of the European Union. The experience gained by the Europeans is that it is not enough to have general support for the integration. Nor is it sufficient for progress that no member state opposes a proposal. Actually very little happens by itself. There is a need for astute political leadership that makes it clear where the integration is going and how to get there. Plans must be devised and they must reflect not only what is preferable, but also what is politically feasible. After this homework comes the hard selling of the plans to other member states, and in the European case, to the European institutions. Without France and Germany as a driving force, first to agree among themselves what is aimed at, then to rally a core group of member states around the idea, and then to take this to the European institutions, it is more than doubtful whether the European integration would have progressed. This goes for the European Union as it does in most boardrooms and other bodies designed for decision making, and undoubtedly, will be so for other attempts at international integrations: a large majority is ready to follow an emerging consensus, only a few and very stubborn members will hold out when isolated. The challenge is to shape the consensus, take the first steps, and come out into the open with the foundation for what can become the consensus. This is what France and Germany did for Europe. It does not mean that the same kind of driver will work for attempts at integration in other geographical areas. A larger or smaller group of member states may work better elsewhere; the driving force may take another shape, depending on circumstances. But the need for the driving force cannot be contested. The difficulty will often be to find a driving force that is acceptable to the rest of the group. In Europe no one really challenged the Franco-German leadership, even if some grumbled from time to time. The heritage of reconciliation served as a testimony, making that particular construction firmly rooted and so, self-evident, in the eyes of the large majority. And the Franco-German axis did not fall for the temptation to steamroll the others, even if they were from time to time accused precisely of that. They played with caution and made sure that the cards they played were to the benefit of the European Union and did not only serve their own interests. Appendix I lists the mechanics of the French German cooperation showing how widespread it has become and how deeply it has penetrated the civic society in the two countries.

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Annex I

THE FRANCO-GERMAN RECONCILIATION From 1871 to 1945 — less than two generations — Europe was ravaged by three civil wars, which saw Germany and France at each other’s throat. After 1945 an astounding, and from a historical perspective, unique, European integration was born out of a reconciliation between the same two countries. The first and indispensable step was the political will. After the end of World War II political leaders in France, in the victor’s camp, and Germany, as the vanquished nation, concluded that war between them must never happen again. They decided to trust each other, forget rivalries, and forsake recriminations. In short, put history behind them and look forward. France did not repeat the disastrous policies after World War I to “punish” Germany politically and economically, but offered cooperation. Germany’s reckoning with its own past was sincere — as the denazification process clearly illustrated — and most important of all, was perceived as such in the rest of Europe. Germany emerging in 1949 as a Federal Republic should not be held accountable for the crimes of the Nazi regime, and most important of all, made every effort to dissociate itself from it. The climax came in 1970 when Federal Chancellor Willy Brandt, himself an exile during the Nazi regime, knelt down in sorrow and repentance when visiting the ghetto in Warszawa where Nazi troops crushed a rebellion in 1943. To achieve the objective, they chose to put their heavy industries (coal and steel) under supranational control in the European Coal and Steel Community (ECSC). By giving up national control over these two industries, unilateral rearmament became impossible. The political leaders of the two countries have constantly taken care to express the political will to deepen the reconciliation and bring the two nations closer together. In 1986 — 70 years after the terrible bloodbath at the French fortification of Verdun where total casualties came up to 400,000 French soldiers and 300,000 German soldiers — the then President François Mitterrand and then Federal Chancellor Helmut Kohl met at the battlefield to hold hands — a symbol of how far the reconciliation had gone. There is a widespread political net of contacts on the basis of the Elysée Treaty signed in 1963. The political leaders of the European Union meet three times a year in the European Council. It is well-known that the two countries coordinate their positions before the meetings, but the mutual trust is deep enough to allow one of them — in special circumstances — to speak

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on behalf of both countries, and during negotiations about difficult political problems calling for decision making at the highest level. But the reconciliation goes far deeper than the political level and is firmly rooted in an extensive network of contacts between the peoples of the two nations. It is astonishing but encouraging to see how the politicians and the populations have managed to push the reconciliation at all levels — it is not a top-down exercise, far from it. The facts reveal a deeply rooted mutual wish among the French and the Germans to bring about a special kind of commonality. The official network is not limited to the government level. Various regions in the two countries (in France les Regions, and in Germany, the Länder) have instituted a network of cooperation, opening the door for consultations and specific projects. An illustration is the network between the French region Alsace, which from 1871 to 1918 was a part of Germany, and two of Germany’s westernmost Länder, Baden-Württemberg and Rheinland-Pfalz. The French region Lorraine, also partly German from 1871 to 1918, has formed a network with the German Länder of Saarland and Rheinland-Pfalz. 2200 agreements among cities to constitute a network of twin cities have been formed. The tourist travelling by road in France or Germany meets at the approaches to every city or town in the two countries a signpost saying X-city and below, twin city Y. In October 2004 the so-called Poitiers process, opening the door for a more organized and goal-oriented structure, institutionalized the system of twin cities. A widespread network has been built up between research institutions in both countries, as has been the case for business networks. In the area of culture the two countries have established a Council for Culture (1988) to give new impulses to cooperative efforts. The best-known example of common activities in this area may be ARTE — a common and bilingual French-German television channel. As a symbol of the reconciliation, 21 January is the chosen date for what is termed French-German date. In 1963 an organization was constituted for bringing the youth in the two countries closer together. Since 1963 more than seven million young people have been involved in programmes of exchange and currently 200,000 participate each year in about 7,000 programmes. After a pilot project the two countries agreed in 1994 to launch a common German-French high school certificate called the AbiBac after the German Abitur and the French Baccaleauréat. More than thirty high schools in both countries offer AbiBac to students.

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In 1999 the German-French University was founded. Its administrative headquarters is in Saarbrücken (Germany) and it organizes university courses in about 100 subjects, currently with 3,000 students enrolled, leading to a binational certificate. The two countries agreed to publish a common history book to be put on the curriculum in schools of both countries. It will encompass three volumes. The first one is scheduled to appear in spring 2007, covering the post-World War II period; the second volume for the period from the eighteenth century to 1945, is scheduled for 2008. The lessons to draw from the reconciliation between Germany and France are: •

• • •

It cannot be done without political will demonstrated in practice, which reflects mutual trust and puts the past solidly behind the countries in question. It helps if it takes place inside a broader geographical integration such as the European Union in Europe. It is not enough to operate on the political level. A determined effort to mobilize the population is necessary. Constant upgrading and innovation are required to keep pace with societal development.

Notes 1. This book does not present an historical outline of the European integration. There are many other books offering that. Those interested in the history of the European integration may start with http://europa.eu/abc/history/1946/ index_en.htm, which gives a year-by-year monitoring of events shaping the integration. 2. That should be the case even when offered an agreement extending some of the advantages of the common market to a non-member nation state. If a nation state could be as well off outside with such an agreement as a full member inside, the lure of membership would dim for at least some member states, in particular, those having joined for economic reasons and harbouring doubts over the longterm political objectives of the European Union. Three Western European nation states have over the years chosen to stand outside the European Union: Switzerland, Norway, and Iceland. For all of them the result of an economic analysis will show that there may be economic benefits from joining, but that such benefits do not weigh heavily on the domestic economy. Switzerland has been able to maintain its position as a high tech country, and the Swiss banking and insurance sector would probably need some

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4. 5. 6. 7.

8. 9.

10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

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restructuring and recasting to respect EU rules, which might have imposed economic disadvantages for Switzerland. Norway is partly a petrol economy seeing possible economic benefits as irrelevant, but instead fearing what EU rules might imply for its natural resources (oil and fish). Iceland is dependent on its fisheries and wishes to safeguard this natural resource for itself. These three countries have all come to the conclusion that by and large, while there may be some economic benefits by joining the European Union, they are not beyond dispute, and in any case, not necessary for maintaining the growth of their domestic economies. For illustration Norway’s relations to the European Union can be traced at http://www.eu-norway.org/eu/news/History.htm which also refers to the EEA (European Economic Area) extending the four freedoms — goods, capital, services and persons — to Norway, Iceland, and Liechtenstein. At the time the British government raised the issue, these two sources were still predominant even if they soon were to be overshadowed by VAT contributions. See Chapter II, point 9, about common financing. European Coal and Steel Community. European Economic Community. Cooperation about peaceful use of nuclear energy. The Economic and Monetary Union’s third and final phase started on 1 January 1999, but the Single Currency (Euro) as legal tender replacing national currencies and available to citizens was introduced on 1 January 2002. International Herald Tribune ‘Slovenia’s Doubts’, 28 December 2006, accessible at http://www.iht.com/articles/2006/12/28/business/euro.php. Denmark did not join the European Union until 1973, but currency rate cooperation was already underway in 1971 and the following remarks aim at describing what happened during the 1970s. Council Regulation 86/1707/EEC. Council Directive 82/501/EEC. Swedish Alcohol Retail Monopoly. http://www.andrewduffmep.org.uk/pages/myth-index.html. http://ec.europa.eu/dgs/communication/facts/gyfs_en.pdf The transmissions of the open sessions can be viewed on the Council website at www.consilium.europa.eu/videostreaming. All figures are from OECD Economic Outlook published twice per year. The text of the seven-year financial framework can be found at http://ue.eu.int/ ueDocs/cms_Data/docs/pressData/en/misc/87643.pdf. The Council of the European Union, Press Release 15168/05 (Presse 333). Grundgesetz from 1949. Paragraph 3B in The Treaty of Maastricht. See for example Bitsch, Marie-Thérèse Bitsch (dir.), Le couple France-Allemagne et les Institutions Européennes (Bruylant, Bruxelles, 2001). Website from the two foreign ministries: http://www.France-Allemagne.fr/www.deutschland-undfrankreich.de.

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2 INSTITUTIONS

THE BASIC MODEL: SUPRANATIONAL OR INTERGOVERNMENTAL1 Intergovernmental cooperation is the traditional form for cooperation among nation states and their governments. The United Nations and the World Trade Organisation (WTO) are examples. These two organizations are among the most advanced and binding forms of intergovernmental cooperation aimed at decisions, which the member states should implement. Most forms of intergovernmental cooperation are based on a loose structure reflecting willingness of countries to sound out other nations, to listen to what they have to say, and if necessary or convenient, to adopt decisions, but regardless of form and substance, decisions cannot be enforced. Decisions are taken by unanimity. If anything, institutions are weak and normally confined to secretarial duties with little or no powers to put proposals forward. The member states and their governments reserve for themselves the right of initiative and to consider what to do in case of non-compliance. Intergovernmental cooperation is a political model in the sense that it is up to the member states and their political systems not only whether they want to take decisions, but also whether to implement them, even if taken by unanimity. The member states guard their national sovereignty — jealously and meticulously. Decisions target nation states and their governments, not citizens and/or corporations. Decisions taken by the United Nations Security 39

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Council and certain decisions by the WTO are binding, but these are exceptions to the rule. An international integration based upon supranationality introduces a rule-based system, where decisions are taken in accordance with an agreed procedure often introducing some kind of majority voting, with strong institutions and binding treaties serving as the foundation for the integration. Not only are decisions binding, they can be enforced. Decisions will often apply directly to citizens and/or corporations in member states, replacing national legislation, and in case of contradiction between the national legislation and legal acts adopted by the integration, the national legislation is overruled. In the European Union, the European Court of Justice has the power to overrule national decisions, if they contradict EU decisions, regardless of whether the said member state voted for the decision, abstained, or voted against it. The two fundamental, conceptual differences between intergovernmental cooperation and international integration based upon supranationality are: Supranationality pools sovereignty to exercise it in common, while intergovernmental cooperation leaves member states to exercise sovereignty alone and in a national framework. Legal acts taken in a supranational context may be, and often are, legally binding for the citizens of the member states, while this is not the case for intergovernmental cooperation. Basically an international integration is tantamount to a legal system operating internationally with the national legal system as its role model. It is no wonder that international integration emerged after World War II, parallel to the strong globalization moving most economic transactions from the national to the international level. A legal and political system confined to the national framework would gradually be void of substance as most economic transactions influencing the domestic economy take place beyond its frontiers. International integration and supranationality mirror the attempt of the political and legal systems to operate on the same level as trade in goods and services, capital movements, and movements of persons. Without these initiatives, the liberalization of global trade, services, capital movements, and movements of persons would operate in a vacuum, transferring power to market forces and robbing the domestic political system of its ability to control the development. In a way supranationality can be seen as a counterattack by the domestic political and legal systems, not against economic globalization, but against decimation of its power brought about by globalization moving economic transactions out of the national framework.

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The word “supranational” must be clearly distinguished from international or multinational. International and multinational are often used randomly and interchangeably. It is normally applied to an enterprise or organization that operates or covers more than one nation state, but still maintains links to a nation state. The United Nations may be the ultimate international organization, but the fact that it is composed of almost 200 nation states confines it conceptually to the world of the nation state. Without the nation states, the United Nations would not exist. Multinational is generally applied to enterprises operating in more than one nation state, but originating in, and having a home base in one particular nation state. It has widened its scope of activities outside the nation state, but is still linked or associated to a particular nation state. Supranational means something else. Whatever its legal or literal meaning, it neglects or operates outside the framework composed of, and defined by nation states. In other words: a supranational activity could in principle take place without nation states. It goes beyond the concept of nation state. A supranational enterprise is, generally speaking, an enterprise operating in many nation states, perhaps even globally. It is without a firm footing, for example, in the shape of a headquarters, in one particular nation state. The European Union has provided for exactly such a basis through the Statute for the European Company,2 opening the door for the legal establishment of a company not headquartered or located in one particular country. A supranational organization, such as the European Union, is an organization or a framework for operating beyond nation states. In short, it subordinates nation states or the member states to the rules of the supranational organization. It can and does overrule national rules. It replaces nation states vis-à-vis their citizens by taking over many of their functions.

THE ROLE OF THE NATION STATE i) The nation state has been THE political entity for a couple of hundred years. The Westphalian Peace in 1648 after the Thirty-Year War is generally regarded as the birth of the “modern” nation state, establishing itself as the flywheel for the political and economic architecture of Europe. It had to wait more than 100 years before conditions for blossoming appeared. It became the twin of the industrial age, providing the political and technical (transport, power, etc.) infrastructure for the transformation from agriculture to industry. Without industrialization, the nation state would not have had the opportunity to grow and assume power. Without the nation state, industrialization would have been stopped in its tracks due to the lack of

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political and technical infrastructure. It was, and still is, the main actor in international power play. At the present juncture in history, its shortcomings and disadvantages start to be more and more visible. It is often too large for questions of prime importance for the individual citizen, while at the same time, too small for global political and economic problems. The nation state is caught between the devil and the deep blue sea. It is neither able to defend its prerogatives nor volunteer solutions to the problems faced by its citizens. It blurs the distinction between cultural identity (ethnicity, religion) and nationality (follow the flag). A brief glance shows that the development of the nation state is at a different level of the curve for political developments in Europe, Asia, and North America. The nation state as we know it today is a European invention. Before the Napoleonic Wars that unleashed the strong current of nationalism in Europe, very few genuine European nation states existed. Germany and Italy were not on the map. The United Kingdom was barely born after two wars in the eighteenth century to subjugate the Scots under “English” rule. France was probably a nation state, but with much more animosity between the composites than normally admitted. The European nation state as it emerged after about 1800 was the fruit of several hundred years of war waged by the majority to keep the minorities under control, and under the rule of the majority. The minorities inside Western European nation states accepted the cultural imperialism exercised by the majority, because the nation state was the key to participation in the international division of labour. It was a quid pro quo. The minorities got their share of the spoils flowing from economic globalization and they rallied grudgingly, but rally they did, to support the culture of the majority as the national culture. ii) The European Union changed all that. And for good measure. The European Union removed the nation state as the gatekeeper to the international economy. Most economic legislations were moved from the capital of the nation state to the European Union. When that happened, the minorities withheld their acceptance of the national culture and resuscitated their own cultural identity. For the last decade or two, Western Europe has seen a strong revival of Catalonia, Lombardy, Scotland, Bavaria, just to mention a few of the old European household names. They want to remove the cultural yoke imposed upon them by the majority governing nation states such as Spain, Italy, the United Kingdom, Germany, most of which have little or no genuine foundation in Europe’s political history.

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Western Europe was saved by the European Union from what might have been an ugly clash between the minority and majority groups inside Western European nation states. And the European Union prevented a similar calamity from taking place in Central and Eastern Europe after 1989 by forcing the majority groups in these newborn nation states to respect human rights, and especially the rights of the minorities, as condition sine qua non for entering the European Union. Such a model as displayed in Europe can be described as Economic Internationalization and Cultural Decentralization. It ensures a reasonable distribution of benefits flowing from the international division of labour among the peoples of the nation state. At the same time, the minorities have the right to flag their own cultural identity. This is the main reason for the weakened nation state in Europe. Some people refute this, but just compare the number of legislative acts passed by the Institutions of the European Union as opposed to the individual nation states, in areas such as industry, trade, agriculture, now and twenty-five years ago. The nation state was invented in Europe, as was the industrial age. The two fit hand in glove. The nation state provided the political infrastructure to industrialize, and provided industrial nations with the government, federation of industry, trade unions, and the legislative framework to distribute the benefits. An elaborate political decision-making process was set in motion and worked. At the same time the nation state offered a home market for the output of industrial production without which early industrialization would not have taken place, and the technical and transport infrastructure, without which further industrialization would not have been possible. Precisely at the moment when the industrial age is on its way out, so is the European nation state. Europe is actually forging a new and own political and economic architecture with a limited role for the nation state. Even its prerogative to strike currency, to form an army, and run its own judicial system is slipping away. iii) In Asia the nation state often acts as the defender of the minorities against the majority. The Asian nation state has been indispensable in promoting economic growth in the last generation by masterminding the transformation of hitherto economically backward countries into industrialized nations and engineering their entry into the age of the service society dominated by advanced technology. The difference between Europe and Asia is that the European nation state holds back development, threatens stability, and needs to be replaced, or at least supplemented, by a new political infrastructure, while the Asian

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nation state promotes development, ensures stability, and feels little or no need for supranational institutions. The question for Asia is whether this happy coexistence with the concept of the nation state will persist. The United States of America is generally regarded as a nation state, but functions as such only in certain areas. It constitutes the framework for a home market and much better so than is the case in Europe. The mobility of labour within the United States is one of the best, perhaps the best, in the world. Although the nation state does not play the same role in Europe, Asia, and North America, it faces the same problem and challenge: diminishing capability to serve as the exclusive framework for solving the problems of the nation state itself and its enterprises and citizens. The transformation from an agricultural to an industrial society, both more or less confined to the national world, and then into the Information Communication Technology (ICT) society thriving in a globalized world, shifts the focus from the nation to the well functioning of society and communities, regardless of whether they operate as a part of the nation state or the international community. It is interesting to note that Europe was first with industrialization and the nation state, the combination of which has dominated global politics and economics for several hundred years. The exciting question is whether Europe’s next first, this time with the supranational model, will come to dominate global politics and economics or be classified as a model suitable for Europe, but not for the rest of the world.

THE CONCEPT OF SOVEREIGNTY IN TODAY’S WORLD i) The leading politicians in Europe have acquiesced in the diminishing role of the nation state. The question they faced was to select one of two alternatives: Either to transfer political power to the European level (international level) thus maintaining some, but not all, of their power. Or to deny the impotency of the nation state, clinging to symbols of power, learning the hard way that symbols carry little value in the power play. They made their choice: alternative one. It is a misunderstanding and, regrettably a common misunderstanding, that the members of the European Union have abandoned or surrendered some of their sovereignty by joining the European Union. This is not correct. They have transferred/pooled some of their sovereignty to exercise it in common with adjacent nation states sharing the same basic values and political systems.

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They have realized two core notions and implemented them in actual politics: • •

Power is not confined to one level. It can be exercised at various levels and simultaneously. Power is not static confined to its original box. Depending on how and with whom, its exercising power can be enhanced/increased.

And they have rejected the old and worn out interpretation of sovereignty as an absolute value. Formerly, sovereignty was perceived inside a national context as the nation state’s defence at the geographic border against intruders, be they military, economic, or cultural ones. Sovereignty defined the rules they had to obey and respect to operate inside the nation state. If they were not willing to do so, they stayed away. In the international world this attitude is gone with the wind. The intruders are no longer a threat, but enriching the national society. If they go elsewhere, they impoverish the nation state in question and augment the wealth of competing nation states. Reluctant and declining nation states are relegated to play in Division Two. In a global world a nation state has no, or at most, limited room for manoeuvre to introduce and implement legislation running counter to the path chosen by adjacent countries and the international community. It may do so and some have tried. In most cases international investors shied away and trade and investment flows were steered elsewhere. To safeguard the domestic policies preferred by a nation state, national legislation must match international rules and/or an international environment. In case of contradiction, two options obtrude themselves upon policy makers: either to change the international framework by negotiation, or abandon the proposed national legislation. To carry the legislation through nonetheless is not commendable. ii) We may speak of a new kind of sovereignty. It is defined as the room for manoeuvre achieved by the nation state to introduce national legislation in conformity with, and not in contradiction to, international rules and international norms. The more spacious the room for manoeuvre achieved, the more sovereignty is encroached on — with sovereignty understood as the ability to implement national legislation in a global world. It is an outside edge. Formerly a nation state protected itself by national legislation, raising conditions for the outside world to operate inside its borders. Now a nation state initiates international legislation, opening the door for subsequent national legislation and not risking international legal confrontation.

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It is no longer a question of the nation state and its borders. It is a question of our society, and latitude available to shape our own society that reflects our own political preferences. Sovereignty is no longer defensive and is no longer a question of imposing rules, restrictions, and conditions on foreign intruders. It is a question of offensive diplomacy, political canvassing, and manoeuvres on the international stage to safeguard your own interests by influencing the international system. iii) The analysis can be taken one step further. It becomes more and more crucial to harbour enterprises, persons, and civic society at the upper end of the value added ladder. They are all extremely mobile and extremely choosy. Those nation states and/or global cities attracting trendsetters will reap hefty economic benefits. Sovereignty must be exercised in a way that even if enterprises, civic society, and communities live in the nation state, they can function in the globalized world. Again the point is not the national society, but society and/or communities thriving and operating inside the nation state regardless of nationality or other affiliations. Sovereignty must not block, but give access to the global world. If nation states pursue and adopt a definition of sovereignty disregarding this, the players will move to another place. If we dare redefine sovereignty as the ability to shape civic society and communities living inside our nation state in accordance with political preferences, three factors stand out: Have an active policy to make sure that there is congruity between international rules and own national rules. Participate in economic internationalization to obtain financial resources for the nation state to pay for the development of society. Realize that a lucrative mass of enterprises and persons move from place to place and may stay in one place only for a while, with the implication that rules and privileges for this segment of society go beyond frontiers. Attaining the rights to potential benefits, but not necessarily exercising them, should not be conditioned on their physical presence on the premises. The keyword in a redefinition, or rather, new definition of sovereignty, is not to look at privileges exclusively for those living and operating in the nation state, but for those adopting more or less the same set of values and lifestyle, and accordingly, potential citizens of the nation state. iv) In a longer term perspective, sovereignty may be a question of equal rights, privileges, and obligations for enterprises and persons regardless of where they actually live. The world becomes international in the sense that they can choose between options, for example, offers put forward by various nation states The role of the nation state may be first to put forward its offer

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and then negotiate appropriate agreements with other nations states and/or international organizations to secure mutual respect and recognition of such rights, privileges, and duties. The players choose the sovereignty under which they want to operate. The nation states in cooperation with international organizations establish the appropriate international legal framework. This may be a long way ahead, but is the underlying explanation for the problem many nation states face when grappling with sovereignty. As the world develops into a global community, confinement to national borders and defence of national privileges become a relic of the past. Instead of protecting the nation state, enterprises, institutions, and persons inside and affiliated to that particular nation state, sovereignty becomes an instrument to safeguard the right, privileges, and obligations of enterprises, institutions, and citizens, regardless of where they live. The safeguard for this development and its existence in practice will inevitably be some kind of international supranational institution. Formerly the nation state exercised sovereignty to ensure a certain set of values inside its borders. The potential threat came form outside. Those who were “protected” so to speak, whether they wanted it or not, were the players — enterprises, institutions, and citizens. The nation state ensured safety and stability in their surroundings and required as a quid pro quo loyalty, that is, no attempt to escape sovereignty as defined by the nation state. Conceptually, the players — those who actually control the development and accordingly wish to protect themselves against unwanted repercussions from other players or to secure room for manoeuvre, exercise sovereignty. In the industrial world governed by national interests, the players were the nation states and they exercised sovereignty. In the present world going through a transitional phase, the players are the enterprises, institutions, and civic society that are operating internationally or globally gradually, but surely, starting to exercise sovereignty. v) The political and emotional challenge for the nation state is to square the circle by realizing what sovereignty means in the global world without jeopardizing the way of life of those citizens not wishing to live in the globalized world. This may lead to a kind of dual citizenship or shared sovereignty, in the sense that some parts of the population are content with a more old-fashioned concept of sovereignty and citizenship that neither extends the rights and privileges to, nor imposes obligations on them that are associated with the globalized world. This challenge explains why the European Union has introduced the pooling of sovereignty, but limited it to well-defined, specific sectors of economic life. Where necessary, even imperative, to defend interests in a

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world shaped by economic globalization, sovereignty has been pooled that present member states (the nation states) with the advantages outlined above. But important sectors such as social welfare and income distribution have been maintained as the prerogative of the nation state under the legal and well-known definition of sovereignty preserving the right to decide. Neither the nation state nor its citizens have wished to dispense with their “sovereign” right to decide for themselves in these sectors. So far the European attempt to dichotomize has been successful: pooling sovereignty in some areas, keeping sovereignty in other areas.

EU INSTITUTIONS Overview The method chosen in the following for description, analysis and evaluation of the European Union’s institutions is: • •

To compare with a bicameral system To maintain as the starting point the decision-making model from the Treaty of Rome in 1958, as it distributed powers among the institutions in clear and unequivocal ways, and afterwards turn to how the European Parliament has encroached on the powers vested in the Commission and the Council.

This method illustrates how the decision-making model and the institutions have become a target for the political process driving the integration. i) The theory of separating power operates with three branches: the executive (or government), legislature, and the judiciary. Many observers will reject such a comparative approach because they do not want to analyse European Union in the context of federalism; however much confusion about how EU institutions work can be avoided by choosing this itinerary. The European Union does in principle operate a bicameral system comparable to the U.S. Congress despite all specific and concrete differences. The European Parliament can be seen as something like the House of Representatives, and the Council of Ministers as some kind of a Senate. The EU institutions do interact in the same way as the U.S. bicameral system, and broadly speaking, the model is the same. The population is represented in one chamber, the states in another. In principle, legislation cannot pass without being debated and approved in both chambers. The European Union has instituted a Court of Justice, which broadly speaking, is comparable to the U.S. Supreme Court.

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The main difference is that the European Union does not possess a onestring executive branch/government, as is the case for the United States. In the European Union, the executive function is shared among several institutions: the European Commission, the Council, and the national executive branches. ii) The EU institutions are designed to support a rule-based international integration, where member states exercise their sovereignty jointly in a specified number of areas. Its primary function is to frame legislative acts binding for all member states, regardless of whether they voted yes or no to the proposal. The original decision making takes the following course: a proposal is drafted and forwarded by the Commission that is vested with the exclusive right of initiative. It is submitted to the Council for taking the final decision. The Parliament submits suggestions and amendments to the Council. Depending upon the specific circumstances, the Council adopts or rejects these suggestions/amendments. Other institutions submit opinions, but only the European Parliament can force the Council to deliberate on its amendments. In case of legal disputes, the matter is taken to the Court of Justice. With one exception, the basic principles of the decision-making procedure and distribution of powers among institutions have not been changed since the Treaty of Rome came into force in 1958, despite the Treaty being more than 50 years old and the European Union enlarged from six to twenty-seven member states. The exception is a visible and tangible increase in the powers of the European Parliament, which had little or no influence in the first decades, and was merely designed as a consultative body and not a partner in decision making; something parliamentarians did not acquiesce with. The European Parliament has managed to weaken the Commission’s exclusive right of initiative and emerge as an almost equal partner to the Council in the legislative process, thus weakening the Council’s exclusive right to adopt legal acts. iii) Supranationality and impartiality require proposals designed to solve problems in a European context. This explains why the Commission obtained the exclusive right of initiative, which was withheld from the Council and member states (except in the case of treaty amendments). Legislative acts are binding as law within each member state, and may require national legislation for implementation, which makes it indispensable for member states as a collective body to possess the ultimate power to adopt or reject proposed legislation. This is why the Council was originally given the exclusive and ultimate say in decision making. At the same time the

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Council is where the balance between the large and the small member states is allowed to influence decision making. The right of veto for each member state in the Council can be essential when very important decisions — vital matters — are at stake in order to provide the necessary mutual confidence. The EU experience, however, suggests that with an ever-larger number of member states, such a right becomes unmanageable. More importantly, the building up of trust among member states has made the veto right less relevant. Inspired by federal states, the European Parliament has gradually achieved co-decision on legislative matters so that — as mentioned above — the Council moves towards a State Chamber, and the European Parliament, a Peoples Chamber, both of a conceptually bicameral parliament. As a rule-based integration, it is inevitable that legal disputes will arise, and so there must be a body that has the competence to cut through the arguments and decide the issue, hence the Court of Justice. Access to the Court has not been limited only to member states and the EU institutions. Individuals can rely on European law, even against their own governments, and bring cases to the Court of Justice. The importance of this for the success of the European integration should not be underestimated. The institutional structure follows quite closely the requirements of a supranational construction. It has proven its worth in practice and withstood many crises since the Treaty of Rome came into force — a clear evidence of its inner strength showing how robust the construction actually is. It is remarkable that institutions and decision-making processes designed originally to deal with customs duties and agricultural prices have been able to assist the birth of the Single Market and a Single Currency (Euro). The European Union has proliferated beyond economic issues and taken up Justice and Home Affairs plus Foreign and Security Policy. Only selected parts of these two sectors were originally subordinated to supranationality. The resistance to apply supranationality and the pooling of sovereignty was significant as nation states moved from traditional economic issues to judiciary, police activities, and armed forces, but seems to have evaporated at least as far as the first two issues are concerned although they still are intergovernmental. iv) For a long time the European Union has operated with what is called its three pillars. Pillar one constituted by the original Treaty of Rome and its amendments is primarily of an economic nature, with the well-established institutional structure mentioned above. Pillar two (Common Foreign and Security Policy) and pillar three (Justice and Home Affairs) are incorporated in the treaties since the Treaty of Maastricht

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and make use of EU institutions, but do not fully work on the concept of supranationality. By incorporating them in the treaties and letting the two pillars use the same institutional structure, albeit with different rules and procedures, the implicit message is that they might in due course be transferred in full to supranational decision-making. This process is nearly completed for Justice and Home Affairs. The decisive step was taken with the Treaty of Amsterdam,3 leaving a small portion of what used to be intergovernmental cooperation under that heading and moving most of the items to decision making that is subject to supranationality — pillar one. On top of this the present treaty4 contains provisions for the transfer of the remaining items, conveying the message that in due course all items under Justice and Home Affairs may be dealt with under the supranational part of the treaties.5 In a few key words, it can be said that the core of sovereignty is being questioned, when a nation state contemplates the pooling of sovereignty for its money, its legal system and police, and its armed forces. The member states of the European Union have said yes to a single and common currency. They are in the midst of a process transferring competence concerning legal matters. The remaining bastion for national sovereignty in the old-fashioned way is the armed forces.6 It is interesting to see that intellectually and politically, the pooling of sovereignty is linked to the challenges. In the early stages it was clear that the European nation states were interdependent economically. Whatever they thought, the scope for independent policy making was limited, very limited indeed. What one nation state did, had repercussions on the rest. The jump to exercise sovereignty in common was not big. It commended itself and could be explained both politically in the national parliaments and to the public. In the last decade of the twentieth century and beginning of twenty-first century, this already belongs to history. It is barely questioned outside the circles of convinced, faithful, almost fanatic anti-Europeans who, whatever happens, will always argue that the integration and “Europe” is a bad thing to be shied away from at all costs. Now the focus is on human security inside the nation state and external security in the sense of being able to keep potential enemies at bay. When these threats grow and it intellectually becomes rather obvious that neither human security at home nor security from terrorists abroad is possible for the nation state in isolation, the support for a supranational model to replace the ineffective intergovernmental one will grow steadily.

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Supranationality and the exercise of sovereignty in common do not only present themselves as an appropriate model, but as the only one if the nation state wants to guarantee its citizens the security and stability they crave. Terrorism is an international/global phenomenon. No country can shield itself from being hit. Terrorism does not recognize borders and nation states. If the nation states themselves operate inside a national straitjacket, terrorists will be the main beneficiaries. Military threats have changed from outright fear of aggression exercised by one nation state to a question of stability for the whole geographical area. For both internal and external security the message is that either all countries are secure or no one country is. It is incomprehensible to see one country maintaining human security inside its borders, free from fear of instability imported from adjacent countries that are living with insecurity and fear. The interdependence has jumped from economics to home security and external security. The attitude vis-à-vis supranationality and the pooling of sovereignty is shaped by these changed circumstances and rightly so. Who dares to neglect the imperative of the development? Certainly not the political leaders. They do get together and agree on one treaty amendment after another. The sovereignty they pool to exercise in common has been amassed by the nation state they represent over time and they themselves have finally, after years of political struggle, got their hands on the wheel. They give their nod not because they enjoy it, but because they realize that this is the only way to maintain some power in a world becoming more and more global and where almost all players of importance be they economic, political, or ideological have escaped national control. They face a dilemma to which they have all, possibly with Margaret Thatcher (Prime Minister of Britain from 1979 to 1990) as an exception, given the same answer: defend the nation state’s prerogative and relish symbolic power, or exercise sovereignty in common and have some clout to influence the political and economic environment. At the next election they will primarily be judged on how good they have been in delivering a better life for the citizens. They have chosen option two. It delivers results. They have not done so because they like it, but because at the end of the day, staring into the crystal ball, the signal reads: no alternative.7

Commission i) The Commission is the real unique piece in the institutional jigsaw of the European Union. As an institution it acts independently of the member states. Its two main competences are:

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a. Having the exclusive right of initiative to put forward proposals for legal acts. The Treaty of Maastricht diminished this exclusive right somewhat, giving the European Parliament, with a majority of its members, the right to request the Commission to put forward a proposal, which it considers necessary for the purpose of implementing the Treaty.8 b. Being the guardian of the treaties, to ensure that member states are respecting the treaties and legal acts adopted, and if not, take the necessary steps to achieve compliance. Presently all twenty-seven member states are represented in the Commission. As the Commission has the exclusive right of initiative, it is deemed necessary for each nation state to appoint a member. When the Commission approves a proposal or takes action against one or more member states for non-compliance with the treaties, a citizen who knows each nation state from the inside is present. If not, member states would feel antagonized from the very beginning. The other side of the coin, as we will see later, is that an increasing number of members make the Commission too unwieldy to function effectively and efficiently. It is recognized in the Treaty of Nice9 that when the number of member states reaches twenty-seven, which happened in 1 January 2007, the system must be changed to reduce the number of members of the Commission to fewer than twenty-seven, or the number of member states.10 The reasoning behind this is that a Commission with twenty-seven members would not be workable in practice. It is, however, recognized that a system of rotation should be worked out so that all member states are placed on equal footing. In other words, the decision reflects that the larger member states will not get priority over the smaller ones in the rotation11 system. With this model the European Union tries to square the circle: making the Commission workable while at the same time ensuring representation for all member states on an equal footing, and paying the price that all member states will not be represented at the same time. When appointed all members of the Commission swear allegiance to the European Union and give a solemn pledge not to be guided by national interests. This is a commendable objective, but rarely followed in practice where the individual commissioner has to strike a balance between the European imperative and the national necessity. When the Commission deliberates proposals, it is expected that each individual commissioner knows his or her nation state and can judge with a certain degree of accuracy how it will react. This knowledge can be incorporated in their stance without letting themselves be seduced by national interests.

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The scoreboard of the Commission and individual commissioners are actually not bad in this respect. There have been cases where a commissioner has rather obviously lost the balance and has rightly been accused of favouring his/her nation state, but these cases are exceptions to the rule. ii) The Commission is supposed to be the driver of the integration, keeping it going and deepening the integration. A pile driver so to speak. It is, and does not work like a secretariat, but an individual institution. While each member state appoints a member of the Commission, the President of the Commission is appointed by all member states at one of the regular meetings of the Heads of State and Government in the European Council. The President of the Commission is vested with the powers to allocate portfolios12 — the sector for which a member of the Commission assumes responsibility — among the members appointed by the member states. In practice it cannot be done without a certain amount of flair for political realities reflecting the power and influence of member states. It gives the president considerable power over the Commission and its members, making him/her potentially powerful. The Commission acts in unity. If unanimity cannot be achieved inside the Commission, a vote is taken. Commissioners in the minority are bound by the decision of the college, as it is called in EU jargon. All members of the Commission, regardless of what they think, must support proposals or policies adopted by the Commission. Over the years the political climate vis-à-vis European integration has had considerable influence on the role of the Commission. The member states have signalled whether they wanted a strong or a weak Commission by the person nominated to lead it. Under its first president (Walther Hallstein from Germany from 1959 to 1967), it played an extraordinarily strong role and can claim much of the credit for the initial successes of the European integration. When the European Union was enlarged in 1973 with the United Kingdom, Ireland, and Denmark, it was clear that the integration of the newcomers would not be an easy one. The president chosen was the former French Minister of Finance, François Xavier Ortoli, who masterminded this difficult task and challenge with great skill. His attempts to push the integration further were, however, thwarted by the uncertainty following this first enlargement and the negative impact on the European economies of the rise (300–400 per cent) of oil prices after 1973/ 74. The next strong president was also a Frenchman and also a former Minister of Finance, Jacques Delors, who was the intellectual and political power behind the Single Market and the plans for introducing the Euro. His greatest asset was a deep understanding of building a coalition around a number of powerful member states to shape an unbreakable phalanx behind his proposals and ideas. He managed to push the integration through

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further and give the European Union a much-needed political status and respect despite the animosities he evoked in anti-European circles, especially among Euro-sceptics. He was always conscious of the need for the European Union to act like a problem grinder. Though he is most known for his great ideas and plans, his reputation among member states was equally based upon his readiness to listen to the problems of individual member states and rally the Commission behind a course to solve them. Another arrow in the quiver of the Commission is its role as guardian of the treaties. The Commission must make sure that all member states respect the treaties and implement the legal acts approved by the Council in a way reflecting their purpose. It is the Commission’s duty — not only right — to take a member state to court in case a member state does not fulfil its duties. iii) The Commission’s staff of civil servants are, like the Commissioners, bound to work in the interests of Europe as a whole and not pursue the interests of individual countries. The staff are recruited from all member states by one or two annual examinations (“concours” in the EU jargon). While member states at the beginning of the integration had a certain influence on the appointment of higher officials in the Commission, this is in practice no longer the case. The high officials (the highest post is DirectorGeneral) are nominated from within the staff and not from the civil service of the member states. Political realities, however, are such that “strangely” enough, all member states used to have a national citizen in one of the posts as Director-General.

Council/European Council i) While the Commission sits pretty with the exclusive right of initiative, the Council sits just as pretty with the exclusive right to decide on proposals submitted by the Commission. It may require a cumbersome consultative procedure and the internal rules of the Council itself may be tiresome, but politically, the Council decides whether to approve or not to approve a proposal. The co-decision between Council and Parliament may make it impossible for the Council to decide on its own in a large number of policy areas, but can never serve to force an adoption against the will of the Council. The superior conceptual role of the Council can be glimpsed when reading that the basis for the final meeting between the Council and the European Parliament is the Council’s common position.13 In short, the Commission determines what the Council decides upon. Without a proposal from the Commission, there is no basis for deliberations and/or decisions in the Council. Without a decision by the Council, the proposal put forward by the Commission continues to be just that, a proposal.

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ii) Members of the Council are ministers from the government of each member state. In principle, there is only one Council, signifying that the composition of different ministers does not affect the status of the Council. In the early days of the integration, going back to the 1950s and part of the1960s, the Council met with uniquely Ministers of Foreign Affairs in its composition. Since then, the Council meets in as many configurations as there are ministers in the national government, but still as the Council exercising its rights under the treaties. Its composition does not have any bearing on its competence. It is normal practice that the formal adoption of legal acts (after all negotiations are finished and after the text has been legally scrutinized and translated into all official languages) takes place in the next Council meeting regardless of its composition. To illustrate: the Ministers for Environment may, and actually do, formally adopt legal acts negotiated by the Ministers for Foreign Affairs, and vice versa. An item that keeps returning to the agenda for political control of the integration is the question of whether member states should appoint so-called Ministers for Europe, who could assume responsibility for much of the work being done in the Council in various configurations. The idea, albeit attractive, has never been viable. The reason is not difficult to see. If these ministers should negotiate on behalf of ministers having competence in the national context, a split of responsibility would appear. Suppose the Minister for Trade and Industry in a member state takes a strong view on a specific item and has informed the national parliament of this and then another minister is negotiating on his/her behalf in the European Union, and giving way on one or more important items? Who should shoulder the ministerial responsibility for the outcome? If the Minister for Trade and Industry is finally responsible, he/she will never accept that somebody else negotiates on his/her behalf. If the Minister for Europe is responsible, the Minister for Trade and Industry finds his/her domestic political power eroded. The linking together of the national domestic political systems and the EU political systems compel continuity and coherence in ministerial responsibility and competence from the national scene to adoption of EU legal acts. iii) The competence of the Council must be seen in the context of the influence on its decision making, of the Commission and the European Parliament. The Commission by its proposals draws the boundaries for what the Council can decide. The normal rule is that the Council can only change a Commission proposal with unanimity.14 The Council’s powers to change Commission proposals are limited by giving the Commission the right to withdraw proposals. If the Commission exercises that right, no proposal

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exists any more and the Council cannot decide. It has quite often been seen that the Commission threatens to withdraw its proposal if the Council intends to deviate too much from its proposal. It has been equally frequently seen that this threat is sufficient to keep the Council’s deliberations within the limits of the Commission’s proposal. An inventive interplay between the Commission and the Council takes place in the technical implemention of common policies. The starting point is to combine the Commission’s competence as the institution putting forward proposals and the Council’s role as the institution with powers to decide. Illustrations of this are specific data in many of the regulations governing the Common Agricultural Policy, and specific projects funded by the European Union’s Regional or Social Fund. These are not political decisions, but as they influence the daily lives of those concerned, they have political consequences (farmers cannot be indifferent to the prices they are paid, recipients of funds to project cannot be indifferent to whether the project is approved or rejected). A special, often tricky, complicated, and tiresome procedure has been put in place. If powers to implement were given to the Commission alone, member states would feel deprived of insight and the possibility for influencing the way common policies are run. No other body is available, however, for this tedious task. The compromise invented lets the Commission implement these policies, but under a supervisory body called the committee procedure. The Commission takes a decision, which is forwarded to a committee of representatives from the member states. Unless the decision is rejected by the committee, it stands; in other words, a majority and, in most cases, a qualified majority needs to take the initiative to reject the Commission’s decision. This is some kind of common denominator between the legitimate interests of the member states and the competence and role of the Commission. Over the years the procedure has been elaborated and many different combinations of prior or ulterior approval and different kinds of majorities have been invented. Basically the model is unchanged: the Commission decides; this decision stands unless a majority of member states stops or rejects it.15 iv) The Council is the member states’ institution. This is where the member states are represented by their ministers. This is the institution that can block or approve proposals, but not itself take initiatives. Again political realities have their say. This worked completely according to script until the late 1960s. Then a feeling arose that while ministers met quite frequently, the Prime Ministers — and Heads of State in those countries, primarily France, where the President holds genuine power — were kept outside the political process of

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European integration. This was a surmountable problem as long as the European Union confined itself to basic economic, industrial, and agricultural topics, but the gradual move towards more and more political influence made it an anomaly. The enlargement deliberations in the 1960s with the United Kingdom, Ireland, and Denmark and the great plans for an economic and monetary union, already accentuated this feeling at that stage. In the late 1960s the Heads of State and Government met twice. The first meeting held in Rome (1967) to celebrate the tenth anniversary of the Treaty of Rome was exclusively about ceremony.16 The second one held in the Dutch seat of government, The Hague, became a milestone. At this meeting the political leaders drafted a conclusion setting out directives for the future political development of the European Union.17 To prepare for the enlarged European Union, the third summit was held in Paris in October 1972 with British, Irish, and Danish participation, and produced a long text stipulating the way ahead for the enlarged European Union.18 The meetings among the Heads of State and Government became known as the European Council. Since the 1970s the European Council has developed into a forum drafting the guidelines for the European Union. When the meeting starts the President of the European Parliament sits in for a short introductory speech, but is not a regular member. The President of the Commission is a member of the European Council on an equal footing with the Prime Ministers. The European Council can act as the Council mentioned in the treaties (adoption of legal acts), but very rarely does so. It is, quite simply, not the job of the Heads of State and Governments. But political agreements are often reached among the political leaders, when the Council in its configuration of other ministers, has failed to do so. The plain fact that the most important matters go to the European Council if the Council cannot agree, means that many of these questions actually land on the table staring at the Heads of State and Government. They in turn refuse to deal with technical issues, reserving for themselves only the task of overall political responsibility. The European Council may sketch the political agreement and cut through many, if not most, of the politically difficult issues; afterwards the technical implementation and formal adoption take place in the Council. The European Council quite frequently invites the Commission to put forward a proposal about this or that topic. Strictly speaking this encroaches upon the Commission’s exclusive right of initiative, but over the years the Commission has found it wise to comply, understanding the political realities

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and not insisting on formalities. The President of the Commission is present to ensure that the voice of the Commission is heard. He can and actually does exercise a certain, not negligible, influence on what kind of requests and how these are worded are penciled into the conclusions. These conclusions have gradually become some sort of roadmap for the European Union.19

The European Parliament i) The European Parliament is the institution that has — and by far — changed most since the start of the European integration. Until 1979 it was not called a parliament, but an Assembly. This name was “borrowed” from the French l‘Assemblée Nationale, which is the one of two chambers in the French bicameral system. From the start, logic spoke in favour of seeing and classifying the Assembly as one of two chambers, but it would have been misleading in the early phases of the integration as the Assembly had no real powers. A parliamentary system either operates with two chambers, each having its respective competences, or one chamber possessing all parliamentary powers. But the Assembly fell outside both definitions. In the early phase of the integration the Assembly was constituted by indirect elections. National parliaments selected some of their members to take part in this consultative work. As politicians are normally quite ambitious and wish to have real and genuine influence, this was not the most sought after job among members of national parliaments, who were looking for influence and a role in politics. The Assembly looked destined to degenerate into some kind of secondrate institution, attracting politicians, who either did not see any career ahead of them in national politics, or had their careers behind them. This risk paved the way for the change of name to the European Parliament and direct elections. A large majority of the member states wished to engage their populations in the political decision making of the European integration. Changing the name from Assembly to European Parliament, while at the same time switching to direct elections, was thought to strike a chord with the public. A more complicated name would have strengthened the notion among the population that decision making in the European Union was cumbersome and a thing far beyond their reach. ii) There are 785 MEPs (members of the European Parliament) chosen by direct elections taking place on the same day(s) in all member states. It sits for five years. The last election took place from 10–13 June 2005; the next

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one is scheduled for June 2010. The members of parliament are elected on a political, not national platform, which explains why the European Parliament works like a national parliament with political groups shaped by political convictions and not affiliation to nation state(s). Members can be elected to the European Parliament in a member state without being a citizen of that particular member state. The largest political group is the EPP-ED (called the Christian Democrats) with 277 members. It is the only political group in the Parliament having members from all member states of the European Union. The second largest is the Socialist group with 218 members from twenty-five member states. The third largest is the Liberal group with 105 members, and number four is the Greens (for improvement of the environment), followed by three more groups. The European perspective is reflected by the fact that members have formed political groups reflecting the political spectre across Europe, instead of sitting according to national criteria. The Assembly highlighted this practice to bring across two political signals. First, that the Assembly, and later the Parliament, regards itself in principle as one of the two chambers in a European bicameral system, however embryonic, in the first two decades of the European Union. Second, that positions taken in the European Parliament by the MEPs mirror political and/or European views, not national positions. The European Parliament, as the Assembly in the early days, constitutes the channel for the people to voice their opinion regardless of nationality, while the other chamber — the Council — constitutes the channel for the states to do so. To underline that the European Parliament works in the same way as national parliaments, committees are doing most of the daily work and submitting recommendations to the groups before Parliament itself votes. The parallel to national parliaments is accentuated by the questions and answers procedure in the Parliament. Both the Commission and the sixmonth acting presidency of the Council are summoned by Parliament to a session of questions and answers that can frequently be quite rough for the members of the Commission or the minister representing the Presidency. The main powers vested in the European Parliament are its role vis-à-vis the nomination of the Commission, a complicated consultative procedure vis-à-vis the Council leading to co decision, and the influence on the budget of the European Union. iii) When the European Council has appointed a President for the Commission, he/she must be approved by the European Parliament. After nomination of the full Commission, it too has to be endorsed by the European Parliament. A thread often seen in the powers vested in the European

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Parliament is that its powers to block outweigh its powers to initiate and/or decide. Not surprisingly, the Parliament goes to the extreme to find out the political programme of the newly-born Commission. The threat of rejection is used effectively as a weapon to force the Commission to pledge a policy that conforms as much with the preferences of the parliament as possible. When the current President of the Commission José Manuel Barroso, was nominated, the debate was quite long and arduous. Even if very few found it credible, the Parliament actually rumoured the threat of ousting him before he had even taken office, on the grounds of general dissatisfaction with his political programme! It is interesting in the context of political science to observe how the MEPs manage to overcome differences due to political orientation (Christian Democrat, Socialist, Liberal etc.) and get to an agreement on a large number of issues looked at from a European perspective. The Parliament has taken it upon itself to drive the European integration, often criticizing the Commission for not being European enough and submitting too easily to shallow and harsh political realities expressed in the Council. After nomination by their governments and approval by the Presidentelect of the European Commission, each Commissioner meets the relevant committee of the European Parliament for a hearing, which in some cases can look almost like an American style grilling. The Parliament cannot reject a nominee for the Commission. However reality is not exactly as stated in formality. In October 2004 Russo Buttiglione, nominated by the Italian government as member of the Commission to take office at the beginning of 2005 and approved by President-elect Barroso for the Justice, Freedom, and Security portfolio, met the relevant parliament Committee.20 During the hearing, lasting more than three hours, he voiced views on homosexuality and family matters that caused an uproar. It soon became clear that if his candidacy were upheld, Parliament would not approve the Commission as such. The Italian government drew the relevant conclusion, undoubtedly after behind closed-door deliberations with President-elect Barroso and possibly other member states, withdrew his candidacy, and nominated another person. In reality, the Parliament rejected an individual Commissioner without having the formal powers to do so.21 The Parliament can dismiss the Commission. As the Commission is a college, no individual member can be forced out of office (only the Commission itself has the right to force an individual member to resign), but the Commission as a whole can be thrown out by Parliament. Formally it has never happened, but in 1999, the then Commission headed by Jacques Santer was so heavily censured by the Parliament that it chose to resign itself.

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The Parliament has no powers to dismiss individual members of the Commission, but by threatening to dismiss the Commission, it can exercise pressure on the President of the Commission to force individual members of the Commission to resign. Finally Parliament has obtained a certain leverage over the Commission with the right to request the Commission to put forward a proposal, albeit it is not yet clear how far that right can be stretched. iv) As the Parliament gained in influence and powers it also got de facto influence on the EU’s legislative process through the existing consultative procedure. The consequence of this was made clear when treaty amendments were on the political agenda in 1992 with the Treaty of Maastricht, in 1999 with the Treaty of Amsterdam, and in 2003 with the Treaty of Nice. All three enlarged the scope for the Parliament’s influence on proposals submitted by the Commission to the Council. For forty-five areas covered by the treaties — in practice all policy areas — the new procedure called co decision22 has instituted parallel decision making between the Council and the European Parliament. Neither of them can decide without the consent of the other. This is a milestone in the endeavours of the European Parliament to increase its role, not only politically, but also constitutionally. Methodologically the price paid is a more cumbersome process, sometimes stretching over a long period, with a maximum of three readings, and a conciliation committee composed of members from each institution as the final step. Politically the European Parliament as the “chamber” representing the people has managed to encroach on the powers of the Council in its role as the “chamber” for the states. Political preferences may decide whether this is good or bad. There is, however, no doubt that it is a significant step towards a more federal Europe, although there is still a long way to go. As described in Chapter I, the Parliament actually uses these powers, and to good measure. v) Finally the Parliament has real influence on the EU budget being vested with the power to approve the budget. Parliament can reject the budget if it is not in conformity with its preferences expressed over an eightmonth long budgetary procedure. If so, the European Union will have no funds to finance its expenditures.23 The European Parliament has actually exercised this right in the 1970s, forcing changes upon the Council, which that institution was opposed to originally. An illustration of the European Union’s “constitutional” system and its links to its financing is the adoption in 1970 and 1975 of two so-called

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budget treaties giving the Assembly, as it was called then, real powers regarding sections of the budget.24 In 1970 the European Union decided to introduce what is called own resources.25 Custom duties and agricultural levies, to mention the two most important financial resources at the time, should belong automatically — hence the name — to the European Union and flow directly into the EU budget without any national parliamentary procedure and control. The national parliaments were deprived of their right to control financial resources. If powers had not been vested in the Assembly, there would have been no parliamentary control of the EU’s financing. That would have violated one of the most fundamental principles in European democracy. But the Assembly tasted blood, the feeling of which was reinforced, when a couple of years later, the change of name and direct elections were introduced. The conceptual impact of these two budgetary treaties is often overlooked, but in the constitutional history of the European integration, they actually constitute a significant signal about parliamentary control exercised directly by a EU institution.26 It is reported that Margaret Thatcher, when she was Prime Minister of the United Kingdom, referred to the European Parliament as a Mickey Mouse parliament. It made the Parliament furious, but at the time she said it, the statement carried an element of truth. This is, however, far from true anymore. The European Parliament has come of age, it works like one of the chambers in a normal, national parliament, it expresses European political preferences according to political, and not national positions, and it has got real powers, which is exercised with a growing self-confidence. And not to forget, it has gradually assumed the mantle of driving the European integration as the Commission has found it difficult to follow in the footsteps of great presidents such as Walther Hallstein, François Xavier Ortoli, and Jacques Delors.

Court of Justice The Court of Justice arising from the European Union is a rule-based organization adopting legal acts binding for all member states. The Court of Justice is composed of one member from each member state nominated for six years. The judges are assisted by eight advocate generals assigned to put forward recommendations to the Court of Justice as the basis for its decisions. In principle the Court of Justice works as a college in the same way as the Commission. When a decision is taken, all judges, whether they agreed to it or not, and/or voted for or against it, support the decision. A judge may dissent during the deliberations in the Court, but it

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will not be made public. Technically it would be impossible for the full court to rule in all cases, so the court is divided into three instances.27 The competence given to the Court of Justice falls in the following main categories: a. The institutions of the European Union shall act in conformity with the treaties. The Court is vested with powers not only to annul a legal act deemed to be in contradiction with the treaties, but also to rule that an institution has failed to act to fulfill a task given to it by the treaties. This highlights the drive for integration and the constant push for action, a typical example being a threat by the European Parliament to take the Commission to Court if it proves inactive, not tabling proposals foreseen in the treaties. b. The member states shall respect legal acts adopted by the institutions, and if not, can be taken to court for failing to fulfil obligations. c. The Court of Justice has exclusive competence to interpret EU law. Preliminary rulings guarantee this competence. A member state, the Council, the European Parliament, and the Commission all have powers to ask the Court of Justice to decide whether a national legal act is in conformity with the treaties (failure to fulfil obligations). In practice, it is almost always the Commission that takes the initiative to bring a member state to court. One of the most high profile decisions by the Court forced Germany to amend its constitution in year 2000. A lady by the name of Tanja Kreil complained that she was banned from bearing arms in Germany’s armed forces. The case ended in the European Court of Justice, which ruled that the ban was illegal, forcing Germany to amend its constitution which duly happened.28 The vast majority of cases, however, fall within the pattern of disputes on whether a member state violates the non-discrimination principle offering some kind of (hidden) protection vis-à-vis imports from other member states. A person can only submit a case to the Court of Justice concerning a legal act adopted that is directed at him/her and obviously this will be very rare in the European Union. Several of the most famous cases have, however, been started by individuals complaining that domestic authorities behave in contradiction to legal acts issued by the EU institutions. If a person or citizen wants to contest a national decision disputing its conformity with an EU legal act, he/she takes the case to a national court. Before this court deals with the case, it needs to

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know whether or not his/her claim is correct, that is, how to interpret the EU legal act. And the Court of Justice decides this. If the national courts were vested with such powers, there would be a risk of different, even contradictory, national decisions. Application of EU legal acts would not be uniform among member states. The Court of Justice is called upon to make a prejudicial/ preliminary ruling, stating whether the plaintiff ’s interpretation is correct or not. After this ruling the national court can decide on the case itself. If the European Parliament, the Council, or the Commission fails to act in cases where the treaty requires it to do so, the member states and/or the institutions may take the institution in question to court for inaction or inactivity (failure to act). Over the years this has turned out to be more of a political, than a real power being used in a legal context. The threat of taking to court an institution accused of inaction will normally be sufficient either to prod it into action, or bring a compromise to the table.

Court of Auditors Each member state nominates one member for six years to the European Court of Auditors. According to the court itself, its mission can be summarized in the following way.29 The mission of the European Court of Auditors is to audit independently the collection and spending of European Union funds and, through this, to assess the way the European institutions discharge these functions. The Court examines whether financial operations have been properly recorded, legally and regularly executed and managed so as to ensure economy, efficiency, and effectiveness. The Court makes the results of its work known through the publication of relevant, objective, and timely reports. In undertaking its work, the Court aims to contribute to improving the financial management of European Union funds at all levels, so as to ensure maximum value for money for the citizens of the Union.

The Court of Auditors submits a report in November in the year following a budget year (a calendar year, so for the 2005 budget, a report will be submitted in November 2006). These annual reports used to be critical about how the Commission used the funds allocated to it, or implemented common policies giving rise to common expenditures. The President of the Court of

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Auditors presents the annual report to the European Parliament. This presentation is followed by a debate. According to the treaties, this is supposed to lead to a discharge of the budget, accompanied by recommendations to the Commission on ways to improve the execution of the budget. This is no formality. The European Parliament exercises this right to summon the Commission and often gives it a hard time. And there is no way to escape. The recommendations voted by the European Parliament to improve budget management are binding for the Commission. The Commission administers about 1 per cent of total EU Gross Domestic Income. To ensure Parliamentary support for transferring this sum of money annually to the European Union, national parliaments must have some kind of guarantee that the funds are used properly and correctly. As the Commission administers the budget, the auditing cannot be entrusted to this institution, which explains the combination roles of the Court of Auditors and the European Parliament. It was the criticism put forward by the European Court of Auditors, among other things, which forced the European Commission to resign in 1999.

European Investment Bank The objective of the European Investment Bank (EIB) is to assist the integration, balanced development, and economic and social cohesion of the member countries. The EIB is an integral part of the Treaty of Rome. The member states contribute to its capital. The operations are, however, financed by borrowing in the capital markets and the proceeds of these borrowings are used to finance projects inside the European Union and in countries forming part of the European Union’s cooperation schemes. The bank has over the years built up a very high reputation based on its status as an independent legal entity and its financial autonomy. The European Investment Bank has through the years taken great pains to associate itself with the objectives of member states and the European Union. This is reflected in the priorities of its lending policies, which emphasize the following programmes/projects geared towards five operational priorities: economic and social cohesion inside the European Union; implementation of the programme set out at the conclusion of the meeting in 2000 in the European Council about enhancing Europe’s competitiveness and directing more funds to research, development, and technology (Lisbon programme); development of the trans-European network; supporting EU

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policies in developing nations; and supporting a better environment and renewable energy, thus contributing to endeavours to prevent changes in the climate. In 2004, the EIB disbursed loans equalling 38,640 million Euros.30 Total outstanding loans at the end of 2004 stood at 265,833 million Euros. It is one of the largest borrowers in the global capital markets, raising 50 billion Euros in 2004 in fifteen currencies, and has enjoyed AAA credit rating since it was first rated in 1975. The European Investment Bank may be a low-key EU institution, but plays an important role. It has succeeded in amalgamating sound financial policies, using the label “European” in a positive way, and has created a respectable place for itself in the global financial markets. At the same time it has taken an active role in the endeavours to fulfil the objectives of the union. For those travelling in Europe the signboard saying this project is financed with the help of the European Investment Bank is well known and highly appreciated.

Consultative Bodies i) EU’s two consultative institutions, the Economic and Social Committee and the Committee of the Regions, do not have any real power. Their influence on the legislative process is limited. The Economic and Social Committee has 344 members drawn from economic and social interest groups in Europe. Members are nominated by national governments for four years. They belong to one of three groups: employers, employees, and various interests. When the Economic and Social Committee was established, the intention was to create some kind of input from various economic and social groups to the EU decision-making process. The objective was commendable, but it has never really turned out to be an institution providing much added value. ii) The Committee of the Regions (344 members) is the political assembly that provides local and regional authorities with a voice in the European Union.31 The Committee was established in 1994 and set out to address two main issues. First, about three quarters of EU legislation is implemented at local or regional level, so it makes sense for local and regional representatives to have a say in the development of new EU laws. Second, there were concerns that the public was being left behind as the European Union steamed ahead. Involving the elected level of government closest to the citizens was one way of closing the gap.

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The Treaties oblige the Commission and Council to consult the Committee of the Regions whenever new proposals are made in areas that have repercussions at the regional or local level. There are ten such areas: economic and social cohesion, trans-European infrastructure networks, health, education and culture, employment policy, social policy, the environment, vocational training, and transport. The Committee of the Regions was born out of the conviction that many of the member states gave some kind of autonomy to the regions, and access for the regions to the EU decision-making process would strengthen the links of the Union to the populations in the regions. Maybe it is too soon to judge, but rarely has input not available from other sources been provided by one of these two committees.

Agencies A Community agency is not a Community institution (Council, Parliament, Commission, etc.), but has its own legal personality. It is set up by a legislative act in order to accomplish a technical, scientific, or managerial task, which is specified in the relevant legal act. In principle much of this work could be done by the Commission, but would draw some of the Commission’s attention and energy away from its true task of acting as a driver of the integration and making sure that member states fulfil their obligations. This explains why eighteen agencies have been set up.32 This also embodies an advantage in that almost each member state is host to either an institution or an agency, making them feel connected to the daily running of the European Union. The European Environment Agency33 can serve as an example. It was established in 1990 by a Council Regulation and started to operate after some wrangling among member states about where to locate it, the final decision being in favour of Denmark. The total number of staff at the end of 2005 was 130. Its mission is to collect, prepare, and disseminate timely, targeted, relevant, and reliable information on the state and trends of the environment at the European level. It is open to countries that do not belong to the European Union, but share concerns for the environment. Iceland, Liechtenstein, and Norway have used this opportunity to participate in endeavours to improve the quality of the environment in Europe, underlining the cross-border aspects of environmental problems and the necessity to cooperate geographically to reduce the risks and effects of pollution. The agencies reflect several trends in the development of the European Union.

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The first is that many of the tasks resulting from the footsteps of new policies or projects are complicated and consequently call for technical staff and expertise that cannot be provided inside the normal framework of an institution. The second is the wish to decentralize and deconcentrate, especially when dealing with topics that are not a full-fledged part of a common policy. The European Union is often accused of centralization and concentration. The establishment of agencies handling technical and/or administrative tasks contradicts this thesis. The third is to give member states the feeling of being stakeholders by hosting agencies. Every time a new agency is created, a tug-of-war takes place with several candidates wanting to host the agency.

Presidency i) Each member state assumes the Presidency according to a scheme of rotation. The duration is six months, with the first half Presidency from 1 January to 30 June, and the second half Presidency from 1 July to 31 December. The Presidency does not only encompass the meetings of the Council in all its configurations, but the Committee of the Permanent Representatives, and all working groups under the Council, which come up to 200. It represents the Council in its dealings with the European Parliament, negotiating on its behalf (in particular on institutional, budget, and co decision matters), and participates as the representative of the Council in meetings with the plenary session of the Parliament and its committees. It is also the responsibility of the Presidency to answer on behalf of the Council at regular question sessions in the European Parliament. Finally it is the face of the European Union in the gradually increasing number of summits between the European Union and countries and international organizations around the world. The burden for a single member state is exceptional and increases in reverse ratio to the size of the member state. The larger member states have a larger pool of civil servants to call upon, supplemented by national institutions of various kinds, while the smaller member states with more limited resources operate under the label of “too few civil servants chasing too many meetings”. There is an enormous difference between sitting at a meeting defending and putting forward well defined and confined national interests, and chairing the session, having to master all aspects, knowing all member states’ positions

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and shouldering the burden of guiding the negotiation towards a solution. This demands time, planning, and preparation. Smaller countries, however, have the advantage of shorter internal communication lines and are for that reason often better organized and coordinated. ii) Most people see the Presidency as some kind of moderator giving the floor to those who ask for it. This is of course true, but only shows the surface of the job. The real job is to be chief negotiator. All member states come to the meeting with their own wishes and preferences. The Commission is defending its original proposal. The European Parliament may have given an opinion that is delicate and not in conformity with what looks like a possible compromise in the Council. The Presidency is given the unenviable task to work out where the solution lies, that is, find its way through the maze in front of it and sometimes with very little help. The Presidency in the working groups is normally taken over by the representatives of the member state in that group. He/she knows the matter as the group has presumably been meeting quite often in the past. Normally most of the work carried out in the working groups is of a technical nature and not necessarily asking for political solutions. The objective of the working group and its president is to distinguish between technical problems that can be decided at that level, and political problems that must be submitted to a higher — political — level. The political negotiations and the real hard work take place in the Council itself with ministers present, as they are the ones to defend and explain the final compromise to the national parliaments. This is where the ability of the Presidency to master the brief and exercise diplomatic and political common sense is called upon. The crucial decision on how and when to enter into the final stage of the negotiations, and how to judge whether a compromise is possible or whether the proposal must be sent back to working groups for further elaboration, is in the hands of the Presidency. The responsibility of the Presidency is heavy and in many cases a good Presidency can guide a difficult matter through to a decision where a less adroit Presidency can let it fall on the floor. First of all, a good Presidency must analyse which topics, according to already decided plans, will come up for final decisions during its Presidency, and how to mastermind the way through the labyrinth of EU procedures. As the Presidency lasts for six months, the risk is that all of sudden a Presidency finds itself loaded with all the important topics undecided a couple of weeks before the end of the last Presidency. This leads to what in computer language is known as “error”, simply too much to cope with. Meticulous planning is required to map out when and how to push the relevant proposals for a final

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decision. To survive, a Presidency needs to instil the mentality at all levels that only matters which prove themselves absolutely unsolvable at that level are being pushed upwards. One of the great arts of a successful Presidency is to solve almost all outstanding problems at a lower level, limiting the number of questions put before the ministers to one or two definitely political questions. It is the end of a Presidency to submit technically complicated matters to the ministerial level. The ministers do not have the time, and they do not want to deal with questions that, according to their accounting, do not qualify as political questions. The next step is to ponder whether the conditions are favourable for pushing proposals or introducing matters, which according to that member state, is of particular importance. This is a very delicate matter. The other member states do understand and do accept that the Presidency twists the deliberations in the Council somewhat to its own preferences, but they are very much on the lookout to make sure that it does not go too far. If it does, the Presidency loses credibility to carve out compromises. So all in all, yes, the Presidency provides a platform for pushing matters. The Presidency must use a steady hand to make sure it is well known and understood in which direction the integration is steered, which policies are to be adopted, and how to implement them. These Presidency policies must not reflect a purely national interest. To illustrate: a Presidency may push deliberations about improving the environment, the other member states accept that, but it cannot push a particular proposal of interest to itself, and even less, try to insert specifications corresponding to its own preferences; the other member states will back-pedal if that happens. iii) Before the meetings the Presidency needs careful and time-consuming preparations. Most ministers do normally arrive at meetings of the Council knowing, of course, their own positions and having ideas about how to achieve a satisfactory outcome on that score. They do not care much, and know less, about the positions of the other member states, unless those interests infringe on their own interests. The Presidency needs to allocate time for separate meetings with the Commission to find out where there is common ground; to meet with member states taking positions out of line; and to chair the meeting knowing not only the substance, but having an idea how to steer negotiations towards a solution. The Presidency must be able to analyse the situation and divide member states into at least three groups: Those who will help the Presidency and support the compromise proposals put forward, those who will be neutral, that is, do not have strong national interests and, therefore, do not take much interest in the final outcome, and

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those having very strong interests and seemingly running against what emerges as a majority position. During the preparatory talks the Presidency must make a crucial decision on whether to opt for — if necessary — majority voting with the disadvantages embodied in such a procedure, or negotiate until unanimity is obtained. Sometimes the Presidency threatens recalcitrant member state(s) with voting to force them to modify their position. Such a threat is dangerous, if the Presidency is not ready to carry it out. The most commendable policy seems to be ambiguity, neither to commit itself to voting, nor to wait for unanimity, using the unsaid threat of voting against member states in the clear minority. It goes without saying that it is unwise and rarely facilitates a solution to commit itself to achieving unanimity. That removes any incentive for member states holding minority views to move, as they just need to hold on to their positions. iv) After its own preparations and preparatory talks the Presidency draws up some sort of battle plan before the meeting starts and sticks to it during the negotiations. A good and often rewarded trick is to list the outstanding problems in order of priorities so that the easiest ones to solve are negotiated first. If, for example, there are ten outstanding problems and six of them seem comparatively easy to solve, the Presidency proceeds to get them out of the way and create momentum, which eventually leads to agreement, and if not, serves to isolate one or two member states still opposed. Having achieved consensus except for a couple of member states, the Presidency chooses the least stubborn one and tries to get it on board by modifying the proposal. That leaves any member state holding firm to its no vote exposed to pressure not only from the Presidency, but from the other member states, and in particular, those having offered concessions not wanting anybody else to escape without doing likewise. This tactic is almost always crowned with success. v) The agenda needs to be shaped by the Presidency to convey a picture of the member state in the chair as resolute and determined, knowing what it wants, and capable of getting there. This will serve it well for future negotiations in the Council when the Presidency is over, and the invested capital will be reaped through the higher respect earned from other member states. There is a unique window to learn about other member states, their weaknesses and strengths, which can be accumulated as a kind of intellectual and negotiating capital. When trying to reach a compromise, other member states have to inform the Presidency of their own peculiar interests and sometimes — special conditions — which, of course, are not limited to this

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six-month period. The Presidency can create alliances in the sense that an honest and helpful Presidency runs up a considerable amount of goodwill that is useful to have at hand or on later occasions when help is needed during difficult negotiations. The same goes for links with the Commission and the European Parliament. The Presidency learns about these institutions, how they work, and why they take the stance they do. Such knowledge can be useful when the Presidency comes to an end. The coin has two sides. An unhelpful and perhaps arrogant Presidency pushing matters through and neglecting the role of a facilitator, will get the bill for this behaviour at a later stage when those being rolled over sit in the chair. This is indeed one of the reasons for the rotating Presidency: to learn how to understand other countries’ problems and see the broader picture as it moves towards a more mature role in the European Union. For the smaller and medium-sized member states, the opportunity to chair EU summits with other countries and/or group of countries is a splendid opening for it to make itself known on the global scene. Summit meetings with the United States, China, and India are not an everyday occasion for small- or medium-sized EU countries, but the Presidency offers these events on a plate. It can be said that, in a way, the Presidency requires hard work, sometimes, extremely hard work that is rewarded by the opportunity to build up a network inside the European Union and abroad that is beyond the reach of all member states except for a handful of the bigger ones. This explains why preparing for the Presidency and allocating resources are often taken more seriously by the smaller member states than the bigger ones. Experience indicates that the Presidency more often than not ends a negotiating round not necessarily a loser, but as a member state that has to yield first, and more than the rest of the pack. A famous French Permanent Representative to the European Union in the early days coined the phrase “la présidence côute chère”.34 His point was precisely that not only could the Presidency not pursue national interests with the same vigour as if it was sitting in its normal place, but it also had to show the way in the final stages of the negotiations when concessions were called for. The events during the British Presidency in the second half of 2005 when the main point on the agenda was the seven-year financial perspective (2007– 2013) for the European Union seem to confirm this. In the final stage of the negotiations in the European Council (December 2005), British Prime Minister Tony Blair offered to throw in an extra 2.5 billion Euro cut to the so-called British budget rebate35 — an offer for which he was heavily criticized in Britain and which he must have known would be the case, but

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without which no deal could have been made. Prime Minister Tony Blair, sitting behind a banner saying “Presidency”, and facing the ugly prospect of a failure of the negotiations, had to take most of the blame himself or show the way by offering more concessions, to drag other reluctant member states along. The tactic succeeded. The European Union came to an agreement. A crisis was averted. It is extremely doubtful whether Tony Blair sitting behind a banner saying the “United Kingdom” would have made the same offer. vi) Until 1995 when the European Union was enlarged from twelve to fifteen members, the rotation of the Presidency followed the original alphabetical order starting with Belgium and ending with the United Kingdom. The heavy burden on the Presidency, in particular the requirements of the CFSP (Common Foreign and Security Policy), made it more and more difficult for small countries to mobilize the administrative and logistical support for carrying out tasks given to the Presidency. The EU involvement in the former Yugoslavia from 1991 onwards demonstrated this without the slightest doubt. The CFSP has, as one of its own characteristics, the troika, which represents the European Union vis-à-vis foreign countries. In 1995 the order of rotation was changed, so that the troika would always include a large member state having the administrative and logistical capabilities required. Presently the Presidency, the incoming Presidency, and the Commission compose the troika.36 Gradually the feeling has become widespread that the six-month tenure by one member state is simply not viable anymore. Although this has not actually been said, this assessment is also based on the observation that the enlargement with ten Central and Eastern European countries, as well as Malta and Cyprus, means some very small member states would at some point take their turn at the Presidency. Without in any way casting doubts upon their abilities, one only needs to take a quick glance to see that their resources are limited. The proposed Constitution has sought to solve this problem by introducing group presidencies composed of three member states, which will form the Presidency for eighteen months. To illustrate: Member State A enters the group Presidency as an incoming member for the first six months, after which it becomes leader of the group Presidency for the next six months, and is then classified as the outgoing Presidency in the last six months. This makes it possible to distribute the workload more evenly and call upon a pool of resources, instead of straining a single member state, sometimes with sparse resources.

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The Constitution was rejected by two member states (France and The Netherlands), meaning that this proposal has been put on ice until the future of the proposed Constitution has been decided, but it is only a question of time before it will be implemented in one way or another. The merit of group Presidency is quite obvious in the sense that the workload is more evenly distributed and member states learn to team up more effectively.

Council Secretariat/The High Representative The Secretariat of the Council is where the synchronization of the work in the Council and the working groups takes place. Over the years an extremely competent staff has been built up, headed by highly qualified, outstanding personalities. The Secretary General of the Council secretariat occupies a crucial position, as it is his duty to do much of the work needed to find compromises. The Commission is bound to defend its own proposals, and limit the room for manoeuvre as a partner in search of compromises. The Commission37 normally tries to be helpful, but can never be a neutral partner in negotiations as an institution pursuing its own objectives. The Presidency finds the truly neutral staff around the Secretary General and his staff. The Treaty of Amsterdam introduced the office of High Representative. The aim was to give the office of Secretary General more clout, partially to reflect reality. The upgrade to the use of this word was long overdue. Many of the most important documents in the evolution of the European Union had been drafted by the Secretary General and his staff in close cooperation with the Presidency in office at the time, and sometimes drawing upon the Commission, albeit respecting its role as an independent institution. The Secretary General and his staff have over the years built up a remarkable combination of political skill and ability to smell where potential compromises could be found, and mastered the often technical aspects of proposals necessary to turn politics into legal texts. It becomes clear that the post of Secretary General also wearing the hat of High Representative in the CFSP requires a heavyweight, and currently the former Minister for Foreign Affairs of Spain and former Secretary General of NATO, Javier Solana,38 occupies that position.

Coreper Coreper is the French abbreviation for the Committee of the Permanent Representatives. It is one of the most efficient, almost ruthlessly efficient, and powerful bodies in the European Union.

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Coreper is composed of the Permanent Representatives (Ambassadors) sent by the member states to represent them at EU institutions. It is no secret and will not offend anybody to say that those selected to go there by member states are absolute top class. They combine political finesse, diplomatic skills, hard work, and relentless perseverance to get a satisfactory outcome from each and every negotiation. This is nothing new in diplomacy. The real secret is that, at the same time, they form a club that has grown out of mutual trust and a startling drive to reach agreement, thus taking the European Union further ahead. In two respects they find themselves between the devil and the deep blue sea. Technically they are there to receive reports from the working groups and distil: • • •

What is not good enough and has to be returned to the working groups What Coreper can decide de facto What has to be submitted to ministers

They belong to the select and rare group of people who can master the detail and grasp the broader picture at the same time. As ministers seldom wish — and why should they — to dig into technicalities, Coreper weeds these kinds of subjects out of the agenda before ministers meet. In mechanical terms, Coreper can be labelled the European Union’s main screening body. Politically and diplomatically they stand between the member states and the EU institutions in a semi-political role. They need a strong flavour of the political realities in their home countries and the confidence of the home governments. It is up to them to judge what issues the home governments will classify as political ones to be decided on a ministerial level. Coreper is sometimes described as an institution taking many of the decisions instead of forwarding them to the Council. This is not correct. All decisions are forwarded to the Council, not the smallest comma in an EU legal act passes through without having been on the agenda of the Council, but Coreper divides the issues into two groups: • •

The ones that Coreper deems can be passed without further discussions. the ones that after deliberations in Coreper are ready for discussion by ministers, with a view to their adoption, after the solving of outstanding political questions.

The first group is labelled A-points. If one or more member states wish to discuss an A-point, the item is hauled off the agenda for discussion at a later

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meeting. There are several reasons for this procedure. First, the other member states are coming to the meeting expecting all A-points to be settled and not prepared to reopen what was thought to be an agreed compromise. Second, the principle of the Council as an institution not dependent on its composition means that many of the A-points may be final and formal adoption of legal acts negotiated by the Council meeting in another composition. A Council gathering of Ministers for Foreign Affairs may be asked to formally approve A-points legal acts negotiated by the Ministers for Environment. None of the Ministers for Foreign Affairs would like to step into the shoes of the Ministers for Environment to negotiate on his/her behalf, so the matter is referred back to the next Council meeting gathering Ministers for Environment. The second group is what may be termed “normal” items, which Coreper has prepared for a ministerial discussion/negotiation to cut through the remaining questions that are classified as political ones. This takes up almost all the time during Council meetings. Coreper has earned its reputation of nearly always getting it right when classifying agenda points as A-points or “normal” points in preparing for Council meetings. It happens, however, that a member of Coreper sometimes gets it wrong. A large part of an ambassador’s standing and credibility depends on whether he/she gives the correct signal on a matter. If not, confidence in him/her depreciates as the impression the others have is that their colleague does not enjoy the confidence of the government, and is accordingly not privy to information about its political orientation. He/she loses leverage when negotiating with colleagues as concessions depend on a high degree of certainty that it settles the matter and the case will not be reopened. It is of vital importance for a member of Coreper to be able to “read the mind” of the home government. The importance of Coreper is reflected by the fact that it is mentioned in the Treaties.39

HOW THE EU TREATIES WORK The original Treaty of Rome signed in 195740 and coming into force on 1 January 1958 was in reality a kind of script. It stipulated the long-term objective “an ever closer union among the peoples of Europe” without really saying what it means and mapping out a string of specific measures, and some kind of timetable for setting up a rather pragmatic integration in three main areas: Common Agricultural Policy, Customs Union, and Common External Trade Policy. Since then this strange, but effective playing at several levels at the same time, has been a permanent feature in the life of the European Union.

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An illustration of how the original European Union was established and how it basically still works can be found in paragraphs 8, 40, and 43 of the original Treaty of Rome. Paragraph 8 lays down how the Common Market shall be implemented. The paragraph stipulates a transitional period of twelve years, stating precisely what is going to happen after the end of each phase and using the model of proposal from the Commission to the Council vested with the power to decide. Paragraphs 40 and 43 lay down how the Common Agricultural Policy is implemented and use exactly the same method. A gradual phasing in, working in the same way as a kind of transitional phase. The principles applied are a step by step approach with an examination at the end of each step (phase) to verify whether it has worked as envisaged, and if so, transition to the next step (phase). If conditions to progress are not fulfilled, a procedure to handle such a situation would normally be prescribed. This is a very careful, methodical, almost meticulous, way of attacking the elaborate problem of setting up a Common Market and a Common Agricultural Policy. The European Union neither then, nor now, plunges headlong into deep water. On the contrary, it tests the water to gauge the temperature. But the objective was laid down and agreed: a Common Market and a Common Agricultural Policy. The Treaty of Maastricht negotiated in 1990–1991 reflects the same combination of political boldness and careful step-by-step moving ahead. This treaty is built around three cornerstones: • • •

Incorporation in the Treaties of legal or political principles applied by the European Union even if not embodied in the original Treaty of Rome. Changes with immediate effect in the workings of the integration (for example, more qualified majority voting). Decisions scheduled to be taken at a later date (for example, a plan for introduction of the Euro).

An economic integration such as the European Union cannot work without explicit or implicit recognition of legal principles, but as the integration moved ahead after the first Treaties in the 1950s, these principles were not at all, or only superficially, incorporated in the Treaty. The Treaty of Maastricht sought to remedy this omission by incorporating principles such as subsidiarity, legality, and proportionality in the Treaties. This step did not have much impact on the daily workings of the European Union. It is, however, an

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important confirmation of the principles guiding the institutions when proposing, pronouncing, or deciding on legal acts. The second batch of changes was about amendments taking effect immediately. They fell primarily inside the existing chapters such as environmental policy and the so-called social dimension, that is, steps to improve working conditions. These chapters were not built into the original Treaty, or alternatively, were of an embryonic character. The need was strongly felt to bring them up to date. The crucial and trail-blazing chapters in the Treaty of Maastricht were about topics inscribed in the Treaties as principles or objectives, but to be decided on at a later stage. The three most well known and far reaching topics were: — The transition from the first and second phase of the economic and monetary union to the third phase41 on the basis of the “normal” EU procedure, that is, a proposal by the Commission put forward to the Council, which has the prerogative to decide. — The Common Foreign and Security Policy (CFSP) incorporated in the Treaty of Maastricht (as intergovernmental cooperation and not under the principle of supranationality) did not include defence and defence related questions as a large number of member states felt that the time for such a step was not ripe. The Treaty says that a common defence policy and a common defence could be envisaged at a later stage. — Justice and Home Affairs were likewise incorporated in the Treaty as intergovernmental cooperation. The treaty opened up the possibility of transferring certain aspects of this chapter from an intergovernmental character to the principle of supranationality (in EU jargon, from pillar 3 to pillar 1).42 This way of proceeding is borrowed from the original Treaty of Rome: a combination of principles, objectives, and immediate actions and procedural descriptions of how to get from one step or phase to the next. The careful weighing of how fast to progress and how to do it has served the European Union well. Member states know where they are going and under which conditions, with a kind of emergency brake provided that says the next step is dependent on the preceding step having worked satisfactorily and in conformity with what was planned. The fact that all major revisions have taken the form of new Treaties, placing the European Union in almost continuous constitutional negotiations from 1984 to 2005, shows how cautious the progress actually is. Not a big

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bang as some believe, but measured progress that at the same time keeps the ulterior steps in sight.

MAJORITY VOTING The original Treaty of Rome reflects one of these strange occurrences in international, and sometimes, national legal practices where the main rule becomes the exception! The Treaty of Rome stipulates that unless otherwise stated, a simple majority applies for decisions, with each of the member states having one vote.43 However almost all paragraphs in it started stipulating either qualified majority or unanimity. A simple majority has become the exception to the rule and has rarely been used except for procedural decisions. Unanimity was quite common in the original Treaty of Rome, but every amendment of the Treaties has enlarged the scope for qualified majority voting. After the adoption of the Treaty of Nice unanimity is limited to a few topics.44 Qualified majority voting has gradually taken over as the main rule applicable to almost all decisions taken by the Council. This development reflects the growing integration and the increased trust and confidence among member states. The fear voiced by France in the mid-60s about replacing unanimity with qualified majority voting is seldom heard anymore.45 It can safely be said that the use of qualified majority voting reflects maturity, hence, trust, among member states. In the original Treaty of Rome with six member states, a total of seventeen votes were allocated, with France, Germany, and Italy each given four votes, The Netherlands and Belgium, two and Luxembourg, one. Germany had 23.5 per cent of the votes, the Netherlands 11.8 per cent. At that time the population of Germany was approximately 4.5 times that of The Netherlands. The weighting of votes was thus heavily tilted towards the smaller member states being “over represented” if share of population, or for that matter, share of Gross Domestic Product, was chosen as the parameter for the number of votes. When the Treaty of Nice came into force on 1 February 2003, Germany was allocated twenty-nine votes (as was France, the United Kingdom, and Italy) while The Netherlands, hitherto on parity with Belgium, Greece, and Portugal all having five votes, got thirteen and the other three, only twelve votes. The ratio between the populations of Germany/The Netherlands was still approximately 4.5 (maybe nearer to 5). The policy of favouring the smaller member states was maintained.

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In political terms the smaller member states’ “overrepresentation” has been of vital importance. This can be seen by recalling that before the Treaty of Nice (before 2003), 8.2 million Germans constituted one vote in the Council, compared with only 1.8 million Danes for one vote. After 2003, the figures are 2.8 million Germans and 760,000 Danes. The ratio is more or less the same: a Dane (from a small country) “weighs” almost four times as much as a German. An equally important comparison over time is to analyse what share of votes constitutes a qualified majority, and even more interestingly, what share of the EU population is required to constitute a qualified majority. In the original European Union of six member states, twelve out of seventeen votes constituted a qualified majority equivalent to 70.6 per cent. After the Treaty of Nice, this had risen slightly to 73.9 per cent. In the original European Union of six member states, a qualified majority could be mobilized by member states which together constituted 67.7 per cent of the European Union’s population; 62 per cent was required in the European Union with 25 member states.46 A smaller share of the European Union’s total population can push a decision through. This is not tantamount to easier decision making. More complicated rules of decision making have made diplomatic manoeuvrings more sophisticated. It stimulates and encourages coalition building, making the political game in the EU arena more like the one on the national scene. This is one more step towards a more mature and compromise seeking political system that forces member states towards coalition building. The fine balance achieved between large and small member states, number of member states, and share of population, not only reflects a balance between various political factors, but also the quest for a political system that works, and at the same time, finds legitimacy among the populations. The European Union has sought to avoid a situation where large member states alone can push through a proposal.47 It reveals a good many things about the attitude of member states to see how they look at this complicated voting system. A qualified majority is necessary to adopt a proposal. Some member states speak instead of what constitutes a blocking minority. The chosen vocabulary is no coincidence. It tells outsiders about the basic stance vis-à-vis integration: whether the member state wants to shape things, to go along with what others shape, or to block further integration. The member states in favour of strong integration have always tried to lower the barrier for the number of votes required to constitute qualified majority as a lower threshold would facilitate decisions, thus pushing the integration forward.

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The words “blocking minority” tell how many votes prevent a qualified majority from arising, and how many member states are needed for such a blocking minority. For the member states not wishing the integration to go as fast as some of the more enthusiastic member states, it became important to make it comparatively easy to constitute a blocking minority. As the European Union has matured and member states have become accustomed to the game surrounding qualified majority, the perspective taken has increasingly become protecting the minority and making sure that minority views are taken into consideration in the decision-making process. This is a delicate political balancing act as the idea is not to strengthen the minority’s ability to block, but to allow them to be heard and not just steamrolled. In the treaty text now put on hold (the proposed Constitution) a qualified majority is constituted by: • • •

55 per cent of the members of the Council At least 65 per cent of the total population Fifteen of the member states voting

There are thus three criteria for qualified majority voting. The rule stating that at least fifteen member states must vote “yes” is a concession to the smaller member states, guaranteeing that a decision can only be taken if a clear majority votes yes. The proposed Constitution would have assured this by the 55 per cent criteria. The protection of a minority is further elaborated in the proposed Constitution by the rule that a minority that has 75 per cent of the votes required to block a proposal, can ask the Council to, but not legally insist that it should, postpone and further deliberate on it before a decision is taken. This mixture of political and legal protection of a minority of member states is what keeps the European Union together and instils trust among member states. Those who wish to go ahead know that unless they accommodate the concerns of a minority, decisions will drag out. The minority knows that they have a certain amount of leverage as long as they do not fall into the temptation to overplay their hand. The proposed Constitution can, with some justification, be said to come as near as possible to a voting system for decision making that reflects a combination of one member state one vote, and one citizen one vote. One of the merits of the proposed Constitution is that by introducing the above mentioned criteria, it largely removed the well known political arithmetic harassing the European Union for many years and which runs along the following lines:

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The allocation of votes is based upon many and, often contradictory, criteria, but above everything else, it mirrors political influence. Throughout the whole history of the European Union, it has been of paramount, yes, vital, importance for France to have the same number of votes as Germany, even if Germany had a larger population and a larger Gross Domestic Product. Germany felt that after the German reunification, its number of votes compared with France should be increased. What may be termed political realities prevented Germany from insisting. A smooth German reunification could have been derailed, or at least, submitted to a much rougher ride, had France wanted it so. Italy could not stomach having fewer votes than Germany and France; neither could the United Kingdom when it joined in 1973. Spain fought hard for parity with the four above mentioned member states when joining in 1986, but had to be satisfied with eight votes while the other four had ten. When Poland joined in 2004, it fought hard and successfully to get the same number of votes as Spain. When Sweden joined in 1995, it was placed between Denmark and Belgium.

LEGAL PRINCIPLES48 A number of legal principles are incorporated in the Treaties. A legal principle is a maxim or principle forming part of EU law and consequently used by the Court of Justice in its rulings. If EU institutions violate the legal principles when adopting EU legislation, those decisions can be deemed illegal by the Court of Justice and consequently annulled.

Legality The principle of legality is stated in paragraph 5 (formerly paragraph E)49 of the Treaties, which states that each institution shall act within the limits of the powers conferred upon it by the Treaties. This means two things. First, the institutions can only act on the basis of the Treaties themselves. They need to refer to one of the paragraphs of the Treaties as a basis for a decision. Second, they cannot act in contradiction to what is stated in the Treaties. The principle of legality thus narrows the competence of the institutions and prevents them from going beyond or against the Treaties. It is rare and indeed difficult to find an example where the Court of Justice has ruled that a legal act approved by the Council goes beyond the Treaties. But there are many cases where the Court of Justice has ruled that a legal act is not in conformity with the Treaties.

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Politically, the disputed question has mainly been Paragraph 235 in the original Treaty of Rome, now Article 308 in the amended Treaties, after the latest treaty revision (Treaty of Nice), stating that If action by the Community should prove necessary to attain, in the course of the operation of the common market, one of the objectives of the Community and this Treaty has not provided the necessary powers, the Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament, take the appropriate measures.

This opens the door for EU institutions to take a decision without basing it on an article in the Treaties, referring to a specific policy or activity. Article 235 accordingly raised the question of how far the European Union can go with the sole limitation that the measures are in conformity with the objectives of the Treaties. Unanimity has been maintained for this very reason in all revisions of the Treaties.

Solidarity The solidarity principle can be found in Article 10 of the Treaty on the European Communities (formerly Article 5) which states that: Member States shall take all appropriate measures, whether general or particular, to ensure fulfillment of the obligations arising out of this Treaty or resulting from action taken by the institutions of the Community. They shall facilitate the achievement of the Community’s tasks. They shall abstain from any measure which could jeopardize the attainment of the objectives of this Treaty.

This principle reflects the idea of solidarity and cooperation that is not much different from that stated in the Vienna Convention on the Law of Treaties in 1969,50 but within the special EU legal framework, it gets more substance. It applies to the member states, for relations among the member states, and between member states and the EU institutions. The Court of Justice sees Article 5 as an article solid enough to form the basis for decisions by the Court, and this has been the case several times. The most interesting cases have emerged, where, for various reasons the member states have not been able to decide on a legal act, resulting in a legal vacuum. The Commission has asked for, and the Court of Justice has listened to the Commission in several such cases and endorsed, the use of Article 5.

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Subsidiarity The basic idea behind the principle of subsidiarity is that the European Union acts only if the objective can be achieved more efficiently at the EU level, than at the national level. This is of paramount legal importance when separating and allocating competences and powers between the European Union and its member states. When proposing a legal act, the Commission has to justify it in comparison to measures on the national level. The principle attempts to draw a line between legislation at the EU level, and what member states shall and can do. It is a legal principle — note that it is incorporated in the same article as the principle of legality — and forms part of the text taken into consideration if/when the Court of Justice has to rule. It is equally important in a political context. In the early years of the integration, the principle of subsidiarity was not in the forefront and rarely heard of except in legal seminars. As the European Union has taken on more and more topics, often in the zone where member states’ and EU competences overlap, it has become a political question. The European Union and its institutions have been pushed into limiting EU legislation, as citizens, by all indications, prefer legal acts to be approved and implemented as near the local level as possible. Hence subsidiarity has grown out of the scepticism of citizens, not directed against the European Union as such, but against the proliferation of EU legal acts into almost all areas of daily life and often those where the citizens find it difficult to see what role the European Union can play. Article 2 (formerly Article B) says that The objectives of the Union shall be achieved as provided in this Treaty and in accordance with the condition and the timetable set out therein while respecting the principle of subsidiarity as defined in Article 3b of the Treaty establishing the European Community.

A more elaborate and precise wording is to be found in Article 5 (formerly Article 3B) In areas which do not fall within its exclusive competence, the Community shall take action, in accordance with the principle of subsidiarity, only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community. Any action by the Community shall not go beyond what is necessary to achieve the objectives of this Treaty.

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These words, prompted politically by the turmoil in 1992 — after the Danish rejection of the Treaty of Maastricht — came after the European Union for the first time looked at limiting its powers and how it was exercising them, instead of exclusively looking forward and increasing its powers, competences, and actions. It can be read as the politician’s signal to the population that the scepticism and reluctance about going too far and too fast away from traditional objectives had been heard.

Proportionality The principle of proportionality means two things. First, that the least farreaching, least drastic means to achieve an objective shall be selected. Second, that the obligations embedded in a legal act must not go beyond what is necessary to achieve the objective. The Court of Justice had for many years incorporated this principle, reasonable by all accounts, in its rulings. It was, however, not integrated in the Treaties before the Treaty of Maastricht in 1992, and then only with the following text to be found as part of the principle governing subsidiarity. Any action by the Community shall not go beyond what is necessary to achieve the objectives of this Treaty.

Non-discrimination The principle of non-discrimination, prohibiting discrimination based on nationality, is a cornerstone in the integration. It is stated unequivocally in Article 12. (formerly Article 6) Within the scope of application of this Treaty, and without prejudice to any special provisions contained therein, any discrimination on the grounds of nationality shall be prohibited.

There are two vital words to highlight. First, that the Article speaks about “application of this Treaty”, defining the area in which non-discrimination applies. The principle of nondiscrimination must thus be seen in the context of other legal principles guiding the Treaties. It is not some kind of carte blanche, stating that discrimination between citizens or companies in all areas is prohibited. Nationality may be required to exercise certain public functions — to mention an example of the exception to the rule.

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Second, that the principle of non-discrimination obviously opens the door and legalizes discrimination vis-à-vis citizens and companies from nonmember states. This is often overlooked in the debate and, in particular, the legal debate focusing on the interpretation of this principle. Looked at from an economic point of view, the principle reveals an interesting factor in that citizens and companies from other member states are automatically accorded the same treatment as nationals, while discriminatory rules and practices against non-member states and their citizens and companies are allowed. The main idea is not only to do away with discrimination, and introduce equal treatment for all citizens and companies inside the European Union, but at the same time, offer them a potentially more advantageous treatment than in the case of citizens and companies from a non-member state.51

Cohesion When negotiating the Treaty of Maastricht at the beginning of the 1990s, many member states felt the need for some kind of wording expressing the wish of the European Union to achieve what is termed cohesion, defined as policies to ensure harmonious growth in the European Union as a whole. It can be debated whether or not it is a legal principle, but it is noteworthy that the Treaty of Maastricht introduces a new wording in what is now Article 2 of the section of the Treaties (the European Community, the so-called Pillar 1) “to promote throughout the Community a harmonious and balanced development of economic activities”.

It reflects the political necessity to assure the poorer member states that the European Union is ready and prepared to do something to stimulate their growth so they can catch up with the richer and faster growing member states.52

Basic Rights When they met at the European Council in year 2000 the Heads of State and Governments decided to adopt a charter on what is termed fundamental rights, more commonly named, basic rights.53 It was signed by the Presidents of the European Parliament, The Council, and the Commission, and became politically, but not legally, binding. The charter is inspired by the UN Charter, the work done over the years by the Council of Europe54 and what is written into the constitutions of the member states. The proposed Constitution envisaged incorporating the Charter in its full text in the Treaties to transform it from being not only politically, but also

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legally binding. Although the proposed Constitution has not come into force, it is gradually acquiring a certain legal status since the Court of Justice has started to take the Charter into account when judging matters where basic rights issues are involved. In addition the Treaties already contain specific texts concerning this issue. The present Treaties contain two main provisions quoted below. Article 6 (formerly Article F): 1. The Union is founded on the principles of liberty, democracy, respect for human rights and fundamental freedoms, and the rule of law, principles which are common to the Member States. 2. The Union shall respect fundamental rights, as guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms signed in Rome on 4 November 1950 and as they result from the constitutional traditions common to the Member States, as general principles of Community law (…)

Article 7: On a reasoned proposal by one third of the Member States, by the European Parliament or by the Commission, the Council, acting by a majority of four fifths of its members after obtaining the assent of the European Parliament, may determine that there is a clear risk of a serious breach by a Member State of principles mentioned in Article 6(1), and address appropriate recommendations to that State. Before making such a determination, the Council shall hear the Member State in question and, acting in accordance with the same procedure, may call on independent persons to submit within a reasonable time limit a report on the situation in the Member State in question.

Article 7 is incorporated into the Treaties with the latest treaty revision undertaken in 2000 (The Treaty of Nice). The text contains three interesting, new, far-reaching provisions. First, unanimity is not required for taking up the matter of a breach by a member state of principles concerning human rights. Second, a recommendation can be addressed to a member state in case of a clear risk of a serious breach, implying that the rest of the member states do not need to wait until such a breach is documented, but can act if they think a risk is at hand. Third, independent persons may be called upon to express their views on the situation in the member state in question. These two paragraphs taken together with the intention of making the Charter legally binding bear clear witness to the intention of the European

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Union to safeguard human rights in all member states for all citizens, and vest the European Union with powers to pursue that goal.

EU Law Takes Precedence Over National Law As the European Union is a rule based and supranational organization, the legal acts adopted by EU institutions must take precedence over national law. Otherwise the judicial systems of member states could strip EU legal acts of substance by passing legal acts to the contrary and then letting the national courts of justice rule that the national acts take precedence over EU legal acts. The long-term implication of this would be a meaningless system where national laws are not harmonized as envisaged in the Treaties. In case of contradiction between an EU legal act and a national legal act, the case will be referred to The European Court of Justice, which will always and without exception decide that the EU legal act takes precedence. In two cases from 1963 and 1964 respectively, the European Court of Justice established the direct effect of Community law in member states, and the primacy of Community law over national law. The EU Court of Justice first confirmed this principle in 1963 with the Van Geend & Loos case, and a year later in 1964, with the Costa ENEL case.55 Costa was an Italian citizen who refused to pay an electricity bill amounting to approximately 3 Euros. The matter was brought before an Italian court, which decided that national courts should deal with these matters, were competent, and that national law took precedence over EU law. This ruling was brushed aside by the EU Court of Justice, which decided that it was competent and laid down what has since been the basic principle and uncontested as such, namely, that EU legal acts take precedence over national law. It is an indication of the strong support for the EU integration that the ruling of the European Court of Justice was not met by opposition from member states, but taken note of and accepted. Another and even more interesting question is how EU legal acts relate to the Constitutions of member states. What will happen if an EU legal act or, for that matter, a treaty revision is considered to contradict not a national law, but the Constitution in one or more member states? When the Court of Justice ruled in 1964, it stated that EU legal acts take precedence over any national decision. Literally interpreted, it includes the case where a national court would rule that a member state’s constitution was violated. There has actually been a run-up to such a case. After the adoption of the Treaty of Maastricht in 1992, the Constitutional Court of Germany was asked to rule whether Germany could ratify it or not; in other words whether

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the treaty violated the German Constitution. The Constitutional Court ruled that Germany could ratify it, but added that an EU treaty could not disregard the constitution of a member state. If that was the case, EU legal acts issued on the basis of such a treaty or the relevant provisions of such a treaty, would not be56 upheld by the national judiciary system. This interpretation is not difficult to understand. If EU legal acts disregard a national constitution, the European Union and the member state(s) in question face a political problem. Most member states have quite specific procedures for changing their Constitution, and few people would sign a statement saying that an EU legal act passed in the Council, with for example, qualified majority vote, can overrule a national constitution. Over the years it has been seen that the EU Treaties have forced member states to change provisions in their national constitutions to eliminate or avoid contradiction between their constitutions and the European Treaties. This has been the case in France, to mention an example. The political message is that neither member states nor the European Court of Justice want a test case of legal contradictions between a national constitution and the Treaties.

Directly Applicable Legal Acts Intergovernmental cooperation means that member states must incorporate into national law what is agreed. They can choose whatever procedure is appropriate according to their own constitutions. No one will hold them accountable for the method chosen, as long as they transform it correctly into national law. The decisions taken in an intergovernmental cooperation becomes binding for the citizens only after this incorporation or transformation into national law. In other words, an intermediary is required and that intermediary is the national legal system. Not so in a supranational integration such as the European Union. Legal acts may be directly applicable and binding for citizens without any kind of intermediary. An EU regulation is thus law in all member states when the formal procedures (publication, etc.) have been accomplished. This means that the same legal act is law in all member states, making the EU legal system uniform in all member states and for all EU citizens. This was explicitly started in Article 189 (Article249 after the latest update of the Treaties) saying that: A regulation shall have general application. It shall be binding in its entirety and directly applicable in all Member States.

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In some cases it can be preferable to leave some scope for member states to transpose an EU decision onto national law. This method may be chosen when the need for complicated and different national procedures makes it difficult to put it into a legal text, and this is not necessary to achieve the objective. In these cases the European Union adopts a directive according to Article 189:57 A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.

As the European Union has developed and matured, a directive can be directly applicable for the citizens or it can be binding for the member states committing them to transpose it onto national law respecting the text, with the risk of being brought before the Court of Justice if that is not the case. The European Union will normally rely on a directive binding for the member states and not for the citizens, if the substance makes it difficult to phrase a uniform legal text binding for all citizens in the European Union.

Acquis Communautaire The Acquis Communautaire is a term that has gradually worked its way into the EU vocabulary or jargon. It stands for the entire body of EU-legislative acts, policies, and practices, which have evolved in the European Union since the first Treaties came into force in 1952. It is referred to when the European Union negotiates enlargement, stating that the adhering nation states must accept the Acquis Communautaire in full. The Acquis Communautaire was codified in the Treaties with the Treaty of Maastricht. Article B states as one of the objectives of the Union to maintain in full the “Acquis Communautaire” and build on it.58

EXCLUSIVE COMPETENCE, MIXED COMPETENCE59 In certain areas the European Union has exclusive competence, meaning that the member states cannot legislate or enter into agreements with other nations. This is for example the case for the Common External Trade Policy. When the European Union signs an agreement with other nations in such an area, only the European Union signs and this signature is binding for the member states. It happens quite often that agreements with other nations cast the net wider than areas where the European Union operates with exclusive

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competence. The procedure will then be for the agreement to be adopted by both the European Union and the member states. This is often called mixed competence in EU jargon and covers situations where the European Union and member states act in unison. When the European Union was not as firmly established as is the case today, it happened that other countries refused to enter into agreements with the European Union, rejecting the EU principle of exclusive competence for the EU institutions. This was politically motivated and was seen for many years in the attitude of the former Soviet Union vis-à-vis the European Union. It highlights the interesting point that it is not only the European Union and its member states that have a say in the application of exclusive competence vis-à-vis other countries. The partners entering into agreements where the European Union operates mixed competence must agree to that principle. The best-known example of shared competence and agreements of economic and political significance with other nations — in EU jargon, third countries — is with the Central and Eastern European countries. Having transformed their political and economic systems after 1989, they entered into agreements with the European Union. The agreements were given the name “Europe agreements” to signify the political importance.60 They dealt not only with trade and related matters under the European Union’s exclusive competence, but included sections about political dialogue under the competence of member states. As a result of this mixed competence, both the European Union and the member states acceded as partners to the agreements. Seen from the outside, it may look odd that the European Union has to square the circle and use various legal instruments, but it is the unavoidable consequence of the distribution of powers — exclusive competence as well as competence falling under member states. This can also be seen in international organizations. In the World Trade Organisation (WTO), the Commission negotiates because the substance is covered by exclusive competence. As WTO enters into areas such as intellectual property rights, a part is included under national competence. However, it has been a long standing tradition that the Commission negotiates on behalf of member states in this area. The Commission enters into agreements on behalf of the European Union and negotiates inside a mandate agreed by the member states. The Commission does not negotiate and enter into agreements for the Commission. It acts as the representative of the member states. This is now the general rule. There are exceptions, however, for instance, in UNCTAD, where the Commission and the Presidency of the Council normally represent the European Union. The Commission speaks when matters under

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exclusive competence are on the agenda; the Presidency speaks when matters under the member states’ competence are dealt with. For the EU institutions, the dividing line between exclusive competence and competence under the member states is clear and rarely disputed. Prior to international negotiations, the EU stance will be fixed at a Council meeting where the dividing line between the two competences will be settled. In case of disagreements, the matter will be referred to the Court of Justice. It looks cumbersome and has sometimes given rise to some confusion, but gradually the pieces of the puzzle have fallen into place.

COMMON FINANCING LINKED TO COMMON POLICIES61 The basic principle behind the EU budget is to link financing as well as expenditures to the common policies. The EU budget is not like a normal national budget geared to redistribute income, and/or an economic policy instrument to stimulate or put the brakes on the national economies. Its limited size — even at its highest point, total EU expenditure has not surpassed 1.10 per cent of member states’ Gross Domestic Product (GDP) — puts a role outside the financing of common policies, beyond reach. The financing and expenditures are linked to common policies and accordingly reflect the common policies. Until 1971 expenditures from the EU budget were financed by contributions from member states. This model reflected what has been the norm for international cooperation and, in particular, intergovernmental cooperation. In 1970 the European Union passed a decision62 replacing financial contributions with what in EU jargon is termed “own resources”. That term covers the conceptual change of financing EU activities from national contributions to financial resources not needing transfer from the national budget, but channeled directly to the European Union without any kind of national procedures, hence the label, “own resources”. The Court of Justice has twice ruled that failure to credit own resources constitutes failure to fulfill its treaty obligations.63 “Own resources” consist of customs duties and import levies on agricultural products. When recalling the foundation of the original European Union, it is not difficult to see why the term “own resources” is used. Forming a customs union by dismantling internal tariffs and harmonizing external tariffs means that it becomes irrelevant where in the European Union the import takes place. A product may be imported in Rotterdam, but consumed

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in Germany. Infrastructure and geography determine where in the European Union a product is imported and the customs duty is collected. This place does not necessarily coincide with the place for final consumption. It would be strange to let the importing member state keep the revenue that was in fact paid by the member state where final consumption took place. The idea of channeling these revenues directly to the European Union removes any risk of discrimination among member states which might otherwise have arisen. The same goes for agricultural levies. At the early stage it was realized that customs duties and agricultural levies would not be sufficient to finance EU expenditure as the reduction of customs duties following international agreements and world trade rounds automatically leads to lower revenues. As a supplement to these two financial resources — own resources — the European Union agreed that up to one per cent of a uniform assessment basis for value added taxation (VAT)64 could be used for financing the European Union. There were two reasons for choosing VAT. In the 1960s and early 1970s, lower consumption was high on the political agenda and a value added tax conformed to that objective. Economically, efforts were being made to facilitate the free movement of goods through a harmonized basis for assessment of VAT so the endeavours to remove barriers to trade could help in financing the common policies. A uniform assessment basis would promote non-discrimination among the member states.65 Despite bringing in VAT as a third source of revenue, the evolution of the integration implying larger expenditures, combined with falling revenue from customs duties and agricultural levies, made it necessary to introduce a new — fourth source of financing. In 1988,66 member states introduced a share of their GDP. This was conceptually a step backwards in the sense that for the first time since 1970, a link to the common policies was abandoned, and the financing was based upon the economic strength of member states. In 2005, this share of total financing increased to 73 per cent of total expenditure, making it by far the largest and most important source of financing and undermining the link to the common policies.67 On the expenditure side the Commission executes the budget in conformity with decisions by the Council. Expenditures are linked to common policies agreed in the Council, as was the case for revenues. The inventors of the integration process looked at this as a driver. The more the common policies, the higher the total EU expenditure. Common policies would enrol more member states in common activities, giving rise to expenditure being paid out to all member states and working towards a more equitable distribution of expenditures among member states. They quite

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clearly saw the budget mechanism as a cornerstone in the integration, stimulating the adoption of more common policies. This did not work out as planned. For a long time the Common Agricultural Policy was the only common policy giving rise to expenditures. The result of the underlying mechanism was that expenditures went primarily to countries having a share of agriculture in their GDP above the EU average. The discussion in the early 1980s of the British budget problem illustrated this. Britain saw this as an unfair or unreasonable high flow of revenues from Britain to the European Union and an unreasonable low flow of expenditure from the European Union to Britain, resulting in what the United Kingdom termed “net contributor” — Britain paid in more than it received from the European Union. The flaw in the British arguments was that the system worked as designed. Britain paid more than its GDP share into the EU budget because its ports functioned as transit points for the import of industrial goods into the European Union. A share of goods registered as imported in the United Kingdom was actually consumed in other EU countries. At the same time, the United Kingdom was the net importer of agricultural goods leading to a large sum of agricultural levies. The share of financing from the United Kingdom to the European Union surpassed its GDP share. The customs duties did not “belong” to Britain as the goods were not necessarily consumed there, and agricultural levies were designed to divert British import of agricultural goods from outside sources, to imports from the European Union. Politically it can be debated, but as the Treaties were written and implemented, the Customs Union and the Common Agricultural Policy implied what is termed “EU preference”, meaning that member states should be encouraged to trade with each other. As for the expenditure side, the correct remedy in the eyes of the integration’s fathers would have been to implement common policies in areas where expenditure would go to Britain. This was also done to a certain extent with the Regional Policy and Social Policy — both of these policies have a fund as an important part of their activities — but not sufficient to correct what the United Kingdom called an imbalance. The debate and the negotiations about the British problem led to the acceptance of the term “net contribution”. Instead of looking at the budget as a consequence of common policies, acknowledging the link between financing (revenues and expenditures), this debate diverted the EU financing away from the link to common policies, to financing based on GDP share, and allocation of expenditures, with an eye on distribution among member states.

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It can be said that the original principle of financing, linking it to the common policies, has gradually been undermined since 1980, and today (2006) resembles the traditional financing of international cooperation, thus losing a large degree of its “magic” touch as something new and inventive. For the integration process, this poses the danger that focusing on what member states pay into the EU budget and what they get back, leads to a wish — politically almost irresistible –– of balance; if so, it can be questioned what the value added is of the common activities. The way the European Union is financed has stopped to function as a driver of the integration.

OPENNESS Since 1992 the European Union has transformed its decision-making procedure from being non-transparent and inaccessible to outsiders, even to those with a strong interest in EU legislation, to an open, yes by international standards, extremely open, procedure. This development runs contrary to policies hitherto pursued by some member states and has encountered some resistance, which is being worn down by public pressure and the obvious difficulty of having to explain and defend a position that says no to openness.68 The push came in 1992 after the Danish rejection of the Treaty of Maastrict. It triggered soul-searching inside the European Union to discover why the Treaty, so obviously attractive in the eyes of politicians, was not equally attractive to the populations. This soulsearching was intensified after the extremely narrow French approval of the Treaty by a referendum (a paper thin majority of 51.05 per cent yes, 48.5 per cent no), and the Conservative government in the United Kingdom running into massive opposition from its own ranks. The parallel is striking to what happened in the European Union after a majority of French and Dutch voters in 2005 rejected the proposed constitution. Many explanations were put forward for this phenomenon that was completely new and unexpected for the European politicians. One of the answers was that the decision-making procedure was aloof, non-transparent, and took place behind closed doors. This criticism was justified, but also somewhat overdone as many of the critics, perhaps conveniently, forgot to compare the EU decision-making procedure with national decision-making procedures. If they had done so, the scoreboard would have shown that the EU decision-making procedure was not far off the mark, and more or less congruous with some, albeit not, all national procedures. The political conclusion was, however, that the European Union needed more openness and fast. The British presidency took the initiative, and at two

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meetings in the European Council during the second half of 1992 — in Birmingham and Edinburgh — the first and decisive steps were taken to introduce a more open and transparent decision-making procedure. At the Meeting of the European Council in Birmingham,69 on 16 October 1992, an annex was devoted to what was termed “A Community close to its Citizens”. A political pledge was given to introduce more openness, and the Foreign Ministers asked to put forward proposals to that effect at the next meeting of the European Council a few months later. The conclusions from the European Council in Edinburgh (11–12 December 1992)70 dealt for the first time with the matter. In an annex, it says almost breathlessly in the first line, “The process of opening up the work of the Council will start in the following ways.” The main provisions called for an open debate, televised, when major legislation was on the agenda, forcing member states to make their fundamental positions clear in public. Even more important was the element calling for member states to disclose when they had voted against a proposal, accompanied by the obligation to disclose declarations given to the minutes of the Council. Until then, the result of a vote, but not which member states had voted yes or no, was made public. Even if it was known by leaks how member states had voted, a formal obligation to come clean marked a major change. For the decision-making procedure, the change was important. It became more difficult for member states to hide behind one another. Before the change, it was somewhat obscure who had actually voted no and why. Not so anymore. These were useful, timid steps. What mattered was that a process had been started. In 1993 the Council and the Commission agreed on a common guideline for the right of access to documents. It opened the door for getting access to documents in the same way as the rules operated by most member states for national citizens. The start was a bit fumbling. Sometimes access was granted and sometimes not. A decisive case emerged in 1995, initiated by The Guardian. The Guardian had been refused access to certain documents and took the case to the Court of Justice. It ruled that the objective was to give the public wide access to documents, and rejection of such requests should be based on a specific assessment. It was no longer possible for the institutions to reject requests out of hand or with reference to a standard formula. Each case had to be dealt with separately and on its own merit.71 The access to documents in the European Union is at least as open as in the member states. In 1997 the more openness initiative took one more step forward and inscribed in the Treaty72 the following principles:

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This Treaty marks a new stage in the process of creating an ever closer union among the peoples of Europe, in which decisions are taken as openly as possible and as closely as possible to the citizen.

The preliminary keystone was established in 2006 when the European Council at its meeting in June73 agreed to increase the openness and transparency of the Council’s work on EU legislative acts by broadcasting such deliberations on the internet in all official EU languages.74 The process has accelerated over time, and today all Council deliberations on issues (a majority) where there is co-decision with the European Parliament are open through televised debates. In 1995 the European Union got its own Ombudsman (an independent person to whom citizens can file complaints). The Ombudsman has his own home page75 setting out what the Ombudsman can do for the citizens and how to file a complaint. The legal basis is Article 138 (e) in the Treaties and the relevant paragraph setting out what precisely he is supposed to do reads like this: In accordance with his duties, the Ombudsman shall conduct inquiries for which he finds grounds, either on his own initiative or on the basis of complaints submitted to him direct or through a member of the European Parliament, except where the alleged facts are or have been the subject of legal proceedings. Where the Ombudsman establishes an instance of maladministration, he shall refer the matter to the institution concerned, which shall have a period of three months in which to inform him of its views. The Ombudsman shall then forward a report to the European Parliament and the institution concerned. The person lodging the complaint shall be informed of the outcome of such inquiries.

There are two main points to note. First, the Ombudsman can take the initiative himself to investigate a matter. Second, in the case of institutions he generally has no power to enforce his views, but relies on the self-discipline of the member states. He can make it known that in his judgment maladministration has taken place and hope, indeed, expect, the relevant EU institution to act accordingly, but if it doesn’t, there is not much more he can do.

ENHANCED COOPERATION In principle all member states participate 100 per cent in all aspects of the EU system. The system worked this way until the entry of the United Kingdom,

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Ireland, and Denmark into the European Union in 1973. After that it started to crack.76 During the 1970s and early 1980s the integration was stumbling and did not make much progress. The idea of what in EU jargon is called “variable geometry” emerged, signalling the idea that not all member states necessarily had to take part in all aspects of the integration.77 The background for this line of thinking was the perception among the original six member states that the United Kingdom and Denmark, and after its accession in 1980, also Greece, did not share the fundamental objective of the Treaties as expressed by the words “an ever closer union”. In the opinion of the founding member states, the newcomers saw the European Union as more of a necessity or convenient framework for economic globalization, and less as progress towards a politically united Europe. If any doubts on this had existed, they were removed by the European policies of Prime Minister Margaret Thatcher, making it clear that there were limits to not only how fast, but how far, the British would like the integration to go. The logical response, and indeed the only door open, for those favouring a stronger and deeper integration was to dismiss the notion of universality in the form of all member states taking part in all aspects of the integration. The next step was whether to live with this reality and not inscribe it in the Treaties, or change the Treaties to make reality conform to the legal basis governing the integration. The first step was taken implicitly and tacitly by the European Union out of sheer necessity to avoid a standstill. During the negotiations on the Treaty of Maastricht in 1991, it became clear that the United Kingdom was not prepared to join what was called the Social Charter.78 The Conservative government took pride in hard won changed conditions in the British labour market during the 1980s and felt that the Social Charter would undermine, or could be used to roll back, these changes. It was deemed politically impossible for Prime Minister John Major79 to accept the Social Charter — even if he had wished to do so — when no indications pointed to this. Denmark wanted a special provision concerning its procedure for joining the Economic and Monetary Union. After the rejection by a slim majority of the Danish voters in June 1992 of the Treaty of Maastricht, Denmark achieved a virtual derogation from four of the new items included in the Treaty (Economic and Monetary Union, Common Defence, Justice and Home Affairs, Union Citizenship). These special provisions were necessary to keep the European Union going, as the other member states wished to make progress, and the British and the Danes did not want to take part in all chapters. If the European

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Union had insisted on universality, the United Kingdom would not have signed the Treaty of Maastricht and/or Denmark would have blocked its ratification. It shows the ingenuity of the European Union and once again the political will to make compromises to accommodate particular problems of individual member states, while at the same time pushing the integration forward. This change of mindset led to the next step: incorporating variable geometry in the Treaty. The next enlargement in 1995 with Sweden, Austria, and Finland promoted this line of thinking. In 2006 Denmark still operates its four derogations.80 The United Kingdom did sign up to the Social Charter after the change in government in 1997 from Conservative to Labour, but has joined neither the Economic and Monetary Union nor the Schengen cooperation on free passage of borders. Sweden does not participate in the Economic and Monetary Union. Ireland stands outside the free passage of borders as a consequence of its open borders with the United Kingdom. After the enlargement on 1 May 2004, with eight Central and Eastern European countries, plus Malta and Cyprus, and on 1 January 2007, with Bulgaria and Romania, variable geometry may look more attractive, and the prospect of seeing all member states applying universality, more remote. The new members all wish to join the grand designs such as the Economic and Monetary Union. So the scope for enhanced cooperation may be found in practical policies, for example, taxation of companies where the loss of prestige may look limited even if the tangible costs may be large. Even if some traditionalists among Europeans favouring the integration still keep the flag flying that advocates the principle of universality, there is no doubt that the European Union has turned the corner and there is no way back. It is in reality impossible to see all member states taking part in all aspects of the integration. Faced with this political reality, the European Union opted for making the impossible possible by including provisions in the Treaties opening the door for variable geometry. The ingenuity led to adoption of another label namely, “enhanced cooperation”. The first and decisive step to legitimize enhanced cooperation in the Treaties was taken by the Amsterdam Treaty, but it was the Treaty of Nice in 2003, which in Articles 43 and 44, fleshed this out. Although variable geometry as mentioned above has been used in practice for many years, “enhanced cooperation” as incorporated in the Treaties has never been formally decided and institutionalized for a group of member states. The importance should not, however, be underestimated, as it opens the door for choosing this road inside the Treaties and using the institutions

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as stated in Article 43. The change of vocabulary from variable geometry to “enhanced cooperation” reflects the wish of member states to prevent a few member states from blocking the large majority moving on. The crucial terms are “inside the treaties” and “using the institutions”. It should also be recalled that enhanced cooperation is open to any member state wishing to participate, which in practice means that it cannot be a closed club with a small group going ahead and rejecting participation by others. Enhanced cooperation can also be perceived as a threat to be used against sceptical or recalcitrant member states. By having the option to apply enhanced cooperation and leaving such member states out in the cold, the majority stands a better chance of getting all member states to compromise on the topic under discussion. Specific vocabulary can be tedious. However, it is useful to distinguish between “opt out” and “opt in” when looking at member states standing outside particular areas of the integration. An “opt out” clause means that the member state has chosen to stand outside, with no plans to join later. It does not necessarily mean a permanent derogation as the United Kingdom joining the Social Charter after a change in government shows, but it points in that direction. An “opt in” clause means that a member state has chosen to stand outside, but reserves for itself the right to join later on, having full control over how and when to do so (the member state decides for itself, the other member states cannot block it).81

RESPECT FOR NATIONAL IDENTITIES The question about identity has always been an extremely difficult and sensitive point for the European Union. Most opinion polls show that the people living in Europe have divided loyalties for Europe and see identity as between European, and a member of some kind of local community, for example, the German Länder, or regions in, for example, France, Italy, and Spain, or Scotland, and to a certain extent, Wales in the United Kingdom. Very few Europeans will say that they feel European only, or overwhelmingly European, when asked about their identity. For many years the mainstream thinking — in what from time to time, somewhat contemptuously, was called “Brussels” — was to shape some kind of European identity or even European culture. The reaction from citizens all over Europe indicates that this is not viable. On the contrary, there is strong evidence that as economic globalization moves ahead, many Europeans see a stronger and deeper national or regional identity as a counterweight.

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The Treaty of Maastricht (formally the Treaty on European Union) took a first and decisive step towards highlighting the importance of national identities and, by doing so, issued the verdict that the grand idea of a European identity was not attractive for the population, but on the contrary, made it more difficult to gain support for the European Union. The Treaty stated explicitly82 that “The Union shall respect the national identities of its Member States”. Seen in the context of the focus on the principles of subsidiarity and proportionality there clearly was a swing in political direction supporting the new wording. The Treaty of Maastricht integrated Articles on, among other things, education and culture in the treaties. In both cases, the national identities and their importance are brought to the forefront. In Article 12683 about education one of the paragraphs runs like this: “while fully respecting the responsibility of the Member States for the content of teaching and the organization of education systems and their cultural and linguistic diversity”.

It is clear statement pointing to the importance of the national identities. The same goes for Article 12884 about culture where the words “respecting their national and regional diversity” are found. The integration had been pushed further and deeper by incorporating education and culture in the Treaties of the European Union. What may be called the true Europeans — interpreted as those genuinely wishing for a European identity — have had to abandon ideas about a European identity. They have had to pay the price and calm fears about such a development among a large number of people living in the European Union. In fact, the Treaties can now be used to safeguard national identities. This evolution was taken several steps further in the proposed Constitution, which in Article I-5 explicitly says: “The union shall respect the equality of Member States before the constitution as well as their national identities, inherent in their fundamental structures, political and constitutional, inclusive of regional and local self-government.”

The basic conclusion when discussing national identities inside an economic integration such as the European Union is a strengthening of national identities and not, as many would have expected, some kind of obliteration. National identity has grown stronger. The drivers of the integration have gradually been forced to take this into account when amending the Treaties.

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LANGUAGES When the European Union was established in 1958, four languages were acknowledged as official languages: French, German, Italian, and Dutch. After each enlargement the new member states nominated a language to qualify as an official language (the United Kingdom nominated English in 1973, Greece nominated Greek in 1980, and so on). In 2006 with twentyseven member states, twenty-three languages are official.85 This has often been ridiculed, with the European Union described as some kind of Babel Tower where all speak their mother tongues, and people do not really understand one another. It takes time and costs a lot of money to translate all legal acts into all official languages that is required before they can come into force. In meeting rooms the space and logistics to ensure simultaneous translation for all these languages look at a glance to be superfluous at best, and enormously wasteful in the eyes of many. The fact is, however, that in an economic integration such as the European Union, which issues legal acts, many of which are directly applicable to the citizens, all citizens, regardless of language abilities, must be able to read them. This condition can only be fulfilled if they are available in the language used by national authorities for national legislation. It is easy to imagine the uproar if legal acts were issued in only a few languages and ordinary citizens were unable to read them. It is equally easy to imagine the feelings if a minister speaking only his/her mother tongue could not argue the member state’s case before the Council. The funny thing is that the criticism against what is often called the chaos of languages is often voiced by the very people criticizing the European Union for being too distant in its relations with the citizens. In many of the working groups, officials often choose, and for practical purposes, to use one of the main languages of the European Union. Officials in the institutions can, of course, not use their own language in conversations with colleagues or in drafting documents. At the beginning of the European Union, French was the dominating working language — now English has clearly taken over.

RELIGION The borders of the European Union follow more or less the borders of the Catholic and Lutheran Church in Europe. All of Western and Central Europe belong to one of these two churches. The same is the case for Eastern Europe, broadly speaking. Only a few countries such as Greece (the Orthodox Church) fall fully, or partially, outside these two churches.

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Religion has nothing to do with the integration. Neither the original Treaty of Rome nor the Copenhagen criteria adopted at the meeting in June 1993 by The European Council, stipulating conditions for adhering countries, mentions religion. It was never intended to be the case and any attempt since the mid 1950s to incorporate religion and give it a role has been vigorously rejected. This was also the case during the meetings held by the Convention preparing the draft European Constitution. The relevant Article concerning the Union’s values86 refers explicitly to “pluralism” as one of the Union’s values. This falls in line with secularism and the grip on the European mindset exercised by secularism,87 regardless of provisions about religion in various constitutions.88 When discussing religion and the European Union, the point is a different and maybe even more interesting one: the impact of religion on the mindset of people. There is no doubt that the European mindset has been framed by secularism and although most Catholics and Lutherans would probably deny it, their views on societal matters do not diverge very much. Having grown from the same root, their societal values are more congruous, paving the way, broadly speaking, for a common view on society among member states with a majority of people belonging to either the Catholic or the Lutheran Church. It would be strange to deny or reject that these common cultural roots have opened the door for the strong integration, in the sense that no fundamental barrier with regard to societal development has arisen. It is a hot topic in Europe whether the European Union can or should include Turkey as a member state. There are several dimensions to this question. The first one, which is not so difficult to dispose of, is whether the fact that a country is overwhelmingly Muslim prevents it from joining. The answer is no. No Articles and no criteria stand in the way of Turkish membership. The second question is more complicated and constitutes the real problem. It raises the question of whether Turkey, shaped by Islam for more than 600 years, has a mindset and a perception of society sufficiently congruous with the European Union as it is now with twenty-seven member states, all with a mindset shaped by Christendom. This is the real problem to which there is no foregone conclusion. It would be nice to skirt the issue and pretend that Turkey’s integration would be smooth or run in the same way as the integration of, for example, the Central and Eastern European countries. It will not.

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But it would also be wrong to take the stance for which there is no foundation — that because Turkey is overwhelmingly a Muslim country, it cannot join the European Union. The very principle of secularism rules out any idea that the religion of a majority of its population can disqualify a country from joining the European Union.

DURATION, AMENDMENTS, AND MEMBERSHIP In its final provisions, The Treaty of Rome lays down the principles for the duration, amendments to the Treaties, and future membership. They are all politically sensitive questions. The original principles have all been basically unchanged. i) As for duration, the Treaties89 say: “This Treaty is concluded for an unlimited period”. This is in theory legally binding, but in practice no treaty and/or membership of an international organization or adherence to a treaty will be respected, unless it reflects the interests of member states. ii) It follows from this logic that the text in the Treaties is primarily of a political nature. It is difficult to see institutions and/or member states preventing another member state from leaving the European Union in case it wants to do so. There is indeed such a case. Greenland, a part of Denmark, joined the European Union together with Denmark in 1973. Greenland has home rule and in the course of the 1970s the sentiment grew on the island that membership in the European Union did not correspond to its interests. The main reason was dissatisfaction with the Fisheries policy, which the Greenlanders thought deprived them of natural resources. After several years of negotiations, an agreement was reached containing provisions for some continued fishing by member states in Greenland waters and allowing Greenland to leave the European Union, which it did with effect from 1 January 1985.90 This example demonstrates that when discussing integration, duration, and the possibility for a member state to leave or being forced to do so, everybody is better served classifying it as what it is: a political rather than a legal problem. Legality will never govern such matters and legality cannot twist political realities. The proposed Constitution formalized the possibility of leaving the Union. iii) The treaties91 specify a procedure for amendments of the Treaties stating that

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The government of any Member State or the Commission may submit to the Council proposals for the amendment of the Treaties on which the Union is founded. …… The amendments shall enter into force after being ratified by all the Member States in accordance with their respective constitutional requirements’

This is one of the few exceptions to the general rule giving the Commission exclusive right of initiative. However all amendments of the Treaties have started with comprehensive proposals put forward by the Commission, supplemented by contributions from, among others, The European Parliament and member states. The procedure also stipulates that unanimity is required, followed by national ratification in all member states. EU legal acts come into force also in member states that have voted against them, but this cannot be, and is clearly not the case, for amendments to the Treaties. It has been discussed a few times whether it was possible or preferable to introduce a provision saying either, that an amendment comes into force when a certain number of member states have ratified it or, comes into force for those that have ratified it. Every time this theme has been discussed it has run aground. Both politically and legally it would bring about incalculable consequences to operate with Treaties not in force for all member states. The Treaty of Rome opened the doors for other European nation states,92 stating that any European state may apply. The procedure is that the Commission puts forward an opinion whether membership is feasible or not, after which the Council decides with unanimity, followed by ratification by the member states. This procedure has been amended slightly over the years, but the basic principles and the prescribed procedure are still valid.

Notes 1. Parts of this chapter, especially (1) to (3) are sourced from my book The Future European Model: Economic Internationalization and Cultural Decentralization (1995), and my booklet A New International System, published by ISEAS, 2004. 2. http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/04/1195& format=HTML&aged=0&language=en&guiLanguage=en. 3. Title VI in the Treaty of Amsterdam (signed on 2 October 1997, came into force

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on 1 May 1999) available at http://www.europarl.europa.eu/topics/treaty/pdf/ amst-en.pdf. Title IV in the present updated Treaty on the European Community. Title VI; article K. 14 in the Treaty of Amsterdam. Such transfer requires not only unanimity, but subsequent ratification in the member states according to their constitutional requirements. Some member states have begun the process of constituting common armed forces. An example is the so-called Eurocorps, which is an army corps with contingents from five framework nations (France, Germany, Belgium, Luxembourg, Spain). Even the first president of the French Fifth Republic, Charles de Gaulle, normally known for his strong and unbending safeguarding of French interests, did acquiesce in the transfer of sovereignty invested in the Treaty of Rome. Article 192 in the updated treaties, formerly article 138B. Note (1) a majority of the members, not the votes cast, (2) that the wording is “request”, putting a little bit of ambiguity in the wording, and (3) that the European Parliament cannot itself put forward a proposal. Paragraph 213 and Protocol 1, http://europa.eu.int/eur-lex/en/treaties/dat/ nice_treaty_en.pdf. The mandate of the present Commission expires in October 2009, meaning that before that date, an arrangement to implement the new principle in practice must be available. This decision was incorporated in the proposed Constitution, Paragraph I-26, 5-6, http://europa.eu.int/constitution/index_en.htm. An analogy can be made to ministerial portfolios in a national government. The common position in the Council is an agreed text awaiting final and formal approval. Do not confuse this requirement for unanimity with voting rules for adoption of a legal act after all negotiations have been brought to a successful conclusion. A description of management committees for the Common Agricultural Policy can be found at http://europa.eu.int/comm/agriculture/publi/fact/comit2001/ comi_en.pdf. http://aei.pitt.edu/1408/. http://aei.pitt.edu/1451/. http://aei.pitt.edu/1919/. The Conclusions from each meeting of the European Council can be found at http://europa.eu.int/european_council/conclusions/index_en.htm. Committee on Civil Liberties, Justice And Home Affairs. For the course of events, see for example http://en.wikipedia.org/wiki/ Rocco_Buttiglione and http://news.bbc.co.uk/2/hi/europe/3718210.stm. Article 251 in the Treaties, formerly Article 189B. An emergency procedure to bridge the gap for a limited period is available, but it can only last for a couple of months. It temporarily authorizes the Commission to use 1/12 of its expenditure monthly for existing activities.

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24. Treaty of 22 April 1970 amending certain budgetary Provisions, Official Journal L 2 of 2 January 1971 — no English text — available at http://www.ena.lu/ europe/european-union/treaty-amending-certain-budgetary-provisions1970.htm. Treaty of 22 July 1975 amending certain financial provisions of the Treaties establishing the European Communities, Official Journal L 359 of 31 December 1977available at http://www.legaltext.ee/text/en/T2130.htm. 25. For a description of what “own resources” is, see for example http://europa.eu/ scadplus/leg/en/lvb/l34011.htm. 26. It fits neatly into constitutional history where Assemblies always fought the King about the right to impose taxes. 27. The Court of Justice, The Court of First Instance, The Civil Service Tribunal. When it rules, it may sit in Full Court, in a Grand Chamber with thirteen judges, or chambers of three to five judges. 28. http://www.emplaw.co.uk/topinfo/kreil.htm. 29. http://www.eca.eu.int/eca/mission/eca_mission_index_en.htm. 30. http://www.eib.eu.int/about/index.asp?designation=keydata. 31. http://www.cor.eu.int/en/presentation/Role.htm. 32. A complete list can be found at http://europa.eu.int/agencies/index_en.htm. 33. http://www.eea.eu.int/main_html. 34. “The presidency is costly”, said Jean Marc Boegner. 35. http://news.bbc.co.uk/2/hi/europe/4535162.stm. 36. The so-called high representative which is de facto Secretary General of the Council takes part in the troika’s activities when it operates on the ministerial level, but can be said to be part of the presidency. 37. Sometimes the Commission is mistakenly seen as some kind of secretariat. This is not true, as the explanation in this chapter has shown. The Commission is one of the EU institutions having its own powers, serving neither the member states nor the other institutions. 38. Mr Solana took office as the first High Representative and Secretary General of the Council on 18 October 1999. 39. Paragraph 207 in the Treaty of Nice. 40. http://www.bmdf.co.uk/rometreaty.pdf. The text of all treaties can be found at http://europa.eu.int/eur-lex/lex/en/treaties/index.htm. 41. The Treaty of Maastricht was signed on 7 February 1992. 42. This was actually done with the Treaty of Amsterdam coming into force on 1 May 1999. 43. The rule is a bit strange as the original European Union was constituted by six member states, thus opening the door for three yes and three no votes — a stalemate. 44. (1) Matters concerning taxation, (2) Article 235 about measures to achieve an objective for which no specific legal basis is available, (3) steps to establish common defence and (4) transfer of police matters and criminal law from

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46.

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intergovernmental cooperation (pillar one) to supranationality (pillar three). The last two questions do not only require unanimity, but also ratification by member states according to constitutional requirements. This analysis covers only the part of European Union inside the integration grown out of the Treaty of Rome (the supranational part) while the Common Foreign and Security Policy, plus some aspects of Justice and Home Affairs, still operate under the heading of intergovernmental cooperation, hence unanimity. The procedure for qualified majority voting after the Treaty of Nice asks for three criteria for a qualified majority vote: 73.9 per cent of the votes, a majority of member states, and 62 per cent of total population. All three must be fulfilled. This was actually the case until the first enlargement with the United Kingdom, Ireland, and Denmark on 1 January 1973, with twelve out of seventeen votes constituting qualified majority. After 1 January 1973, forty-one out of fifty-eight votes were required and as the large member states had ten votes each, they needed at least one smaller member state to obtain qualified majority. There is a bit of confusion when referring to the Articles as they have been reshuffled during several amendments of the Treaties. I refer to the Articles in the latest revision of the Treaties which is the Treaty of Nice, but often mention the Article number in earlier Treaties, typically the Treaty of Rome, as the literature often goes back a few years and accordingly refers to those Articles. In the remaining part, both the Article number in the updated Treaties after the latest revision — Treaty of Nice — and the former Article number is referred to. This may help readers used to working with the original Treaties and amendments of the Treaties. A UN Convention laying down international rules about treaties. Available at http://untreaty.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf. The limits for discrimination against non-member states’ citizens and companies are set by other international institutions and organizations such as the World Trade Organisation (WTO). The Single Act from 1986 introduced a new chapter on cohesion, but the principle as such was first incorporated among the objectives of the European Community with the Treaty of Maastricht. The full text can be found at http://www.europarl.eu.int/charter/pdf/text_en.pdf. http://www.echr.coe.int/echr. The Council of Europe must not be confused with the European Council. The European Council is the forum for the EU’s summits (two or three every year) where the Heads of State and Governments gather. The Council of Europe was constituted on 5 May 1949, and now has forty-six member states. It is strictly intergovernmental. One of its main achievements is the Convention for Protection of Human Rights and Fundamental Freedom and the European Court on Human Rights (http://conventions.coe.int/treaty/Commun/QueVoulezVous.asp? NT=005&CL=ENG). Read about these two cases and the principle of direct effect of Community law

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and EU legal acts’ precedence over national law. A) The Court of Justice’s short description under the heading “Fundamental principles established by case law” on its websitehttp://curia.europa.eu/en/instit/presentationfr/index_cje.htm and http://europa.eu.int/eur-lex/en/about/abc/abc_13.html. B) Van Geend & Loos is case 26-62 of 5 February 1963, available at http://eur-lex.europa.eu/smartapi/ cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc= 61962J0026 and Costa ENEL is case 6/64 of July 15 1964 available at http:// eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEX numdoc&lg=en&numdoc=61964J0006. See in fine http://europa.eu.int/eur-lex/en/about/abc/abc_27.html. This was preferred when the European Union in 1977 adopted a uniform basis for assessment for value added taxation. The directive was a milestone in the harmonization of the mechanisms for value added taxation to facilitate trade. It was an extremely complicated matter taking many years to negotiate and obviously requiring different national legislations, ruling a regulation out of the picture. See http://europa.eu.int/scadplus/leg/en/lvb/l31006.htm. Full text of Article B (inserted in Article 2 in the updated Treaties): to maintain in full the “acquis communautaire” and build on it with a view to considering, through the procedure referred to in Article N(2), to what extent the policies and forms of cooperation introduced by this Treaty may need to be revised with the aim of ensuring the effectiveness of the mechanisms and the institutions of the Community. And of Article N(2): a conference of representatives of the governments of the Member States shall be convened in 1996 to examine those provisions of this Treaty for which revision is provided, in accordance with the objectives set out in Articles A and B. EU vocabulary can be tricky. Mixed competence is defined as below. Shared competence refers to areas — most policies — where both European Union and member states can legislate e.g. environment. See for example http://europa.eu.int/comm/enlargement/pas/europe_agr.htm. Reference is made to my book, Member States and the Community Budget (Copenhagen 1982). Council Decision of 22 April 1970 on the own resources system. It has since been replaced by the Decisions of 7 May 1985, 24 June 1988, 31 October 1994, and 29 September 2000 (OJ L 252 of 7.10.2000). Case 303/84 (ruling of 26 March 1986), European Court reports 1986 page 01171, available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi! celexplus!prod!CELEXnumdoc&lg=en&numdoc=61984J0303 and case 93/85 (ruling of 18 December 1986), European Court reports 1986 04011, available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod! CELEXnumdoc&lg=en&numdoc=61985J0093. In 1985 the ceiling was increased to 1.4 per cent. The uniform basis meant that the same goods and services are eligible for

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constituting the basis for payments to the European Union, but the rates of VAT operated in member states are not uniform or harmonized. So member states could maintain, which they still do, different rates without affecting payments to the European Union. The method ensured that contributions to the European Union would be neutral. Council decision 88/376 of 24 June 1988, following agreement at the preceding meeting in the European Council. In 2000, it was decided that the European Union could not dispose of “own resources” going above 1.24 per cent of the European Union’s total Gross Domestic Product. In fact, the budget has been kept at a level of not more than around 1 per cent since then. The debate disclosed the differences in national policies and traditions between member states, which had introduced openness in the domestic political system, and member states still holding back. http://www.europarl.europa.eu/summits/birmingham/bi_en.pdf. http://www.europarl.europa.eu/summits/edinburgh/default_en.htm. For a description of the case see http://www.statewatch.org/secret/freeinfo/ ch2.htm. The First Instance of the European Court of Justice ruled on 19 October 1995, in case T – 194/94 available at http://eur-lex.europa.eu/ smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg= en&numdoc=61994A0194. When amended as the Amsterdam Treaty as part of Article A now article 1 in the Nice Treaty. Council of the European Union, Press Release from 2748th/2749th meeting at 15 September 2006, document 12255/06 (Presse 241) available at http:// www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/gena/90993.pdf. There is a built-in constraint as the conclusions say that this decision aims in particular at legislative acts under the Council — Parliament co-decision procedure. This procedure covers most, but not all, proposals of most interest to the citizens. http://www.euro-ombudsman.eu.int/home/en/default.htm. To mention one example: Denmark managed to get an exception to the rules opening the market for summer houses (secondary houses) for citizens from other member states and has since maintained this particular exception from the Treaties. French speaking readers may recall the phrase spoken by a diplomat ‘Ce n’est pas une Communautée à deux vitesse mais à demi-vitesse’ reflecting the frustration among the original six member states, seeing how the first enlargement stalled the European Union. An English translation that doesn’t do justice to the French language reads: “It is not a Community of two speeds but at half speed.” Articles in the Treaties governing certain aspects of the labour market and social affairs. He replaced Margaret Thatcher in 1990.

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80. In 2000 the then Danish government tried to get rid of the derogation concerning the Economic and Monetary Union, but in a referendum, a majority voted against the proposal by the government. 81. These are political and not legal definitions and interpretations. 82. Article F, 3, now Article 6 in the Treaty of Nice. 83. Article 149 in the Treaty of Nice. 84. Article 151 in the Treaty of Nice. 85. http://europa.eu.int/comm/education/policies/lang/languages/index_en.html. 86. Article I-2. 87. Separating state and church. 88. The Danish Constitution, to mention an example, refers to “The Evangelical Lutheran Church shall be the established Church of Denmark and as such shall be supported by the State.” Other Articles in the Constitution make it clear, however, that Denmark is a secular nation state with clear separation between State and Church, the latter having no influence on government and legislation. 89. Article 208 in The Treaty of Rome. 90. Official Journal L 29 of 1 February 1985. 91. Article 204 in The Treaty of Rome. 92. Article 205 in the Treaty of Rome.

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3 GRAND DESIGNS

DEEPENING OF THE INTEGRATION VERSUS ENLARGEMENT One of the most fascinating “either — or” questions in the history of the European Union has been the dispute, sometimes almost of a theological character, of whether to deepen the integration, saying No to enlargements, or open the door for new members, with the accompanying slowing down of the integration as a risk. As always the solution proved to be a compromise. Take in the applicants and maintain the pace of the integration as far as possible. The issue came to the forefront for the first, but far from the last time, when then President Charles de Gaulle of France in January 1963 said No to the United Kingdom. The accession negotiations actually went very well, as five (all except France) of the original member states were prepared to grant concessions to Britain. France felt, however, that these concessions would change the fundamental structure and the balance between costs and benefits for member states achieved during the establishment of the European Union and the preceding negotiations from 1955 to 1958. The story goes that at a talk in 1944 between Prime Minister Winston Churchill and Charles de Gaulle as leader of the Free French, Churchill allegedly said that every time Britain had to choose between the overseas world (the United States and the Commonwealth) and Europe, it would choose the overseas world. This may 113

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explain why de Gaulle harboured strong suspicion about the British motives for wanting to join the European integration.1 In this round, deepening of the integration won over enlargement. The decision to reject fundamental changes was taken by France. The other five more or less grudgingly acquiesced. It can be said, and a good many observers have said so, that France did not defend the basic structure of the European Union, but its own economic interests flowing from the Common Agricultural Policy. This is correct. In this context, however, it must not be overlooked that the benefits accruing to France from the Common Agricultural Policy were part of the political deal and cost-benefit distribution among member states negotiated prior to the signature of the Treaty of Rome. It had therefore become part of the fundamental system, and if the British demands had been complied with, they might have changed the fundamental structure and thereby also the distribution of cost-benefits. In 1969 the situation was reversed. At the summit in The Hague, France acquiesced with British entry. Negotiations were successfully concluded in the course of 1971. The main reason was that the European Union had been firmly established. The transitional period for putting the common policies in place had expired, so no main risk of reversing gears loomed on the horizon. The British had also learned from the earlier negotiations that it was not a good idea to ask for fundamental changes and the key answer to “do you want to join the EU as it is” was an almost unconditional Yes. The history of the integration shows quite clearly that as enlargement started to include the weaker countries, the understanding grew that a strong and vibrant European Union with the economic power to shoulder the burden was a necessary condition for successful enlargement. This first became clear when Spain and Portugal joined in 1986, followed by the enlargement with Central and Eastern European countries on the agenda in the course of the 1990s. This understanding served a double purpose. It helped in offering terms suitable to the acceding countries’ economic performance, thereby alleviating the burden and boosting advantages in the first years of their membership, while at the same time prodding the European Union to adopt policies that make it capable of shouldering the task. The European Union as it looks today is more fully integrated than before the first enlargement with the United Kingdom, Ireland, and Denmark in 1973. Not only are the then existing common policies more firmly rooted, but they have been supplemented by a whole new string of common policies and common programmes. The protagonists of enlarging admitted that further integration was necessary. The protagonist of deepening the integration went along with enlarging, but monitored meticulously to ensure the deepening actually took place.

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INSTITUTIONAL APPROACH VERSUS SUBSTANCE In the same vein as the deepening versus enlargement debate, we find one on institutional approach versus substance. The original Treaty found a balance between institutional strengthening and substance. In fact, it is two sides of the same coin. Strong institutions are indispensable for pushing agreements and ensuring they are implemented. Without a grand strategy and common ideas for the integration, even strong institutions can do very little. The schism between these two approaches already emerged before the first enlargement in 1973 with the United Kingdom, Ireland, and Denmark. Several of the original member states found that the institutions should be made stronger, in particular, the European Commission, even if such a course would inevitably lead to a diminished role for the member states. France took another approach, rejecting a slide towards more supranationalism and, indeed, floated in the mid-1960s its own plan for a change of the European Union, based more on intergovernmental cooperation and less on supranationalism. This plan did not find approval.2 With the entry of the three above-mentioned countries in 1973, it was clear that the institutional side was weakened. Neither Britain nor Denmark wanted stronger institutions and more supranationality. Several attempts were made at the end of the 1970s and beginning of the 1980s to boost the institutions and push the European Union further ahead with stronger institutions as the main driver. The two most important attempts were a report tabled in 1976 by the former Prime Minister of Belgium, Leo Tindemans, and the Solemn Declaration approved by the European Council in 1983. Tindemans was given the task of revitalizing the European Union after the enlargement and the economic recession in the slipstream of the oil price increases in the 1973. Not an easy task. He focused primarily on amelioration of the institutional framework. His report got a tepid reception, even from those fundamentally sharing his philosophy. Caught in an economic recession, few Europeans could see the way ahead as one where politicians concentrated on the institutions instead of tackling the economic difficulties. In 1983 Germany and Italy succeeded in getting a declaration — called the solemn Declaration — from the European Council’s meeting in Stuttgart. Again the focus was on institutions. This time the wind had changed.3 In the mid-1980s all member states with the exception of Britain, Denmark, and to a certain extent, Greece, had changed their position from being against, to be for, a treaty revision. The crucial point was that France had joined the other original five member states in agreeing that the time had come for changes.

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This was a too strong group for the British4 and the Danes to resist. They had to give in and so they did. The subsequent negotiations led to the Single Act. The run-up to the first change of the original treaty (The Treaty of Rome) shows three things: Firstly, that understanding of the need for a change of an international treaty governing integration does not come easily. The ground has to be prepared. Solid work to mobilize political support is necessary. Only robust arguments based on sound reasoning will carry the day. As long as the need for treaty revision is obscure or rooted in more philosophical arguments nothing will come out of it. It took almost ten years from the first drive for a treaty change to getting sufficient political support. At least four reports were submitted in different contexts to open the door.5 Lesson: these things take time — they have to mature. Secondly, that it is very difficult for a small minority to stop treaty amendments proposed by a strong phalanx of member states, if their arguments are solid and those opposed to them cannot really justify their opposition. The respect for the views of others and the incessant drive for compromises inside the EU framework work only when a member state or a minority group of member states are capable of defending and explaining their positions. Lesson: one member state or a small minority of member states cannot stop the integration from moving ahead with the sole argument that they are against it simply because they are against it. Thirdly, that the views of a minority, even a small minority, carry weight as long as the negotiations are about substance, for example, a directive setting out agricultural prices or what concessions to offer third countries in a trade deal that requires sacrifices from industrial sectors inside the European Union. The endeavours of almost unlimited duration and strength will be set in motion to secure an agreement rallying all member states. When the negotiations are about the basic structure of the European Union — especially if the talk is about the institutional framework — the willingness to listen and accommodate a small minority is much less. Lesson: a minority will seldom be allowed to impose its view on the overwhelming majority shaping the institutional framework.

INSTITUTIONAL IMBALANCES The European Union has lived through one major crisis about the balance between the institutions, and there is one hard, long-running struggle that has yet to end.

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The major crisis pitched member states against supranationality or, in EU jargon, the Council versus the Commission. The current long-running struggle is between the European Parliament and primarily the Council (member states), but also the Commission.6 If you look for further internal conflicts, the gradual and silent rising role of the European Court of Justice not only as arbiter of diverging opinions, but as promoter of the integration, could be a third item. i) From the mid-1960s until about the year 2000, there was a clear divide among the member states. Some member states, represented by those supporting supranationality, wished that the Commission would exercise its full powers, and indeed get enlarged powers, while others saw the way ahead for the European Union based on a gradual transfer of power to the Council.7 A genuine crisis erupted in 1965 with the French attempt to prevent further supranationality and a stronger role for the Commission. Despite an apparent solution, it has been simmering below the surface since. It became evident when Jacques Delors8 assumed the presidency of the European Commission from 1985 to 1994 (two terms). He not only pushed the powers of the Commission to the limit in the eyes of the Euro sceptics, but also managed to build up a workable coalition among member states ready and prepared to push the integration further. Not surprisingly he irked the Euro sceptics who saw in him the archetypal Eurocrat. Be that as it may, the Commission under Delors, fulfilled and occupied the role entrusted to it by the founding fathers. The Commission became the main driver in the construction of the Single Market and laid the foundations for the Economic and Monetary Union, while at the same time playing an instrumental role in formulating the Treaty of Maastricht in 1992. No one actually staged a showdown with Jacques Delors because his successes were evident and his ability to rally political support was unprecedented for a president of the Commission — with the possible exception of the first President of the European Commission, Walter Hallstein, who worked in a less complicated political environment. Jacques Delors gave rise to much anger and ire because he pushed the integration. Even if that was his job according to the Treaties, Euro sceptics got irritated and wanted to thwart his efforts, especially as it became clear that he was successful and demonstrated political flair for picking the right issues and getting them approved. The main reason was, however, that he represented something rarely liked among politicians: somebody who has real power, but was not elected by the people. Many sceptics posed the not-out-of-context question of how it could be that a person who never faced the voters to be held accountable for his

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policies, could have so much power. They found it irreconcilable with the very principles of democracy. ii) And that leads us to the next question concerning the balance between the institutions: the role of the European Parliament. During the 1970s, members of the Assembly — in particular after the EU summit in Paris in 1974, which called for the first directly elected Parliament to take place in 19799 — became more and more impatient in their bid to obtain genuine powers in the EU legislative process. After the budget treaties in 1970, the Parliament took the bull by the horn in 1972 with the Vedel Report calling for its legislative powers to be increased.10 A lot of publicity, in particular, among those opposed to vesting such powers in the Assembly, as it was then called, emerged, although nothing came of the Report except an omen of what to see one day. It was clear to political observers that with a directly elected Parliament, it was not a question of if, but when and how much legislative power, to transfer to the Parliament and where to take it from: the Council (in principle, the member states) or the Commission (in principle, supranationality). After amending the Treaties in 1986 (the Single Act), 1993 (the Treaty of Maastricht), 1997 (the Treaty of Amsterdam), and 2003 (the Treaty of Nice), the European Parliament has obtained real powers in the legislative process. These powers may be limited by the basic structure of the Treaties. They are, however, increased every time the Treaties are amended at the cost of the Commission and the Council. Being a Parliament, it exercises powers by going public to try to mobilize and channel public support. This, however, has proved to be more difficult than many members of the Parliament would have expected, as less than 50 per cent of the population in the member states participate in the elections, thus implicitly undermining the role of the Parliament. The low turnout at direct elections gives a platform to those saying that the European Parliament is not really representative. The disappointing participation in direct elections to the European Parliament has led to some reflection on whether the national parliament should be given a stronger role in EU decision making. This is an attractive idea to several countries. The obvious drawback is that any attempt to beef up the role of national parliaments will further diminish the status of the European Parliament. Even more important is the fact that such a change would be a fundamental deviation from supranationality, turning the European Union towards traditional intergovernmental cooperation. Member states would be given back some of the sovereignty previously pooled to be exercised in common via the institutions of the European Union.

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The evolution of the European Parliament from an Assembly having little or no power, to something comparable to a chamber in a national parliament, provides the lesson that parliamentarians are not likely to contend themselves with a role as bystanders. In an institutional structure where they have a role, they will incessantly press for further influence, and the benchmark will be powers comparable to those vested in a national parliament. Accordingly, a weak parliament sows the seeds for an institutional struggle, making life difficult and sometimes channeling resources from substance to a somewhat uninteresting, but time-consuming institutional infight. The basic lesson is either to establish a genuine Parliament from the start, or be content with parliamentary control exercised by national parliaments. The European experience of having an almost non-existent chamber of Parliament representing the people (the Assembly) for the initial decades of the integration, and after that switching to a directly elected parliament with limited powers, does not provide the answer. It has definitely not appealed to the European voters who still see the Parliament as an institution difficult to place in the institutional structure. iii) The European Court of Justice is another institution that has not worked or developed exactly as the Treaties prescribed. Not surprisingly, the Court of Justice was designed primarily or exclusively as a legal institution, but nonetheless, it has put its mark on the integration as an institution assuming a political role. The primary reason lies with the member states having failed in some cases to adopt legislation called for in the Treaties. The Court of Justice has been asked to rule on cases for which other EU institutions should have passed legislation. They did not and the Court’s answer has been to rule on these. Few observers will contest that it has constantly ruled in favour of more integration. An interesting political question for which there is no foolproof answer is whether this attitude by the Court has subsequently pushed member states and the EU institutions to pass legislation faster than would have otherwise been the case. Or in other words: knowing that the Court would rule to set a precedence, the EU institutions and member states might have had the incentive to forestall such a turn of events and been prodded into action. If so, it might actually have been the chief motive for the Court of Justice. The fear of seeing the Court rule may have prodded the Council into action. The vacuum created by unclear and equivocal language paving the way for political compromises has provided the Court of Justice with the opportunity to play this role. Some would go one step further and say that

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unclear political compromises have made it unavoidable and necessary for the Court to step in and cut through the “maze”.

FIRST BATCH OF COMMON POLICIES: CUSTOMS UNION, COMMON AGRICULTURAL POLICY, AND COMMON EXTERNAL TRADE POLICY The European Union formed in the 1950s was based upon three treaties: the Treaty on the European Economic Community was by far the most important one and formed the basis for the three mentioned common policies. The European Coal and Steel Community dealt with two exclusive albeit very important economic sectors: Coal and Steel. Euratom was in principle a replica of the Coal and Steel Community, entrusted with the powers to ensure equal access to fission material for peaceful purposes — nuclear power — just as the Coal and Steel Community was to ensure equal access to coal and steel. The three original common policies constituted the backbone of what was called the Common Market, which indeed was the unofficial name of the European Union in the first decade or two. The Common Market was in reality a customs union. This is a rather limited perspective, as the common market included free movement of labour and opened up the free right of establishment and liberalization of services. It is, however, not completely wrong to look at it as a customs union. The free movement of labour had to wait for regulations concerning social security and the free right of establishment plus liberalization of services only made a serious impact on economic life in the European Union after the Single Market was launched in 1986. i) A Customs Union means that member states dismantle tariffs and quantitative restrictions for trade among the participating countries, while at the same time, harmonizing tariffs vis-à-vis the outside world — a common tariff. Goods flow freely among the member states to increase competitiveness and productivity. This construction has been at the centre of a sometimes heated economic debate and was controversial politically. A whole economic literature debating whether a customs union increases welfare or not has emerged, taking as its starting point, the analysis put forward by Jacob Viner11 and James Meade.12 Viner concluded that an increase in welfare depends on whether a customs union creates trade or diverts trade. If trade is created, welfare increases, but if trade is merely diverted from one source to another, it diminishes welfare, as it is the difference in tariffs and not production costs that determines the swing in trade patterns. Meade took the analysis one step further, but still operated fundamentally inside the same model.13

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Many of the opponents of the European Union or as it was then called, the Common Market, took the view that it would mainly produce trade diversion. A clue to whether one or the other will take place is the industrial structure among member states. If it is comparatively similar, chances are that the most efficient producers will out compete the less efficient producers, leading to an increase in welfare. If, on the other hand, the industrial structure is not congruous so that one or two producers take the market, chances are that they will crowd out more efficient producers from outside, thus leading to diminished welfare. It is difficult to say whether one or the other happened in Europe, as the Common Market was launched exactly at the moment when the international economy turned from a lacklustre performance in the 1950s to one of the longest boom periods Europe has seen. A short glance at the industry in the original six will, however, reveal that apart from Italy — or to be more precise Southern Italy — there was not much difference in their industrial structure, making trade creation more likely than trade diversion. The political signal was quite clear. The EU preference meant that EU producers should be given preferential treatment and no discrimination should take place inside the European Union. This was labelled “the community preference”. Especially during some stages of the negotiations about the British entry into the European Union, this was not understood or maybe some people did not want to understand this. When the British pointed out that British entry into the European Union would lead to diversion of trade away from traditional suppliers in the Commonwealth, the not-always-well-received answer was that Yes and this is the whole idea. Happily for the Europeans, international reduction of tariffs for manufactured goods was already so far underway that the risk of trade diversion in manufacturing was small. By taking an active stance towards the many international trade rounds since 1958, the European Union has reduced the importance of the community preference. The community preference was primarily seen in agricultural goods via the Common Agricultural Policy. ii) The Common Agricultural Policy (CAP) reflects the same basic principles and mechanisms as the Customs Union, but was more complex, and a genuine study calls for deep understanding of a whole string of mechanisms. Agriculture was more protected against imports than industry was. This is explained by a combination of politics and economics. The strategic importance of feeding the nation in case of war leads many countries to set agricultural production at a sufficiently high level, without cost effectiveness as an imperative.

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This argument was reinforced by a supply deficit in Europe in the postwar period, which enhanced the importance of food security. Traditionally European farmers have an edge over other groups in society, when talking about political influence, as indeed is also the case in countries such as Japan, Korea, Switzerland, and Norway. Until the end of the twentieth century, a large part of urban population in Europe still had roots in the countryside, and thus understood and sometimes sympathized with the political views of farmers, even when the consequences meant a higher price for farm products. Some politicians even saw Europe’s agriculture as a kind of Europe oil — an export sector, which Europe possessed, giving it unique opportunities to supply to other parts of the world what they did not have, but Europe did. The CAP introduced the principle that a farmer in Europe should get a guaranteed price, regardless of where in the European Union the product was sold.14 This political decision gave rise to the mechanical problem that the difference between world market prices and EU prices had to be bridged to guarantee farmers in all member states the price fixed by the Council. The instrument chosen for this task was agricultural levies imposed on imported agricultural products when world market prices were lower, supplemented by export subsidies. Mechanically this was fine, but political pressure constantly forced the European Union to increase prices, taking little or no account of the level of world market prices. The effect was a rising gap between EU prices and world market prices. Two problems arose: First, that production increased inside the European Union, as higher prices were in themselves an incentive to increase production. Second, that this increased production could not be sold on the market, leading to surplus production. This surplus production had to be disposed of. Either it was bought by the European Union for destruction or dumped on the world market. Strong criticism arose inside the European Union, which were supplemented by an outcry from competitors in the world market who felt that the European Union violated the rules of the game. As taxpayers had to foot the bill, this policy became the catalyst for clashes between member states. It was the age of wine lakes and butter mountains, depicting a sore picture of the European Union as a wasteful economic group, neither capable of good household economics within itself, nor playing by international rules. The CAP was one of the most severely criticized common policies of the European Union. Member states such as the United Kingdom, being a traditional importer of agricultural goods, have balked at the high prices.

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Outside the European Union more cost-effective producers have taken aim at the barriers that shut the door for their products, regardless of the fact that they were more competitive than the EU producers. On top of that comes the acrimonious discussion about economic benefits flowing to agricultural exporters inside the European Union such as France, The Netherlands, and Denmark, paid by the agricultural importing countries such as Britain and Germany. Those who want to dismantle the CAP overlook one factor, namely that without the CAP, the European countries would not have gone, from the existing system to free trade with no distortion. On the contrary. Without the CAP, the European countries would, without any doubt at all, have introduced national measures to protect the farming sector. No one knows whether the level of protection under national systems would have been higher or lower than the present one with EU controls prohibiting national support measures. One of the advantages of the CAP — rarely mentioned — is that agricultural subsidies, in whichever forms they take, are transparent and under control by an international institution, in this case, the Commission. This would hardly be the case for national subsidies. There are several other illustrations of the sensitiveness of agriculture when negotiating international trade agreements and/or integration. It is per tradition one of the most difficult ones to deal with inside the World Trade Organization (WTO). When negotiating Free Trade Agreements (FTA) a country like Japan is very cautious about giving concessions touching upon vested agricultural interests. The lesson to be drawn from the history of the Common Agricultural Policy is not necessarily that the policy as such was wrong, but that political realities can distort the original objectives, starting a slide towards a totally unwanted situation. This is especially true for economic sectors exposed to strong and well-organized pressure groups that are able to mobilize political support. In Europe, consumers far outweighed the farmers, but were never able to organize themselves as powerfully as the farmers were. iii) The three common policies constitute a whole. They ensure that goods can flow freely inside the European Union while at the same time introducing uniform custom tariffs vis-à-vis foreign countries (community preference). This requires a common and uniform EU stance during international trade negotiations. They also formed the foundation for the financing of the European Union by channeling revenue from the customs duties and agricultural levies into the EU budget, thus linking the financing of common activities

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with the common policies. This made a lot of sense, in particular, in the early days of the European Union, as financing of the Common Agricultural Policy took up a dominating share of total expenditure. It was, simply put, logical to finance these expenditures from revenue coming in by invoking the community preference. Politics should never be overlooked or forgotten and that is also the case when analysing the European integration process. These three common policies meant that France and Germany both got what they wanted and as the Franco-German axis at that time was running the show, the European Union could not have been launched without such an understanding. Germany got free trade within the European Union for its industrial goods and could benefit from access to the markets of the other member states. For Germany, having built up its industrial power after World War II, this was the opening of a new frontier so to speak. The German domestic market was no longer sufficient to fuel the industrial growth. Access to new European markets came in handy. Germany established itself as the undisputed economic and industrial powerhouse in Europe. France got the Common Agricultural Policy. For France in the 1950s and even in the 1960s, this was of paramount importance. Not only did France get access for its agricultural products to the markets of the other five member states, in particular, Germany, but also French agricultural products could, after the establishment of the European Union, benefit from financial support when exporting to non-European markets. Since the establishment of the European Union in 1958, not a single example can be mentioned where France and Germany have broken this unwritten pact of mutual benefits. Much to the chagrin of some other member states, in particular, the United Kingdom after 1973, Germany may have flirted with, and may even have misled Britain, but has never distanced itself from the CAP to side with Britain in endeavours to downplay the role of the CAP. It should be added that the third large country among the founding fathers — Italy — obtained free movement of labour.

REGIONAL AND SOCIAL BALANCE, REGIONAL FUND, EUROPEAN INVESTMENT BANK, COHESION FUND, SOCIAL FUND, GUIDANCE SECTION OF THE AGRICULTURAL FUND From the outset it was clear that competition would be fine for the strongest economies and the strongest sectors, but would pose problems for the weaker regions and weaker economic segments of the European Union.

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The Europeans realized that an American-type model with high geographical mobility could not work in Europe. Many reasons, for example, traditions and the Europeans’ strong attachment to their regions and/or local communities meant that mobility of the workforce could not be counted on to smooth out geographical differences. Time has proved this assessment to be correct. Consequently something else was needed to alleviate the onslaught on the weaker parts of the national economies. Hence the European Funds were born, of which the Social Fund,15 supplemented by the European Investment Bank and the Guidance section of the Agricultural Fund, are the oldest ones, with others added to the panoply of instruments later. The objective of the Funds and the investment bank was to facilitate and channel financing for investment projects into the weaker regions and segments of the economy to promote growth and employment. Instead of mobility of labour with the labour force moving to where the jobs are, the Europeans tried to create jobs where the labour force actually was. The challenge was how to do this without too much distortion of competitive advantages. It is difficult to judge the performance of these policies, as the sums paid out were small compared with the total EU Gross Domestic Product — often not more than 0.20 per cent per year, but gradually rising to in the vicinity of 0.33 per cent of total Gross Domestic Product. With such small, almost negligible, financing, the Funds have not been able to work as a counterweight to market forces, with one clear exception: For several of the new member states such as Ireland, Portugal, Greece, and Spain, the financial support from the Funds proved to be substantial. They contributed handsomely to investment projects especially infrastructure, which otherwise would not have been launched. For the years 2000–2006, a total of 21316 billion Euros was earmarked for the structural funds.17 The same is the case for the twelve new member states, which joined the European Union in 2004 and 2007. Generally speaking, the Funds served as some kind of political signal that the European Union and the member states actually cared for the underdeveloped regions and segments of the economy and tried to do something about it. The critics of the Funds overlook the fact that they were not only economic but also political instruments. They were introduced to show a degree of solidarity with the weak parts of European societies, and conveyed the message across that the European Union was not an attempt to introduce another and more market-based economic model than the existing one.

The Social Fund18 The Social Fund was incorporated into the original Treaty of Rome’s chapter on social policy. It has nothing to do with policies such as

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unemployment benefits and social welfare in the labour market, but is geared to promoting mobility inside the labour market and introducing higher productivity, in short, improving the quality and performance of the European Labour force. The main tasks of the Social Fund can be summarized in the following way: • • • • • • • •

Occupational integration of the long-term unemployed. Occupational integration of young unemployed persons. Occupational integration of persons excluded from the labour market. Promoting equal opportunities for all in accessing the labour market. Specific actions to improve women’s access to the labour market. Improving education and training systems. Promoting a skilled workforce. Boosting human potential in the field of research and development.

The Regional Fund19 The Regional Fund was introduced in October 1972, when a summit between the original six and the new three member states prior to the enlargement with the United Kingdom, Ireland, and Denmark, was held in Paris under the French presidency. The original six, and, in particular, France, wanted to accommodate the British view that the Common Agricultural Policy gobbled up too high a percentage of the common expenditures. In 1972 Britain was hard hit by an economic slump; parts of Britain were classified as underdeveloped regions. This was the background for the new Fund. Or in other words, the French hoped that the Regional Fund would silence or, at least, weaken the British opposition to the Common Agricultural Policy. Maybe it was even envisaged that it could turn into a new balance of costs and benefits, supplementing the FrancoGerman balance, based on the Customs Union and Common Agricultural Policy. However it was not going to work out this way. Soon all member states wanted to benefit from the Fund, making it impossible to concentrate resources in the regions really in need. The main tasks of the Regional Fund can be summarized in the following way: • • •

Productive investment leading to the creation or maintenance of jobs. Infrastructure. Local development initiatives and the business activities of small and medium-sized enterprises.

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The Guidance Section of the Agricultural Fund20 This is part of what is sometimes regarded as one of the EU monsters — the FEOGA — or the fund financing the agricultural policy. The largest, by far, part of this fund is used to support the markets (the Guarantee Section), while the Guidance Section is reserved for facilitating structural changes in the member states’ agricultural sector. The main tasks of the Guidance Section can be summarized in the following way: • • • • • • • •

Investment in agricultural holdings (modernization, reduction in production costs, product quality, the environment, etc.). Aid for the setting up of young farmers and vocational training. Aid for early retirement. Compensation for less favoured areas. Agri-environmental measures. Processing and marketing of agricultural products. Development and optimal utilization of forests. Development of rural areas through the provision of services, support for the local economy, encouragement of tourism, and craft activities, etc.

This instrument is now replaced by the Rural Development Fund, which has taken over most of the objectives, but with a strong focus on developing the rural areas (not just farming) and promoting agri-environmental measures.21

The Cohesion Fund22 The Cohesion Fund was born out of the negotiations to establish an economic and monetary union. The economically weaker member states pointed out that such a union would further strengthen the already strong regions and weaken the already weaker ones. As it is often seen, the European Union found its way out of this political and economic impasse by financial support to the weaker ones, in this case, the weak regions. The Cohesion Fund can thus be seen as some sort of compensation to the weaker member states and the weaker regions for saying Yes to the economic and monetary union, which opened the door for stronger competition within the European Union. The main tasks of the Cohesion Fund can be summarized in the following way: The Cohesion Fund is a structural instrument that helps Member States to reduce economic and social disparities and to stabilize their economies since 1994. The Cohesion Fund finances up to 85 per cent of eligible

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expenditure of major projects involving the environment and transport infrastructure. This strengthens cohesion and solidarity within the European Union. Eligible are the least prosperous member states of the Union whose gross national product (GNP) per capita is below 90 per cent of the EUaverage (since 1 May 2004, Greece, Portugal, Spain, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. From 1 January 2007, Bulgaria and Romania should be included).

The European Investment Bank23 The task of the European Investment Bank, the European Union’s financing institution, is to contribute towards the integration, balanced development, and economic and social cohesion of the member countries. To this end, it raises on the markets substantial volumes of funds, which it directs in the most favourable terms towards financing capital projects according to the objectives of the Union. Outside the European Union, the EIB implements the financial components of agreements concluded under European development aid and cooperation policies. Its total lending to projects inside the European Union amounted to 190 billion Euros for 2000–200424 — a considerable sum of money. The question may be raised as to what the Bank can do for member states that they themselves or other banks cannot do. The answer is that the weaker member states can borrow at lower costs by jumping on the bandwagon with an EU label, thereby getting a higher credit rating and lower interest rates. As many of the projects are infrastructure, running up high costs, even small variations in the interest rate can be significant.

SINGLE MARKET25 The Customs Union and the Common Agricultural Policy were designed to open up the markets between member states and galvanize Europe into stronger and higher growth. And so they did, but only to a certain extent. They focused on the manufacturing sector and the agricultural sector. In the 1950s these two sectors were, together, by far the most important part of the national economy in the member states. In the course of the 1970s and the beginning of the 1980s it became clear that other and more sophisticated barriers to trade, in particular with regard to manufactured goods, had popped up. They were normally described as non-tariff barriers often in the form of technical standards. By adopting

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technical specifications for a manufactured product and tailoring it to the domestic industry, which could be consulted and even take a hand in the specifications, a country could effectively close the door to competition without breaking the rules of the Treaties. Domestic producers could get a head start by knowing the technical specifications before foreign competitors. That made it possible for them to change production lines at an early stage, thereby imposing an abrupt and costly transformation on their competitors. This was supplemented by the change in economic structure with less emphasis on manufacturing and agriculture. Indeed services and other sectors such as public procurement took a larger share of the economy; the Treaties did not cover these sectors. Even if the general provisions of the Treaties did constitute some limitations to discriminating against other member states, there was no real and effective defence against a nation operating a strong protection scheme for domestic producers in such sectors. The European Court of Justice paved the way. In February 1979 it overruled in the Cassis de Dijon case26 a German prohibition of sales of liqueurs from other member states that did not meet German alcohol standards. The crucial phrase in the ruling was “There is therefore no valid reason why, provided that they have been lawfully produced and marketed in one of the Member States, alcoholic beverages should not be introduced into any other Member State.” This proved to have wide reaching consequences as it implied mutual recognition of national standards, rules, and regulations, provided that they pursued legitimate purposes and fell inside what may be termed normal interpretation. Intellectually and politically the road was cleared for a major assault to remove existing and remaining barriers to trade. These observations gave rise to what has since been called the Single Market.27 The idea was basically very simple. Instead of saying, as it was done in 1958, that the European Union should constitute a common market by removing quantitative restrictions and tariffs without mentioning other barriers, it was said that regardless of sectors — whether it was services or manufactured goods — goods and services produced in one member state could be sold in another member state’s market without border control. In 1985 the new president of the Commission, Jacques Delors, put his proposal to the member states in the form of a White Paper.28 The Commission pointed out that the cost to Europe of various still existing barriers to trade among the member states was approximately 200 billion Euros (approximately 1 per cent, depending on the exact calculation of the European Union’s total Gross Domestic Product). The Commission accompanied its outline with a

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plan to approve 270 new legal acts, removing existing barriers to reap the benefits of opening the borders and make it possible to export from one member state to another without any kind of border control. The advantages were obvious, but it had been seen before that even clearly advantageous proposals get stuck in political mud unless homework has been done first. Jacques Delors had done his homework. Before tabling the proposal, he had put together a coalition among the interested parties, such as trade unions and employers organizations, to act as proponents of the White Paper. He had also sounded out the member states and explained in advance what he was going to do. These two pieces of political marksmanship made it possible to ensure a smooth passage through the Council, and the Commission’s White Paper was adopted, catapulting Europe one more step towards integration. As always there were voices against something new and, in this case, the Single Market. Some of the critics pointed to the proposed 270 new EU legal acts and cried more bureaucracy. That was easy to repudiate. It could be shown that every time an EU legal act was passed, twelve (the number of member states at that time) national legal acts became redundant and could be scrapped, so the red tape across Europe was reduced considerably, instead of being increased. Delors was in tune with the mood of the time. In the 1980s the deregulation wave started in the United States and in Europe. The Commission pointed to the advantages the United States was reaping by a large American single market. It was driving home the point that this was one of the reasons the United States could channel funds back to research and technology and thereby keep itself on the crest of the wave as far as innovation, new products, etc. were concerned. Europe agreed that it was necessary to catch up with the United States. The Commission’s White Paper provided one of the instruments to do so When the White Paper appeared, the voice was heard from abroad, not the least, from the United States, that it was actually a hidden way to strengthen Europe’s protectionism. Removal of border controls between the member states would be accompanied by a more protectionist European attitude towards the outside world. This fear proved completely unwarranted. And it was never the idea. During the 1980s and 90s, Europe moved not towards a more protectionist attitude. If it moved, it was towards a more liberal trade policy. One of the reasons behind this was the harsher competition within Europe, making European companies more competitive in the global market place.

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The result achieved in establishing the Single Market can be summarized in the following way:29 a. The national public contract markets have been opened up, thanks to tougher rules requiring transparent procedures and proper checks for public supply and works contracts. b. Disparities between national indirect tax systems have been ironed out by certain common rules on indirect taxation, value added tax (VAT) and excise duties. c. The money markets and financial services markets have been liberalized. d. Steps have been taken to harmonize national laws on safety and pollution, and more generally, EU countries have agreed to recognize the equivalence of one another’s laws and certification systems. e. Obstacles hindering the free movement of persons have been removed: passport checks at most of the EU’s internal borders have been abolished, and the EU countries mutually recognize professional qualifications. For example, it is now easier for lawyers to practise their profession throughout the European Union, thanks to the directive adopted in November 1997. f. Company law has been harmonized in the European Union, and member states have brought their national laws on intellectual and industrial property rights (trade marks and patents) in line with one another. This has created a much better environment for industrial cooperation. Despite the Catch Phrase “The Single Market”, there are still barriers for goods and services among member states. As all countries move towards the global market place, more and more economic sectors are shifting from the public to the private sector with some kind of regulatory framework or barriers against outside competition maintained at least on a temporary basis. The newfound barriers are not due to the countries moving backwards on liberalizing, but are because a larger share of the national economies is traded internationally, which calls for new measures to ensure liberalization. Sectors hitherto kept out of international trade now suddenly enter international competition, making national regulations visible in an international context, where they used to be seen exclusively as a natural part of the national economy. Subsequent studies by the OECD (Organization of Economic Cooperation and Development) for example and other research activities confirm that there are benefits, considerable benefits, accruing from the Single Market. In a study from 1994, the staff of OECD30 came to the conclusion that economic

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gains originally estimated by the Commission of between 3 per cent and 7 per cent of Gross Domestic Product, spread over a number of years, look realistic and achievable, provided the restructuring of European industry to take advantage of the Single Market gets underway. This is where the European Union may have stumbled — by failing to exploit the window of opportunity, and thereby not harvesting the full benefit of the Single Market. Yet more interesting are recent econometric studies about the link between the dismantling of restrictions on product market competition and the labour market. The studies seem to suggest that the reforms of the product market increase the benefits of the labour market reforms. If this is true, and the evidence suggests that it is, the European Union with the Single Market embarked not only on a reform of the domestic markets for goods, but also freer labour markets. In fact, some studies point to the reform of the product market before the reform of the labour markets.31 An IMF working paper32 finds that even if there is still some way to go, product market regulations have declined from 1998 to 2003 for — the order reflecting openness, with the United Kingdom being the most open economy — the United Kingdom, Ireland, Denmark, Sweden, Finland, Belgium, the Netherlands, Austria, Germany, Portugal, Spain, France, Greece, and Italy. The Euro zone — those members states participating in the economic and monetary union — is between Norway and Korea, more open than for example, Switzerland, and less open than for example, Canada. In a report published ten years after the scheduled full implementation of the Single Market (1993), the Commission estimates that EU Gross Domestic Product was 1.8 per cent higher — equalling 164.5 billion Euros — thanks to the Single Market, and that 2.5 million jobs would not have been created without the opening of frontiers.33

ANTI-TRUST POLICY One of the most effective and efficient — even dreaded — departments of the Commission is what is called DG Competition, that is, the DirectorateGeneral in the Commission dealing with antitrust legislation. It has over the years become as fearful and frightening, as was intended. It has a long list of successful operations under its belt in a long running endeavour to increase competition and halt attempts by enterprises to abuse their position and/or make agreements to keep competition at bay.34 It follows in the footsteps of the American legislation that started with the Sherman Act of 1890, followed by the Clayton Act, and the Federal Trade Commission Act both of 1914, and the Antitrust Improvement Act introduced in 1976.

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Competition is regarded as a basic mechanism of the market economy and is a simple and efficient means of guaranteeing consumers a level of excellence in terms of the quality and price of products and services. In order to be effective, competition assumes that the market is made up of suppliers who are independent of one another, each subject to the competitive pressure exerted by the others. To achieve that fairly general objective, the antitrust legislation covers two prohibition rules set out in the EC Treaty.35 The first one aims at agreements, which restrict competition, and prohibits these (Article 81 of the Treaty36). This is, for example, the case for price-fixing agreements and cartels between competitors. The second one focuses on dominant positions abused by firms (Article 82 of the EC Treaty37). This is for example the case for predatory pricing, aimed at eliminating competitors from the market. The Commission is empowered by the Treaty to apply these prohibition rules and enjoys a number of investigative powers (inspection in business and non-business premises, written requests for information…) to that end. It may impose substantive fines for their violations. Since 1 May 2004, all national competition authorities are also empowered to apply fully the provisions of the Treaty in order to ensure that competition is not distorted or restricted. National courts may also directly apply these prohibitions to protect individual rights conferred to citizens by the Treaty. It has the power to investigate in cooperation with national antitrust authorities, and if necessary, to stop any violations of Articles 81 and 82, and furthermore to impose fines on enterprises in case of such violations. The Commission is using all these instruments and the antitrust area is one of the few areas where the European Union can actually punish those who do not follow the rules.38 Over the years the Commission has adopted an aggressive behaviour and “raided” many companies by, simply put, turning up in the morning with the power to access all information and prevent any attempts to cover up. As a recent example — the BBC reported on 16 February 2006,39 that investigators launched “dawn raids” against the following European airlines: British Airways, Lufthansa, Air France, KLM, SAS, and Cargolux as part of a European and U.S. cartel probe. Such a raid is by no means a picnic and shows the power and determination invested in the EU antitrust rules. In a speech in October 200340 Commissioner Mario Monti, who gained universal recognition for his work as Commissioner responsible for antitrust, revealed that in 2001 the Commission adopted ten cartel decisions entailing fines on enterprises amounting to 2 billion Euros — more than the sum of all fines imposed by the European Union prior to 2001, and in 2002, nine decisions entailing fines of 1 billion Euros.

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Fines of more than 1 billion Euros are a considerable amount of money. Obviously the Commission is pursuing this policy in a preventative and preemptive way to make it clear to enterprises that it is in business if anyone was in doubt. A glimpse of how the Commission works can be found in the annual report of 2004. The report describes the case against the leading European plumber tubes producer (Boliden AB) and a number of other companies that had breached European competition rules by colluding to fix prices and share markets. A total fine of 223 million Euros was imposed.41 Another more recent illustration is the decision of the Commission in November 2006 to fine five producers and traders of synthetic rubber with 519 million Euros. They were found guilty of price fixing and market share arrangements in the period from 1996 to 2002. The five companies belong to the groups of ENI, Bayer, Shell, Dow, and Unipetrol of Trade-Stomil. It is the second highest fine ever imposed and brought the total of fines for 2006 to 1843 million Euros.42 The European Union’s antitrust legislation does not confine itself to EU enterprises. As a consequence of economic globalization, it looks into agreements among enterprises and mergers not only between European companies and foreign companies, but also between foreign companies. General Electric and Honeywell43 learned that in 2001 when the Commission blocked General Electric’s plan to acquire Honeywell, pointing to the negative consequences for the European consumer. When Oracle acquired Peoplesoft in 2004, the two companies were luckier, as the Commission found that competition would not be limited to the extent that Article 81 would be invoked.44 Microsoft has also tasted the bitter medicine of the European Union’s watchdog regarding competition.45 From 1998 to 2006 the quarrel between the EU Commission and Microsoft turned into a running battle46 with Microsoft refuting the accusations and the Commission threatening heavy fines of 2 million Euros per day. In March 2004 the Commission concluded47 the case by imposing on Microsoft a fine of 497 million Euros and setting a timetable for it to comply with its decision. These decisions can be appealed to the European Court of Justice, which Microsoft did. Two questions were highlighted: did Microsoft limit the ability of other companies to create software that interoperates with its Windows operating system? And, did the company freeze out RealNetworks’ RealPlayer by tying its own Windows Media Player into the operating system? The reasoning behind the Commission’s decision is that the abuses act as a brake on innovation, and harm the competitive process and consumers face limited choice and higher prices.

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After more than two years of arguing between the Commission, Microsoft and the Court of Justice, the Commission decided on 13 July 200648 to fine Microsoft 280.5 million Euros for abusing its dominant position.49 A fine of a maximum of 3 million Euros per day will be imposed if Microsoft does not comply with the Commission decision.

STATE AID/SUBSIDIES State aid constitutes another risk for distorting competition.50 It falls in the same category as antitrust or competition policy. It is fair to say that the European Union has played a remarkable role in preventing member states from using state aid to disadvantage producers in other member states.51 The general rule is that state aid distorting competition is not compatible with the EU system. As with all general rules, there are exceptions. To mention a few of these: • •

Promote the economic development of underdeveloped areas (regarded as particularly backward in accordance with Community criteria). Promote the execution of an important project of common European interest, or to remedy a serious disturbance in the economy of a Member State.

The really important factor concerning state aid may not be what is permitted and what is not, but the fact that the Commission has the power to oversee that state aid does not distort competition. The Commission monitors and scrutinizes national state aid. If measures implemented by a member state do distort competition, it has the power to deem them illegal, and indeed, require that the sum received be paid back In some areas, state aid is paid out by the European Union itself (Guarantee section of the Agricultural Fund, Regional Fund, Social Fund, etc.) and in these cases the Commission is entrusted with powers to ensure that competition is not distorted. According to statistics provided by member states to the Commission,52 the average share of state aid paid out in member states in 2004 amounted to 0.63 per cent of Gross Domestic Product.53 The highest share was found in Finland with 1.50 per cent, followed by Portugal with 1.10 per cent, and the lowest one was 0.30 per cent for several member states. There are several reasons the European Union has been successful in its endeavours to reduce national state aid. The economic trend pointing towards a more liberal economic model, combined with the drive in all member states to reduce public expenditure, has weighed in heavily in favour of this policy.

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The increasing perception of the European Union as a home market has been another factor, making it politically less attractive for member states to grant state aid. The restructuring of European industry away from old smokestack industries such as steel, shipyards, coal, etc. removed many of the sectors that had drained the public budget with state aid. When judging the success of the European Union’s policy concerning state aid, it is worth noting that reducing it to a share of the Gross Domestic Product over the years is in itself a fine achievement. The main score is discipline, transparency, and the rule of the law, which used to be absent in this economic sector where member states tried to the best of their abilities to cheat one another and gain unfair advantages (at least for the producer receiving state aid, albeit not for the taxpayer). The main instrument has been the transfer of control over state aid from national authorities to the European Union, which oversees that member states adhere to the rules. If not, the Commission can, and has, in many cases, taken action. The sector has been made transparent, and many of the manoeuvres for providing state aid in a hidden fashion have been done away with. The fact that all member states are operating under common rules supervised by the Commission is in itself a barrier to state aid and imposes discipline. The political leadership can rightly point to the fact that sacrifices in their home country are the same as in other member states, often competitors. This shield against pressure groups has proven to be robust in many situations. Earlier, member states found themselves in some kind of a race about which countries and which economies had the strongest ability to shoulder state aid, thus exercising a beggar-my-neighbour policy. This has been stopped completely. It is one of several examples of how the EU system and supranationality impose stronger discipline on member states and force them to behave more in accordance with market mechanisms and be more responsible vis-à-vis one another.

ECONOMIC AND MONETARY UNION — SINGLE CURRENCY (EURO) The Original Treaties When the Treaty of Rome was negotiated, recognition of the importance of economic and monetary policies was limited. They were mainly seen as

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instruments to support the establishment of the common policies and to prevent obstacles to the well functioning of the Common Market. This is not difficult to understand when one recalls the picture of Europe in the mid-1950s when the Treaties were drafted. Experience with economic integration was non-existent and the word economic “globalization” had not been invented. No one gave exchange rate cooperation much thought, as the world was living under the Bretton Woods system based on fixed exchange rates linked in theory to gold, while linked in practice to the U.S. dollar.54 Exchange rate adjustments,55 not to speak of floating exchange rates, were not on the agenda, so there was no need to deal with these problems in the Treaties. Article 2 speaks in fairly general terms of “a harmonious and balanced development of economic activities”. Article 6 says that member states shall coordinate their economic policies, but adds that this coordinating shall only go as far as is necessary to achieve the objectives stated in the Treaties. Economic policies and the coordination of economic policies were only brought into the picture when the establishment of the three common policies made it necessary. Article 103 went one, but only a small, step further saying that member states should regard policies designed to influence common development and the business cycle as a matter of common interest, and consult one another as well as the Commission about steps to be taken. This is the first acknowledgment that economic policy in one member state influences other member states, and by logic, should trigger consultations in cases of policy. An elaboration is found in Article 107, which states that member states’ exchange rate policies are a matter of common interest. Article 108 deals with a situation where a member state runs into balance of payments problems. If the functioning of the Common Market is threatened, the Commission shall examine the situation. If the member state’s adjustment measures are deemed insufficient, the Commission recommends appropriate steps to the Council. The experience gained in the 1960s brought economic and monetary policy to the forefront. In 1968/69, social unrest forced France into a reflationary policy which distorted competition between France and Germany. That had several effects. First, national economies had become so interlinked in the Common Market that member states lost the prerogative of formulating economic policies in isolation. Unless national economic policies followed parallel lines, adjustment of exchange rates had to be made with inevitable, but unwanted, political and economic repercussions. It was one of the first illustrations of

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the philosophy that one step towards further economic integration makes the next one unavoidable. Economic integration is steered by the so-called ratchet effect. It goes one way and one way only and cannot be forced backwards. Second, temptations to undermine the functioning of the Common Market by more or less hidden protectionist measures could not be ruled out. The Commission as watchdog of the treaties had to be vigilant. Third, the Common Agricultural Policy ran into difficulties of a political and technical nature — not foreseen when the Treaties were written — when exchange rates were changed. All these problems could be dealt with separately. But in an economic community they could be preempted by bringing national economic policies in line — at that stage it was too early to talk about common economic policies.

The First Ideas — 1969 i) The first initiative concerning economic and monetary policy was tabled for the Council on 12 February 1969, and was named the Barre Plan56 after the Commissioner responsible for economic and monetary policy.57 The Barre Plan had four main suggestions: a. Medium-term economic targets. The plan put forward targets for economic growth, inflation, unemployment, and balance of payments. Seen in retrospect, this seems old-fashioned and out of tune. At that time, however, it was regarded as a reasonable yardstick. The idea was modelled on French economic planning — not surprisingly, as Raymond Barre was French — which had been quite successful in pulling France out of stagnation and into economic growth during the late 1950s and early 1960s. Looking back, one can say that such medium-term targets augured what has since been put into the economic and monetary union, namely, targets for central economic figures. b. Political obligation to consult member states, if a member state implements economic policies that will lead to a deviation from the medium-term targets, or affect the Common Market. Apparently, at that time, member states were not ready for an unlimited and unspecified obligation to consult one another, but only to take such steps in well-defined situations. c. Short-term credit among central banks in case a member state ran into balance-of-payments problems. The sum was fairly limited (US$1 billion) and short term, being up to three months’ duration and the option for a further three months. It was, however, an interesting step that made a

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future European central bank visible on the horizon and — most important of all — that told the world that balance-of-payment problems for a member state was a European question, and that the European Union would neither let the member state fend for itself, nor hand it over to the International Monetary Fund (IMF). It expressed community solidarity for the first time for the economic and monetary policy. This understanding is a cornerstone for the future mapping out and implementation of an economic and monetary union. There is little doubt that even if this intellectually opened the door for a future European central bank, member states were heavily inspired by the European Payment Union, which worked during the 1950s as some kind of clearing system. Credit and debit sums of the participating countries would be offset against one another to leave each country a debtor or creditor vis-à-vis the EPU as a whole.58 d. Medium-term financial assistance in case of balance-of-payment problems from — not the central banks — but the governments, financed and offered via the public budget. The signal is the same as above, but is made stronger and louder by drawing in the member states and explicitly pointing out that this was seen as a substitute for, among other things, medium-term financing via the IMF. The length of the credit was defined as two to five years, and the total amount fixed at US$2 billion. The Barre Plan was the prelude to the next step. ii) When the six original member states met for a summit in The Hague, in The Netherlands, in December 1969, they decided to establish an economic and monetary union.59 This was the first time the term economic and monetary union was heard. It took thirty-three years to realize despite strenuous, tireless, and continuous attempts. And when EUROland finally materialized, it was more of a monetary union than an economic union. Politically the decision at The Hague summit was a compromise in two respects. The first compromise was between those wishing to enlarge and those wishing to integrate further before enlargement. In fact, the summit decided to do both and who could then disagree. Second, it was a compromise between those wishing to strengthen the institutions (primarily the Benelux countries), and those wishing to deepen the integration. Even if there was agreement to establish an economic and monetary union, this agreement glossed over differences among member states with regard to what such a union actually meant — a divergence of views that was to haunt the European Union until the beginning of the 1980s and of which traces are still seen and heard. The two fundamental choices revolved around whether the emphasis should be on a monetary union or an economic union

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(which economic policy objectives should be prioritized), and whether the economic and monetary policy should be steered by member states, that is, be a political decision or be free from political interference and be governed by an independent central bank. Linked to these fundamental choices were two main dilemmas that emerged when analysing the future economic and monetary union’s economic policy, regardless of where the decision centre was placed. The first one was whether monetary cooperation via fixed exchange rates should have priority, and force the economic policy to conform to the exigencies of the monetary approach. France preferred this model, fearing that if the conductor’s baton were given to economic policy, it would be too stringent. Germany on the other hand wanted to follow a rigorous and strict economic policy that put the fighting of inflation ahead of economic growth, which means subordinating monetary policy to economic policy. This fault line was somewhat reduced when France in 1983 shifted the course of its economic policy by switching to the German economic thinking. It was, however, to emerge time and again during all kinds of negotiations and is visible even today inside EUROland. The second fault line is basically the same as the first, but with the battle lines drawn for economic policy. The question was whether priority number one was to reduce inflation or to put growth ahead and ensure full employment. This dilemma was not so evident in 1969 when the business cycle was still favourable, but it moved into gear after the oil crisis in 1973/74. Analysed by economic theory it can be boiled down to a simple question: who should bear the pain of adjustment in the case of deficit/surplus in the balance of payments. Should debtor countries trim economic growth to bring costs and inflation in line with surplus countries, and by implication, pay a price in the form of lower growth, or should surplus countries boost their economic growth and reduce exports while increasing imports, thus risking higher inflation and a hard won reputation as low inflation countries?60 The dilemma was for some time accentuated by the popularity in the 1960s of the Philips curve.61 According to this theory, low inflation is accompanied by high unemployment and vice versa. The policy implication was an almost unsolvable dilemma, as low inflation and low unemployment seemed irreconcilable. Under such conditions low inflation could only be achieved by a restrictive economic policy auguring high unemployment and low growth. In the 1970s a group of economists challenged the basis for the Philips Curve. At the same time, Europe’s central banks and, to a degree, also the governments, came to the conclusion that the Philips curve was not so

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reliable a policy instrument as supposed. The German experience suggested that low inflation could go hand in hand with high employment. This greater room for manoeuvre for economic policy making helped the talks about stronger economic and monetary integration to move ahead. In the international financial markets the equation was the same, but expressed in another way. Should surplus countries risk their credit standing, for which they have paid so heavily over many years, to accommodate deficit countries, or should deficit countries adjust to surplus countries by paying for it now to reap benefits many years later when the financial markets were convinced of their credit standing? The creditor countries gave a clear, almost abrupt answer: no. The debtor countries found it more difficult as they did not know how long it would take the financial markets to increase their rating. These basic questions are faced by every group of nations embarking on economic integration and starting to look at an economic and monetary union. There is no way around them. They may be skirted for a while, but not for long. The market craves an answer. The European answer came after almost fifteen years of haggling. The creditor countries, represented primarily by Germany, won, imposing on the rest of the European Union, what has been termed the stability policy after the German word “stabilitätspolitik”. During further analysis of how the European Union moved towards an economic and monetary union that is now called EURO-zone/EUROland, we will run into these questions again and again. It’s almost a running intellectual dispute and political fight whether the adjustment burden lies with the deficit/debtor or surplus/creditor countries.

The Werner Plan In 1969 the Prime Minister and former Minister of Finance of Luxembourg, Pierre Werner, was asked to submit a report to the European Union of how to establish an economic and monetary union. The Werner report,62 as it was called, appeared in October 1970 before the first enlargement of the European Union63 and while the economic situation of the European Union was strong with high growth and fairly balanced economies. It looked feasible and the report proposed that the economic and monetary union should be implemented in stages before the end of the decade, that is, 1980. One of the traditional and successful working methods of the European Union is seen here. Projects are carried out in stages with a target date. That was the procedure followed in the original Treaties for the establishment of

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the three common policies and later used as the working method for the Single Market and the Euro. It delivered according to plan for the other ambitions, but not for the first attempt to build an economic and monetary union. Before going into why, it may be useful to draw a short sketch of the Werner Report. It pinpointed the definition of the final objective, an economic and monetary union. Such a union, says the report, “would make it possible to realize an area in which goods and services, people and capital will circulate freely and without competitive distortions, without thereby giving rise to structural or regional disequilibrium”. Equilibrium should be achieved by mobility of production factors and financial transfers. It would imply “the total and irreversible convertibility of currencies, the elimination of margins of fluctuations in exchange rates, the irrevocable fixing of parity rates and the complete liberation movements of capital”. The report put its finger on economic policy making by calling for a transfer of policy making to the community. This was clear with regard to monetary policy. As far as fiscal policy is concerned, the report called for variations in the volume of public budgets, the size of the balances (surplus/ deficits), and the method for financing these balances to be decided at the community level. Institutionally it asked for the setting up of a community system for the central banks and a centre for decision on economic policy. Both monetary policy and economic policy should be decided at the community level, with no powers left to member states in formulating economic and/or monetary policies. The Werner report went a long way towards telling what an economic and monetary union is and how to get there. It had, however, two weaknesses. First, it was weak on the institutional structure, leaving doubts about how much power to transfer to the institutions in charge of economic policy. Second, it mapped out the stages without laying down sufficiently tough methods to pressure member states into following the rules. Economic policy in the first stages introduced guidelines, but very little could be done if the member states did not follow or stick to the guidelines. The Werner report spelled out with intellectual rigour how to bring about an economic and monetary union. The problem was that it also revealed how dependent an integration process is on the political determination of member states to fulfil the objectives. That had not been a problem for the three original common policies, partly because the European Union was politically stable, and partly because the economic situation was favourable

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then. All these conditions had changed from favourable to unfavourable in the course of 1970–1971. In 1970 the green light was given for negotiations with the United Kingdom, Ireland, Norway, and Denmark to join the European Union. In August 1971, the United States left the gold standard and implemented discriminatory trade measures that plunged the whole international monetary system into chaos. The enlargement negotiations meant that a good deal of political impetus trickled away. The United Kingdom was not interested in an economic and monetary union, to say the least, and let it be known to the effect that several member states thought it right to freeze such an ambitious plan. Launching it just before British entry would make it even harder to turn the British attitude around, as the timing might be perceived to be an almost provocative act. This political problem could unquestionably have been overcome if other member states had pushed sufficiently hard, but they did not. The international economic and monetary situation spoke in favour of a more cautious approach and the two preceding years had cast doubts over the ability of member states to implement an economic and monetary union. 1969 saw a depreciation of the French Franc and an appreciation of the German Mark (D-mark) As long as this was regarded as a one-off event, it might not have jeopardized the enterprise; events showed that this was not to be the case.

Currency Cooperation The strength of the German economy forced Germany to accept a limited floating on the currency market of the D-mark in the course of 1971 (May 1971). In less than three months, the D-Mark had appreciated 7–8 per cent vis-à-vis the U.S. dollar. The French Franc remained unchanged. A new gap opened up between Germany and France. Before the two countries and, indeed, the European Union could tackle this, came the deathblow to the Werner report and the plan for an economic and monetary union. The United States “left gold” in August 1971, abandoning its obligation to convert U.S. dollars into gold at a price of US$35 per ounce.64 The U.S. dollar started to float on the currency market pulling the carpet from under the feet of the European Union. The industrialized world slipped into a system of fluctuating exchange rates. The European Union with its newborn Common Market for manufactured goods and the Common Agricultural Policy based upon fixed exchange rates between member states had to respond

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and fast. Earlier achievements could be endangered. It was clear that further integration as sketched by the Werner report would have to be postponed. The immediate response came at negotiations with the United States and took the form of two steps. The United States imposed upon several EU member states, in particular Germany (and other countries such as Japan), an appreciation vis-à-vis the U.S. dollar. That was a surmountable problem and could be overcome. The next one was more difficult in the sense that it was agreed that currencies could fluctuate vis-à-vis one another with a maximum of 4.5 per cent.65 On 24 April 1972, the European Union66 decided to create what became known as “the snake in the tunnel”. It was an attempt to introduce less flexible exchange rates (fixed but adjustable exchange rates) among member states that convey the impression that in the stormy currency markets of 1971–1972, the European Union was a safe haven. Mechanically the fluctuation margins between EU currencies was cut to half of the 4.5 per cent. The EU currencies could, at most, fluctuate 2.25 per cent vis-à-vis one another within the global width of 4.5 per cent. If for example the strongest EU currency, which in those days was always the D-Mark, was pulled towards its upper limit vis-à-vis the U.S. dollar, the other EU currencies were pulled in the same direction, but still having a downward floating margin of 2.25 per cent (they could rise 2.25 per cent less against the U.S. dollar than the D-Mark). The snake was the EU currencies, which could move up and down inside the global band of 4.5 per cent vis-à-vis the U.S. dollar called the tunnel. It was a fair attempt to calm waters and try to get the European Union through the turmoil. Had it not been for the two weakest countries — the United Kingdom and Italy — it might have succeeded. In June 1972, the United Kingdom came under such heavy pressure that it had to leave the scheme and adopt a floating exchange rate for the Pound Sterling. Ireland67 followed. Denmark opted out temporarily, but soon rejoined. Italy was forced to draw the same conclusion in February 1973 as the United Kingdom had six month earlier. France was the next victim and left in January 1974 only to rejoin in the summer of 1975. When the worst international storms had calmed down in the summer of 1975, Germany, France, the Netherlands, Belgium, Luxembourg, and Denmark maintained a maximum of 2.25 per cent of fluctuation margins vis-à-vis one another’s currencies. The maximum margin for fluctuations vis-à-vis the U.S. dollar had been abandoned, which meant that these currencies were the only ones sticking to the principle of fixed currency rates in a world totally dominated by floating exchange rates.68 Of the EU member states, the

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United Kingdom, Italy, and Ireland remained outside the system, operating a system of freely fluctuating currency rates. No one inside or outside the European Union would contest that not only the currency rates, but also the whole EU construction was under pressure. The Common Market and the Common Agricultural Policy could weather stormy waters, but there were limits. Politically and economically, it was clearly understood that the very survival of the integration — what had been achieved since the European integration started in 1950 — was at stake. If it was not clear enough, it became abundantly so in October when France was forced to leave the system of, in principle, fixed exchange rates. In 1975, 1976, and 1977 the agreed rates among the participating currencies had to be changed and in some cases, more than once per year. The D-Mark was pushed upwards vis-à-vis the U.S. dollar. The German economy was strong enough to shoulder this burden, several of the other participating countries’ economies were not. That was the case for France, Denmark, and to a certain extent, Belgium. There were two reasons for this: First, the member states’ economies were far from operating some kind of common or coordinated economic policy. Germany gave priority to reduction of inflation, while some other countries wanted to boost employment. The economies got out of sync and could not maintain the same parities vis-à-vis one another. Second, the number of participating countries had become too small. If a large number of countries had appreciated, the upward pull exercised by the D-Mark would not necessarily have brought other countries into severe difficulties. With a limited, indeed, small, number of countries, however, the competitiveness was undermined not only vis-à-vis the United States, but also vis-à-vis a large number of other European countries that did not follow the upward trend for the D-mark and that were, in many cases, competitors to those that did.

European Monetary System (EMS) The evolution demonstrated the need for a coordinated economic policy, plus a critical mass of participating countries. France and Germany under the political leadership of Bundeskanzler Helmut Schmidt and President Valèry Giscard d’Estaing, and with the strong support of then President of the European Commission Roy Jenkins,69 realized the danger and initiated what became The European Monetary System (EMS). The first step was taken at a meeting of the European Council in

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Copenhagen in April 1978. The decisive step came at the meeting of the European Council in Bremen in July 1978.70 The EMS71 was built around three cornerstones: fixed but adjustable exchange rates, mutual currency credit line administered by the central banks and special assistance to the economically weaker countries. A fourth one can be added: participation was not compulsory. The system was logical and augured the establishment of an economic and monetary union to be launched a little more than a decade later. The fixed but adjustable exchange rates policy meant that exchange rates should be fixed with the caveat that changes in the respective countries’ competitive positions could be remedied by adjustment of the agreed rates. It could, however, not be done unilaterally, it required mutual consent. Exchange rates changes were negotiated among member states. This procedure forced the weaker member states to explain the need for adjustments, and imposed on them a higher degree of discipline as they could not count on automatic and frequent adjustments. It was a political and economic signal that adjustments had to be made primarily through domestic economic policies and change of exchange rates were to be regarded as an exception to this rule. Many observers took the view that the whole enterprise was doomed before it even started in spring 1979. The time was not ripe. Economic policies were not sufficiently coordinated and/or harmonized. The economic outlook was divergent for member states and their economies. The scheme, however, worked, but entailed far more frequent exchange rate adjustments than envisaged. At times, especially in the early days, adjustments became so frequent that the sceptics seemed to have got it right. Already in 1979 two adjustments had to be made, 1980 went happily without any adjustments giving rise to optimism. Unfortunately both 1981 and 1982 saw two adjustments, all of them reflecting the same pattern, namely an upward adjustment for the D-Mark and downward adjustments vis-à-vis the D-Mark for the other currencies. 1983 produced one adjustment, 1984 passed without adjustment, and in 1985 and 1986 exchange rates were changed once. But in the mid 1980s calm had replaced the earlier turmoil and EMS was proving itself under difficult conditions. The lesson from this is that when a number of countries start a system of fixed, but adjustable, exchange rates, it can work for a limited period, even with frequent changes of the rates, if the economically strongest country — in Europe at that time Germany — is willing to lead and shoulder the burden. There are, however, limits to how frequently rates can be changed and how large the changes can be. The adjustments inside the EMS were normally 5–6 per cent between the strongest currency and the

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weakest one. This was manageable. The disadvantage was that many observers started to look towards the next adjustment, judging the one just made to be ineffective. Larger adjustments would have loosened the discipline and thereby undermined the gradual enforcement of stronger discipline in domestic economic policies especially for the weaker member states — one of the main points of the EMS. Credit lines among the central banks were necessary to maintain the fixed rates as intervention on currency markets became inevitable.72 The drawback was that the market could observe how the weaker countries borrowed to support their currencies by intervention, signalling that they were in difficulties, thus showing that the next adjustment could not be far away. Italy and Ireland felt that their economies were not strong enough to join. Politically they wished to do so and the other member states wanted them to join. An arrangement was made for special support to these two countries, allowing them to participate, but the initial evaluation of their economic strength proved correct as many of the adjustments were triggered off by a need for depreciation of one of these currencies.73 The United Kingdom did not want to join and chose to stand outside.74 During the 1980s, EMS emerged as a solid foundation for the European Union and grew in reputation — politically and economically. From 1987 member states actually lived under an exchange rates scheme with fixed rates. It gradually dawned on many that the European Union was more or less operating as if it was an economic and monetary union, so why not take the step towards the creation of such a union? The question was quite simple: when the European Union functions like an economic and monetary union, why not institutionalize it and reap the benefits accruing from such a step?

European Economic And Monetary Union — From The Drawing Board to Realization i) At the meeting of the European Council in June 1988, under the presidency of Bundeskanzler Helmut Kohl, political leaders agreed75 to ask a group of experts to submit a study to their meeting one year later, accompanied by concrete stages for implementing an economic and monetary union — not whether it could be done, but how it could be done. The political platform for this initiative was the Single Act of 1986 reaffirming the progressive realization of the economic and monetary union that the European Union had agreed to several times before.76 The political reality was that President Jacques Delors of the Commission, Bundeskanzler Helmut Kohl of Germany, and President François Mitterrand of France had made up their minds and

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wanted an economic and monetary union. However, the jury was still out on whether the new report to be labelled the Delors report would suffer the same fate as the Werner Report or be adopted by the member states. A rerun of the summit in 1969 could be glimpsed behind the scenes. The price for an economic and monetary union was, in the eyes of some member states, comparable progress towards political union (stronger institutions). In 1969 the Benelux countries stood for this line of thinking. In 1988 it was Germany. Germany acquiesced, however, in a single-track start, leaving the political union aside for a while without forgetting it. The report called the Delors report 77 after the President of the Commission who chaired the group of experts, appeared on 12 April 1989. The timing could not have been better. A couple of months later, the Soviet Union started to fall apart. Germany could be reunited. Politically the reunification could not take place without the acquiescence of the rest of Europe. German resistance towards economic and monetary union would have painted an image of Germany throwing its weight around at a moment when Germany wanted and needed support. Delors managed to get the German central bank (Bundesbank) on board by emphasizing economic policy more than monetary policy — actually he steered his report towards the Werner Report in weighing economic policy against monetary policy. This reflected the general thinking in the European Union since the early 1980s that Keynesian economic policy, by stimulating the economy through deficits in public budgets, was not effective in the long run. With the signature of the Bundesbank on the Delors Report, a major potential hurdle had been overcome. The essence of the report was put into the draft for the Treaty of European Union (the draft Treaty of Maastricht), negotiated among member states from December 1990 to December 1991, with a successful conclusion emerging at the meeting of the European Council taking place in the Dutch city of Maastricht. For technical and also partly political reasons, two so-called IGCs (Intergovernmental Conferences) were held. One — with the Ministers for Foreign Affairs representing their countries — dealt with the overall structure of the Treaty and all items other than the economic and monetary union that was handled by the Ministers for Finance and/or Economic Affairs. ii) The result of the IGC concerning economic and monetary union in Maastricht was as had been seen many times before — a gradual approach (step by step) with three stages towards a full economic and monetary union.78 Phase One (before the coming into force of the Treaty of Maastricht) from 1990 to 1994 did not go much further than what was already on the

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table, such as full implementation of the Single Market, and strengthening of coordination of economic policies. Good and useful stuff, but not much more. The second phase from 1994 to 1999 on the basis of the Treaty was far more substantial. Now the central banks’ full independence from national governments should be secured, financing of deficits by ‘monetarising’ (increasing the money supply) was forbidden, and the central banks came together in the EMI (European Monetary Institute) — a forerunner of a European Central Bank — which was given the task of administering EMS and preparing the monetary policy for Phase Three. The third phase was to start, at the latest, on 1 January 199979 — which it did — and during that phase, preparations were made for a single currency — Euro — to be put in place.80 Until the Single Currency materialized as legal tender, the Euro was what can be called a synthetic currency. It was used as a denominator and accounting unit for monetary and financial transactions, but not in daily transactions by the member states, its enterprises, and citizens. 1 January 2002 saw the Single Currency introduced and after that date no national currency exists.81 There were two crucial economic points and one political point during the final phase of the negotiations — economic versus monetary policy, and priorities for economic policy decision making. The flywheel of the discussions about economic policy was the institutional framework for determining economic and monetary policy, and which objectives should be set for the economic policy itself — how to weigh price stability versus growth. To a larger degree, it was — not surprisingly — a rerun of the debate between Germany and France during the EMS-period and the exchange rate systems from 1972 to 1980, with Germany insisting on rigour and stability (keeping inflation low), and France focusing more on growth. The German view was that the future European Central Bank should be a strong and independent institution pursuing low or no inflation. The Council, or for that matter, other institutional frameworks with member states in the driver’s seat, should have little or no influence on the Central Bank, which is constitutionally independent. Member states should accept rules for domestic budgetary discipline with a ceiling on how large member states were allowed to run deficits. This view tried to transfer the basic ingredients of Germany’s successful postwar economic and monetary policy to the European Union’s economic and monetary union. An economic and monetary union would be successful, only if the rules for the coordination of member states’ economic policies aimed at stability and low inflation, and prevented them from influencing the policy of the Central Bank.

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The opposite view put forward primarily by France was to create an institutional body through which member states could control the economic policy, including the monetary policy of the economic and monetary union. It was sometimes called a kind of economic government, as the idea was not only coordinating the member states’ economic policies, but also mapping out the monetary policy of the Central Bank. According to this view, there should be a much more balanced approach between low inflation and growth, plus employment, which does not focus almost exclusively on low or no inflation. The majority of the other member states rallied around the German position with regard to the institutional structure (independent Central Bank) and rejected the French idea to invest powers in the Council allowing member states to determine the overall economic and monetary policy. The German view about objectives of the economic policy also won the first round, but it soon became clear there was going to be another and this time, different perception of what kind of economic policy the European Union and its economic and monetary union should stand for. When the negotiations ended, the economic policy was reflected in Article 4 and Article 105 of the Treaty. Article 482 says “these activities of the Member States and the Community shall entail compliance with the following guiding principles: stable prices, sound public finances and monetary conditions and a sustainable balance of payments”. The words “growth” and “employment” are conspicuously absent and it was no coincidence. Article 10583 says “the primary objective of the ESCB84 shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community of the objectives of the Community as laid down in Article 2.85” They follow closely the corresponding elements in the Bundesbank Gesetz.86 The key words are that the ESCB shall maintain price stability, and only to the extent that this objective is not jeopardized, can ESCB support other economic policy objectives such as growth and employment mentioned in Article 2, listing a number of objectives, some of which are contradictory — as sometimes happens during negotiations among a group of countries trying to shape a consensus from divergent views. The old lesson that an international treaty reflects the realities and the strength of the negotiating partners proved its validity once more. The realities at the beginning of the 1990s were that Germany was by far not only the largest, but also the strongest economy in the European Union. Germany would only enter an economic and monetary union basically in line with the

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apparently unstoppable German economic model that had been tested for forty years. And without Germany an economic and monetary union was not feasible. Germany was not disposed towards “sacrificing” the D-Mark without major concessions from its partners. One of them was support for the German reunification. Another was to tilt the economic policy in the same direction as the German economic policies the country had for decades before the introduction of the Euro — in short, see the Euro as some kind of extrapolation of the D-Mark and not really a “European” currency reflecting policy preferences of other member states. iii) What few people expected — least of all the Germans — were the sweeping changes in the economic landscape of Europe and the European Union that were to appear in a few years’ time. The German economy started to stumble and from being the strongest economy, it showed signs of weakness. The reality — once more: reality dictates what can be achieved at the negotiating table — in this case, it opened the door for what in EU jargon was called a rebalancing of the objectives. In 199587 Germany proposed a stability pact88 that reflected strict budgetary guidelines and aimed at ensuring price stability. During the negotiations, however, several of the other member states achieved a parallel decision called the Luxembourg process,89 mapping out guidelines for member states to pursue growth and employment. They took the stance that, despite the uncompromising wording of the Treaty of Maastricht, low or no inflation was not the only economic policy objectives for the European Union. The drive for rebalancing was further strengthened when the European Council met in Cardiff in June 1998 under the British Presidency. Structural policies were now enrolled in the endeavours to combat unemployment, pulling growth and employment higher on the list of priorities.90 The long, arduous struggle to find a balance between, on the one hand, price stability, and on the other hand, growth and employment, came to an end — almost ten years after the end of negotiations for the Treaty of Maastricht — when The European Council met in June 1999 in Cologne under the German presidency, one year after the Cardiff meeting, and agreed on an Employment Pact.91 The relevant part of the conclusions from the meeting reads like this: ……The European Council affirms the global responsibility, which Europe has assumed with introduction of the euro. The European Council again stresses the need for strict application of the provisions of the Stability and Growth Pact. This involves clearly keeping to realistic and credible budget targets in each financial year, which are certain to be achieved only through ambitious consolidation efforts in public budgets. The policy of overall

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economic stability and growth also requires a growth-oriented taxation policy, in particular a decrease in the fiscal and social security burden on the labour factor, and an employment-oriented wage policy by the parties to collective wage agreements. Higher employment continues to be Europe’s top objective. The European Council therefore takes the initiative for a European Employment Pact aimed at a sustainable reduction of unemployment. The European Employment Pact embodies a comprehensive overall approach bringing together all the Union’s employment policy measures. The European Council endorses the Pact’s three pillars, viewing them as long-term processes to be dovetailed, namely92 ……

It was now clear that the priorities of the political objectives for the economic and monetary union had changed. From highlighting price stability without mentioning growth and employment these policies now put all these objectives on an equal footing. The German initiative a few years earlier to confirm price stability as the one and only objective had led to a watering down of this objective and moved growth and employment upwards. Behind this change of political priorities lay a change of an almost brutal character in the economic situation. From an area with high growth and dominated by a strong German economy, Europe and the EURO-zone had turned into a lowgrowth area, and the earlier, so-mighty German economy showed lower growth and rising unemployment. Politically, Germany had seen a shift from a conservative-led (CDU led) government to a coalition of the Social Democrats and the Greens; France had what is termed cohabitation with a Gaullist president, and a socialist government and Labour had replaced the Conservatives in the United Kingdom. The main reason for the policy change was the feedback from the European population, who was more and more worried about unemployment, and was demanding political action to combat rising unemployment. The European politicians had to be aware of this new phenomenon on the domestic and the EU scene. The dilemma between low inflation and growth was softened by the global development introducing low inflation worldwide. There were several reasons for this, none of which had much to do with the economic and monetary union. The most important one was the speedy integration of China in the global economy in the mid-90s, which exercised a downward pressure on prices for manufacturing. The members of the economic and monetary union could rebalance priorities without suffering any harmful consequences with regard to what used to be the number one priority — low inflation.

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Without this change in the global setting, it is doubtful whether the rebalancing could have been achieved without political costs and a shadow of uncertainty over the future of the European Economic and Monetary Union. It is far from certain what would have happened if member states had been forced to make a real and painful choice between these two alternatives, instead of letting international circumstances hand them the luxury to pursue both. iv) One of the most sensitive points during the negotiations was whether a member state could be blocked from joining the Euro. There was a fear among certain member states that one or two others would voice their determination to fulfil the criteria, but when the Euro was established, not live up to their pledge. Some of the member states with an unblemished record for decades felt that fiscal rigour suddenly shown by a few others was not sincere. It might be replaced by a lax fiscal policy when the Euro was implemented, thus landing a genuine problem on the table of the economic and monetary union, and jeopardizing its reputation abroad. Germany as the strongest economy was particularly worried that Italy would join, and at a later stage, compromise the economic and monetary union by not respecting the criteria for deficits on the public budget, thus jeopardizing the future of the economic and monetary union. This was a sore political point, and at the end of the day, the door was opened for all member states wishing to join. This decision reflects two things. First, it is not possible in an integration such as the European Union to close the door to a member state without objective criteria as a basis for doing so. Second, the whole enterprise is based upon trust and confidence in one another’s capability to fulfil pledges and promises, and mutual respect for what is agreed. It is true that the treaties contain paragraphs punishing member states with excessive deficits on public finances, but doubts persisted on how effective these penalties would be in trying to rein in “irresponsible” fiscal behaviour. As events were to show, Germany itself ran into difficulties and was not able to fulfil the criteria of keeping to the ceiling for deficits on public budgets. This might be a third lesson in the sense that in politics, or in economics, extrapolation of present trends cannot be expected to reveal a true picture of what the future is going to bring. v) After the signing of the Treaty of Maastricht on 7 February 1992, the spirit was high. The three Nordic countries standing outside the European

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Union — Sweden, Finland, and Norway — all linked their currency to the EU currencies in the ERM,93 but soon the storm gathered. On 2 June 1992 a paper-thin majority of Danes voted No at a referendum. That brought the future of the whole Treaty and the economic and monetary union in doubt. In the course of September 1992, the Pound Sterling and the Italian lira was forced out of the ERM. Sweden, Finland, and Norway94 had to leave the system. The Spanish Pesetas and the Portuguese Escudos came under heavy pressure and had to be depreciated. In July 1993 the ERM fell apart. A change in the economic climate, combined with a French misunderstanding of economic realities, leading to the belief that the French Franc could take over as anchor currency,95 produced such heavy speculation that the ERM system of fixed rates had to be abandoned. The member states instead adopted a margin of fluctuations of plus/minus 15 per cent — almost the same as adopting fluctuating exchange rates. Few people believed at that time that the economic and monetary union stood any chance of realization. This may have been a blessing in disguise. The EU member states rallied to the situation and soon the currencies were brought back to something like fixed rates again. After presidential elections in France in 1995 many observers followed closely the determination of the French government to implement strict economic policies. France passed the test. The South European countries learned the lesson and changed their economic policies. They also benefited heavily from the falling interest rates that reduced the burden of their public debt. After the crises, the political determination to see the economic and monetary union through was, in fact, stronger than ever. The attack from the international financial markets had illustrated how vulnerable the individual currencies — even the hitherto robust D-mark — were, and the need to avoid the role of potential victims in the future. The run-up to the start of the economic and monetary union and its first years from 1999 to 2006 reveal what needs to be done and where the quest for harmonization and/or common rules and regulations are less imperative. There may be some room for manoeuvre for specific items — scope for doing things differently — but the unanswered question is how much. In several respects, comparison with the economic and monetary unions for the United States and for the Commonwealth of Australia — to take these two unions as examples — are interesting and revealing. They actually demonstrate that the need for common rules and harmonization are not so widespread as would be expected at a first glance. The obvious example is tax harmonization, where rates for income tax and indirect taxation can differ and actually do from state to state. For Europe the political challenge is whether the Europeans and their

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national governments are willing to live with the economic consequences of variations in economic conditions. Basically the Europeans can choose between: Either — full harmonization, thus removing all artificial incentives such as differences in tax rates and other regulatory framework for people and enterprises to move across borders. If they do so, it is because underlying changes in competitive conditions make it profitable. The drawback by choosing this way to proceed is undoubtedly a much higher degree of EU regulations than most European politicians and citizens would like. Or — less harmonization, offering member states the option of a certain degree of variation between some basic economic rules, such as tax rates, of which people and enterprises are invited to take advantage. This may not start much migration of the labour force as experience suggests the labour force in Europe is reluctant to move, but it may lead to movement of enterprises (production, and even more importantly, headquarters and by implication, tax revenue). American economists, who were quick to point out that it would not work, often dominated the debate about a European Economic and Monetary Union. They argued on the basis of what made the U.S. economic and monetary union work, but a comparison is trickier. The respective sizes of federal and state budgets in the United States and the EU budget (not capable of influencing economic activity because of its small size) and national budgets, vary considerably. The integration is much higher in the United States. The financial sector in the United States works on the same rules for all states, while discrepancies still exist for the financial sectors between nation states in the EUROland. Geographical distances are also very different. Every economic and monetary union will find its own balance, as has been the case in the United States and other political entities operating such unions. The European one searched for its own way by striking a balance accommodating often-contradictory political and economic considerations.

European Economic And Monetary Union — What Is It? The European economic and monetary union — EUROland for short — is based on the following main objectives and instruments: a. The Single Market for goods must function so that aberrations are rare. b. There must be freedom for labour to move across borders without any problems to work in another member state. c. Capital movements must be completely liberalized. In principle, the economic and monetary union must constitute one capital market. This

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also calls for the right to establishment in another member state for financial institutions. In short: Financial institutions must work on the same basic set of rules everywhere in the Union, regardless of their origin. d. The monetary policy is the prerogative of a common central bank or a central bank system (ECB). The national central banks can be maintained, which is the case, but without any real powers. Powers to influence money supply, the level of interest rates, and the rate of exchange for the Euro vis-à-vis other currencies are all vested with the common central bank. e. The fiscal policy is in principle a national competence, but Article 9996 of The Treaty of European Union stipulates that in a medium-term perspective, member states’ fiscal policies shall be neutral and allow them to run deficits of up to a maximum of 3 per cent of Gross Domestic Product on public budgets in low-growth periods. If member states do not respect this ceiling, a fairly complicated procedure97 is set in motion stretching over up to two years. In principle, the European Union can impose fines on a member state that has breached the 3 per cent ceiling. Formally the rules for the formulation of economic policy are unambiguous. Monetary policy is the competence of the European Central Bank — exclusively. Fiscal policy is a national matter. If these rules and distribution of competences are followed literally, the scope for conflict between monetary policy and fiscal policies is obvious. Accordingly, some rules and constraints on national behaviour with regard to fiscal policy have been agreed upon. They are found in what is known as the Stability and Growth Pact of 1997. The core decision is to avoid destabilizing large deficits on national public budgets.98 In 2005 the Stability and Growth Pact was revised to incorporate experiences and take account of new circumstances. The two main amendments are greater flexibility and stronger efforts to play a preventive role.99 The ECB needed to define its monetary policy. Traditionally a central bank can choose between a mix of three strategies: inflation, money supply, and exchange rate. As the exchange rate fluctuates on the currency market, the ECB had to concentrate on the two other targets. That was not easy in view of the circumstances. The economic and monetary union was embryonic and little was known about the reaction to monetary instruments in EUROland. In the beginning the ECB followed a strategy to keep inflation below 2 per cent in the medium term. In 2003 the ECB redefined its medium term policy goal as “close to but below 2 per cent”.100 The overall strategy chosen was a diversified approach with two pillars. First, a reference to growth in the money supply,101 put at 4.5 per cent.

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Second, analysis of risks for future inflation. In recent years, the ECB has downplayed the role of the first pillar, which to many observers, looked very much like the instruments chosen by the German Bundesbank prior to the establishment of the European Economic and Monetary Union.102 The ECB needed to establish itself as a central bank in the tradition of the German Bundesbank, with high credentials to combat inflation, and emerge as an equal partner to the US Federal Reserve, and this at a time when that prestigious institution was riding high. It may be too early to say whether the ECB has succeeded or not, but, grosso modo, it looks like it has managed to carve a respectable position for itself and find the right balance among these targets, and the right instruments to achieve them. It has been noted that in recent years the inflation in EUROland has been just above 2 per cent, causing the ECB to miss its targets for several years. According to OECD,103 consumer prices rose in 1999 by 1.2 per cent; in 2000, by 2.1 per cent; in 2001, by 2.4 per cent; in 2002, by 2.3 per cent; in 2003, by 2.1 per cent; in 2004, by 2.2 per cent; in 2005, by 2.2 per cent; and in 2006, by 2.2 per cent. Actually inflation has not been below 2 per cent since 2001. Inflation has thus, on average, been kept at bay, even if target figures have not totally been met. The problem is that, below the surface, huge discrepancies in price movements are visible. As Dr Willem Duisenberg, President of the ECB,104 mentioned in September 2002: Eating out, having a haircut or having clothes dry-cleaned became significantly more expensive in the first few months of 2002, and many people in the euro area have noticed this, including myself. In general, price increases have mainly taken place in sectors with a low level of competition and where products are rather differentiated

This divergence in price movements has given a large number of people the impression that the introduction of the Euro has led to price increases because goods they buy every day have risen, while falling prices are seen for goods they only buy from time to time. Politically and psychologically this has posed a problem for European policy makers as the perception of price increases obliterates the reality. People buy a cup of coffee every day, but a new car every five years or so. The verdict on the coordination of economic policy is more ambivalent. When the European Union itself was established in 1958, the business cycle was favourable, giving the newborn venture tailwind. The opposite was true in 1999 when EUROland started. The global cycle may have been favourable, but in Europe, growth rates had fallen and the strong German economy

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had gone into semi-recession, or at least, low growth, and was not able to pull the other economies along. No other dynamic economy in the EUROland had emerged. The happy days — boom times — when all member countries could register surpluses on the public budgets from buoyant tax revenues, following a rise in incomes and low social welfare expenditure, were over. Instead member states slipped into a situation where, much to the surprise of the architects behind EUROland, deficits instead of surpluses became the norm. Germany itself, the king of fiscal austerity, registered a deficit above the 3 per cent ceiling. Several other member states were in the same position, including France. The Franco-German axis spluttered economically. From an economic point of view there was little doubt that the time had come to disregard the 3 per cent ceiling and stimulate the national economies. Several member states had not followed a strict fiscal policy when deficits were below 3 per cent of GDP, but introduced tax reductions, partly for political reasons. That worked fine as long as high economic growth continued, but growth started to falter almost simultaneously with the implementation of the economic and monetary union. From an average economic growth of 3.7 per cent in the three-year period from 1998 to 2000, France saw its annual average growth fall to 1.2 per cent in the years 2001–2003. For Germany, the corresponding figures were 2.2 per cent and 0.3 per cent respectively (the German economy contracted in 2003).105 The lower growth produced lower tax revenues, leading to rising deficits on the public budgets which could not be corrected, as a more restrictive fiscal policy would further diminish growth. Disregarding the ceiling was contrary to the rules laid down in the Stability and Growth Pact, as well as the Treaty itself, supplemented by Council regulations. The end of the matter turned out to be a FrancoGerman not-very-elegant dictate to do exactly that — disregard the ceiling and accept the inevitable. The economic situation not only called for this, but also made the violation of the ceiling the right and sensible policy. The two countries convinced, persuaded, or bullied — depending on whom you ask — the Council to suspend the sanction’s mechanisms envisaged in the Treaty and accompanying legal pacts for not respecting the 3 per cent deficit ceiling. It attracted a good deal of attention. Not so much because it was not common sense — it evidently was — as the strong support for this view testified — but because the procedure used by the two countries conveyed the message that if they were in breach of rules, the rules should be bent — in short they were in a class unto themselves. There was a good deal of chagrin among some other member states,106 the Commission, and ECB.107 However the matter

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passed because one of the iron rules stating that substance should take precedence over formality, spoke in favour of the decision. Before turning to experiences, it may be worthwhile to cast a glance at where EUROland differs from the Werner Report. The actual economic and monetary union differs clearly when comparing the institutional framework and the weighting between “economic” and “monetary” aspects. The Werner Report puts emphasis on economic policy, while EUROland is much more focused on the monetary aspect, without going very far with regard to economic policy, apart from constraints on public debt and, to a certain extent, public deficits. The Werner Report called for a decision centre for economic policy (fiscal policy). EUROland leaves the decisions to member states except — as mentioned above — for public debt and public deficits. The Werner Report envisages a central bank system. EUROland operates with a European central bank. The reasons for this divergence is difficult to explain, except for politics. As discussed above, France actually tried to install a central decision centre for economic policy and failed. As for a central bank versus a central bank system, the explanation is probably to be found in the wish to signal a strong and independent central bank. The alternative in the form of a looser construction might have raised the suspicion that member states would have a hand in monetary policy, which would undoubtedly have made the financial markets more sceptical towards the Euro. What matters economically is that an economic and monetary union can only run with one decision centre determining the interest rate common for all members, and that is not dependent on whether a central bank or a central bank system is chosen.

Experience Gained — Conditions For An Economic And Monetary Union i) Experience gained so far indicates that in the European context, integration, even with an economic and monetary union, can move slowly in the following areas, but cannot be postponed ad infinitum: •

Taxation

Tax harmonization still has a long way to go. The EU treaties from the original Treaty of Rome to the Treaty of Nice, only call for tax harmonization, if necessary, to guarantee the functioning of the Single Market. Neither paragraphs in the Treaty on Economic and Monetary Union nor subsequent Treaties or legal acts constitute an obligation to harmonize taxes.108

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It is a political hot potato because taxation is one of the most important political instruments for influencing the distribution of income among citizens (and institutions/enterprises) in national economies. So far no member state has really been willing to relinquish self-determination in this crucial aspect of politics. In year 2000, Denmark held a referendum about Danish membership of EUROland. The Danish Ministry of Economy and Ministry of Finance compiled figures for tax rates in the United States to try to cast more light on the question of whether an economic and monetary union would force member states to harmonize their rates. The compilation revealed109 that: Corporation tax — Minimum rate zero and maximum rate 12.5 per cent. Five states applied the zero rate while one state had 12.5 per cent. Income tax — Minimum rate zero and maximum rate 12 per cent. Eight states applied the zero rate, and one state, 12 per cent. GST — Minimum rate zero and maximum rate 7.25 per cent. Five states applied zero rate while one had 7.25 per cent. Petrol tax — Minimum rate 7.5 cents per gallon and maximum rate 32 cents. One state applied the minimum of 7.5 cents per gallon, while one applied 32 cents.

This clearly shows that an economic and monetary union does not force harmonization of tax rates, albeit the United States, with its large, yes, huge, geographical distances may not be the best comparison. On the other hand, the high degree of mobility in the United States makes it much more likely that persons and corporations actually look at differences in taxation before deciding where to go and carry out their economic activity. When comparing the United States and the European Union, it should be kept in mind, however, that the underlying need for the financing of a U.S. federal state is very different from the corresponding need for a European member state of the European Union. The need to finance activities of a state inside the U.S. federation is hugely different from financing activities of nation states members of the European Union and the Economic and Monetary Union. •

Services

Services are liberalized in the European Union, but only to a certain extent. Several sectors of the economy, in particular, what used to be public

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services, were not included. It was felt that security considerations and/or the prerogative of the state to provide services such as electricity and water, made it natural for the government to maintain the right to regulate these services. However, this point of view is under increasing attack and even if liberalization is moving slower than originally envisaged, there can be little doubt of the direction. For the economic and monetary union, financial services and movement of capital must be completely liberalized, which was the case when EUROland started in 1999. Indeed liberalization of capital movement was an important part of the step-by-step introduction of the economic and monetary union. •

Restructuring across borders

This is where the scoreboard is most depressing. There are no obligations to restructure European industry by cross-border mergers and acquisitions. It has to be admitted, regrettably so, that even if many observers wished it to happen and thought that it would happen, the economic and monetary union has not produced an incentive for cross-border restructuring. When the Treaty was negotiated, it was felt that the drive would be unstoppable, but barriers proved to more resistant and resilient than predicted. Of the four items listed, where no legal requirements are to be found in the economic and monetary union, this item is the one most likely to be singled out as not a legal necessity, but imperative for improving competition to safeguard a high and growing living standard inside EUROland. In retrospect, it might have been wise to insert Articles in the Treaty forcing member states to take a more open and less nationalistic attitude to crossborder mergers and acquisitions. •

Mobility of labour

Mobility of labour is guaranteed in the original Treaties. This is not the problem. The problem is that European workers do not really take advantage of the opportunities to work in another member state, often not even moving to work in other regions inside their own nation state. Apparently this does not threaten the economic and monetary union on the conditions that (1) other measures for adjusting the basic economic imbalances are available, of which the European Union’s various Funds can be mentioned, and (2) the European population acquiesces with the lower growth such immobility of the labour force imposes on the economy.

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The argument put forward by many economists, that an economic and monetary union requires a much higher degree of mobility than the Europeans are willing to deliver, is not correct, to judge by experience. What is correct is that without labour mobility, the economic and monetary union functions much less smoothly, and shifts the burden of adjustment to other variables in the economic picture, while at the same time, leaving some distortions undone thus reducing the potential for economic growth. •

Financial supervision

The Europeans are discovering another item of importance for the smooth running of an economic and monetary union: financial supervision. Strictly speaking, it does not follow from the economic and monetary union, but liberalization of financial services can hardly be separated from the economic and monetary union. Financial institutions are free to operate inside the union. The union has not — at least not yet — taken steps to analyze the implications of financial supervision of various kinds for financial institutions in different member states. In some cases a financial institution based in member state X may accept that activity A undertaken in another member state falls under the supervision by company X’s homeland, while activity B undertaken by the same company in the same member state falls under national supervision.110 Apart from administrative difficulties and ire, it produces a considerable amount of double work and, not the least, uncertainty. To illustrate: there are no clear rules about compensation, if for example, a bank with branches in several member states runs into difficulties. Will the bill be sent to its headquarters in a member state, or will it be shared among member states, according to the number of branches and/or activities? When looking at the advantages offered by liberalization of financial services, it is evident that such unsolved and outstanding questions constitute a barrier. It is remarkable that financial integration has actually taken place anyway and got as far as is the case. It may reflect confidence among the financial institutions that sooner or later, and with some luck, sooner rather than later, clear rules will be implemented. It is however not that easy. Member states seem to be holding back when an idea about an EU supervisory body is floated. ii) There is a tendency to ask for more from an economic and monetary union in, for example, the European Union, than the economic and monetary unions already existing and working. We do not need to compare with the United States. Suffice it to look at each individual nation state, as we discuss the European Union we can take a look at Europe. Denmark111 is a nation

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state and it is a nation state with a — most people would agree to — a well functioning economic and monetary union. Does that mean that tax rates are uniform in Denmark? At least for income tax where the local communities collect taxes, No. Does that mean that services can be freely traded? Yes, but barriers in the form of local unwritten rules will often constitute barriers. Is it well regarded by “the locals”, if a local company is being bought by a bigger and more powerful company from Copenhagen? No. A certain amount of activity to safeguard local companies does take place. Is the mobility of labour inside Denmark perfect? Do unemployed workers in the peninsular of Jutland take the train to the east of Denmark to work there, and if they do, is it without any difficulties? No. They may do it, and there are no legal barriers, but local customs may pose obstacles, making life not so easy. And do they get the same remuneration, regardless of where in the country they work, be it the booming suburbs of Copenhagen, or the depressed areas in the countryside? No. Looking at all European nation states and indeed the United States, we see that unemployment rates differ from region to region. This does not, however, prevent these nation states from running an economic and monetary union. The debate about what is required from an economic and monetary union brings into the open the fact that sometimes the European Union is asked to function more smoothly and be more efficient than similar ventures inside the nation states. The national economic and monetary unions inside all the European nation states have never worked wonders. All of them have shortcomings, and all of them have found it very difficult to work without a good deal of friction. As the integration made the economies of the member states interwoven, limiting the scope of national economic policies the fundamental choice for EU member states could be between: (1) Recognizing the need for the coordination of economic policies, without taking steps to institutionalize it. This amounts to adjustments forced on member states by market forces, and even more importantly, subsequent adjustments, without giving member states the possibility to shape events. (2) Setting up the machinery for the coordination of economic policies that introduce a limited economic and full monetary union, to reap the benefits flowing from the growing interdependence of domestic economies. Option 2 was chosen to control the development and reap the benefits. The EU member states chose to prioritize the monetary aspect, with limited coordination of their economic policies. There were several reasons for that decision.

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It was seen as a logical extension to the grand designs for the Common Agricultural Policy, the Common Market, and the Single Market. The economic theory is not providing a clear-cut answer as to whether these policies would be endangered in the long run without an economic and monetary union, but there is little doubt that such a union constitutes a firmer foundation. iii) The heart of the matter was the role of exchange rate adjustments. During the 1980s and 1990s, the European Union approached a situation where fixed exchange rates gained recognition as the most effective policy. That required coordination of economic policies, in particular, monetary policy corresponding to what the European Union had actually experienced during most of 1990s — except for the turmoil around 1992–1993 — when the European Union operated under conditions equivalent to what would be the case for an economic and monetary union. There was no belief anymore in the effectiveness of exchange rate adjustments as an instrument of economic policies. The experiences gained during the 1970s and 1980s did not warrant confidence in the use of exchange rate to control the real economy. On the contrary, it was felt that such changes were detrimental to economic and social stability. The growing globalization with capital movements amounting to billions of U.S. dollars inside a very short time span put even the larger EU member states such as Germany and France in a vulnerable, even fragile, position. Some European countries — outside the circle of members aiming at an economic and monetary union — favoured flexible or fluctuating exchange rates, but for other reasons. They pursued inflation targeting as an objective for economic and monetary policies, and in that context, a fixed exchange rate was inconvenient. The Europeans did not see exchange rate changes as an effective instrument to redress economic imbalances. That had been tried from around 1970 to the mid 1980s as an economic policy instrument without impressing. It had not provided a platform for growth in Europe; on the contrary it had led to uncertainty and instability, jeopardizing the prospects for growth. Many European nation states that had tried it came to the conclusion that it radiated weak or even disorderly political leadership. Economically, fiscal or monetary policy can achieve anything asked by a change in the exchange rate. Basically devaluation means a reduction of living standards by depressing real incomes and redistributing income from the labour force to the industrial sector (from wages to profit). Fiscal and/ or monetary policy can do the same. The difference lies in the perception among the people. A devaluation signifies that the nation state has been

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forced by outside events — forces beyond its control — to implement such a policy, while fiscal or monetary policies conveys the impression that it was the choice of the government. For a weak government it may be attractive to devaluate, shedding responsibility, but as Europe headed into the 1990s, the European governments did not feel weak and were not favourably disposed to painting themselves as being out of control. If the perception is that exchange rates are no longer suitable instruments for adjusting imbalances in national economies, there are no reasons to maintain them as arrows in the quiver of economic policy instruments. The financial markets impose a price on nation states keeping this option open. It may be small or big, but it is there. Until the financial markets were convinced in the middle or late 1990s that the Economic and Monetary Union would be established according to plans, several member states paid quite a high margin on the financial markets. That disappeared almost in a stroke when the markets changed their attitude from scepticism to conviction. It did not make sense for the member states to pay such a price having decided to do away with exchange rate changes as an instrument for adjustment. Experience showed that even if economic conditions warranted it, the price for maintaining fixed exchange rates could be quite high and demand costly intervention on the currency markets. An economic and monetary union would per definition remove both the higher margins on international borrowing and interventions in the currency markets to defend member states’ exchange rates. It is indeed puzzling to see the limited impact of exchange rate changes on the balance of payments. From 2000 to the end of 2006 the U.S. dollar fluctuated vis-à-vis the Euro between a low of US$1.3625 per Euro (27 December 2004) and a high of US$0.8270 (21 October 2000). The balance of payments has not changed much despite an appreciation of approximately two-thirds. Some economist’s will point to growth disparity, but in this period except for the two first years (2000 and 2001), growth disparity has not fluctuated strongly, but averaged about 1.3 percentage points (low point in 2002 and 2006 with 0.7, high point in 2004 with 1.9) in favour of the United States. The balance on goods and services has been in deficit for the United States for the whole period, and risen constantly from US$377 billion in 2000 to US$765 billion in 2006. EUROland has been in constant surplus from US$35 billion in 2000, to US$114 billion in 2006, and a high of US$201 billion in 2004.112 The rejection of exchange rate changes explains why the theory put forward by Robert Mundell113 about optimum currency area found gradual acceptance as an economic incentive and political objective.

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Mundell’s theory about optimum currency areas as put forward and subsequently elaborated by himself and others, lays down the following criteria for a group of countries to form such an area: Workers must be able to move across the area without any hindrance and take up work anywhere without any direct or indirect barriers. The market must function effectively, allowing supply and demand forces to work themselves through the system to adjust imbalances. Prices and wages must consequently not only fluctuate freely, but also respond to how the market reacts. There must be free movement of capital without any kind of hindrance. In principle this will, or should, lead to what economists call optimal factor allocation. Goods and services are sold where it is most profitable and the place of production reflects competitive patterns — there is no waste of resources judged on the basis of relative prices. A redistribution mechanism should be set up to transfer money, preferable via the public budget, to depressed regions or areas not able to cope with the high pressure of competition and the impact of market forces. Following the criteria strictly means, there is much work left to do and some of it does not appear to be feasible in a short time span. However, much the same can be said, as mentioned above, for the optimum currency areas in operation inside many countries, for example, Denmark or the United States. Almost all criteria are only partially fulfilled. The political trick seems to be an ability to know when they are sufficiently fulfilled to shoulder the burden of an economic and monetary union. And after that, to strike the right balance of advantages/disadvantages between areas inside the region and between various production factors, that is, labour, highly skilled labour, highly educated labour force, and profits.

The Lessons Learned i) The main reasons for the Europeans taking the full step towards an economic and monetary union are: 1. Economic interdependence between member states’ economies had grown so strong that no member state could pursue an economic policy out of step with the rest.114 2. In such circumstances a mechanism for better coordination of national economic policies may commend itself, even if, as it is seen with the European Economic and Monetary Union, domestic economic policies are, strictly speaking, far from being fully coordinated.

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3. Price stability had gained almost universal recognition and the German economic model was looked at as an example to follow. 4. These policies could be pursued instead of adjusting to market enforced steps. 5. Experience indicated that exchange rate changes had lost their effectiveness as an instrument for redressing economic imbalances because of the interdependence among the national economies. 6. That pushed for the logical next step — to link exchange rates irrevocably to one another and replace the system of fixed but adjustable rates. 7. As this amounted to a de facto economic and monetary union, the arguments for taking the full step and establishing such a union was overwhelming. 8. It institutionalized decision-making procedures for monetary policy, making it transparent and, 9. Positioned participants in the economic and monetary union to reap the advantages flowing from the union as a large and hopefully optimum currency area that provides stability, regardless of large and volatile international capital movements. 10. The Euro could be established as an international reserve currency and an alternative to the U.S. dollar, opening the door for EUROland to harvest some of the benefits accruing to a country — in this case EUROland — from operating an international reserve currency. The E.U. experience from 1971 to 2006 gives some clue on what matters when a group of countries contemplates an economic and monetary union. One factor is the conditions for establishing such a union and making it function. Robert Mundell has dealt with this extensively in economic literature and a number of other economists115 have participated in it. The intellectual and empirical foundation is fairly solid, even if the economists disagree on some issues. The next question is a more delicate one — more political and less economic — asking what really matters when the group of countries starts from an embryonic construction, gradually building floor by floor until the building stands. What are the reactions from the global financial markets and inside the countries themselves; what inspires confidence and what does not? The final question is: What are the economic and maybe also political advantages of such a union in which all participants give up their national currencies — voluntarily — and let these be replaced by a single currency? ii) The lessons to be learned from the European experience and some of the answers to these questions can perhaps be summarized like this:

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(1) The starting point is a robust political will “to make it”, transmitted to the global financial markets and the populations of the member states. The message must be put across in a convincing way that an economic and monetary union will be established regardless of obstacles. The Europeans managed to do that with the first political declaration at The Hague summit in 1969, that was followed not only by repeated political declarations, but tangible steps. The ambition was nearly grounded by obstacles on several occasions. In the early 1970s when the United States left the gold standard; in the mid-1970s when oil prices rose by up to 400 per cent; in the early 1980s when exchange rates had to be changed almost incessantly; in the early 1990s after Denmark rejected the Treaty of Maastricht, and the United Kingdom was forced out of the fixed exchange rate regime (ERM); and in 1993 when some of the member states already on the launch pad for an economic and monetary union had to fall back on fluctuating exchange rates. These setbacks were counteracted by the political will to get going again and appropriate economic policy steps were taken. The global financial markets may not have been convinced — in fact there was widespread scepticism as to whether the European Union would manage to establish EUROland in 1999 as planned — but the scepticism was confined to whether the economic conditions were present, not whether the political will was. (2) Member states must pursue economic integration and have demonstrated political will, economic capability, and administrative expertise to manage integration and master the political and technical details required by an economic and monetary union. The establishment of the three common policies in the 1960s made the ambition to build an economic and monetary union credible. When the Single Market was launched in 1986, not fully, but to a large degree finished in the early 1990s, the credibility was enhanced. (3) A certain congruity among the national economies is necessary. An economic and monetary union between countries relying respectively on production of oil, agricultural products, and high tech does not stand much chance of success. One of the main advantages of an economic and monetary union is the enhanced ability to withstand shocks coming from the outside. Congruity among the participating members’ economies makes that ability more robust. (4) The national economies must be at a comparable level. It has not been officially put this way, but grosso modo the divergence between member states’ economies must not be wider/deeper than the divergence within

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member states of regions with the highest income per capita and regions with the lowest one. Public transfers inside a nation state between regions reduce differences in income per capita, but no such mechanism was foreseen in the European Economic and Monetary Union. It must not be felt that disparities between nation states entering into an economic and monetary union are higher than what is already seen within the nation states themselves. If this condition is fulfilled the political and public perception may be favourable. If not, the perception that disparities and social disruptions will undermine the political will may derail the venture. (5) There must be a large degree of consensus about which kind of economic policy an economic and monetary union stands for. It is obviously not feasible to establish such a union if one or more member states prefer high growth and are ready to live with inflation, while the priorities are different in other member states. That condition was not fulfilled in the European Union in the 1960s, 1970s, and a part of the 1980s, when the two most important EU member states — France and Germany — did not see eye to eye about economic policy. But during the 1980s, the German model with low or no inflation, called the stability policy, was recognized also by France as THE model to apply, even if attempts to swing the direction was made in the course of negotiations of the Treaty of Maastricht, and even if the final result does not fully reflect this policy balance. (6) The crucial test for the system in the build-up phase is trust among member states that a sufficiently high degree of comparable economic policies are followed and that the member states whose currencies are under attack will take the necessary steps to redress the situation. No member state will lend to another despite all solemn pledges, unless this trust exists. Creditor member states must feel assured that the debtor member state will put credible economic policy in force. It is not the written agreement, but the unwritten trust, that determines the outcome of the game. In the 1970s and the 1980s Germany was the creditor member state lending its currency to other member states trying to defend their currencies against market enforced depreciation. The pattern clearly shows that Germany and/or the German Bundesbank from time to time lost trust in other member states’ capability and political stamina to adopt austere economic policy measures. France had to leave the currency rate regime of fixed rates in the mid 1970s because Germany was not assured of its economic policy, and because of French hesitation to implement painful economic measures. When

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the French economic policy became trustworthy in the eyes of Germany, which soon happened under the stewardship of President Valéry Giscard d’Estaing, the German willingness to provide currency credits116 paved the way for France to re-enter the system. It served as a signal to potential speculators that the French economic policy had been scrutinized by Germany and had passed the test. That dampened the incentive among speculators to single out the French Franc. These things can never be officially proved, but from around 1972 till the end of the 1980s, the extent of international speculation against the French Franc was more or less inversely proportional to the German evaluation of France’s economic policy. (7) It may be wise to progress slowly. The financial markets will surely test the credibility and the strength of the system. Domestically, a political consensus supported by the business sector to enter into an exchange rate system based on fixed, or fixed but adjustable rates, has to be built. It takes time. Furthermore it cannot be taken for granted that the international economic and monetary environment is favourable, and the true test of the system comes when periodic turmoil on the international financial markets strikes. One of the lessons from the European experience is that if a financial crisis starts somewhere else, the financial markets will analyse other currencies and, in particular, exchange rate systems, to look for potential victims and select currencies judged to be weak. Even if the system looks robust and the builders are convinced that it can weather storms in the international financial markets, it is not possible a priori to know either the strength of the potential speculation, or which currencies will be singled out for attack. The system may be built in calm weather, but will be tested in stormy conditions. (8) There must be an understanding of this risk among politicians and business leaders, supplemented by the willingness and readiness to adapt the system to changing conditions in the international financial markets. The Europeans, on their way to an economic and monetary union, tried several models for exchange rate stability and were quick to adapt and similarly quick to bow out when the pressure became too hot as was seen at least three times. In the 1970s the system was reduced to a few member states as the member states were under pressure from the oil crisis and the subsequent economic slow-down. In the 1980s the EMS and ERM gained strength by a gradual phasing out of the word “adjustable” in the term “fixed”, and by adjustable exchange rates moving towards de facto fixed exchange rates.

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In the 1990s the system of fixed, but adjustable, exchange rates was abandoned for a short time under pressure from international monetary turmoil, and a margin of fluctuations of plus/minus 15 per cent — in reality, fluctuating rates — was accepted for a short time. The system must be adapted to realities. The realities of the international financial markets never adapt to any system put up by a group of countries moving towards an economic and monetary union. On the contrary, the market smells the opportunity for making profits, if exchange rates are out of tune with realities, and will mercilessly pursue and exploit such opportunities. If, or when, the system comes under attack, the authorities must make up their minds whether to defend the system and shoulder the burden, or amend the system. There is nothing more detrimental for future possibilities to rebuild the same or another system, than half-hearted defence, followed by “abandon ship”. In such cases, the authorities get the worst of the two worlds. First, they suffer an economic loss defending the system (loss of currency reserves, instability, negative reputation, higher interest rates). Second, they lose prestige and authority (credibility) in the markets for not standing firm, with the inevitable consequence that the market will not believe they are able to be steadfast next time. (9) When one of the currencies in the fixed rate system came under attack, authorities, be it the government or the central bank, came out with vigorous statements saying that the rate would not be changed. They learned after some time and some agonizing soul-searching that the market does not listen to what you say. It weighs what you are doing. You cannot, by declarations, prevent speculation on exchange rates. The market looks for one thing only: whether the member state in question is ready to pay the price for defending the currency. If steps, for example, interest rate increases, are deemed sufficiently robust and signal that, even if that is painful for the domestic economy, the rate will be kept where necessary to defend the exchange rate, then speculation will die — and fast — as the speculators themselves will be hit. The central banks must rely on the interest rate to defend the currency, and the market watches carefully how it weighs defence of the currency in relation to the repercussions on the domestic economy. This is actually one of the crucial lessons from thirty years of exchange rate cooperation in Europe. The Europeans accepted the consequence of this and some of the other lessons by trying to read the market and making preemptive strikes by organizing exchange rate changes before the speculation gained speed and strength.

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(10) A currency anchor is indispensable. In the global financial system, the U.S. dollar is a currency anchor for many currencies that are fully or partly linked to the U.S. dollar. It serves as a reference point. It plays the same role as the strongest share markets do in giving direction to other markets. In the European experience, the D-mark was the currency anchor. The rest of the world looked to the D-Mark to find its rate vis-à-vis the U.S. dollar and, at least for some of the time, the Japanese Yen. The other European currencies adjusted to the D-Mark. With some justification some observers called the system a D-Mark zone. The market picks a currency anchor based on an evaluation of the currency’s reputation. Germany had for many years followed an economic policy characterized by stringent fiscal policy and low inflation. The market liked this policy. As the Bundesbank gained reputation, it became credible as a lasting policy. The market became convinced that the German authorities, be it the government or the Bundesbank, would defend this policy and pay whatever price was necessary to do so. This perception meant that Germany was never called upon to make such sacrifices. The mere belief was enough. In a way, perception created its own reality.

Advantages — Disadvantages i) It may be too early to analyse the advantages and disadvantages of the European Economic and Monetary Union (EUROland), but not too early to point to some of the benefits the member states looked forward to when they decided to establish such a union. Much of the scepticism and/or criticism of the European Union, as an economic and monetary union, comes from American economists and/or people favouring the “American economic model”, who convey the message that European economies are doing less well because they have not tuned into the same system. The argument is often advanced that the statistical facts for growth, productivity, etc. support this view, that the American model is superior to the European one with regard to high growth. It might be interesting to cast a glance at the European economies versus the American one before embarking on the potential benefits of the economic and monetary union. It is some kind of conventional wisdom that the U.S. economy is much stronger than the European one and many explanations have been offered. In an article published on 19 November 2005, The Economist117 punctures some of the myths and comes to the conclusion that the decisive factor behind the stronger U.S. economic performance compared with the European one is “that America’s population is increasing much faster than

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the euro zone’s”. The article points its finger at the following not very often seen facts: •

•

•

•

•

Over the past five years Gross Domestic Product per capita grew at an average of 1.4 per cent in EUROland and 1.5 per cent in the United States. From 1996 to 2005 employment grew stronger in EUROland than in the United States, albeit the difference is small. It is equally true if the ten-year period is broken up into two five-year periods. This is a strong reversal from 1985 to 1996, when employment measured in annual percentages rose almost four times faster in the United States than in EUROland. Since 1996 the proportion of the population of working age with jobs has fallen from 73 per cent to 71 per cent in the United States while it has risen from 59 per cent to 65 per cent in EUROland. The point is made that EUROland‘s economic performance has been achieved with, broadly speaking, a balance on the current account of its balance of payments, and a deficit on the public finances that is much lower than the one weighing the U.S. economy down.

The Nobel laureate Robert Mundell came to the same basic conclusion — that the main difference between the United States and Europe is population growth — in an interview in September 2006, saying “Some say that Europe has performed badly compared with the US over the past 10 years, but they forget that Europe has zero population growth and that European per capita income isn’t much below the US figure.”118 Another argument often heard about the flaws in the European Economic and Monetary Union is the high public expenditures for social welfare, with increasing taxes thus reducing the incentive to work. But if you add in corporate spending on health care and pensions — spending that is both regulated by the government and subsidized by tax breaks — the United States actually has a welfare state that is about as large relative to the economy as those of other advanced countries.119 The picture about the ability to adjust and how different economic models work in their societal settings is much more complicated than it appears, looking solely at a free market model that is able to adjust by changes in prices and wages. The sore point in EUROland is productivity growth. The Conference Board120 gives figures on productivity for 2005. U.S. productivity fell from 3 per cent in 2004 to 1.8 per cent in 2005 and productivity in the

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European Union (fifteen members, that is, before the enlargement with the Central and Eastern European countries) fell from 1.4 per cent in 2004 to 0.5 per cent in 2005. There are two factors to mention. First, that productivity is falling in the United States because growth is levelling off, and productivity is low in Europe because growth is slow.121 If, or when, growth picks up in Europe, productivity will follow. Second, the disappointing restructuring of the European economies caused by, among other things, slow cross-border mergers and acquisitions, puts a brake on the endeavours to get on a growth pattern. In a study submitted to the European Council meeting in the spring of 2002,122 the EU Commission came to the conclusion that the difference in labour productivity per hour explains one third of the gap in Gross Domestic Product per head. The rest is due to the smaller number of working hours per worker and the lower employment. What these figures reveal is that the dismal picture often painted of EUROland/Europe’s economy and economic performance is only partially true. ii) During the run-up and implementation of the economic and monetary union, the following points were brought forward as potential benefits: (1) Transactions costs — The most quoted example of the benefits from moving to a single currency for ordinary people is that they no longer need to change currencies when travelling from one member state to another. The experiment was made of a round trip to all participating countries, starting with 40 units of currency of which more than half was eaten by fees and lower exchange rates than the official ones. The benefit of getting rid of these transaction costs is visible and many tourists will be glad not to pay it anymore, but its impact, measured as a percentage of Gross Domestic Product (GDP), is probably small. The Commission in analysing the benefits of an economic and monetary union123 concludes that the costs for member states of changing from one currency to another could be put at approximately 0.4 per cent of GDP. This estimate is based on the assumption that all member states operate an efficient and advanced banking system. Not all of them do and the system may not be efficient everywhere in EUROland. The Commission points out that the benefits will be unevenly distributed with the smaller member states getting the lion’s share. Within the member states, small- and medium-sized businesses will gain more than large companies more used to international transactions and know beforehand how to minimize transaction costs. The line of thinking on this point corresponds to the Commission’s view when the Single Market was established. Europe had great potential in mobilizing

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small- and medium-sized businesses to leave the national cocoon and run the risk of going international. If such a policy is to succeed, barriers and various forms of transaction costs must be removed, and this is one of the objectives of the Single Market and the European Economic and Monetary Union. (2) The Single Currency means the removal of uncertainties about exchange rates. In a world of fluctuating rates, companies can guard themselves against the negative effects of fluctuating exchange rates (they can, among other things, use the forward market to buy and/or sell currencies). So it is feasible to remove, or at least, reduce the risk — but at a price, and the price is proportional to the uncertainty. The greater the uncertainty, the more necessary it is to guard against the risks and the more costly it is. The so-called spread on interest rates go up and can, in case of genuine scepticism, be considerable for a borrowing country as several of the Southern European countries saw before the market became convinced that the European Economic and Monetary Union would materialize according to schedule. The risk becomes even greater for an investor who is operating on a longer-term horizon, with risk of exchange rate fluctuations either during the investment, or when the revenue from the investment is transferred to the country hosting the company headquarters. The Commission may have put its estimate of benefits flowing from the removal of these risks on the upside when setting them at between 5 per cent and 10 per cent of GDP over a number of years. There is little doubt, however, that the benefits are substantial. Price stability and price transparency are high on the list of advantages. It may be difficult to quantify whether price stability itself stimulates high growth, but it is even more difficult to reject two clear illustrations of advantages from price stability. First, high inflation, especially if it fluctuates, distorts relative prices, opening the door for inoptimal factor allocation. So the investment level may not be directly affected, but it is doubtful whether investment projects give an optimal rentability. Second, low or no inflation conveys the impression of political and societal stability, making the country more attractive as a home for foreign investments that are skirting, where possible, countries with an unstable political system. Price transparency is obviously easier to obtain with a single currency than with national currencies, as it makes it more difficult to operate different prices for the same product from member state to member state (price discrimination), except for those reflecting different rates of Value Added Taxation (VAT) or excise duties. If we assume a high degree of competition, which may not always be, but is normally present, improved transparency will all in all lead to lower prices.

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It is rumoured in Europe, and often Europeans will voice the opinion that when the Euro was introduced, business took advantage of the momentary lack of transparency and confusion in converting prices in national currencies into prices nominated in Euros, to increase prices. OECD statistics for consumer prices in EUROland do not support this view. According to OECD,124 consumer prices rose as follows: 1991: 5 per cent, 1992: 4.6 per cent, 1993: 4.0 per cent, 1994: 3.2 per cent, 1995: 2.9 per cent, 1996: 2.4 per cent, 1997: 1.7 per cent, 1998: 1.2 per cent, 1999: 1.2 per cent, 2000: 2.1 per cent, 2001: 2.4 per cent, 2002: 2.1 per cent, 2003: 2.1 per cent. The sensitive sector is part of the service sector where people cannot substitute domestic goods with foreign goods, leaving the option open for domestic producers to increase prices by referring to the introduction of the Euro. To mention an example — even if transparency exists, showing it is much cheaper to get a hair cut in another country, no one would travel to exploit this price differential.125 (3) In a path breaking article from 1998, two economists, Jeffrey A. Frankel and Andrew Rose,126 repudiate the thesis that an economic ad monetary union would fail because the business cycle was supposed to be poorly synchronized in Europe. They recognize that such a conclusion may be drawn from historical data, but reject such data as irrelevant. How the business cycle looked among European countries before an economic and monetary union may be of no interest when analysing the effects following the establishment of such a union. Based on data from thirty years and twenty industrialized countries, they find a strong positive relationship between the degree of bilateral trade intensity and the cross-country bilateral correlation of business cycle activity. The interpretation of these findings is very clear. It may well be that a priori analysis shows weak correlation between the business cycle in countries forming an economic and monetary union, but integration increases trade flows, producing a more synchronized business cycle. A later study by Carlo Altavilla127 published in 2004, comes to the same conclusion, broadly speaking, and says that “the new currency area is likely to lead to stronger synchronization of EMU member’s business cycles”. The synchronization of the business cycle among member states in an economic and monetary union (or in an economic integration) depends to a certain extent on the degree of specialization among participating countries. A high degree of specialization poses the risk of less correlated business cycle. Member states are exposed to different, and in some cases, divergent repercussions on their economies. Intra-industry trade, defined as trade among

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member states in goods from one industry, is normally regarded as a yardstick for specialization. A high degree of intra-industry trade signifies less specialization as member states compete with each other and trade comparable industrial products. Analyses based on the Grubel-Lloyd index128 from 1996 show that member states of the European Economic and Monetary Union have not experienced increased specialization of their industrial production that exposes them to the risk of a less correlated business cycle. The index for intra-industry trade is unchanged, or slightly higher for the ten countries chosen, which actually points towards the opposite trend, albeit the figures and the time span used do not yet warrant a conclusion. The jury is probably still out and economists may well provide a number of other studies and findings, but these theoretical analyses confirm the belief that the integration, and in particular, the economic and monetary union, have their own dynamics. For good or bad, the integration actually pushes member states towards a stronger synchronization of the economies’ development and the business cycle. The advantage of this in a macroeconomic and political perspective is obvious. Greater stability produces a better investment climate for EUROland as a whole. For each individual member state, participation means that external shocks may be less brutal than if it is standing outside, having to absorb the shock alone. (4) Until recently no consensus among economists existed about the quantification of trade flows from less volatile, and even, more stable exchange rates and a common (single) currency. In 1995 an analysis published by McCallum129 revealed that a Canadian province traded twenty times more with other Canadian provinces than with a U.S. state of the same size and comparable location. No proof can be given, but an obvious explanation of at least some of this extremely large difference may be that the Canadian provinces share the same currency, while that is not the case for a Canadian province and a U.S. state. In year 2000 Andrew K. Rose, using the gravity130 model, put forward a quantification of positive effects on trade.131 Based on a comprehensive study, he draws the conclusion that two countries, which use the same currency, trade much more than comparable countries with their own currencies. Rose’s analysis did separate common currency from other and related effects, but he admits that even if common currencies increase trade flows, he does not know why. Later studies have confirmed the effect, albeit there still is disagreement on how much. Denmark’s Nationalbank132 has compiled and compared

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fourteen analyses including Rose’s article from 2000, and the result shows that with the exception of one,133 all reach the conclusion that an economic and monetary union has a positive, and in some cases, a substantial effect on trade. Rose’s article from 2000 estimated the positive effect to approximately three times higher trade between countries with the same currency than between countries not having the same currency. Most of the other analyses conclude that the effect is less, but still significant. Empirical studies carried out after the implementation of the economic and monetary union support the findings of the articles referred to above. From year 2000 to year 2003 the intra-EURO trade as a percentage of total trade for the EURO-zone rose from just below 64 per cent to just below 66 per cent, that is, with approximaely two percentage points.134 Five empirical studies referred to in the analysis by Denmark’s Nationalbank (2004) are unanimous in their results that the economic and monetary union has had a positive effect on intra-EURO trade. De Nardis and Viacelli (2003)135 mention 9–10 per cent, Bun and Klaasen (2002)136 get to 10 per cent, the European Commission (2003)137 offers 7–18 per cent, Micco et al. (2003)138 4–16 per cent, and Barr et al. (2003) 29 per cent.139 These empirical studies cannot be directly compared and they use various methods and data, but all find that there has been a positive effect. The German Bundesbank has analysed the effect on German trade from 1999 to 2003140 and takes a cautious view saying that empirical evidence from the first 4 1/2 years of participating in the EURO-zone “only partially substantiates the claim” of increased trade flowing from using a single currency. Recently an analysis by Baldwin (2006)141 puts a question mark, not on the benefit of participation in an economic and monetary union, but on its magnitude. Baldwin comes to the conclusion that the pro-trade effect of the Euro was somewhere between 5 per cent and 15 per cent, with 9 per cent being the best estimate. He further asserts that this effect has already happened, as it appeared in 1999 when the Euro was introduced. Compared with the positive effect in trade flows from three EU member states not taking part in the economic and monetary union (the United Kingdom, Sweden, and Denmark), all having a trade increase of 7 per cent, the Euro’s positive effect is there, but small. Baldwin looks at member states and sectors. Spain is classified as the biggest gainer. Sectors where average productivity increases with output (machinery, transport equipment, and chemicals) came out on top. Over the years many studies have brought out a positive correlation between trade and economic growth. This thesis has become some kind of conventional wisdom. One of the most recent attempts to quantify the effect was made by Frankel and Rose (2002)142 who come up with the result

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that an increase of one percentage point in a country’s trade-to-Gross Domestic Product ratio leads to an increase of Gross Domestic Product per capita in the long term of 1/3 per cent. It is also interesting to note that it is not only a fixed rate of exchange, but also the common currency being placed at the same level as other characteristics under the label “common” that makes a difference. (5) A study undertaken by The International Monetary Fund (IMF)143 outlines the advantages of free capital movement for a more efficient allocation of savings, increased possibilities for diversification of investment risk, faster growth, and the dampening of business cycles. The primary role of the capital market is to channel savings into investment and to ensure that the savings are used for the most profitable investment purposes. There can be little doubt that an economic and monetary union increases the mobility and transparency of the capital market, thus increasing the productivity of capital. According to the IMF study, “the critics of open capital markets, on the other hand, point to the inefficiencies resulting from adverse selection, moral hazard, and herding behavior, all of which are byproducts of asymmetric information — a situation in which not all parties to a transaction have equal information. Government policies, however, can lessen or mitigate the potential damage from asymmetric information problems”. Joseph E. Stiglitz, in a critical study of capital movements,144 attributes to the proponents of capital movements the view that higher growth basically follows from efficiency in a typical neo-classical model and neither takes the difference of capital movements from other markets nor distributional consequences into consideration. In the context of an economic and monetary union, it is interesting that much, if not most, of the scepticism about the link between free capital movements and economic growth, does not question growth, but undesirable distortions. But a free market model is not the basis for EUROland, which has been cast in the role of an economic and monetary union that transfers policy making and control from the national to the international level. One of the arguments for an economic and monetary union is precisely that it lifts economic policy making to the same level — the international one — as that capital movements have chosen to operate. The answer to Stiglitz’s point about potentially negative effects on the distribution of income outweighing higher growth lies in the supplementary policies implemented to counteract rising income inequality. Another argument against free capital movement is that capital exploits the international scene to avoid regulatory measures. This may or may not be

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true when looking at the global scene, but it is definitely not the case inside EUROland where the European Central Bank operates a system of vigilance. A study by Braun and Raddatz145 shows that the positive effects of liberalization follows not so much from capital deepening as from improved allocation of production factors. The positive effects are more likely to occur in countries with a high level of governance. Even if Braun and Raddatz do not aim at EUROland, this is precisely the situation. All member states of EUROland do operate a system of good governance, and are thus able to counteract some of the negative effects ascribed to free capital movements. (6) The literature has not really dealt with an effect of an economic and monetary union, which in the long run may prove crucial, especially for small- and medium-sized countries: the stock market. One of the strongest trends in global business is mergers and acquisitions. Some of them take place by board-to-board negotiations. Others take place by a friendly or unfriendly buying of stocks on the national stock markets. The smaller the national stock market is, the more likely it is that the capital value of a company is underrated, in the sense that somebody else may buy its shares — even at a higher and visibly higher price than the one quoted before the merger — and still reap a benefit. In some cases, the buying company may finance a share of the operation by issuing its own stocks to the sellers to replace the stocks it buys, making them even cheaper. Stocks in a small- and medium-sized national stock market tend to be undervalued because large institutional investors may not bother to enter such a market. Apart for a few global companies, the others are simply not interested. If they go in, they have to explain, and in some cases, defend, why they invested in a small stock market such as, say, the Danish stock market and how they will make sure that they have the expertise and knowledge to do this properly. As there are thousands of other stocks available in larger stock markets, the institutional investor may decide that it is simply not worth the effort. For the small- and medium-sized countries that have joined an economic and monetary union such as EUROland, this effect does not come into play because their stock markets, even if they are national ones, are seen as part of the stock markets in EUROland. For one thing there is no exchange rate risk. And stock markets in an economic and monetary union will have the tendency to be seen by investors as belonging to the same capital market, which indeed they do, albeit transparency may not always be perfect. In the long run, the costs for small- and medium-sized countries standing outside an economic and monetary union may be that the “brain” of a considerable part of national enterprises is cut out by foreign acquisitions at

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a price not reflecting the true value. The small- and medium-sized country loses in two respects. First, the best part of future industrial performance is jeopardized. Second, the compensation may not be large enough to shoulder economic, technological, and industrial life in the future. The economist Peter Kenen puts his finger on precisely the importance of the stock market and its unification among the members of the Eurozone in an interview in October 2005 when asked whether the Euro has been successful:146 The euro is the second most important currency in the world today. For a young institution to have achieved that is a major accomplishment. There is also evidence that the euro has stimulated trade, although on a more modest scale than some of my colleagues, for instance Andrew Rose, had originally predicted. And it has enormously stimulated the growth of European capital markets—to the extent that we are now seeing the unification of European stock markets. Even though London is still the main financial center, the consolidation of the continental securities markets has proceeded at a rapid pace.

(7) On the national scene, a central bank enjoys what the economists call “seigniorage”, as it has exclusive right to issue money. Those in society, be they citizens or companies that hold cash, are strictly speaking, lending money to the government without being paid interest. They can choose between 100 per cent liquidity (cash) with no interest, and the central bank gets the seigniorage benefit, or they can buy bonds or other assets bearing interest, and have an asset, yes, but one that cannot be used for payments. As there is a small cost for printing money, the seigniorage is technically the difference between the interest free loan and what it costs to print money. Normally the benefit will be less than half a per cent of Gross Domestic Product, depending on circumstances. Internationally the same mechanism is valid. As there is no true international currency, national currencies are used for international payments. Those chosen — they are almost exclusively the U.S. dollar, Euro, and Yen — carry a seigniorage. A second benefit is that foreign countries trade in Euros, making it natural for them to have a part of their assets in denominated Euro. They contribute to the build-up of efficient capital markets and financial centres inside the Euro area, as was the case earlier for the Pound Sterling and London, and since for the U.S. dollar and New York. Some of the financial transactions that could have been performed nationally are taken over by international financial centres reaping the benefit.

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A third benefit, which in some cases has been a curse, is that foreign countries accumulate the reserve currency over time. The benefit for the reserve currency country is that it provides more room for manoeuvre in its economic policy. As has been seen for the United States, a reserve-currency country can run a deficit on the current account of its balance of payments for a long time, paying for imports by issuing its own money, which foreigners are willing to hold. In principle it opens up the possibility for the reserve-currency country to pursue and maintain an expansionary economic policy, which in other circumstances, might not have been possible. In the currency market, the joke that “all are equal, but some are more equal than others” is valid; those more equal than others are the reserve currencies. The problem arises if, or when, foreign countries holding, say, U.S. dollars or Euros want to change the composition of their reserves by selling or buying one of the reserve currencies. In that case the reserve-currency country will see its exchange rate fluctuate, regardless of the strength or weakness of its domestic economy. There can be little doubt that seigniorage and the role as the country of a reserve currency gives the country — in the case of the Euro, the European Union — more political prestige and thus a higher degree of leverage in international politics. At the same time, it offers tangible economic benefits, even if the magnitude may be difficult to estimate.147 The U.S. dollar dominates an overwhelming part of international trade and most prices of raw materials are quoted in U.S. dollars, the prime examples, being oil and gold. The U.S. economy gets more room for manoeuvre as fluctuations in the U.S. dollar rate on the currency markets do not per se translate into changes in prices of raw materials in the domestic currency for the United States, while this is exactly what happens for other countries. The rule of thumb may be that as long as there is a general feeling of confidence in the U.S. economy, this is advantageous for the United States, but in case markets start to worry over the future of the U.S. economy, raw material prices denominated in U.S. dollars may start to reflect this and possibly accelerate a feeling of uneasiness about the U.S. dollar, aggravating policy dilemmas for the United States. The Euro has not managed to replace the U.S. dollar as the currency denominator for raw materials prices. Rumours and half-hearted statements to this effect appear from time to time, reflecting uncertainty about the U.S. economy and foreign and security problems around the globe. (8) Very few nation states are capable of influencing global politics and/ or economics. By participating in an economic integration, even small nation

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states may have some influence. This has definitely been the case for the smaller European nation states with regard to international trade politics and the World Trade Organization (WTO). The same effect can be found when analyzing international monetary politics. The global exchange rate system used to operate around the U.S. dollar, the Euro, and the Japanese Yen, and these three currencies’ relative prices, that is, their respective exchange rates. Recently the Chinese currency (Yuan) has attracted strong attention from the United States, which accuses it of having an artificially low exchange rate, thus fuelling an already high surplus on the Chinese trade balance vis-à-vis the United States. There are many arguments to marshal for, or against, this posture, but in this context, suffice it to note that the great game on the currency markets, hitherto confined to three major currencies, starts to become more complicated. The next currency in line for attention seems to be the Indian Rupee. In principle, the major currencies fluctuate on the markets. Yet policy makers signal to the market which rates they think are realistic as can be seen and heard from regular meetings among the leading economic powers in for example G7.148 They may be proven wrong. The markets may not follow these signals, but the fact is that a certain degree of policy making about exchange rate levels takes place at the international level. Being inside an economic and monetary union provides an opportunity to voice an opinion for a small- or medium-sized nation state being, while being outside is rather uninteresting as it is not a player in the game. It is difficult to estimate the potential benefits of being inside an integration and having a say of its stance during international or global negotiations. Common sense tells us that it is better being inside, even with limited influence, than being outside with no influence. *

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A brief summary of how the European Union got to the economic and monetary union with a single currency and what it did not achieve looks like this: The European Economic and Monetary Union is more of a monetary union than an economic one. Emphasis is on the single currency and monetary policy while the coordination of economic policy has a lower profile. France and Germany were the drivers for the creation of the economic and monetary union. For France it was of paramount importance to get real influence on European monetary and currency rate decisions after decades of seeing Europe’s stance in these matters determined by Germany’s

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overwhelming economic strength, and the German Bundesbank, the virtual decision maker. The German government sponsored an economic and monetary union for political reasons, which were enhanced when the need for strong and universal backing to the German reunification emerged in 1989, coinciding with the final phase of negotiations on the European Economic and Monetary Union. The German Bundesbank, which had been sceptical, was won over by the basic construction of the economic and monetary union, which alleviated its fears. What did not happen was a parallel evolution towards a political union, which had often been floated as an objective to be pursued at the same time as the economic and monetary union. Apparently the member states felt less enthusiastic in the early 1990s after problems with ratification not in only Denmark, but also the United Kingdom, France (a paper thin majority at a referendum) and Germany, where the matter was referred to the Bundesverfassungsgerichtshof (Constitutional Court) and approved, albeit with reservations. Some member states may also have felt that with the introduction of a Common Foreign- and Security Policy (CFSP), and Justice and Home Affairs, many of the results expected to flow from a political union would de facto be achieved.

RELATIONS TO DEVELOPING NATIONS — THE LOMÉ CONVENTIONS i) In the first decades under the original Treaty of Rome, the European Union operated with, in principle, three different categories of agreements with non-member countries: association agreements, preferential agreements, and trade agreements. Association agreements constituted by far the strongest and deepest link between the European Union and the country in question. In principle, the European Union and the country entered into a mutual engagement covering a broad front of economic issues. In almost all cases, the core element was a free trade agreement for industrial products, with agricultural products excluded or included peripherally. Normally an association council was established to serve two functions: a forum for decision making and a forum for discussions between the two parties. Both functions underlined that an association agreement is as close as a country can get to the European Union, bar genuine membership. Some of the association agreements explicitly admit that the objective — albeit with a long time horizon — is membership of the European Union,

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thereby classifying the association agreement as a preparatory step towards membership. When the European Union signed an association agreement with Turkey in 1964, membership of the European Union was mentioned, though not in specific terms. The wording meant that Turkey could, but not necessarily would, become a member of the European Union. The association agreement with Turkey was also the first time the European Union entered into an agreement about free movement of labour between it and another country. When a new protocol was signed in 1970, it was agreed that the free movement of labour should be introduced between 1976 and 1986. This objective has never been implemented. Today, more than twenty years after the target date, the free movement of labour between the European Union and Turkey does not exist. A preferential agreement is aimed at the mutual lowering of customs duties, but does not cover agriculture and has no institutions. A trade agreement is the traditional form of agreement for regulating trade between the European Union and one or more countries. These three kinds of agreements were the basis for the European Union’s trade links and economic cooperation with an increasing number of countries. ii) By far the most important of all these agreements, and the one that serves as a symbol for the European Union’s relations with developing countries, is the convention with a large number of developing nations, originally in Africa, but subsequently also the Caribbean and the Pacific. When the Treaty of Rome came into force in 1958, four member states (France, Belgium, The Netherlands, and Italy) had constitutional links with a number of overseas territories, some of which were colonies. Their products had gained preferential treatment in the home market of the respective “mother” countries. The establishment of a common market would, unless special measures were taken, disrupt these preferential regimes. Part IV of the Treaty of Rome lays down provisions to ensure their continuation. As more and more of these territories and colonies became independent, Part IV was no longer sufficient and it was replaced by a convention between the new independent nation states and the European Union. On 1 June 1964, the European Union entered into an agreement with eighteen developing countries in Africa. It was signed in the capital of Cameroon, Yaounde, and became known as the Yaounde agreement, and later, the Lomé convention, as it was renewed regularly at five-year intervals. The first convention was comprehensive and covered a wide area of economic activities such as trade, financial cooperation, meaning assistance from the European Union for the development of the eighteen countries, and other paragraphs about the right of establishment and capital movements. A

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council of association was agreed. This is not confined to consultation, but invested with genuine powers of decision making, bearing on the content of the convention. The first Lomé convention was signed in 1975 and has gradually emerged as the European Union’s most important tool for relations with the developing nations. The core elements were preferential treatment for industrial products, efforts to stabilize prices for raw materials, and financial assistance. iii) In June 2000 a new convention was signed in the capital of Benin, Cotonou,149 giving the convention a new name — the Cotonou agreement. In EU jargon, the participating countries, of which there are seventy-one, are called ACP countries after Africa, Caribbean, and Pacific. Most of them are former colonies that had special relations with one or more of the member states of the European Union. They joined the convention to preserve some of the economic benefits enjoyed under earlier arrangements with European countries. Politically the conventions have fulfilled an important objective by giving the signal that those countries have a special relationship with the European Union, and providing a platform for meetings and consultations. Economically they have benefited from access to the EU markets and obtaining financial assistance. As with almost all preferential agreements, other countries not part of these have suffered despite their competitiveness. This was illustrated by the so-called banana case erupting in the early 1990s and staying on the EU agenda for the subsequent ten years.150 Until the coming into force of the Single Market in 1993, each member state operated its own “banana-regime”. And it was different from member state to member state. The Single Market made it necessary to establish one common regime. The result of the negotiations was a regime giving bananas from the ACP countries preferential treatment vis-à-vis bananas from primarily Latin American countries that are deemed to be much more competitive. Under free market conditions, bananas from Latin America would have replaced bananas from the ACP countries in the EU market. The argument for not establishing free market access was the detrimental effect on banana producers in ACP countries, supplemented by the knowledge that American companies were behind most of the banana production in Latin America. For some countries in the European Union, the preferential treatment given to the ACP countries was a kind of development assistance. The point was made that banana producers in some of the ACP countries were admittedly inefficient, but did not have much alternative.151

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iv) The European Union’s development assistance has been increasing steadily over the years, but used to suffer from the fact that it was given under various labels, thus diminishing its efficiency as well as visibility. Some of it was given under the Lomé-conventions, another part went through multilateral institutions such as the World Bank, and yet other parts were given through direct EU development aid, more or less in competition with the national aid programmes. In September 2005, the European Union agreed for the first time on strategic objectives for a development policy shared by the whole European Union152 and this, with some luck, gives its development programmes and EU’s development programmes and financial assistance the place they deserve as a major donor.

RELATIONS TO MEDITERRANEAN COUNTRIES — MAGHREB, MACHREK In 1969, the then European Union with six members signed bilateral agreements with Morocco, Algeria, and Tunisia.153 The agreements were essentially commercial with an emphasis on industrial products, since France and Italy in the original European Union found it difficult to open their domestic markets to Mediterranean agricultural products, being producers themselves. These agreements were commercial, but had a clear political perspective. All the countries were former French colonies, heavily dependent on export to France and Europe, and were facing severe economic difficulties. It was the first — but far from the last time — that the European Union showed its hand in the diplomatic game about influence in the Mediterranean theatre. The agreements were regularly renewed and expanded on a five-year basis, with financial assistance as the most important addition. It was more or less evenly split between grants and loans, and — between 1978 to 1996 or eighteen years — amounted to 1091 million Euros for Morocco, 854 million Euros for Algeria, and 742 million Euros for Tunisia. These agreements were followed with more or less congruous agreements with the Machrek countries154 in the Eastern part of the Mediterranean theatre. The European Union took one more step when it concluded an agreement with Israel. This network of agreements signalled Europe’s importance economically for the Mediterranean countries and a strong political interest from the

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European side in building a network of agreements with countries south of Europe, most of which looked fairly fragile, with potentially negative repercussions for Europe in case of a political or social meltdown. This explains the next step taken by the European Union in 1995 to institute what was called the Barcelona process after the city playing host to the first meeting.155 The Barcelona process156 comprises thirty-five members, twenty-five EU member states and ten Mediterranean partners: Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine Authority, Syria, Tunisia, and Turkey, with Libya as an observer. The objectives of the partnership are defined as: • • •

Definition of a common area of peace and stability through the reinforcement of political and security dialogue. Construction of a zone of shared prosperity through an economic and financial partnership and the gradual establishment of a free-trade area. Rapprochement between peoples through a social, cultural, and human partnership, aimed at encouraging understanding between cultures and exchange between civil societies.

There are two vital elements in this cooperation: The bilateral dimension with agreements between the European Union and each individual country, reflecting the same basic principles, but adapted to accommodate individual needs, and the regional, multilateral aspects that try to deal with problems that are common to the partners in the Mediterranean theatre. The Euro-Mediterranean Partnership (EMP) institutionalized the concept of a bilateral and multilateral track, at the same time including both institutions and substance. In that regard, the EMP was a path breaker trying to conceptualize the Mediterranean theatre with all its difficulties, challenges, and differences. It also had vast potential. Only an outsider with strong political and economic credentials, classified as more or less neutral in the Israel-Palestinian problem, had a chance to unlock the stalemate. While the United States is the indisputable great power and power broker in the Middle East, the European Union is not without cards to play. The multilateral meetings span a vast network from ministerial meetings to meetings among officials. In fact, with the exception of meetings between Heads of State and Governments, meetings are taking place at all levels. Ministerial meetings have not really been disturbed by the political ups and downs, except for a brief spell with a Syrian and Lebanese boycott that petered out.

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Economic issues have dominated the agenda, but security issues such as terrorism, even before the terrorist attack on the United States on 11 September 2001, have been discussed. The same goes for the tricky issues of water supply and energy. It was no mean achievement on the part of EU diplomacy to attain agreement on the wording about terrorism when drafting the Barcelona declaration, considering the well known positions taken by the various partners around the table. In December 2003, a Euro-Med Parliamentary Assembly was created to broaden the circle of peoples drawn into the dialogue. In a foreign and security, policy context, the Barcelona process reflects the European Union’s dependence on, and ability to use economics, trade, and financial assistance to pursue foreign policy objectives and its inability to use more traditional instruments such as armed forces. The basic idea has been to promote stability and security (within the partner and between the European Union and the partner countries) in the region by economic development. From 1995 to 2005, approximately 9 billion Euros157 were used for financial assistance. The European Investment Bank (EIB) made a corresponding amount available as loans. From a European point of view, the Barcelona process was almost indispensable as an attempt to solve, or at least, alleviate, the problems of instability in the non-member Mediterranean countries, and do it by stimulating economic development. Otherwise, the European Union’s southern flank would be exposed, resulting in an increasing number of legal and illegal immigrants into Europe. From the point of view of the other partners, the economic dependence on Europe meant that there was no alternative, and indeed, no arguments, for not joining the initiative. The EU policy of promoting democracy and human rights was accepted in this context. The Barcelona process is interesting in the sense that both Israel and The Palestinian Authority took part, opening the door for initiatives if the two parties wish it. It proved possible, albeit with substantial difficulties, to overcome differences about the wording among Israel, the Palestinians, and the more radical Arab countries, when drafting the Barcelona Declaration. This was not a breakthrough, but a useful element in what may be called the silent diplomacy, contributing to a step-by-step rapprochement between the various parties in the Middle East. The process was initiated in 1995 and has thus been operative for a little more than ten years. It constitutes a useful framework for agreements between the European Union and the partners in the Mediterranean theatre, but has never really developed into the vehicle for stronger political and cultural

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links, as the initiators had hoped. The greatest disappointment was that the run-up in year 2000 to a Euro-Mediterranean Charter for Peace and Stability failed to do so. There are many explanations for this failure and one of them is certainly the Israel-Palestinian problem. A charter, although not indispensable, would have given the right signal and might have served as a framework, without which dialogue could continue, but with diminished prospects of success. The Barcelona Process and the Euro-Mediterranean Partnership are an attempt among the European Union’s many other similar activities to apply a foreign and security policy based on economy and trade. It underlines that such a process requires at least three conditions for success. Firstly, the political will on the part of the parties directly concerned to use the vehicle put at their disposal. Otherwise, a useful dialogue might go on, but never really materialize into tangible progress. Secondly, a strong “mediator” or “initiator” from outside enjoying trust and confidence among the partners must be present. The European Union has lived up to this expectation to a certain degree, but not completely, as the Common Foreign and Security Policy has not been fully developed. In short, the European Union is regarded as a useful outside partner, but not one that can swing the great game. It is one of the areas where EU success in other areas may enhance its performance, but not in itself constitute a success. Thirdly, if the European Union itself had gone through a more vibrant economic development, the policy might have produced a more successful outcome. The European Union primarily played the economic and trade vector. The conditions for success were hit by the low growth in Europe, limiting what the European Union could do for the other partners and keeping exports to the European Union at a low growth level.158

COMMON FOREIGN AND SECURITY POLICY (CFSP) The Beginning The first attempt to shape a European Common Foreign and Security policy, CFSP, took place in the early 1950s and its ambition has neither been surpassed nor equalled. The idea was to form a European Defence Community (EDC), based on the same principles as the European Coal and Steel Community (ECSC). It was labelled a European Army and this is precisely what would have come out of the plans had they succeeded.

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The European countries should form integrated armed forces where for example, French and German units were integrated under a supranational high command. The amazing thing is not that it was proposed; but that it came close to succeeding. The United Kingdom was asked to join but declined. After this response, France would be the only one among the victors from World War II, grouped together with two of the defeated countries (Germany and Italy) and the three small Benelux countries. This was simply not acceptable to France, which felt that of all the great powers, France would be alone in surrendering national control over its armed forces. After a stormy debate the French parliament rejected ratification.159 Never since has such an ambitious plan been put forward. Until now plans for European foreign and security policies have included armed forces to a certain extent, but never endorsed the principle of supranationality. It took the European Union fifteen years before the ground was prepared for a new and timid drive to launch cooperation about foreign policy matters. The memories from what happened in 1954 were still so vivid that security policy, never mind military policy, was completely left out. At their summit in The Hague in December 1969, the Heads of State and Government decided that the Ministers for Foreign Affairs should prepare a report for cooperation about foreign policy. It was submitted and approved by the Ministers for Foreign Affairs on 20 July 1970, and subsequently approved by the national governments.160 The report became known as the Davignon Report,161 after its chairman, the Belgian diplomat Etienne Davignon. The Davignon Report provided the basis for what, over a period of twenty years, was to be known as the European Political Cooperation (EPC). The key phrase stipulated that member states should try, where possible, to speak with a single voice on international problems. It combined in elegant diplomatic language, hope, ambitions, and realism, and were at the same time, completely non-binding. The EPC developed as a pragmatic and useful form of cooperation, primarily serving as a forum for consultation among member states, but without much influence on the real world. The European voice heard from the EPC was frequently declaratory diplomacy, which is useful and can exercise influence, but rarely convincingly, as it radiates neither power nor a genuine wish to exercise power. It was outside the principles of supranationality embedded in the Treaty of Rome. The institutional framework was kept as intergovernmental cooperation — indeed outside the Treaties. The institutional machinery was separated from the EU treaty framework to the extent that for several years the Foreign Ministers did not meet to

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discuss foreign policy matters in the same room, under the same agenda, as when they discussed matters under the Treaty of Rome. Such was the need to distinguish between the EPC as intergovernmental cooperation, and the items covered by the Treaty of Rome under supranational rules, that Foreign Ministers could be seen holding a meeting in the morning to deal with supranational issues (Treaty of Rome) in Brussels, which is the home for EU institutions, and then fly to the capital of the country assuming the presidency to meet there under a different formula. Some people spoke openly about the European Economic Community falling under the Treaty of Rome, and the European Political Cooperation (EPC) outside it, that was governed by an informal report and intergovernmental in nature, as being two completely different things, which by chance, have the same group of member states. Half-yearly meetings of Foreign Affairs Ministers were scheduled, and to assist them, preparatory work was preceded by quarterly meetings of a Political Committee, constituted by the Political Directors in the national foreign ministries who were assisted by various working groups composed of civil servants. One of the most important changes, or rather, creations little noticed outside the ministries, was the Coreu network. As an instrument for coordination and consultation, a telex network to exchange information was set up by the member states. This network grew so rapidly and became so important as a knowledge and information base that this technical breakthrough sometimes seemed to overshadow meetings of a much higher calibre. What it did was almost seminal in nature: it jolted the very nationalistic chancelleries out of their national myopia and instilled a sense of coordination and consultation among diplomats from member states. Until then it was almost unheard of to learn about the other member states’ foreign policy positions, let alone, consult them. Now it became the norm. It is one of the best, indeed finest, illustrations of how new procedures can and actually did change the mindset of people. The Coreu network was for many years the backbone of foreign policy consultation in the European Union. The step-by-step enhancement of the procedures continued. In October 1981 the so-called troika was established. It meant that when the European Union put forward a common position abroad, it was not done as hitherto by the presidency alone, but by the presidency assisted by the preceding presidency and the incoming presidency.162 This ensured continuity and, furthermore, conveyed to the outside world the picture of foreign policy coordination, albeit still in its embryonic stage.

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First the Single Act in 1987 certified EPC in the Treaties. The only change of substance, if it can be called such, was the creation of a Secretariat in Brussels to relieve the rotating presidency of what had until then been a heavy burden. The practice of meeting in Brussels to discuss EPC questions back to back with Council meetings was also initiated. The real breakthrough regarding foreign and security policy came in 1993 with the coming into force of the Treaty of Maastricht. After further adjustments and enhancements of the role of the Common Foreign and Security Policy (CFSP), the present status can be summarized the following way:163

The Treaty of Maastricht and beyond •

Objectives

The Common Foreign and Security Policy has a number of objectives. They can be summarized like this: The first one is to safeguard the common values, fundamental interests, independence, and integrity of the Union in conformity with the principles of the United Nations Charter. The second is to strengthen the security of the Union in all ways. The third is to preserve peace and strengthen international security, in accordance with the principles of the United Nations Charter, as well as the principles of the Helsinki Final Act, and the objectives of the Paris Charter, including those on external borders. The fourth is to promote international cooperation. The fifth is to develop and consolidate democracy and the rule of law, and respect for human rights and fundamental freedoms. •

Institutional framework

To pursue these objectives an institutional framework has to be set up. The starting point is to underline the basic nature of the Common Foreign and Security Policy. It is inscribed in the Treaties, but intergovernmental in nature. The procedures and legal instruments valid for items covered by the Treaty of Rome with subsequent amendments do not apply to the CFSP. It follows from this that the main rule is unanimity, but the door has been opened for qualified majority voting in specific and well-defined cases, primarily when implementing decisions adopted by unanimity.

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A High Representative is nominated to represent the European Union vis-à-vis the outside world. The post is anchored in the Council Secretariat where the High Representative formally assumes the title of Secretary General of the Council. The role is to participate in formulating and putting forward the position of the Union on items under the CFSP. This raises the question of the role of the European Commission. The answer is that it is fully associated with the CFSP and forms part of the troika. The troika is now composed by the Presidency, the incoming Presidency and the High Representative of the Council, and the Commission, that is, it is composed of four members. •

Defence

Defence has been and still is one of the most difficult problems to integrate in the European Union. There are several reasons for this. It is the core of sovereignty and member states have different and sometimes divergent interests and traditions. The Treaty of Maastricht stipulates that The common foreign and security policy shall include all questions relating to the security of the Union, including the progressive framing of a common defense policy, (…), which might lead to a common defense, should the European Council so decide.

The following sentence adds that member states approve such a decision according to constitutional requirements. In reality a common defence needs a new treaty or treaty amendment to be ratified in member states. When drafting the Treaty of Maastricht there was much talk of incorporating the Western European Union (WEU)164 into the Treaties and using it as the “military arm” of the European Union. Eventually these thoughts came to nothing. WEU existed with the main role as a planning unit, but as nothing like a platform for a common European defence, until the Treaty of Nice. Today WEU is in practice closed down, with only a couple of officials left, and is no longer acting as a planning unit. All decisions about defence issues are taken with unanimity. •

Instruments

The Treaty provisions about instruments to implement the Common Foreign and Security Policy are quite detailed and contain a number of ways and methods to choose from.

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Common strategies constitute the “flagship” of the Common Foreign and Security Policy. To highlight their importance, the European Council adopts them with unanimity, leaving implementation to the Council as common positions or joint actions. A common strategy is a long-term and comprehensive outline for the European Union’s position vis-à-vis a foreign and security problem, a group of countries, or a foreign country. It will normally specify objectives, resources, and duration. The first common strategy was adopted on 4 June 1999, about relations with Russia.165 The second one was adopted on 11 December 1999 on Ukraine.166 On 19 June 2000, the European Union agreed its third common strategy covering The Mediterranean Region.167 These three commons strategies all underline the importance of commons strategies for the European Union’s policy vis-à-vis its neighbours and adjacent regions. The Council lays down the European Union’s positions on specific issues or implements an agreed common strategy by adopting common positions that can be labelled the first workhorse. A common position can aim at a specific country, which is the case of the European Union’s policy on Myanmar, where a common position enumerates a number of restrictions.168 A common position can also regulate its position on a major international problem, such as non-proliferation of weapons of mass destruction and means of delivery.169 A third example is the EU position before international conferences on a major topic such as Biological and Toxic Weapons Convention (BTWC).170 The second workhorse is the joint actions, which will normally be used when the European Union commits itself to action, for example, financially, providing development assistance or humanitarian aid, or sending personnel as monitors. Joint actions are the instrument chosen when the European Union actually acts — is doing something — whereas common positions are chosen to formulate or declare an EU position. The European Union has been active in the Middle East Peace Process where a number of joint actions171 have been agreed as part of a panoply of decisions and activities to be active in this particular geographical area. Another illustration is the EU participation in the peace keeping in Indonesia’s Aceh province172 after the agreement between the central government in Jakarta and the GAM movement. Under the heading of joint action, the Council can appoint EU Special Representatives (EUSRs) to promote EU policies and interests in troubled regions around the world. Each EUSR works under a mandate inscribed in the joint action. They carry out their duties under the authority and operational direction of the High Representative.173 At the end of 2006, the European Union had appointed nine Special Representatives operating in the following

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geographical areas: the Middle East, the Great Lakes, the former Yugoslav Republic of Macedonia, Bosnia and Herzegovina, Afghanistan, the South Caucasus, Moldova, Central Asia, and Sudan. Eighteen preceded the current nine Special Representatives, which makes for twenty-seven Special Representatives in all from 1996 to the beginning of 2007.174 The European Union uses declarations and statements to voice its opinion on foreign and security problems and does so quite frequently. An illustration of such a statement or declaration can be found in the conclusions of the meeting of the Council on 16 March 2005, where the Council approved the general position to be taken at the sixty-first session of the United Nations Commission on Human Rights.175 The common ground to coordinate and harmonize foreign and security policy has often proven to be narrow and difficult to define. The United Kingdom and France are both nuclear powers with permanent seats at the United Nation Security Council, which have the tradition for, and experience in, global presence, albeit they are well aware of the limitations nowadays. Germany is a continental power seeing the Soviet Union/Russia as its most important foreign and security policy problem outside the Union. The smaller European nations do not want to be dragged into ventures overseas by the bigger ones. Italy and Spain are important partners in the European Union, but are not in the same league as the United Kingdom, France, and Germany. A common denominator for conflicting interests has not always offered itself to policy makers as the crisis in the former Yugoslavia and the action against Iraq in 2003 so clearly showed.

Evaluation When analysing the European Union’s foreign policy since 1958 and looking at its behaviour — from bilateral trade agreements to association agreements via participation in multilateral forums such as the World Trade Organisation, then to having a full-fledged Common Foreign and Security Policy — one is struck by how much influence the European Union has exercised by soft power (economics, trade, culture, persuasion, and appeal to common sense/ moderation plus political maturity). Faced with many other foreign and security policy challenges, the European Union has actually managed to play an important role and does it on the basis of a common position. This is the case in Afghanistan, the Middle East, and the Mediterranean, and when it was instrumental in providing monitors in the peacekeeping operations in Indonesia’s Aceh province in 2005. But shortcomings are visible, almost glaring, in cases where it has run into opponents neither sharing its principles nor wishing to play on the basis of compromise, consensus, and conciliation.

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The experience of the European Union makes it clear that the application of soft power depends on the readiness of the adversary to play by the rules. If yes, soft power can yield tremendous influence and twist events with small resources deployed. If not, soft power exposes its impotency. It may be too early to judge the future of the Common Foreign and Security Policy. It is, however, not too early to conclude that the EU experience underlines that the jump from economic integration to the establishment of a Common Foreign and Security Policy is not an easy one. The evaluation of the role the European Union wants to play in the world depends upon three vectors: Its interests, its place in the world, how to secure its influence — grand strategy, the objectives inside this framework — strategy, and the instruments to achieve these objectives — tactics. The main problem for the European Union is that it started with the instruments. The European Union set up the three common policies (customs union, agriculture, trade policy) followed by the Single Market, and the Economic and Monetary Union. These were all extremely good steps to integrate and reap economic benefits. It left the European Union with powerful instruments if, or when, it wanted to pursue a foreign and security policy. The end of the Cold War provided an opportunity for the European Union to define a role and so it did. It took on the role as the stabilizing power in Europe, ensuring the transition of all the Central and Eastern European countries, while at the same time maintaining a good relationship with the former arch-enemy, Russia, as a successor state to the Soviet Union. Strategically the European Union had found a role for itself as a regional power in the European theatre. The United States as a conductor for globalization, and the large influx of immigrants, primarily from Muslim countries, constitute the opportunity, as well as the challenge, for Europe to find a role for itself in the future. The problem — the challenge — for the European Union is that these new phenomena are only partly economic — they also touch on politics outside the economic sphere. The European Union used to operate in an economic win-win game, erasing potentially divergent interests among member states. The new issues shift the parameters away from a win-win situation to a much more complicated game. The outstanding question, where the indications have not given a clear direction, is whether the European Union and the Europeans are capable of getting their act together when confronted with the question of their identity and what role they want to play in the world.

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JUSTICE AND HOME AFFAIRS Overview With the exception of a few member states,176 the European Union today constitutes an area within which people can move freely.177 Going from one member state to another, European citizens do not need to show their passports. The direct benefit of this may be limited (no waste of time), but the political and psychological impact is enormous and conveys to the Europeans that the European Union really does exist. The free passage across borders, combined with the increasing pressure on the Union from migrants, international terrorism, and international crime, has triggered a quantum leap for the integration in the shape of the Justice and Home Affairs, which is increasingly labelled, Justice, Freedom and Security. As of today, border control, asylum, and immigration policies, plus civil law, are integrated into the supranational part of the Treaties, as is the case for the Single Market and the Common Agricultural Policy. Criminal Law and police matters are incorporated in the Treaties, subject to intergovernmental cooperation and not supranationality.178 The main observation in this context is that the European Union experienced precisely the same development when economic globalization made its impact. Then the European nation states realized that no nation state could prosper isolated from its neighbours and no nation state could manage its domestic economy in a fundamentally different way from policies pursued by adjacent countries. Either they all prospered or none did. Now human security brings home the fact to member states that security for their citizens can, quite simply, not be guaranteed if they act in isolation. Common actions and common policies are called for. Either they all enjoy human security or no one would. Globalization opens the door to abuse or improper use by people and organizations pursuing interests contradictory to those pursued by the European Union, its member states, and its citizens. By going international, national legislation could be circumvented. The nation states were left in the position of either merging their national efforts, or fighting a hopeless battle. Some observers will watch the European response to these challenges to see whether the European Union can come up with an adequate answer respecting the time-honoured and prescriptive European identity, or whether the Europeans will stumble and fall into one of two traps: Either shy away from necessary control mechanisms to avoid any tinkering with rights of freedom, thus opening the door to abuse to the extent that European societies will buckle under the pressure.

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Or, be sufficiently scared of the potential dangers to introduce measures that will jeopardize many of the vital elements of the European model, thus moving away from centuries of hard work to secure human security AND freedom, AND doing both at the same time. For the Europeans, the dilemma is awkward as the answer is to avoid the either-or solution and opt for both, which needs a much more adept policy than seen so far. The following elements stand out: Firstly, in conformity with the basic principle of non-discrimination based on nationality, every EU citizen must be equally protected from crime, terrorism, have equal access to the judicial system, and be able to exercise his/ her rights. Secondly, the pressure at the borders of the European Union has grown visibly in recent years. The principle of solidarity calls for some kind of common policy or, at least, coordinated measures with regard to asylum and immigration policy. If not, immigrants may enter the European Union via the member state with the most open rules and move around other member states using the system of no internal border control. Thirdly, two of the member states have experienced exposure to terrorism (the United Kingdom and Spain) and several others have sensed the growing risk. Efforts to combat terrorism call for more exchange of intelligence and more coordination among police. Otherwise terrorism may strike at the weakest link in the chain or use the weakest link in the chain as a safe haven to operate in the rest of the member states.

Treaty Provisions The history of integration about these matters goes back to a rather informal cooperation not inscribed in the Treaties. Justice and Home Affairs had to wait for the Treaty of Maastricht in 1993 before these items were written into a treaty. This Treaty establishes that member states consider the following as areas of common interests to reach the objectives of the Union, and notably the freedom of movement: i) Asylum; ii) Rules concerning entrance at external borders; iii) Immigration policies and policies concerning third countries’ citizens: — Conditions of entry and circulation for foreign citizens in the territory of the Union;

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— Conditions of residence for foreign citizens in the territory of Member States, stating family and employment access; — Fight against irregular immigration, illegal residence, and foreigners working illegally within the territory of the Union; iv) Combating illicit drugs where this is not covered by point vii), viii), and ix); v) Fight against international fraud where this is not covered by points vii), viii), and ix); vi Judicial cooperation in civil matters; vii) Judicial cooperation in penal matters; viii) Customs cooperation; ix) Police cooperation in preventing and fighting terrorism, the drugs trade, and other grave forms of international criminality, entailing, if necessary, certain aspects of customs cooperation. The institutional handling of these matters reflects the hesitation of member states to transfer sovereignty in areas of police and penal matters, as these two are still kept in the Treaties, but subject to intergovernmental principles, that is, kept outside the supranational model, based on pooling of sovereignty. The other items are subject to the supranational model, and in principle, follow the same decision-making procedure as for other items subject to supranationality. The proposed Constitution took the step to transfer police and penal matters from intergovernmental cooperation to the principle of supranationality by applying common and uniform decision making to all items covered by Judicial and Home Affairs. Regardless of the institutional or decision-making setback when the proposed Constitution was rejected by France and the Netherlands, the European Union has made important, tangible and in some areas, remarkable progress in recent years.

Specific Measures i) In 2004 the European Union agreed to introduce instruments of the Common European Asylum System with a view to adoption in 2010.179 The objective was defined as establishing a common asylum procedure and offering uniform status for those granted asylum or subsidiary protection. At the present stage, four main legal instruments have been introduced, all aiming to level the asylum playing field and lay the foundation for a common asylum policy:

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The Dublin regulation offers rules for the member state responsible for assessing an application for asylum. The reception conditions directive guarantees minimum standards. The qualification directive specifies the criteria for qualifying either for refugee or subsidiary protection. The asylum protection directive ensures the same minimum standard in the whole European Union.

ii) A European Refugee Fund (ERF) has been set up180 to assist member states in coping with financial pressure flowing from handling asylum seekers. The total appropriation for four years is 216 million Euros. To supplement the ERF, understanding that a large part of the work to stem an increase in asylum seekers must be done in their host countries, the European Union established in 2004 a five-year programme called Aeneas181 with a total financial appropriation of 250 million Euros. These measures reflect a deep understanding in the European Union of the problem of dealing with asylum seekers in an appropriate way that would be perceived from the outside as being fair and equal, but that would at the same time prevent asylum seekers playing one member state against each another. To help in this last respect, the Eurodac system182 has been introduced to check fingerprints of asylums seekers against information already held by other member states. It reflects the changed political climate in Europe towards asylum seekers, and is moving in a more restrictive direction. iii) The same tendency puts its mark on EU legislation concerning immigration. There is not yet a common policy, but the European Union is moving gradually towards an immigration policy favouring highly-skilled immigrants, as is the case for many other countries receiving immigrants. The Commission opened a Pandora’s Box concerning immigration, future competitiveness and link to national policies, with a so-called Green Paper submitted in January 2005.183 The Green Paper aimed at launching a broad public and political debate in Europe about the future of immigration, to which degree a common policy should be pursued and if so, in what form. The Commission did not hide that demographics (falling population) for most member states would pose an awkward and difficult challenge for the European Union in the years to come. Immigration, not the least of highly skilled persons, should be seen in this perspective. While the Commission cautiously aimed at an immigration policy based on skills, member states moved towards EU decisions that reflect more stringency and stricter controls and rules for family reunification, and

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measures to integrate the immigrants already living inside the European Union. This trend towards a stricter policy of family reunification, obviously designed to limit the number of immigrants, and measures to improve integration, is reflected in an EU decision of 22 September 2003.184 There is unquestionably a long way to go before the European Union is anywhere near a common policy with regard to immigration. Conflicting interests make the matter a difficult and sensitive issue. Many of the member states have for years pursued their own policy, marked by relations to former colonies, or humanitarian attitudes. The increasing number of immigrants has been made a domestic policy issue in almost all member states. Economic and demographic perspectives call for an open, but also more selective, immigration policy. iv) The European Union has put its mark on international endeavours and initiated efforts on topics concerning human security and the combat against organized international crime. In September 2002, the European Union, plus a number of adjacent nation states, agreed on what is called “The Brussels Declaration on preventing and combating trafficking in human beings”.185 It happened after several episodes showing the weakness of the system to prevent this abuse in member states and at the EU level. The basic idea is a common definition of what the crime actually is, accompanied by recommendations to participating countries, with measures and databases to prevent such trade in human beings. v) The IMF (International Monetary Fund) has estimated that money laundering, the legalization of revenues obtained from illegal activities and transformed to apparently legally earned money, corresponds to between 2 per cent and 5 per cent of global Gross Domestic Product.186 As one of several elements in the fight against organized international crime and terrorism, the European Union has taken a number of steps,187 among which can be mentioned the cooperation between national and financial intelligence units, and legislation on identifying, tracing, freezing, and confiscating criminal assets. In 2001, the European Union amended the existing directive combating money laundering to encompass money in the terrorist circuit. To keep it upto-date, the directive has since been revised twice.188 The most well known and successful action so against money laundering was Operation White Whale, aimed at a crime ring located in Costa del Sol in Southern Spain which started in March 2003 and ended in 2005, and involved a crackdown by Interpol and Europol that netted around 250 million Euros.189

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vi) In the area of policing the creation of Europol190 marks a milestone in the common efforts against crime. Europol (European Police Office) is not a common European Police Force, but constitutes a vehicle for sharing and collecting information and intelligence among member states. It is the framework for increased cooperation between national police authorities. It has access to national files and information, among other things, from the Schengen information system,191 thus opening the door for a massive amount of information in the fight against crime. Europol was — in April 2000 — supplemented by the European Police Chiefs Task Force, which holds regular meetings between national police chiefs to strengthen the network; and CEPOL, which is a facility for cooperating with regard to training and improvement of skills for senior and medium ranking police officers. vii) Eurojust created in 2003192 is an instrument for cooperation between member states to investigate cross-border crimes and implement extradition requests. viii) Agis193 is the framework programme running from 2003 to 2007 to help create Euro-wide networks and exchange information and best practices. ix) A major move forward came with the agreement in 2004 of the European Arrest Warrant,194 introducing a rapid transfer of criminals (including terrorists) to the country where the crime was committed. It replaced the former system of extradition treaties, which allowed a criminal who had succeeded in crossing a border to postpone — often indefinitely — prosecution. *

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The building blocks are slowly, but clearly being collected and put together. After some hesitation and an embryonic start, the European Union and its member states have come to recognize the imperative of integrating their efforts to combat crime, international crime, and terrorism. It cannot be done in splendid isolation. The European Union seems to have realized the growing threat to human security and social stability inside the Union arising from factors such as asylum, immigration, human trafficking, and international crime. The Union has shown determination to map out an itinerary that points to common policies in almost all of these areas. What is left outstanding and unanswered is whether the European Union and the Europeans can find the thin line between effective and efficient measures on the one hand, and safeguarding basic and crucially important liberties inside the European societies on the other.

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What is also left unanswered is whether the European Union will be able to find that path without conveying to other nation states, in particular, adjacent ones, that it is turning inward-looking and adopting a secluded attitude towards its neighbours and their citizens. As the world changes and people become more and more focused on, and even almost obsessed by, human security under various threats, the future course and even destiny of the European Union may well be determined by the evolution and the integration of items covered by freedom, security, and justice.

EUROPEAN CITIZENSHIP — FREE PASSAGE OF BORDERS — SCHENGEN AGREEMENT The notion of European Citizenship was first introduced with the Treaty of Maastricht.195 The basic idea is to combine symbols — a citizen of one member state should also feel him/herself a citizen of Europe — with substance. To convey that message, member states issue passports and driver’s licences referring to both the nation state in question and the European Union. It is doubtful whether this actually produces a feeling of commonality among European citizens. Sometimes it is perceived as an irritation forcing an identity on citizens, which they do not feel themselves. In practical terms, it does not mean very much, but it does gradually force authorities to treat citizens from other member states on an equal footing with national citizens. It can thus be said that Citizenship of the European Union does not replace or crowd out national citizenships, recognized by the Union as vital for the identity of the majority of Europeans. It supplements the rights given to national citizens. Illustrations of this include consular service offered to citizens of the European Union when travelling, and the right to vote or be a candidate for local elections and elections to the European Parliament in member states where they live, regardless of whether they are citizens of that particular member state. Citizens of the European Union have the right to travel freely and live in other member states. It is estimated that approximately seven million EU citizens live in another member state,196 which indicates that even if geographical mobility within the European Union is not as smooth — far from it — as in the United States, it is not as rigid as some people think. The notion of EU citizenship is one of these items where the European Union tries to install some kind of European identity for the citizens of member states. Over the years there has been a hot debate on whether this is a good or bad idea, whether it actually produces a more European spirit

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among citizens, or whether citizens feel irritated and antagonized and see it as an effort by the Union to encroach on the identity they already have and want to preserve. The jury is still out on this. Maybe we will have to wait for the generation of young people who have grown up in a Europe with an interrail system,197 have used the opportunities to study full- or part-time in other member states,198 to demonstrate the tangible benefits of the label “European Citizenship”. One of the most evident and concrete results of EU cooperation is the Schengen Agreement.199 It converts theory into practice and shows how the European Union makes life, especially for those travelling around Europe, easier. The Schengen Agreement means that a person can move freely across borders inside the area covered by the Agreement, without showing a passport or any other form of papers, indeed without stopping at national borders. One of the visible monuments of European integration are the empty buildings formerly used by border police to control passports. For non-EU citizens, this means that a visa to enter the Schengen area is a Schengen visa200 allowing the said person to travel freely in the area. A Schengen information system is set up among the participating countries to share information available, to prevent the exploitation of the borderless area practised by criminals and other people trying to escape national police forces, by moving to another member state without being detected. The original Schengen Agreement was signed on 14 June 1985 in the city of Schengen in Luxembourg — hence the name — between France, Germany, the Netherlands, Belgium, and Luxembourg, that is, five of the founding fathers of the European Union with Italy, the sixth founding father, a non-signatory, and none of the member states which joined since 1973, as signatories. Since then it has gradually expanded and, with the exception of the United Kingdom and Ireland, all the countries joining since 1973, until the enlargement with the Central- and Eastern European countries plus Malta and Cyprus in 2004, are now partners. The countries joining the European Union in 2004 are all on their way into this Agreement if it works out as planned. Twenty-three of the twenty-seven member states will then enjoy the privileges of the Schengen Agreement with no border controls. There are three interesting aspects of the institutional and geographical expansion of the Schengen Agreement: It started as an intergovernmental agreement outside the Treaties, but is now an integral part of the Treaties201 even if not all member states participate.

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Two member states, the United Kingdom and Ireland, are not participating in the arrangement and have apparently no intention of joining. This signals that in some areas, and important ones, what is called variable geometry — some, but not all, member states participate — can actually work, and work within the Treaties as long as they do not jeopardize the ultimate objective of the Treaties as defined in the preamble to the Treaty of Rome. Iceland and Norway — countries outside the European Union — are full partners.202 Switzerland decided in June 2005203 to join. Non-member European countries can and have chosen to participate, even if some member states do not do so and even if the legal basis is inscribed in the Treaties.204 The Schengen Agreement shows the remarkable flexibility of the European Union and how the institutional framework and the Treaties can be used to achieve an objective provided the political will is present. It is no mean achievement and quite interesting as an example of institutional and legal flexibility to move: Firstly, from an intergovernmental agreement outside the Treaties to a text fully incorporated in the Treaties. Secondly, from five member states to twenty-three member states soon, and three European non-member states. Thirdly to maintain human security and the necessary preventive measures vis-à-vis criminals in this new setting introduced over less than two decades in an area, which without exaggeration, belongs to a nation state’s core sovereignty.

IMPROVING THE EUROPEAN UNION’S COMPETITIVENESS AND TECHNOLOGICAL PERFORMANCE — THE LISBON PROGRAMME205 Overview Before going into the substance of this subject, it may be useful to provide a brief sketch of the four most commonly mentioned activities: the Lisbon Programme, European Research Area, Barcelona Objectives, and the Bologna Process. The three last mentioned may not be fully and formally inscribed in the Lisbon Programme, but conceptually, all four of them hang together.206 •

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The Lisbon Programme aims at turning the European Union into the most competitive and dynamic knowledge-based economy in 2010. It is basically about economics and technology. The European Research Area is a response to the Lisbon Programme,

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looking at measures to improve Europe’s performance in three critical sectors where Europe is lagging behind: — A fragmentation of research activities and policies. — An environment, which is not conducive to commercialization of research output. — A lack of investment in research and technology. The member states of the European Union set themselves a target of 3 per cent of Gross Domestic Product to be channeled into research and technology in 2010, with two-thirds of this coming from the private sector. This is called the Barcelona Objectives, as it was agreed on in 2002, at the meeting of the European Council in Barcelona.207 The Bologna Process — strictly speaking not part of the European Union — aims at improving higher education in Europe by making offers in higher education more compatible and comparable, and the European higher education more attractive, for Europeans as well as foreigners.

The Lisbon Programme 1993 was the year scheduled for full implementation of the Single Market, which was supposed to boost European economies. Economic statistics, however, signalled that Europe was losing competitiveness vis-à-vis the United States. At the summit meeting in Copenhagen in June 1993, the Heads of State and Government asked the Commission, under the presidency of Jacques Delors, to present a White Paper on “Growth, Competitiveness and Employment” at its meeting six months later.208 This was the first step towards an EU strategy mapping out a way ahead for Europe to revitalize the European economy. Seven years later economic competitiveness had not improved. The European Union launched a new effort (the Lisbon Programme) to prepare European economies for twenty-first century economies, highlighting research and technology. At the meeting in the Portuguese capital Lisbon from 23–24 March 2000, the European Council concluded the following:209 The Union has today set itself a new strategic goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.

The strategy was supposed to rest on three legs: Firstly, make the transition to a knowledge-based economy and society through better policies for an information society and R&D, as well as step

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up the process of structural reform for competitiveness and innovation, and complete the internal market. Secondly, modernize the European social model by investing in people and combating social exclusion. Thirdly, sustain a healthy economic outlook and favourable growth prospects by applying an appropriate macro-economic policy mix. The Strategy listed a comprehensive number of proposals to be launched and/or approved by Council. Europe’s full e-potential should be realized, e-commerce boosted, and there should be more competition in the telecom sector, access for all schools to Internet and multimedia, and other policies to catapult Europe into a high-speed and high-qualitative IT zone. In the Research and Development (R&D) area, a call was made for improved networking conditions between national laboratories and activities under the joint research programme, to improve the financial environment for R&D, among other things, through fiscal measures, accompanied by other steps to promote R&D, and, not least, for the dissemination of R&D knowledge across national borders. The objective was to increase substantially R&D’s share of Gross Domestic Product in year 2010.210 One of Europe’s weaknesses has for a long time been that small- and medium-sized businesses (SMEs) did not grow into viable corporations fostering growth and high-technology in Europe. The European Council mapped out practical steps to ameliorate the environment for this type of enterprises in a European framework. The Single Market adopted, in principle, with the Single Act of 1987, not fully liberalized services and utilities, irrespective of the political will and strong administrative support. The European Council called for a strategy to liberalize services and to speed up liberalization in areas such as gas, electricity, postal services, and transport. Despite the free movement of capital, impediments to a European financial market were still acting as a brake for the efficient allocation of capital on a European scale. The European Council asked for specific measures to remedy this unsatisfactory situation. Realizing the impact on the labour market and the need for reforming education and training systems, it launched a new approach with three main components: the development of local learning centres, the promotion of new basic skills, in particular, in information technology, and increased transparency of qualifications. A robust investment in human resources was envisaged to promote, among other things, life-long learning and mobility of

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students, training teachers and research staff, thus opening the door, with EU support, for them to work at universities in other member states. The need for the reform of the European welfare models was recognized, among other things, through a more active labour market policy.

The Scoreboard In 2005 it was decided that the Commission should submit an annual report to member states analysing progress towards the objectives, accompanied by an evaluation of each individual member state’s performance. The first report was submitted on 25 January 2006.211 In this first report, the Commission highlights the following: i) Research & Development The Commission acknowledges that the original target of 3 per cent of Gross Domestic Product channelled into R&D by the year 2010 seems to be out of reach, but calls for a more effective and efficient channelling of funds to this priority sector. The largest share must come from the private sector, which requires incentives, i.e. tax measures. Subsidies of various kinds can be reshuffled so that a larger share goes to R&D. EU expenditure for higher education is approximately 1.28 per cent of Gross Domestic Product. The Commission wants a substantial increase towards 2 per cent in year 2010. ii) Patents One of the most far-reaching specific proposals aimed at reducing the costs of obtaining patents in the European Union. The Lisbon conclusions called for measures so “Community-wide patent protection in the Union is as simple and inexpensive to obtain and as comprehensive in its scope as the protection granted by key competitors”. Less than half a year later, the Commission tabled a proposal for a council regulation on a Community patent.212 In the framework of creating a unitary Community patent, two Commission proposals were presented on December 2003 for establishing of a Community patent jurisdiction.213 To foster Research and Development, private companies must be protected against abuse by third parties that erodes the profit they would otherwise channel back into further R&D. The European Union had earlier recognized this fact by establishing the European Patent Convention214 with a European Patent Office in Munich. Although this was better than nothing, it proved rather ineffective, as it had to be enforced in all member states using national

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languages and national legislation in each one of the member states, as a European patent is not a unitary EU patent. A unitary EU patent would reduce the cost of translating documents into all official languages and the cumbersome procedure of working through national legal systems instead of using the EU legal system, could be disposed of. Several analyses show that the savings by transforming the existing European patent into a unitary European patent would be substantial. A unitary European patent would cost no more than half the cost of an existing European patent covering all twenty-five member states,215 which is equal to about 30,000 Euros over ten years for each patent. On top of that, there is better protection and transparency by switching from the existing procedure to a unitary European patent. The patent case is interesting as an illustration of what sometimes paralyzes the integration: analytical strength and political weaknesses. The case shows the impediments and barriers to growth and productivity and what may be called technical and administrative obstacles that had been erected for no particular reason — sometimes relics from the heyday of the nation states’ sovereignty. Their removal will have a substantial impact on private companies and their efforts to increase R&D. Apparently there are no political problems associated with a unitary European patent as everybody will gain. However the practical work of doing away with national regulations and rules proves to be much harder work than envisaged. Member states are reluctant to accept the use of foreign languages. The proposal stated that legal procedures should be conducted in one of only three languages (English, French, and German) instead of all official languages. Several member states — some of those whose language were not included — objected. It would have been a clear and beneficial streamlining of administrative and legal procedures in a core sector of R&D. Compared with the U.S. patent legislation,216 Europe has for a long time lived with rules and regulations that are much less conducive to commercializing research results. The working of the U.S. system is geared towards helping industry and facilitating the introduction of new products. Precisely at a time when efforts are being made to turn Europe into a knowledge-based area, the difference in patent legislation, to the advantage of the United States, poses a challenge for the Europeans. iii) Unlocking the business potential The Commission regrets that it is still cumbersome to start new enterprises in the European Union and that existing small- and medium-sized enterprises

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find the going difficult. With this background, the Commission proposes a string of primarily administrative measures to be implemented without delay to remove obstacles. iv) Responding to globalization and ageing The economic incentive to continue working as people grow older must be strengthened. To improve their ability and make them more effective workers, all workers above 45 years should participate in some kind of relearning process. The Commission points to the so-called flexicurity model (combination of flexibility and security) as the way ahead for the European Union and takes the initiative for a number of common principles. v) Efficient and integrated energy policy There is a need for more competition that points to an effective market for energy inside the European Union on 1 July 2007, agreed on as earlier. On top of that, research in alternative sources of energy, and more efficient use of energy and technology, should be stimulated. vi) The Europeans are also looking at the United States in their efforts to combine the various vectors of education, research, and innovation. In 2005 the Commission put forward ideas for The European Institute of Technology (EIT),217 regarded as a future institution for combining higher education, research, and innovation somewhat along the same lines as The Massachusetts Institute of Technology in the United States. The idea has obvious advantages. According to the present timetable, adoption of the legal acts are scheduled for 2007, opening the door for the Institute to be operative in 2008. In 1976 the European established the European University Institute (EUI)218 as a kind of European Brookings Institute. The EIT was cut from the same stone. vii) In 2004 the World Economic Forum published a review of the Lisbon Programme.219 It concludes that some of the member states, in particular, the Nordic countries, are actually doing very well with a high score, while other member states, in particular, in southern Europe, are doing less well. The next observation is that compared with the United States, the European Union performs less well and often much less well in almost all dimensions. There are only three areas in which the European Union as a whole outperforms the United States: in modernizing social protection, in

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implementing policies and practices that are supportive of sustainable development, and in the area of telecommunications. It finally says that to get closer to the objective of becoming “the most competitive and dynamic knowledge-based economy in the world”, three particular areas should be looked at: improving the environment for innovation and R&D, developing a stronger information society, and creating an enterprise environment that is more conducive for private sector economic activity. The Lisbon Programme was a political answer to an economic problem. The analytical work was correct, the whole diagnosis was spot on, and the remedies proposed seemed to be the ones called for and most likely to produce results. The well-known tactic of setting an objective and then pursuing it step by step with concrete measures approved in the Council did not work this time. There was no real follow-up to support and fund the programme. Even technical measures, such as a unitary European patent, did not take off, partly because of the trivial question of official languages. Notwithstanding all the declarations, member states did not really provide the financial means for R&D. Several member states found that it was better, and probably also politically more attractive, to use the funds nationally than to channel them into the European Union. As had happened several times before, the European Union was accused of being a bureaucratic machine, even if that could not be substantiated. A worse criticism was that the European Union had not managed to convince member states, politicians, and the public that common R&D efforts were more rewarding than national programmes. EU funds for the Common Agricultural Policy can be defended by referring to the objectives in the Treaties, requiring an EU financial effort. Funds for the structural funds can be explained by redistribution of income from the richer to the poorer regions in the European Union. But funding of common R&D activities rests on the assumption that R&D in common, and the pooling the knowledge of member states and their laboratories produce a higher return than national R&D. Otherwise it becomes a net loss, as part of the funds allocated to EU R&D almost inevitably goes to administrative purposes necessarily higher in an international effort than on a national basis. Even if many people intuitively share the view that common efforts must lead to better returns as total knowledge put into the process must be higher, the European Union has not been able to substantiate such a belief, thus hampering all efforts since the start of the European Union to build a genuine common R&D policy.

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Compared with common policies such as the Single Market or the Euro, the Lisbon Programme ran into a major difficulty. Most of the policies and instruments needed to fulfill the Lisbon objectives fell with national instead of EU competence. While member states had not resisted extending EU competence to the above-mentioned policies, they very clearly did so when the talk came to the Lisbon Programmes. That left the European Union hanging a little bit in the air without command over instruments to implement policies and objectives. The main lesson to draw from the Lisbon Programme is that it is all very well to diagnose a problem and prescribe an appropriate solution, but if concrete and tangible steps do not follow these lofty political declarations, the reputation of the integration suffers. The European political leaders got their analysis right, but failed to act. Without determined political leadership, even the strongest organizations, such as the European Union, cannot do much. The European governments have adopted a sceptical attitude towards further financial appropriations and did not really support the creation of the institutions necessary to achieve the ambition and objectives inscribed in the Lisbon Programme.

RESEARCH AND DEVELOPMENT The Start For the first decades of European integration, Research and Development (R&D) was associated with EURATOM, focusing on nuclear-oriented R&D. Outside the nuclear sector, R&D grew out of four joint research centres under EURATOM, placed in four member states (Ispra in Italy, Petten in the Netherlands, Karlsruhe in Germany, and Geel in Belgium) to gain support for these activities. The European Union realized the importance of R&D in the second half of the 1960s. When the Heads of State and Government met in The Hague in December 1969, they decided to intensify technological activities and promote and coordinate research, and went even further to mention a common programme and necessary financial means. Gradually but surely, common activities with regard to R&D were launched, but the European Union had to wait until the 1980s before the share of R&D of total budget appropriations passed the 2 per cent mark. The major leap came with the Esprit programme,220 which was the forerunner of the subsequent framework programmes in R&D, covering five or seven years. Esprit was almost exclusively devoted to Information and

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Communication Technology. Esprit II succeeded it and during the 1980s the budget grew to approximately 3 per cent of total EU expenditures.

The Framework Programmes In 1985 the Commission proposed a “Community of Technology”.221 The memorandum was presented at the meeting of the Heads of State and Government in Milan in June 1985. The Commission proposed that research, development and technology, should receive six to eight per cent of the EU budget by 1990. The then president of the European Commission, Jacques Delors, saw it as a follow-up to the Single Market and his vision of improving Europe’s competitiveness. To take that idea from vision to reality required that expenditure to R&D grow to 6–8 per cent of total EU expenditure. This was not going to be the case. The sixth framework programme222 covering the five-year period from 2002–2006 had total appropriations of 17.5 billion Euros. The main sectors were Information and Communication Technology, biotechnology, nanotechnology, and energy. In April 2005 the Commission forwarded its proposal for the seventh framework programme223 covering the seven-year period from 2007 to 2013, with total appropriations of 77 billion Euros. This framework programme was for all practical purposes an implementation of the political objectives set out in the Lisbon Programme. Financially the Commission asked for a substantial increase from 17.5 billion Euros in the sixth framework programme (five-year period) to 77 billion Euros. The Commission was adamant on this point and wanted member states to follow up on the political declarations in the Lisbon Programme by increasing expenditure on the EU budget allocated to competitiveness, growth, and employment. Nine sectors are mentioned as the prime recipients of EU funding: Health, Food-Agriculture and Biotech, Information and Communication Technology, Nanosciences-nanotechnologies-materials and New Production Technology, Energy, Environment, Transport, including Aeronautics, Socioeconomic Sciences and the Humanities, Security and Space. Information and Communication Technology (ICT) is the largest recipient, with a proposed allocation of 12.7 billion Euros over seven years. The health sector follows with nearly 8.4 billion Euros, and Nanosciences comes in third with 5 billion Euros. Security and Space, which did not really figure in the sixth framework programme, is the fifth largest with a budget of 4 billion Euros.

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In its proposal the Commission distinguishes between four types of activities inside the R&D envelope:224 •

•

•

•

“Cooperation” refers to collaborative transnational research activities and is in reality a continuation of well-known forms of common activities inside R&D, taking the largest part by far of budget appropriations. “Ideas” covers basic research implemented through the European Research Council (ERC). The Commission foresees the funding of individual projects suggested by researchers on subjects of their choice. The programme has a proposed budget over seven years of 12 billion Euros. “People” focuses on the so-called Marie Curie actions225 and similar initiatives. The “People” programme will cover the initial training of researchers, life-long training and career development, industry-academia pathways and partnerships, and international activities, including incoming and outgoing fellowships, and the exchange of researchers. The proposed budget allocation is the lowest of the four specific programmes at 7.2 billion Euros. “Capacities” encompasses support to research infrastructure, regions of knowledge and small- and medium-sized enterprises (SMEs). The programme aims at the use and development of research infrastructure, strengthening the innovative capacities of SMEs, the development of regional research clusters, improving the research potential in the EU convergence regions, and improving the integration of science and society. The Commission proposes a budget of 7.5 billion Euros.

Compared with the sixth framework programme there is less emphasis on specific funding mechanisms. For projects launched under the nine R&D sectors, three main instruments are identified: The first are the collaborative projects, which will range from small-scale, focused research actions to large integrating projects. The second are networks of excellence, bringing together a number of institutions in a given field. The third are coordination and support actions, such as networking, exchanges, and access to research infrastructure. The Commission, aware of the criticisms in preceding exercises, put in a great effort to consult all interested parties before the proposal was officially launched. A special website has been set up for the purpose of consultation, supplementing the existing institutionalized procedures.226 One of the more imaginative ideas was to establish a European Research Council (ERC) to fund science activities in the European Union more or less

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along the same lines as the National Science Foundation in the United States. The Lisbon Programme is very innovative, but it is striking to see how often the Europeans look to the United States to get inspiration from the way things are done there. The proposed European Research Council is one of several illustrations.227 The European Council met on 15–16 December 2005, under the British presidency. It decided228 to compromise. Instead of 77 billion Euros, the member states fixed an annual growth rate for expenditure on competitiveness, growth and employment from 2007 to 2013 at 7.5 per cent, leading to a total level for all policies under the Lisbon Programme of 72,120 million Euros for the seven-year period. The appropriations were expected to rise as follows: 2007: 8,250 million Euros; 2008: 8,860 million Euros; 2009: 9,510 million Euros; 2010: 10,200 million Euros; 2011: 10,950 million Euros; 2012: 11,750 million Euros; and 2013: 12,600 million Euros. The total for all headings under the Lisbon Programme was thus approximately 10 per cent lower than what the Commission had asked for. The member states expressed the wish that the financial means should be used in such a way that in 2013, 75 per cent more would be used for R&D, measured in real terms, than in 2006. This was a substantial increase compared with the 2006 figures. Compared with the Commission’s original proposal, it was, however, disappointing and cast doubt on the willingness to finance the Lisbon Programme as a whole, even if R&D had been given a degree of priority by the Heads of State and Government. Over the seven-year period, the European Union would spend approximately 862 billion Euros on all policies, equal to 1.045 per cent of Gross Domestic Product of which approximately 8 per cent would go to the Lisbon Programme, with the lion’s share channelled to R&D. This figure equalled what President Delors of the Commission had proposed for the European Union to reach in 1990 for R&D. The negotiations about the financial perspective for 2007–2013 were almost acrimonious, and to a certain extent, the financing of the Lisbon Programme became a victim of the soured political climate. The member states reduced substantially total EU appropriations and did not manage to restructure the budget to the advantage of the Lisbon Programme, and, in particular, R&D.229 There can be no doubt that the Commission had learned from previous experiences and tried hard to accommodate the criticism. It simplified administrative and financial procedures. It restructured the R&D programme to bring it in line with the Lisbon Programme, emphasizing the importance of innovation, small- and medium-sized enterprises, and the need for a more direct approach to common R&D activities in the European Union.

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Evaluation All in all, the Commission lived up to its role as driver of the integration process and guardian of the Treaties interpreted in the way that proposals from the Commission must look at the European Union as a whole, and not reflect the interests of individual member states. An analysis of the seventh framework programme leaves little doubt that had it been approved, it would have contributed substantially to higher European competitiveness, in conformity with the objectives in the Lisbon Programme. The Commission defended its belief that too low an investment in R&D was crucial in explaining a considerable part of the gap in Gross Domestic Product per head between the European Union and the United States. In a press release of 22 November 2001,230 clearly designed to drive this point home, the Commission stated: In the EU, ICT investments in the business sector have been smaller than in the US: in 1999, 2.4 per cent of GDP against 4.5 per cent in the US. Recent studies suggest that ICT may have accounted for as much as 0.8 to 1 percentage point of GDP growth in the US in the second half of the 1990s. The EU may have foregone 0.3 to 0.5 percentage points of annual GDP growth because of the lower level of ICT investment.

It drew the conclusion that a mobilization of Europe’s brainpower would jump-start productivity, competitiveness, and growth, and tried to rally member states around this viewpoint. Unfortunately, member states did not live up to the high standards set by the Commission. They were not disposed towards putting the necessary financial means at the disposal at the Commission and the European Union. Two main considerations held them back. First, the entire well-known phenomenon that it is difficult to build a common policy replacing national policies. Member states questioned the advantages of doing R&D in common and many of them felt that they could do as well, or even better, by using national funding and national laboratories. International cooperation could be done on a case-by-case basis, without having to resort to the Commission as some kind of midwife. The nagging doubt about the efficiency of the European Union’s R&D activities put a brake on the willingness to endorse the Commission’s bold proposal. Second, member states had changed stance with regard to funding the European Union. In the 1980s and 1990s they were ready to put more financial means at the disposal of the European Union. Now they adopted fiscal stringency. They had to do that nationally and felt that the European Union should not be exempted from similar economies.

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These two effects, fiscal stringency and the doubts about the efficiency of R&D as a common policy, proved a strong political barrier for the adoption of the Commission’s proposal. The lesson for integration is that to gain support and, in particular, financial support for common policies and common activities, the advantages of replacing national policies with common policies must be obvious and tangible. The European experience shows that when trying to set up a substantial programme for higher education, research, technology and innovation, the efforts are being trapped in a triangle consisting of national interests, European (European Union) interests, and interests pursued by universities/research institutions. To find the optimal common denominator is the challenge, and is by no means easy. The nation states are still reluctant to dispense with major parts of their Research & Technology, plus higher education, as national policies. There is a visible barrier set up by institutions, with even governments still preferring national solutions. The Commission has put a strong case forward231 for an enhanced European effort, but finds it difficult to penetrate the resistance and scepticism of member states. The universities and the research institutions are in favour of a stronger European effort because, among other reasons, they smell the opportunity for increased funding, but are very much aware of the risk or danger as they see it, of distortion of their activities. The Commission and the universities are allies in going for more funding and increased efforts, but it is not always that the universities share the policy of the Commission regarding the distribution of their funds. That weakens this alliance against the back-pedalling of national governments. The European Commission tried to galvanize Europe into action. Even if all the objectives mapped out by the Commission had been implemented, this alone would not have been sufficient to relaunch Europe’s competitiveness. What mattered at the end of the day was whether member states would follow up with national measures, while at the same time supporting EU measures. They failed on both counts.

ERASMUS, SOCRATES, LIFELONG LEARNING Socrates constitutes a comprehensive EU programme for learning and education, covering schools and higher education encompassing eight areas.232 In 1987, the European Union started the Erasmus programme,233 which is the most

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well-known and largest programme inside the Socrates envelope. The objective of Erasmus is to promote and facilitate the exchange of students at university level among member states. After a tepid beginning where the programme seemed for some time to be in doubt, it started to take off. In 2002, the European Union celebrated the number of exchange students under Erasmus passing the one million mark and since then the annual growth rate has been 9–10 per cent, making the annual number of Erasmus students approximately 150,000. The basic objective of Erasmus is to enhance a student’s higher education by his/her drawing on the experience of universities other than the one where the student spends most of his/her time. 2,199 higher education institutions from thirty-one countries234 participate in Erasmus. The Erasmus programme is made financially attractive to the students by ensuring that they do not pay extra tuition fees to the university where they stay temporarily. Exchange students create a comparable study structure and allow for European benchmarking. The main idea was, and still is, to improve the quality of higher education by broadening the experience and opening the door for a larger pool of talent among the European countries. It should not be overlooked that on top of that, there is a political objective since students spending time in another member state acquire a more “European” spirit and understanding of not only the advantages of European experiences and knowledge in higher education, but also the European integration as such. It can be said that Erasmus facilitates the emergence of what may be called the future European elite. A first step in this direction was taken in 1949 with the College of Europe in Bruges, Belgium.235 In 1993 the second College of Europe was set up in Natolin, Poland. In the long run, this may be as important as the education aspect. The number of exchange students in Europe is not limited to students under the Erasmus programme, as many students spend time in other member states on their own initiative or under national programmes. If these students are included, the number of European students spending time at a university in another member state rises far above the figure of 150,000, giving a sense of a growing European spirit among European students. Member states have gradually, but surely, come to realize the importance of education in improving competitiveness and productivity. It is realized that education is not confined to young age, but needs to cover a lifetime, which explains why the European Union, in conformity with the objectives of the Lisbon Programme, has gone into the field of lifelong learning.236

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In July 2004 the Commission adopted a proposal for an action programme in the field of lifelong learning, covering 2007–2013.237 The aim is to contribute through lifelong learning to the development of the Community as an advanced knowledge society. Keywords are to foster interaction, cooperation, and mobility between education and training systems within the European Union. Before putting this comprehensive programme forward, the Commission performed a midterm review of the Socrates programme, concerning education, and the Leonardo da Vinci programme, concerning vocational training. An intensive consultation to reach out to all interested parties to hear criticisms and ideas for improvement was set in motion. The framework programme covers seven years and includes five main sectors: • • • • •

Comenius, in school education, aims to have at least one out of twenty school pupils engaged in joint educational activities. Erasmus, in higher education, has the ambitious goal of reaching the three million mark in the number of students by 2011. Leonard da Vinci in vocational training is looking to have 150,000 placements in enterprises per year by the end of the programme. Grundtvig in adult education supports the mobility of 25,000 individuals to be involved in adult education each year, by 2013. The proposed budget revealed the Commission’s ambition as it called for an envelope over seven years of 13.62 billion Euros.

These programmes clarify a good deal about the strength and viability of the European Union. They may not be fully implemented as proposed by the Commission, as the member states may hold back funding, but the vigour and direction are striking. It actually shows the ability of the European Union to refocus on new challenges and strive for solutions. In the early decades, the European Union established the Common Market, the Common Agricultural Policy, and the Common External Trade Policy. The 1980s and 1990s saw the establishment of the Single Market and the Economic and Monetary Union and a growing awareness of R&D and accompanying measures. From the mid 1990s and until the middle of the first decade of the twenty-first century, the European Union adapted to meet the changed international environment by focusing on competitiveness, productivity, and education for the workforce.

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Sceptics will say that it is not enough, but it has to be borne in mind that these new EU policies are not replacing national measures; they complement them by trying to add new dimensions to what member states are doing inside the established framework. It is a genuine example and attempt to enhance European competitiveness by drawing on European experience from various member states. Lifelong learning has found its way into the economies of primarily the Nordic countries, but through the European Union, it is now gradually being adopted in other member states.

ENERGY POLICY Despite the obvious need, the European Union has never succeeded in establishing a common energy policy worthy of that name. In 1973 the first oil crisis brought price increases of 300–400 per cent. It dawned on the European Union and its member states that they were totally unprepared for upheavals in the oil market. Although many words were lavished on the merits of a common energy policy very little action was taken. In 1995 the Commission238 put forward a so-called Green Paper aiming at a better functioning energy market. Some programmes were actually approved and launched, especially with regard to the market for electricity. The present situation, almost fifty years after the Treaty of Rome came into force in 1958, is that the Common Market functions for oil products. A limited degree of progress towards what can be termed a common energy policy has been achieved in selected areas, for example, liberalization and integration of gas and power markets. With this background the Commission forwarded in 2006 a new Green Paper239 sketching another attempt for a common energy policy inscribed in the Lisbon Programme and called “A European Strategy for Sustainability, Competitiveness and Secure Energy”.240 The Commission paper highlights six priority areas: Number one is to complete the internal European electricity and gas market. In July 2007, with very few exceptions, every EU consumer will have the legal right to purchase electricity and gas from any supplier in the European Union. However theory is one thing, practice another. Differences between member states’ approaches mean that in reality not many consumers are able to exercise that right. The Commission calls for a European grid, which can be achieved by common rules and standards on issues that affect border trade.

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Number two is solidarity among member states. The risk of disruption to energy supply in a member state is growing with terrorism, natural disasters, etc., which calls for mechanisms that can switch energy supply from one member state to another, in case of urgent need. Number three is a more sustainable, efficient, and diverse energy mix. A member state can choose its own mix of energy supplies, but its choice will inevitably have repercussions on other member states. Dependence on oil or natural gas is a case in point. The Commission revokes the question of nuclear energy as a possible source of energy in the future. Number four is an integrated approach in tackling climate changes. The European Union is already at the forefront in decoupling economic growth from increasing energy demand, and must continue to be so. Actions on renewable energy and energy efficiency are priority items. Number five is a strategic European energy technology plan. In conformity with the seventh framework programme for R&D, a substantial sum of money should be allocated to research in energy-promising new technologies. Number six is a coherent external energy policy. The European Union must play a more effective international role and build up relationships with energy suppliers. There are several reasons explaining why the integration has moved so slowly towards a common energy policy, compared with achievements in other sectors: First, energy policy is regarded as a strategic sector closely linked to the security of the nation state, so most nation states are reluctant to lose control over energy supply and distribution. Furthermore the utilities sector is not regarded solely as an economic sector. It grew up in almost all member states as a part of the public sector, with the perception that the nation state has the obligation to secure supply of these services to its citizens. For a long period of time, the economic result — whether the service turned in a profit or not — was deemed as less relevant than security and maintenance of a steady supply. All in all, these factors made the utilities sector and energy less susceptible to economic considerations, and consequently less open to steps to increase efficiency. It was felt that the European Union should not really interfere. In the last two decades of the twentieth century, a new political paradigm concerning utilities, including energy, was born that makes member states and the public more willing to take a new look at ownership and management of utilities. Once that jump was taken, the road to the next one was not long: utilities started to be viewed as an economic sector, subject to the same rules as other industrial sectors in the national economies.

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Second, the position of member states was dichotomized between producers and consumers. The Netherlands profited from exploitation of natural gas in the North Sea, and in the course of the 1980s, the United Kingdom emerged as a big exporter of oil. Denmark became self-sufficient, and later started to enjoy a small export surplus. Other member states such as France, Germany, plus the Southern European countries had little or no oil and gas (some of them had coal, but this energy source has become discredited because of negative environmental side effects). Every time the European Union started to look at a common energy policy, this dichotomy and divergent interests between producers/exporters and consumers/importers constituted a gap that could not be bridged. One of the two camps would emerge as the loser, depending on which policy to implement. Political willingness to shoulder that burden was not forthcoming. Even if the camp of consumers/importers was larger and more powerful than the other camp, it was not sufficiently powerful to push through its preferred brand of an energy policy. In almost all other cases where the European Union had established common policies, it could be shown that it was a win-win situation, or at least, that no one would really lose, as those expecting a loss would be compensated by other common policies, or modifications of existing common policies, thus eradicating their potential loss. In the energy sector the gains/ losses were simply too big to be weighed up by steps in other common policies that do not command the same economic clout. Third, member states also had divergent views or environmental issues and, in particular, nuclear power. France decided early on to invest heavily in nuclear power. Today 78.1 per cent, of France’s supply of electricity comes from nuclear power followed by Belgium with 55.1 per cent, Sweden, 51.8 per cent, Germany, 32.1 per cent, Finland, 26.6 per cent, Spain, 22.9 per cent, and the United Kingdom with 19.6 per cent.241 Some of the other member states decided not to use nuclear power at all and resisted any attempt by the European Union to support nuclear power as they felt it ran counter to their policies. They feared a domestic policy backlash in view of the strong emotional leverage this question exercised on public opinion. Some member states (Germany, Sweden) had embraced nuclear power, but in the 1990s, they turned around and embarked on a programme either to stop expansion, or to dismantle nuclear power stations. A not quite similar, but visible difference with regard to environmental issues, could be detected. Fourth, not surprisingly, the energy sector was a pawn in a greater geopolitical game, where most of the member states, in particular, the larger

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ones, saw energy not only as a domestic policy, but also in the context of policies vis-à-vis the United States and the Middle East. A certain degree of competition between member states involving contracts and national political stance evolved, making the picture even more blurred. When looking at the balance sheet, that is, what has been achieved and what has not, the success is a common gas and power market. That is by no means negligible, and in view of the obstacles, a formidable achievement. It cannot, however, obliterate the broader and more general outcome that no full-fledged common energy policy has been established despite the obvious need. The lesson to learn is in fact quite simple, but useful, to keep in mind. Economic integration cannot be successful in sectors where nation states have divergent and even conflicting interests. Attempts to bridge this gap might bring out into the open the divergent interests instead of moving the nation states closer to one another. The European Union and its member states were warned several times. The first oil crisis in 1973/64 was the first warning shot. The last warning came in the beginning of 2006 when a Russian boycott of gas to Ukraine spilled over, and for a short time, interrupted part of the supply of gas to Europe, which is more and more dependent on Russian (and Algeria) for the supply of gas. Maybe this demonstration of a very tangible character will make the European Union and its member states more disposed towards transforming declarations into concrete measures to hammer out what may be a common energy policy. The more integrated the European energy markets become, the more difficult it will be for individual nation states to secure their own supplies by holding back deliveries to other member states. In a way it can be said that a power grid and steps towards a common market make it technically and economically more difficult for a member state to regard energy as a national issue. In 2003 the Commission sketched a coherent and almost full-fledged energy policy in the European Union comprising twenty-five member states.242 The Commission does not confine itself to the traditional and above mentioned aspects of an energy policy, but makes a strong case for an infrastructure — a network — linking member states together, saying that unless such an infrastructure exists, no common energy policy for the European Union can work effectively. This falls in line with the Commission’s other proposals to build an infrastructure, for say, transport linking member states together not only economically, but also technically, to obtain economic benefits resulting from a European network instead of national networks that block economies of scale and efficiency.

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But things are changing. The United Kingdom,243 which earlier was very sceptical towards an EU energy policy, is now pushing for a common policy. This is an indication of increasing understanding and more common analyses in member states of risks arising from a continuation of the traditional course. Energy might well become one of the most important issues on the political and economic agenda of the European Union in the years to come.

TRANSPORT POLICY Overview A common transport policy seems to be evident as the Common Market succeeded by the Single Market cannot function if member states use transport policy and rules for transport to protect their domestic markets. The Treaty of Rome stipulates that the activities of the Community shall include a common policy in the sphere of transport.244 Despite this and a full panoply of Articles,245 very little happened during the early stages of the integration. At the beginning of the 1980s, the European Parliament took the Council to the European Court of Justice, saying that the lack of decisions constituted an infringement of the Treaties by the Council.246 The European Parliament was partly successful in this initiative which prodded the Council into action. The procedure is interesting not only because it forced the Council to start taking the words “Common Transport Policy” seriously, but more so as a piece of evidence of the importance of the European Court of Justice, and the sometimes politically contested role the Court has chosen to play. The Court never skirted its responsibility and ruled in favour of further integration. So it did in 1985.247 The ruling was, strictly speaking, confined to land transport as the Treaties248 direct the Council to act regarding land transport (rail, road, and inland waterway) by using the word “shall”. When specifying the obligations of the Council regarding sea and air transport, the word “may” is used. The coincidence of the ruling, the introduction of the Single Market, and the growing support for deregulation among member states, opened the door for an increasing number of legal acts primarily for land transport, and to a lesser extent, for sea and air transport. The dichotomy in the Treaties may be one of the reasons the European Union has never really been able to map out a common transport policy, but instead progressed sector by sector. The progress obtained is by no means small, and gradually, the framework for what can be termed common policies in each transport sector has emerged, liberalizing the sectors in conformity with the fundamental principles of non-discrimination.

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Another explanation may be found in the definition of what a common transport policy should do. Establishment of a Common Transport Policy is not a goal in itself, but an instrument to implement the objectives set out by the Treaties. In 1989 and 1991,249 the Council decided to eliminate controls at the borders between member states, saying that for roads and inland waterways, such controls should be regarded as a part of normal controls by member states taking place within the borders, and on the basis of non-discrimination in terms of nationality. This removed what has been an irritating, time consuming, and costly practice in the European Union and furthermore gave the signal that liberalization was on the table. This was confirmed when the member states in 1993 approved a legal act250 removing restrictions for road transport of goods and stipulating that in 1998, what is termed cabotage should also be liberalized. A member state could not reserve road transport of goods from one place inside the member state to another place inside the member state to national citizens. Not only was road transport of goods between member states liberalized, but also road transport inside a member state followed. In principle, as well as in reality, this decision equalled liberalization of the market for road transport of goods. The Commission was helped into pushing ahead by — again — the European Court of Justice. In the late 1990s and 2003 the Court of Justice ruled251 that compensation granted to public transport operators — even small local operators — can affect trade between member states. Consequently such compensation falls in principle under the provisions in the Treaties governing state aid/subsidies.252 This opened the door for the Commission, as a watchdog, to ensure that state aid, if at all permissible, does not run counter to the principles of the Treaties. These rulings may not in themselves look important, and they may not have come as a surprise, but their political and psychological impact in the European Union, reinforcing the belief that the transport sector was due for a genuine overhaul, was significant.

Land Transport The next step came in 2001. The Commission forwarded a White Paper on European Transport Policy 2010.253 The main point in the White Paper — containing sixty specific proposals — was to shift the burden of transport in the European Union away from road transport, and revitalize rail transport and internal waterways. The White Paper is an attempt to encompass several policies at the same time. The main thrust is the importance of transport for the smooth

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functioning of the European Union and its significance for the Single Market, indeed as a factor in enhancing the Union’s competitiveness. A suggestion was also put forward to restructure the transport policy as a sustainable policy that tries to reduce the negative impact on the environment of the growing volume of transport inside the European Union. The dismal situation for European railways showing their declining role in transporting freight is illustrated by the fact that in 1970 almost 21 per cent of goods were transported by rail, while the corresponding figure for 2000 was as low as 8.1 per cent.254 In 2006 member states fall into two groups when analysing the liberalization of freight by railways: one group with free access to the market for rail transport for freight includes Austria, Italy, Germany, the Netherlands, the United Kingdom, Sweden. Most of the other member states still operate barriers to protect the domestic market from companies in other member states. This is, however, going to change. In 2004 the Council approved a legal act,255 which in principle, will open the market in all member states. With its communication called “The Third Railways Package”, the Commission256 proposes to open the international market for railway passenger services from 2010. The political willingness in member states to open the domestic market for operators in other member states has yet to be achieved. An encouraging step in that direction was taken by the EU Transport Ministers in June 2006.257 They agreed in principle (with four member states abstaining — but not voting against) that public authorities have to conclude public services contracts with operators of rail and road public passenger transport services. In other words, it means that a large part of such services inside member states will be subject to public tender. The decision-making procedure is not finished and the agreement contains provisions excluding some services, but the principle is approved. Judging from the experience and the normal pattern of behaviour, the principle will slowly, but surely, be implemented. Taken together these steps — even with the outstanding questions concerning freight and the difficulties facing the adoption of the proposals concerning passenger services — constitute a fundamental change in the European railway system towards full-scale liberalization.

Sea and Air Transport Sea transport is liberalized between member states, and between member states and non-member states. Proposals from the Commission to open the market from one harbour in a member state to another harbour in the same member state (called cabotage) have not been approved by member states.

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The most remarkable result for the European Union in the transport area is undeniably air traffic, where the European Union, since 1997, has operated a fully liberalized market, with the Commission instrumental in steering the deregulation through, albeit helped by the tendency to deregulate and liberalize air traffic all over the globe. It has proved more difficult to get approval for measures to coordinate air control. After several years of haggling among the member states, the European Union finally succeeded in 2004 to create a regulatory framework establishing what is called “Single European Sky”,258 which will improve coordination among member states and reduce administrative difficulties and overlapping. Besides improving conditions for air travel in Europe by, among other things, reducing delays, at least those due to non-cooperation between national air control systems, “Single European Sky” will produce substantial savings. In a recent report to the U.K. parliament, it has been estimated that the costs due to delays is approximately 4.5 billion Euros per year.259

The Way Ahead To shape a European transport infrastructure, primarily in railways, the Commission has put forward an ambitious plan to invest 225 billion Euros from 2010 in thirty priority projects binding the centres of the European Union together.260 The transport sector in the European Union accounts for approximately 7 per cent of GDP and 7 per cent of all jobs. It is of vital importance for the functioning of the Single Market. This gives rise to some surprise that it took so many years before the integration started to take root in this sector. The reasons are probably that traditionally the transport sector has been heavily regulated, and in some countries, dominated by strong trade unions resisting any kind of efforts to liberalize and open up for competition. In some cases enterprises in the transport sector are regarded as “national”, so relinquishing control to foreigners is sensitive. On top of that, in some countries, well-established national transport companies had attained the status of some kind of icon even if their results — technically and economically — did not warrant this image. In June 2006 the Commission forwarded a mid-term review of its White Paper from 2001.261 In the period 1995–2004, the annual growth of goods was 2.3 per cent and the annual growth of passengers was slightly lower at 1.9 per cent. The overwhelming part of EU transport is carried by road, with 44 per cent for freight and 85 per cent for passengers.

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On the basis of an annual estimated economic growth rate of 2.1 per cent for the period 2000–2020, the Commission forecasts that freight growth will be 50 per cent and passenger growth 35 per cent. Unless transport is restructured from road to the railway system, Europe will face significant costs from a degrading infrastructure. Congestion will harm economic growth and Europe’s competitiveness. The direct costs for the environment is already substantial and can be estimated at 1.1 per cent of GDP. The Commission issues a rallying cry for further measures in the years to come to follow the guidelines laid down in its White Paper. The transport policy, as it evolved over the years, showed a certain laggardness in the early phases of the integration, but gradually picked up momentum as the need for an efficient transport market and transport infrastructure became obvious, and the costs for the member states could no longer be ignored. The European Union is on its way towards having a common transport policy weaved around three axes: •

•

•

Liberalization, emphasizing economic efficiency gradually, but surely removing restrictions that protected domestic, even local, transport operators, and scrutinizing state aid/subsidies. Restructuring the transport sector, in particular, directing goods/freight from road to railways, as various prognoses’ paint a sombre outlook for congestion of the roads unless such a restructuring is implemented. Heavy investment in the railways sector is called for. An understanding of the negative effects on the environment connected with growing transport volume, primarily road transport and air transport, and awareness that some of the European Union’s international obligations, for example, with regard to greenhouse gases and the Kyoto Protocol, can be jeopardized with an unchecked development.

Studies by independent think tanks and/or organizations provide similar conclusions, albeit not completely congruous policy prescriptions. The Centre for European Policy Studies issued a report almost simultaneously with the Commission’s mid-term review and called likewise for the restructuring of the transport policy and the need to see it as part of other policies including the Lisbon Programme.262 In February 2005 the European Policy Center (EPC) published a paper setting out twelve prescriptions for European progress in the transport area.263 The EPC working paper makes, for example, a convincing case for the European Galileo project,264 which is a global positioning system, launched

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by the European Union and based on thirty satellites scheduled to become operational in 2010. According to the EPC, the following advantages in the transport sector will flow from the Galileo project: increased efficiency and reduced congestion on the roads; improved efficiency in vehicle fleet management in logistics services; better traffic control for sea and air traffic; and for rail traffic, reduced distances between trains.

ENVIRONMENT The Treaty of Rome was written at a time when the political and economic agenda focused almost exclusively on economic and industrial activities. Article 2 in the original treaty talks about a “harmonious” and “balanced” development, but the word “sustainable” indicating environmental preoccupation, is not to be found. It was in the early 1970s that the European Union — enlarged by the United Kingdom, Denmark, and Ireland — first began to introduce environment on the agenda in conformity with the growing awareness of the degrading quality of the environment that was leading most European countries to adopt measures to improve the environment. After a preliminary report, the Commission submitted in 1972265 a report sketching a coherent policy about the environment, accompanied by concrete proposals. It is, however, revealing and reflects the embryonic status of the concern about the environment in those days that a programme to this effect should not constitute a new common policy separate from the others, but was rather a collection of community activities.266 This was followed up with a political endorsement at the summit in Paris in October 1972,267 when for the first time, the original six member states and the three new member states (the United Kingdom, Denmark, and Ireland) got together to map out the course for the enlarged European Union. The result of these efforts was the first environmental action programme covering 1973–1976. By the standards of today, the programme was modest, but it nonetheless broke the ice. It did not happen without difficulties. The first was of a legal nature. The Treaties did not contain provisions for dealing with the protection, or improving standards, of the environment. The European Union had to fall back on two other articles (Article 100 about law harmonization, and Article 235 about measures to attain one of the measures of the Treaties) as the legal basis for decisions. Both Articles stipulated unanimity, posing limits on how far the European Union could go, as all member states had to endorse the proposed measures.

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Article 100 about law harmonization did not automatically lend itself as a legal basis for legal acts to protect the environment. In 1980 the European Court of Justice ruled268 that Article 100 could be used for that purpose, thus removing doubts and uncertainty. Article 235 can only be used provided the aim is to attain one of the measures of the Treaties. The Treaty of Rome was not amended before 1987 and did not contain any provisions concerning the environment, which obviously constituted limits on how far it could be stretched. Several member states felt during the negotiations for the Single Act coming into force in 1987 that the Treaties should have specific provisions concerning the environment as a counterweight to the Single Market. Such a move would express the European Union’s concern about the quality of the environment and not let the impression take root that the European Union is solely an economic enterprise. The Single Act introduced “sustainable” economic growth as one of the principles of the European Union269 and stated that the activities of the European Union shall include “a policy in the sphere of the environment”.270 That was fine as a policy declaration, but a first important step was the incorporation in the Treaties of a special section as the legal basis for decisions to improve the quality of the environment.271 The second step was taken when the Treaty of Maastricht changed a large part of the legal basis from unanimity to qualified majority voting. Taken together, the principles — the introduction of a policy in the sphere of the environment and the relevant articles in the Treaties — reflect a policy based on the following guidelines: •

• •

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Decisions to protect the environment and improve the quality of the environment shall generally be taken with qualified majority voting and not unanimity (exceptions are, for example, decisions of a fiscal nature in conformity with the general rule of unanimity for all fiscal questions). Environmental protection requirements must be integrated into the Community’s other policies. A high level of protection must be ensured, with the diversity of situations in the various regions of the European Union taken into account at the same time. The two principles of precautionary measures and preventive action are endorsed. Pollution shall preferably be rectified at the source. Those who cause pollution should, as a general rule, also pay for measures to rectify it — polluter pays principle (PPP).

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Member states are allowed to take more stringent measures to protect the environment on the condition that such measures are compatible with the Treaties.

This coherent policy has constituted the basis for a large number of legal acts adopted and implemented in the European Union from the time the Single Act came into force in 1987 until today. The Articles in the Treaties are basically unchanged, but in practice, every time the Treaties have been amended, the wording tilted more towards highlighting the protection of the environment. The sixth action programme covering 2002–2010 is the present guideline for the activities of the European Union. It reflects that the European Union over the years have adopted a large number of legal acts aimed at improving the quality of the environment in areas such as water, air pollution and climate change, waste management, noise pollution, nature conservation, and natural and technological hazards.272 The experience to be drawn from the incorporation of a common policy concerning the environment can be summarized the following way: A brand new common policy can be built from scratch, even if it is not foreseen in the Treaties, and even if it does not influence trade patterns among member states. The European Union was politically adept enough to pick up current trends and incorporate new measures to deal with them. There are limits to what can be done without changing the Treaties, but with political consent, existing Articles can be stretched to a certain degree; eventually, however, Treaty changes have to be envisaged. Different perceptions about the importance of protecting the environment and different geographical conditions influencing the environment, which make efforts to reduce pollution more or less imperative, may have an impact on measures adopted, but do not constitute a barrier for building a common policy. Civic society, non-governmental organizations, and pressure groups do actually influence policy making in the European Union, and they very often do it by encouraging the European Parliament to push the Commission and the Council. This has made the European Union one of the leading players in promoting the protection of the environment and sustainable development. It is interesting to speculate on the effects on the European Union’s industrial performance in developing and manufacturing equipment to reduce pollution and thereby gaining an advantage compared with other industrial

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countries. The European Union is, of course, not alone in focusing on the environment. Other industrial countries are adopting a more or less congruous policy. In these areas, a kind of “reverse infant industry” argument applies. The country, and in this case, the European Union which introduces strict measures, initiates the development of technology to meet these standards, thereby getting a market not only in the said country, but also in other industrial countries following suit. The effort to reduce damage to the environment and reduce pollution is inextricably linked with the diminished use of resources as this is indeed one of the most effective measures to improve the quality of the environment and goes right to the heart of one of the fundamental principles — pollution shall preferably be rectified at the source. In the long run, this is one of the many positive side effects associated with a strong effort, and implies indirectly positive elements for the European economy. In its annual report,273 the European Environment Agency put this argument forward. The combination of creating a strong industrial base in anti-pollution equipment, and the reduced use of resources, thus saving the European economy billions of Euros, can be classified as a benefit for Europe in the long run. In 2002 the British Minister for Environment, Michael Meacher,274 used the following words: The environment industry is now a “sunshine” industry, said Meacher. “Profiting in the green economy neatly captures the basic message that business performance and environmental performance are wholly complementary,” he said. Environmental performance is increasingly seen as an integral part of sound business practice. That’s why we are seeing green purchasing and the array of supply chain initiatives; why also we see the growing interest of fund managers and insurers in the newer business indices such as FTSE4Good, the BiE Index of Corporate Engagement, the Dow Jones Sustainability Group Index.

This view seems to be supported by academic analyses. A study from 2000275 based upon eighty-nine companies from the S & P 500 refutes the thesis that companies profit by moving some of their production abroad to exploit more lenient environmental standards. On the contrary, says the study, companies administering one global (high) environmental standard profit more. Such a policy is not a liability, but increases market value. The study points to the not-so-surprising fact that equipment saving resources is also more efficient in other areas. A policy to arrange production technology to exploit lower environmental standards means bringing in lower quality equipment leading

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to a lower quality for the end product. The study does not say so, but it is tempting to guess that those companies moving production abroad do so because they already find it difficult to compete, and are trying to save costs over a broad range of areas, lower environmental standards being only one and maybe not the most important one. It was more than ten years ago that business started to realize the enormous potential in equipment designed to reduce pollution and improve environmental quality. In 1998 the global environmental market was estimated at more than US$700 billion. Even more astonishing was the realization that annual growth rates for this market were above 10 per cent in Asia excluding Japan, Latin America, and Africa while countries that had adopted high environmental standards, such as the United States, the European Union, and Japan had growth rates below 4 per cent.276 The common environmental policy has developed into some kind of inter-disciplinary policy, evolving from being a purely domestic EU policy to becoming an integral part of the European Union’s international stance. Even those member states originally sceptical or putting a question mark on whether it really was worthwhile to develop a common environmental policy now seem convinced.

COMMON FISHERIES The Treaty of Rome does not contain specific provisions about a Common Fisheries Policy nor do subsequent Treaties. Nonetheless, the European Union has agreed a Common Fisheries Policy. The reason is that in its definition of agriculture,277 the three words, “and of fisheries” are added, meaning that all the elaborate provisions drafted in the Treaties for agriculture, in principle, also apply for fisheries. The principles of a Common Fisheries Policy were adopted on 30 June 1970. The date was no coincidence, as it was the start of negotiations for enlarging the European Union with the United Kingdom, Ireland, Denmark, and Norway — all of whom had strong interests in the fisheries sector. The implementation took longer than expected so the original target date of 1 February 1971 was not met. Basically the Common Fisheries Policy meant a common market for all six, and subsequently, all nine member states, where the fisheries sector could thrive on equal terms, and sell its products on equal terms, obliterating differences and divergences based on nationality. The entry of the United Kingdom, Denmark, and Ireland into the European Union — in 1973 — three nations having access to fish stocks — increased the significance of the political and economic conditions for this sector.

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Much more important was the international evolution. Using the International Convention of the Law of the Sea, a number of countries extended their zone of exclusive fishing from twelve nautical miles to 200 nautical miles.278 The European Union followed suit as of 1 November 1977. The existing Common Fisheries Policy was, in principle, also applicable to the extended zones, but it did not take long for it to be realized that this had to be amended in view of the new circumstances. It was this event that put fisheries on the screen for most people. It opened the door to near acrimonious negotiations lasting six years before an amended common policy was adopted. The European Union saw and felt the consequences of the extension of the exclusive fisheries zone. A considerable part of the European Union’s fishing zone was forced back from rewarding banks, for example, near the Norwegian or Icelandic coasts, and pushed back onto the North Sea. When the EU countries themselves extended the zone, the question immediately arose as to what to do with EU fishermen from other member states used to fish in what were now national exclusive zones. The European Union discovered the same problem after the enlargement with Spain and Portugal in 1986, when Spanish fishermen started to appear and fish near the coast of other member states. All these problems might have disappeared or been easy to solve had it not been for one factor casting its shadow increasingly over the fisheries sector in the European Union: the plain fact that there was not enough fish. While the Common Agricultural Policy has struggled with the consequences of overproduction, the Common Fisheries Policy has had to cope with a production capacity (fleet size) larger than available fish stocks. This explains why the Common Fisheries Policy has moved gradually towards a policy aiming more and more at conservation rather than production. The problem became almost acute as one of the few areas in the European Union, the North Sea, at the beginning, had available fish stocks, but over-fishing soon put an end to that. In 1980 member states agreed on the principles which were to guide a Common Fisheries Policy for years to come.279 Even if the declaration called for a Common Fisheries Policy to be put in place before 1 January 1981, it was only at the beginning of 1983, after long negotiations, that the agreed principles were implemented in a coherent policy, worthy of the name, Common Fisheries Policy. As it developed and deepened over the 1980s, it contained five basics elements: Firstly, conservation is the main point as over-fishing gradually exhausted fish stocks in EU waters and turned attention more and more on this point. The basic legal acts were renegotiated several times during the 1980s and first found their final shape in 1992.280 The key words showing the preoccupation

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and priorities of the European Union are “rational and responsible exploitation” and “conservation and management of fisheries resources”. Both phrases clearly bring out the fact that one of the most important objectives of the Common Fisheries Policy was to secure fish stocks for the future, even if the price in the short term was holding back on fishing capacity. Secondly, conservation is technically implemented by the so-called TAC (Total Allowed Catch), fixed by the Council on the basis of scientific advice,281 which states how much of each type of fish can be caught in EU waters, and leaves it to the Council to carve the TAC into quotas for each member state. This is easier said than done. The scientific advice was sometimes challenged, and each member state fought hard to acquire the largest possible quota. In true EU tradition, fixing quotas became one of the hardest fought battles at the end of each year, just before the Christmas recess — a battle that has the full attention of the mass media. Thirdly, structural policies that bring in financial assistance for the European Union to restructure fishing fleets to help scrap what was regarded as overcapacity and try and share the economic burden more equitably among member states in conserving fish stocks. Fourthly, adoption of a market policy with specific rules,282 aimed at the stable development of income in the fishing industry, and, at the same time, the securement of stable supplies to the consumer. As is the case for the Common Agricultural Policy, one of the elements is guaranteed prices, but the Common Fisheries Policy has rarely been caught in the same dilemma as the CAP. The supply has been limited, making it much easier to maintain prices at what is termed a reasonable level for producers as well as consumers, without intervention on the market. Fifthly, relations must be built with the outside world, thus opening the door for the European Union to negotiate fisheries agreements with nonmember states. A weak and sore point in the Common Fisheries policy has always been control, especially for the TACs. Each member state is responsible for the waters under its control. It has not only the right, but also the duty, to control vessels from other member states (and from non-member states) fishing in these waters. It can be made in the port or at sea, and aerial photography, plus satellite technologies are used. Each member state is likewise responsible for controlling how much its own fishermen catch in non-member states’ waters. The challenge for the control is that circumstances make it extremely difficult to control how much is caught and where. It became even more difficult as not all member states showed vigilance in living up to the expectations of how effective the control should be. Mutual accusations

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resulted between member states of over-fishing, and it was often aired to the mass media that the control was not up to the task, which cast an ominous shadow over the Common Fisheries Policy.283 A growing consensus emerged during the 1990s that the Common Fisheries Policy did not work as planned. Scientific evidence showed that even if conservation and long-term sustainability were prime goals for the policy, fish stocks were dwindling. That led the Commission to ask for a redrafting of the Common Fisheries Policy,284 with the main ideas clearly set out in a paper called “Why do we need a new Common Fisheries Policy”.285 The Council adopted shortly afterwards a new and revised Common Fisheries Policy,286 very much in line with the main thrust put forward by the Commission. The Common Fisheries Policy has never really burdened the EU budget as has been the case for the Common Agricultural Policy, running as it does at a cost of approximately 1 billion Euros only, which corresponds to approximately 1 per cent of the European Union’s total budget. A comparison shows that fisheries amounted to approximately one thousandth of the European Union’s total Gross Domestic Product. The verdict and lessons to be drawn from the endeavours to get a Common Fisheries Policy up and running over more than thirty years of hard work can be summarized like this: •

• •

•

Politically it has been one of the most costly policies in the European Union and is the main explanation for two referenda in Norway which saw a majority of the population turning out to say No to joining the European Union. It was the reason Greenland left the Union in 1985. It has soured relations between member states to a high degree from time to time, for example, between the United Kingdom and Spain. It has, probably with some justification, been accused of circumvention or even outright fraud, thereby supplying ammunition to those saying that the European Union is a cumbersome bureaucracy not even capable of ensuring respect for its own rules. It has struggled to find the right balance between economy and ecology, accused as it is by fishermen for tilting too much towards conservation, and by ecologists for doing the opposite.

Most of these verdicts are negative. The positive verdict is that it has proved possible for the European Union to agree on a Common Fisheries Policy when the Law of the Sea changed, creating exclusive economic zones precisely at a moment when fish stocks were starting to dwindle.

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The hard task for the European Union was to distribute reduced capacity — a fact that the European Union could do nothing to remedy as it was a global phenomenon — among member states in a way which was politically regarded as equitable. In doing this, the European Union must be said to be reasonably successful despite all the other failings, which can rightly be pointed out for everybody to see. It is, after all, a remarkable demonstration of the political solidarity among member states that it has been possible to agree on a Common Fisheries Policy under difficult circumstances, and to keep members states on board while adapting the policy to new and frequently less promising circumstances. The alternative to a Common Fisheries Policy would have been regulation by member states of their respective exclusive economic zones, which would have member states up against one another with dire consequences for the integration, not only in the fisheries sector, but in a larger perspective. Maybe the best thing that can be said about the Common Fisheries Policy is that the alternative would have been worse.

TELECOMMUNICATION Telecommunication is for obvious reasons a sector only recently brought into play, and then primarily in the context of the Single Market, the Lisbon Programme, and the efforts to beef up the European Union’s capability in Information and Communication Technology (ICT). Although the European Union in 2002 and earlier enacted a number of regulatory frameworks, their implementation and interpretation were largely left to national regulators. In some EU member states, national regulators were only recently formed and are still too tightly coupled to the mindset of old incumbent monopolists. The ambition of the Commission is to create a Single European Information Space in the field of electronic communication and media services in 2010. The driving forces are first, that efficient, cost-effective advanced communication services fuel competition and socio-economic growth, and the observation that this market is not yet efficient enough in Europe. It should be highlighted that Europe is by far the largest exporter of telecommunications systems, products, and services. The total market in Europe for electronic communication services alone is estimated at approximately 273 billion Euros,287 by any account, an impressive figure. The instrument chosen is the force of competition and the introduction of an EU regulatory framework instead of the existing national ones.

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This has brought the Commission into direct confrontation with established national regulatory frameworks, starting a genuine battle about the future of European ICT. The scoreboard for European telecommunication is actually positive and encouraging.288 The increased competition in the sector following national and EU efforts to deregulate has produced considerable savings for consumers, who are spending 30 per cent less of their income on telecom services in 2002 than in 1996 despite an almost enormous increase in traffic. Since 2000, the average charge of a three-minute call has fallen by 65 per cent, and a 10-minute call, by 74 per cent. These figures, albeit good ones, may not match productivity gains. In large parts of Europe, there is close to a 100 per cent penetration for telephony and mobile services, with broadband in the leading rank. From 2004 to 2005, investment in the sector rose 6 per cent, reaching 45 billion Euros while those in communication services and related areas (software, consumer devices, value added services) are even higher. European firms hold the No. 1 position in infrastructure sales (Ericsson), and terminals sales (Nokia), the No. 2 position in services (Vodafone) worldwide. A pan-European telecom industry is emerging. Cross-border investment has driven merger and acquisition activity to above 70 billion Euros. Revenue of between 5 per cent and 27 per cent for various operators originates in European countries other than their European home market. Further consolidation is expected in left-behind areas such as consumer devices, as well as operators and value-added services Thanks to champions in several innovative segments, Europe has achieved leading positions in terms of mobile and broadband (xDSL) deployment and exports, far ahead of the United States. This is the background for the decision on 29 June 2006 by the Commission to launch a public consultation on policy options for updating the European Union’s telecommunication rules, which have been in existence since 2002.289 The Commission focuses on three main issues: The first is a more market-based approach to allocate radio spectrum. The size of services using radio spectrum in Europe is estimated at 200 billion Euros. European ICT is already competing for what is becoming a scarce resource. Congestion becomes worse as national regulatory bodies prevent a full-scale European management of the radio spectrum. The Commission proposes to substitute national regulatory bodies with a European spectrum agency. The second is more consistent application of the EU telecom rules. The Commission notes that national regulatory bodies do not follow up on agreed

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EU rules with the same vigour. This constitutes a barrier for stronger competition and furthermore distorts competition in that operators in member states applying stricter rules are at a competitive disadvantage compared with operators in member states with less vigorous implementation. To achieve uniform implementation and regulatory practice, the Commission proposes an independent European telecom operator working together with national regulators, with a structure and organizational build-up similar to the European Central Bank system. The third is a policy of structural separation. The heart of the matter is to separate infrastructure provisions from service provisions. In reality it would mean that a dominant operator could be forced to offer nondiscriminatory services to all operators. Infrastructure is one thing, services offered via the infrastructure is another. This point is particularly interesting. Both the technological evolutions with a persistent capacity and bandwidth glut, and the redistribution of roles in communications service provisioning, speak for a separation of infrastructure and service provisioning. This is the most practical way to allow multiple service providers to compete by regulatory granted access to infrastructure, without endless duplication thereof at high economic and environmental costs. It would allow companies and even individuals to connect to the infrastructure directly without always depending on service operators. In future, each user of services should be able to, as for any other service, select his demand and negotiate an individual tariff for just what is needed. Integrity, dependability, security, and public service interests must however, be preserved by infrastructure providers. The knowledge basis and cost/revenue structures of service providers and infrastructure owners are in any case completely different. The Commission has chosen to tackle national regulators in member states head on by a balanced approach of market forces, competition, and an EU regulatory body. In doing this, the Commission follows in the footsteps of experience gained when implementing the Single Market. The political difference is that when implementing the Single Market, the Commission was not up against well-established and politically supported national bodies, as is the case for the telecom sector in many member states. Those who have over-liberalized the operators, or are inclined to do so, for example, by selling them to capital funds, while maintaining their privileges, may end up having very little quality of service, reduced coverage, dependability, and security. Telecoms, electronics, software, and computer industry suppliers in Europe are also held back by the current situation as regulators implicitly do not

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support the testing and deployment of innovative solutions for commercial and government sectors alike. Deployed solutions for eHealth, eGov, eTransport, as well as the wider use of Mobile banking, cannot be fully used, as long as public operators, which are actually not needed, are put in as imposed intermediaries. The retail industry, as well as the media industry, would also like to benefit from direct relations with their customers, whereas public operators now manage the supplier-customer relationships. It looks like the Commission, without saying so, hopes that market forces will gradually and implicitly open the door to a framework for the telecom sector in Europe, along lines analogous to those proposed. Discrepancies in conditions between member states will benefit member states, industry, and operators offering the best conditions. This effect will trickle through and force more reluctant member states to follow suit. This indirect approach has been seen before, but its eventual success rests on one key assumption, that is, a Commission strong enough to wring the initiative away from member states and ensure compliance to agreed enforceable EU rules. EU R&D funding should also benefit novel and exportable solutions wherever they come from in business, instead of reinforcing the grip by some operators on service creation and provisioning. This is a sore point. Supervision of rules rests with national regulatory bodies, which unfortunately for the Commission, the European consumer, and the European export industries, are the main culprits in the endeavours to prevent a recasting of the European Union’s telecom and ICT sector.

Notes 1. The exact wording of President de Gaulle’s No can be found at http://www. spartacus.schoolnet.co.uk/2WWeuropeunity.htm. The key phrases ran like this: Thereupon Great Britain posed her candidature to the Common Market. She did it after having earlier refused to participate in the communities we are now building, as well as after creating a free trade area with six other States, and, finally, after having — I may well say it, the negotiations held at such length on this subject will be recalled — after having put some pressure on the Six to prevent a real beginning being made in the application of the Common Market. If England asks in turn to enter, but on her own conditions, this poses without doubt to each of the six States, and poses to England, problems of a very great dimension. England in effect is insular, she is maritime, she is linked through her exchanges, her markets, her supply lines to the most diverse and often the most distant countries; she pursues essentially industrial and commercial activities, and only slight agricultural

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ones. She has in all her doings very marked and very original habits and traditions. It was called The Fouchet plan after the French diplomat/politician who drafted it. Ref http://www.ena.lu/europe/success-crisis/draft-treaty-fouchet-plan1961.htm. Report on European Union submitted to the European Council by Mr Leo Tindemans, former Prime Minister of Belgium. It is published in supplement 1/76 to The Bulletin of the European Communities. For a brief summary, see for example http://www.ena.lu/europe/crisis-recovery/report-european-union1975.htm. The Solemn Declaration on the European Union from the meeting in June 1983 of the European Council in Stuttgart can be found at http:// aei.pitt.edu/1396/01/Stuttgart_jun_1983.Pdf look for page 209. Its origin was the so-called Genscher-Colombo plan after the foreign ministers of Germany and Italy respectively, who put the first draft on the table. The British were among the intellectual and political fathers to the Single Market, which became the cornerstone in the Single Act, but were not in favour of treaty amendments, probably realizing, as proved to be the case, that any new treaty would encompass institutional changes and/or pledges in that direction including the words “European Union” and “Economic and Monetary Union”. Apart from the two reports mentioned above, the European Union saw a report called the Dooge Report after its Irish chairman (available at http://aei.pitt.edu/ 997/01/Dooge_final_report.pdf.) The European Parliament drafted its own report with Altiero Spinelli — see Spinelli’s presentation of his plan at http:// www.ellopos.net/politics/spinelli.htm — as the driving force inspired by what was called the Crocodile Club, not the animal but the name of a restaurant! One of the reasons for this conflict is the ambiguity of the institutions and their powers compared with a national bi-cameral parliamentary system. In the European Union the executive branch is not confined to one institution, but divided between the Council and the Commission, and there is no clear definition of the Council as the state’s chamber and the Parliament as the people’s chamber. Of the original six member states, the Netherlands, Belgium, Luxembourg and Italy were steadfast supporters of increased powers to the Commission. Germany was to a certain extent, while France demonstrated reticence, however less and less as years went by. The United Kingdom and Denmark wanted to keep the Commission under tight control, and in some instances, even to curb its powers. Ireland sided with the camp of the six founding member states. Spain and Portugal tended to side with the original six; Greece to side with the United Kingdom and Denmark. This is a broad and superficial description, but basically correct until the mid-1990s. Former Minister of Finance of France and former socialist member of the European Parliament. Held on 7 June and 10 June 1979, increasing the number of seats elected by national parliament from 198 to 410 directly elected members.

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10. Another of the long line of reports preceding the decision to call an intergovernmental conference and amend the treaties in 1985. 11. The Customs Union Issue, published in 1950. 12. The Theory of Customs Unions published in 1955. 13. Since Viners’s and Meade’s path-breaking analysis, economic theory has moved many steps forward and a whole litterature about customs unions, free trade agreements, and preferential agreements has grown up, not only refining the Viner/Meade model, but casting doubt upon many of its conclusions. Jagdish Bhagwati is the foremost economist on trade policy and his books, “Free Trade Today” (Princeton, 2001) and “In Defense of Globalization” (Oxford, 2005) give a good overview. Dean A. DeRosa wrote in 1998 a paper for the World Bank on “Regional Integration Arrangements: Static Economic Theory, Quantitative Findings, and Policy Guidelines”, available on http://www.worldbank.org/html/ dec/Publications/Workpapers/wps2000series/wps2007/wps2007.pdf. 14. This principle is actually the key to understanding many of the extremely complicated mechanisms such as Monetary Compensatory Amounts (MCA) that have been incorporated in the CAP over the years. It will almost always lead to the answer when unable to understand why and how the CAP works. 15. Full name of the European Social Fund (ESF). 16. Corresponding to approx 0.30% of the European Union’s total Gross Domestic Product. 17. A useful overview at the Funds’ financial support can be found at http:// europa.eu.int/comm/regional_policy/intro/working4_en.htm. 18. For an introduction to the Social Fund, see http://europa.eu.int/comm/ employment_social/esf2000/index_en.html. 19. For an introduction to the Regional Fund, see http://europa.eu.int/comm/ regional_policy/funds/prord/prord_en.htm. 20. For an introduction to the financing of the Common Agricultural Policy by the Agricultural Fund, see http://europa.eu.int/scadplus/leg/en/lvb/l60024.htm. 21. http://ec.europa.eu/agriculture/rur/index_en.htm. 22. For an introduction to the Cohesion Fund, see http://europa.eu.int/comm/ regional_policy/funds/procf/cf_en.htm. 23. For an introduction to the European Investment Bank, see http://www.eib. eu.int/. 24. http://www.eib.eu.int/projects/loans/regions/. 25. The vocabulary is not always as stringent as the label “Single Market” and “Internal Market” often used at random in the literature. 26. Judgment of the Court, 20 February 1979, case 120/78, available at http://eurlex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnum doc&lg=en&numdoc=61978J0120. 27. The meeting of the European Council in Copenhagen in December 1982 was the first time the member states recognized the need for reinforcing what was then called the Internal Market.

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28. http://europa.eu.int/comm/off/pdf/1985_0310_f_en.pdf — COM (85) 310. 29. http://europa.eu.int/abc/12lessons/index6_en.htm. 30. Working paper 147, Economics Department, OECD, 1994, “The EC’s Single Market: Implementation, Economic Consequences, Unfinished Business”, available at http://www.oecd.org/dataoecd/11/37/34336359.pdf 31. For a brief summary, see IMF Survey, 7 March 2006, Vol. 25, No. 6, p. 92. 32. IMF Working Paper No. 05/191 “Product Market Regulation and the Benefits of Wage Moderation” by Marcello M. Estevao, available at http://www.imf.org/ external/pubs/cat/longres.cfm?sk=18576.0. 33. “The Internal Market — Ten Years without Frontiers”, available at http:// www.cijdelors.pt/Newsletters/Mercado/20Interno/workingdoc_en.pdf. 34. A list of the EU anti-trust cases can be found at http://europa.eu.int/comm/ competition/antitrust/cases/. 35. A very useful introduction to the anti-trust policy of the European Union can be found at http://europa.eu.int/comm/competition/index_en.html. 36. Full text (Article 85 in the original Treaty of Rome): The following shall be prohibited as incompatible with the Common Market; all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect, the prevention, restriction, or distortion of competition within the Common Market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void. 3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of: — any agreement or category of agreements between undertakings; — any decision or category of decisions by associations of undertakings; — any concerted practice or category of concerted practices; which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

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37. Full text (Article 86 in the original Treaty of Rome): Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or unfair trading conditions;). This is for example the case for predatory pricing aiming at eliminating competitors from the market. (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 38. Another example is fines imposed on member states inside EUROland that do not respect the rules governing public sector deficits. 39. http://news.bbc.co.uk/2/hi/business/4713722.stm. 40. http://europa.eu.int/rapid/pressReleasesAction.do?reference=SPEECH/03/ 489&format=HTML&aged=0&language=EN&guiLanguage=en. 41. Paragraph 49 in the annual report of 2004, see http://www.eu-oplysningen.dk/ upload/application/pdf/0b72eff3/2005_0805.pdf. 42. European Commission press release IP/06/1647 of 29 November 2006, available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/06/ 1647&format=HTML&aged=0&language=EN&guiLanguage=en. 43. http://europa.eu.int/comm/competition/mergers/cases/decisions/m2220_en.pdf. 44. http://www.crmbuyer.com/story/37612.html. 45. See for example http://www.heise.de/english/newsticker/news/69750 and http:/ /www.internetnews.com/bus-news/article.php/3327801. 46. For a time line, see http://www.informationweek.com/windows/showArticle. jhtml?articleID=190302510 47. Press release IP/04 382 of March 2004, available at http://europa.eu.int/rapid/ pressReleasesAction.do?reference=IP/04/382&format=HTML&aged=0& language=en&guiLanguage=en. 48. Press release 57/06 of 12 July 2006, available at http://www.eurunion.org/ News/press/2006/20060057.htm. 49. The Commission invoked Article 82 in the Treaties saying that abuse of a dominant position is prohibited as incompatible with the Common Market. (In the original Treaty of Rome Article 86). 50. Article 87 (Article 92 in the original Treaty) and Article 88 (Article 93 in the original Treaty). 51. A useful overview is found at http://europa.eu.int/comm/competition/state_aid/ overview/. 52. http://europa.eu.int/comm/competition/state_aid/scoreboard/key_ indicators.html.

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53. The European Union with fifteen member states — before the enlargement with the Central and Eastern European countries plus Malta and Cyprus. 54. This was labelled the Gold Exchange Standard, distinguishing it from the Gold Standard, where each country’s currency could be changed into gold. 55. From 1945 to the currency problems that started around 1970, the only major exchange rate adjustments were two depreciations of the Pound Sterling vis-àvis the U.S. dollar (1949 from US$4.03 to US$2.80 for £1; and 1967 from US$2.80 to US$2.40 for £1). 56. http://europa.eu.int/comm/economy_finance/emu_history/documentation/ chapter2/19690212en015coordineconpoli.pdf. 57. Later Prime Minister of France from 1976 to 1981, and presidential candidate in 1988, coming in third after François Mitterrand (winner) and Jacques Chirac as runner-up. 58. For a good and lucid description of the EPU, see Scammell, W.M., International Monetary Policy, pp. 174–88 (London, 1965). 59. Full text of the conclusions see http://europa.eu.int/comm/economy_finance/ euro/origins/hague_declaration_en.pdf. 60. The same dilemma faced the negotiators in 1944 when sketching the post WW II international monetary system at their meeting at Bretton Woods. Debtor countries are traditionally in favour of credit creation. Creditor countries prefer credit transfer. The difference is that credit creation increases international liquidity, giving room for expansionary economic policies, while credit transfer limits the size of international liquidity. 61. See for example http://www.econlib.org/library/enc/PhillipsCurve.html. 62. Full text see http://europa.eu.int/comm/economy_finance/euro/origins/ werner_en.pdf. 63. Negotiations started on 30 June 1970, and were effectively concluded a year later on 23 June 1971. 64. In 1968 the storm had already brewed with the result that the gold market was divided into an official market with the price of US$35 per ounce of gold, and an unofficial one where the price was determined by market forces. The price on the unofficial market rose sharply as an omen of what was to come. Formally the peg of the U.S. dollar to gold was abandoned in February 1973. 65. In technical terms it was plus/minus 2.25 per cent so that if one currency rose, and another one fell, and both of them with the maximum of 2.25 per cent, it would amount to a change of 4.5 per cent vis-à-vis each other. 66. The four countries having ended enlargement negotiations (the United Kingdom, Ireland, Norway and Denmark), joined. 67. It was only a few years after Ireland had left the link to the Pound Sterling. 68. Sweden and Norway were for a while associated with the system, but left. 69. Former Chancellor of the Exchequer in the United Kingdom and President of the Commission from 1977 to 1981. 70. http://aei.pitt.edu/1454/01/Bremen_July_1978.pdf.

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71. http://europa.eu.int/comm/economy_finance/euro/origins/origins_3_en.htm. 72. When a currency started to fall, the central bank had to buy it and sell foreign currencies. In the first phase foreign currencies were available from the reserves, but as speculation gained speed, the reserves quickly ran out, forcing borrowing from other central banks. 73. See for example http://historical-debates.oireachtas.ie/D/0315/ D.0315.197906200009.html. 74. The United Kingdom joined in autumn 1990 to leave again at the end of September 1992. 75. http://www.europarl.eu.int/summits/hannover/ha_en.pdf (paragraph 5). 76. It was actually mentioned in the conclusion from the summit meeting in Paris when the political leaders from the original six and three new member states (the United Kingdom, Ireland, and Denmark) met from 19–20 October 1972. 77. A summary of the report by the European Central Bank (ECB) and subsequent decision by member states can be found at http://www.ecb.int/ecb/history/ emu/html/index.en.html. The Delors report itself is called Report on Economic and Monetary Union in the European Community, published by the Office for Official Publications of the European Communities, Luxembourg, 1989 ISBN 92-826-0655-4. 78. http://www.eurotreaties.com/maastrichtext.html. 79. French President Mitterrand wanted a date to prevent the process from being stopped along the road. Bundeskanzler Kohl likewise wanted a fixed date showing the decision was irrevocable to prevent opposition inside Germany forcing him out of the agreement Ref. Hoffmeyer, Erik (2005) in the Bibliography. 80. The conversion rate of the national currencies to the Euro was made arithmetically based on the rates vis-à-vis one another operated in the EMS. The rate between the U.S. dollar and Euro on 1 January 1999, was also calculated arithmetically to US$1.1789 per Euro. 81. The difference between a common currency and a single currency is that a common currency, in principle, can co-exist with national currencies, provided that the exchange rate is irrevocably fixed. A single currency means that no other currency is recognized as valid currency. In principle, an economic and monetary union does not require a single currency, but only a common currency. Belgium and Luxembourg constituted, prior to the European Union’s economic and monetary union, such a union, each having its national currency. 82. Article 3 A in the Treaty about The European Community before entry into force of the Treaty of Nice. 83. No change in number of the Article. 84. European System of Central Banks. 85. Article 2 reads like this: “The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing the common policies or activities referred to in Articles 3 and 3a, to promote throughout the Community a harmonious and balanced development of

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88. 89. 90. 91. 92. 93. 94. 95.

96. 97. 98.

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economic activities, sustainable and non-inflationary growth respecting the environment, a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States. The legal foundation of the German Central Bank, the Bundesbank. For a brief outline of the stability pact, the German initiative, and the attitude of other member states, see http://www.iht.com/articles/1996/11/27/ emu.t_7.php. Formally, the Stability Pact was agreed by the European Union in 1997 see http://www.eurotreaties.com/emupact.html. Full name: Stability and Growth Pact, see http://europa.eu.int/comm/ economy_finance/about/activities/sgp/sgp_en.htm. http://europa.eu.int/scadplus/leg/en/cha/c11318.htm. http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ec/54315.pdf. http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ec/kolnen.htm. Excerpts from Article 5, 6 and 7 in the conclusions, see http://ue.eu.int/ ueDocs/cms_Data/docs/pressData/en/ec/kolnen.htm. Exchange Rate Mechanism, an integral part of EMS. Formally these countries did not fully participate in the system, but had linked their currencies to the ECU (the forerunner for the Euro). See for example International Herald Tribune, 23 June 1993, “Neighbor Members Get The Breathing Room to Lower Interest Rates: Mark Ends Its Reign as King of EC Currencies”, available at http://www.iht.com/articles/1993/06/23/ ec_6.php and 26 June 1993, “ECONOMIC SCENE: An Anchor Begins to Drag As the Tide Tests the Mark”, available at http://www.iht.com/articles/ 1993/06/26/anchor.php. Supplemented by Council Regulation 1466/97. See above-mentioned Council Regulation. The Stability and Growth Pact is not formally a pact, but a decision by the European Council (16–17 June 1997 in Amsterdam, see http://www.consilium. europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/032a0006.htm) mapped out in two Council Resolutions published in the official journal C 236 of 2 August 1997 and L 209 2 August 1997. Denmark’s Nationalbank publishes annually a record of the developments of the Stability ad Growth Pact in Denmark’s Nationalbank Monetary Review, a quarterly. http://www.nationalbanken.dk/ DNUK/Publications.nsf/Publikationer.HTML?openview&RestrictTo Category=Monetary/20Review. http://europa.eu/scadplus/leg/en/lvb/l25084.htm. For an overview of how ECB‘s inflation target and strategies to achieve the goal were reached, see “Navigating Uncharted Waters, Finance&Development”, December 2006 — an interview with ECB’s Chief Economist Otmar Issing. Available at www.imf.org/fandd. The broad M3 indicator — according to definition by the U.S. Federal Reserve System — was chosen.

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102. Interview with Otmar Issing, ref. note 88. 103. OECD, Economic Outlook, statistical annex, bi-annual publication, Paris. Available at http://www.oecd.org/document/61/0,2340,en_2649_201185_248390 1_1_1_1_1,00.html. 104. Speech by Dr Willem F. Duisenberg, President of the European Central Bank, on the occasion of the International Imaging Industry Summit, in Schloss Bensberg, on 24 September 2002, available at http://www.ecb.int/press/key/ date/2002/html/sp020924.en.html. 105. OECD, Economic Outlook, statistical annex, half-yearly publication, Paris. 106. In particular, among those having made sacrifices to respect the 3% ceiling. 107. See, for example, International Herald Tribune, 26 November 2003. http:// www.iht.com/articles/2003/11/26/euro_ed3_.php. 108. We speak here of legal obligations flowing from treaties, legal acts or decisions by The Court of Justice. Another matter is whether an economic and monetary union and/or globalization pushes member states towards some kind of harmonization i.e. whether member states by mutual competition are forced to reduce differences in taxation. 109. Økonomiministriet og Finansministeriet: Danmark og Euroen, København 2000. 110. This is, for example, the case for banks after approval in 1988 of “Second Bankdirective”, Directive 89/646/EEC of 15/12/1989 — EC Official Journal N.386 of 30/12/1989. Activities of the same bank in another member state can be under the supervision by the authorities of its homeland or the host country, depending on what kind of activity we speak about. 111. I choose Denmark as an example for two reasons. (1) That is the country I know best. (2) Since it is small, you would expect mobility and adjustment to be faster and smoother than in bigger nation states such as Germany or France. 112. Growth disparity in favour of the United States was for 2000: –0.2, 2001: –0.7, 2002: 0.7, 2003: 1.7, 2004: 1.9, 2005: 1.8, 2006: 0.7. IMF World Economic Outlook, April 2007, Statistical Annex, available at http://www.imf.org/external/ pubs/ft/weo/2007/01/pdf/statappx.pdf. 113. 1999 Nobel Laureate, who in 1961, put forward his “A Theory of Optimum Currency Areas” in an article published in The American Economic Review, followed by a long list of subsequent works, see http://www.robertmundell.net/ books/main.asp?Title=A/20Theory/20of/20Optimum/20Currency/20Areas. 114. The lesson learned by France in 1983–1984 after the newly elected President Mitterrand had to abandon an economic policy out of tune with the German one. 115. Two of the most well known early participants in the discussion are Peter B. Kenen and Ronald McKinnon. 116. Currency credits had been an element of the monetary cooperation for some time, including ultra short credits, but the political will of Germany to provide assistance grew considerably with its increased confidence in France’s economic policy.

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117. The Economist, 19 November 2005, “Seeing Europe the Right Way Up”, p. 71. 118. Ahead of his time, Interview with Robert Mundell in “Finance&Development”, September 2006, available at http://www.imf.org/external/pubs/ft/fandd/2006/ 09/people.htm. 119. Point made by Paul Krugman in his article, “Age of Anxiety”, published in the New York Times, 28 November 2005 (available at http://www.truthout.org/ docs_2005/112805M.shtml ) referring to Jacob Hacker of Yale, who points this out in his book, The Divided Welfare State (2002). 120. News Bulletin, 17 January 2006. See http://www.conference-board.org/ UTILITIES/pressDetail.cfm?press_ID=2799. 121. The ten new member states increased productivity from 4.1% in 2004 to 6.3% in 2005. 122. COM (2002) 14 available at http://66.102.7.104/search?q=cache: 97CG191G_44J:europa.eu.int/comm/barcelona_council/14_en.pdf+the+ lisbon+strategy+making+change+happen&hl=en&gl=sg&ct=clnk&cd=1. 123. EEC Commission (1990), “One Market, One Money: An Evaluation of the Potential Benefits and Costs of Forming an Economic and Monetary Union”, European Economy, no. 44, October. 124. OECD, Economic Outlook, a semi-annual publication, Table 18. 125. Reference is made to the discussion under point G above. 126. Jeffrey A. Frankel & Andrew K. Rose, “The Endogeneity of the Optimum Currency Area Criteria”, Economic Journal, July 1998. For a press release with summary, see e.g. http://72.14.207.104/search?q=cache:9qOo34dNlO4J: faculty.haas.berkeley.edu/arose/ocapr.pdf+the+endogeneity+of+the+optimum+ currency+area+criteria&hl=en&gl=sg&ct=clnk&cd=4. 127. Altavilla, Carlo: Do EMU Members Share the same Business Cycle?, Journal of Common Market Studies, Volume 42, December 2004. For an abstract, see http://www.blackwell-synergy.com/doi/abs/10.1111/j.0021-9886.2004.00533.x. 128. The Grubel-Lloyd index measures the degree of a country’s intra-industry trade with other countries. An explanation of the Grubel-Lloyd index can be found in Denmark’s Nationalbank, Monetary Review, 2nd Quarter 2004, p. 38, available at http://www.nationalbanken.dk/C1256BE9004F6416/side/Monetary_ Review_2004_2_Quarter/$file/MON2_04_web.pdf. 129. J. McCallum, “National Borders Matter: Canada-US. Regional Trade Patterns”, American Economic Review, Vol. 83, No. 3, 1995. 130. For a definition of the gravity model, see i.e. Denmark’s Nationalbank, Monetary Review, 2nd Quarter, 2004, p. 38, available at http://www.nationalbanken.dk/ C1256BE9004F6416/side/Monetary_Review_2004_2_Quarter/$file/ MON2_04_web.pdf. 131. Andrew K. Rose: One Money, One Market: The Effect of Common Currencies on Trade, Economic Policy 30 (2000). See also Andrew K. Rose website with references, http://faculty.haas.berkeley.edu/arose/RecRes.htm#CUTrade, http://www.imf.org/external/pubs/ft/issues/issues17/index.htm.

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132. Denmark’s Nationalbank, Monetary Review, 2nd Quarter 2004, p. 38, available at http://www.nationalbanken.dk/C1256BE9004F6416/side/ Monetary_Review_2004_2_Quarter/$file/MON2_04_web.pdf. 133. M. R. Pakko and J. W. Howard, “Reconsidering the Trade-Creating Effects of a Currency Union”, Review, Federal Reserve Bank of St. Louis, Vol. 83, No. 5. 134. Denmark’s Nationalbank, Monetary Review, 2nd Quarter 2004, p. 38, available at http://www.nationalbanken.dk/C1256BE9004F6416/side/Monetary_ Review_2004_2_Quarter/$file/MON2_04_web.pdf. 135. S. De Nardis and E. Vicarelli, “Currency Unions and Trade: The Special Case of EMU”, Review of World Economics, Vol. 139, No. 4, 2003. 136. M. J. G. Bun and F.J. G. M. Klaasen, “Has the EURO Increased Trade?” Tinbergen Institute Discussion Paper, No 108/2, 2002. 137. The European Commission, “The Impact of EMU on Trade and FDI”, Chapter 2 in Quarterly Report on the EURO Area, No. 3. 138. A. Micco, E. Stein and F. G. Ordonez, “The Currency Union Effect on Trade: Early Evidence from EMU”, Economic Policy, No. 37. 139. D. Barr, F. Breedon and D. Miles, “Life on the Outside”, Economic Policy, No. 37. 140. Deutsche Bundesbank, Monthly Report, October 2003, p. 15, available at http://www.bundesbank.de/download/volkswirtschaft/monatsberichte/2003/ 200310mb_e.pdf. 141. Richard Baldwin, “In or Out: Does it Matter? An Evidence-based Analysis of the Trade Effects of the Euro”, Centre for Economic Policy Research, London, 2006. 142. J. A. Frankel and A. K. Rose, “An Estimate of the Effect of Currency Unions on Trade and Output”, Quarterly Journal of Economics, Vol. 117, no. 2, 2002. 143. International Monetary Fund, Economic Issues Number 17, February 1999 available at http://www.imf.org/external/pubs/ft/issues/issues17/index.htm. 144. Stiglitz, J. E, World Development, Oxford, 2000, the relevant sector is available at http://www2.gsb.columbia.edu/ipd/sept/CML_JES_Instability.pdf. 145. See e.g. MatÌas Braun & Claudio Raddatz, “Trade Liberalization and the Politics of the Financial Development”, Working Paper 04-3 Federal Reserve Bank of Boston. It can be downloaded from http://ideas.repec.org/p/fip/fedbwp/ 04-3.html. 146. Peter Kenen, Senior Fellow at the Council of Foreign Relations, in an interview with IMF Survey, 30 October 2006, Vol. 35, No. 20 available at http:// www.imf.org/external/pubs/ft/survey/2006/103006.pdf. 147. A good overview of the Euro as a reserve currency is found in Deutsche Bank Research, 8 September 2005, available at reserve http://www.dbresearch.com/ PROD/DBR_INTERNET_EN-PROD/PROD0000000000191273.pdf. See also ECB’s (European Central Bank) annual report http://www.ecb.int/pub/ annual/html/index.en.html and Euro Money Market Survey published by ECBhttp://www.ecb.int/pub/pub/ecb/html/index.en.html.

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148. Russia is a member of G-7, but does not normally participate in meetings among ministers responsible for economic policy (Economic and/or Finance Ministers). 149. About the Cotonou Agreement, see http://europa.eu.int/comm/development/ body/cotonou/index_en.htm 150. The banana case is also illustrative of how member states form alliances and what can force changes in positions. This will be briefly dealt with in Chapter VIII. 151. A good account of the banana case can be found at http://www.bananalink. org.uk/trade_war/trade_war_main1.htm. 152. http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/06/256& format=HTML&aged=0&language=EN&guiLanguage=en. 153. Known as Maghreb, even if geographically this term stretches from the Atlantic Ocean to the Egyptian desert encompassing Mauritania, Morocco, Algeria, Tunisia, and Libya. 154. Maghreb in Arabic means West, Machrek means East. 155. Formally known as “The Euro-Mediterranean Conference”, held in Barcelona on 27–28 November 1995, marking the start of “The Euro-Mediterranean Partnership”. 156. The Barcelona process has its own website http://www.euromedbarcelona.org/ Home_EN.htm 157. http://www.euromedbarcelona.org/EN/ProcesoBarcelona/QueEsElProceso/ index.html. 158. A good, comprehensive survey is found in Federica Bicchi, “The European Origins of Euro-Mediterranean Practices”, Paper 040612, 2004, available at http://72.14.203.104/search?q=cache:J6WHM3bg-5MJ:repositories.cdlib.org/ c g i / v i e w c o n t e n t . c g i / 3 Fa r t i c l e / 3 D 1 0 4 4 / 2 6 c o n t e x t / 3 D i e s + e u + mediterranean+policy+maghreb+machrek&hl=en&gl=sg&ct=clnk&cd=19. 159. It is often forgotten that at the same time a proposal was put forward, not by the governments, but by the Assembly of the ECSC for a political community based on a two-chamber parliament directly elected by the populations in the six founding nation states of the European Union. It also fell. 160. Ratification was not required as it was not an international treaty, but an “understanding”. 161. Full text available at http://aei.pitt.edu/4543/. 162. Original composition, since changed, see later in the text. See point B. 163. An overview can be found at http://europa.eu.int/scadplus/leg/en/lvb/ r00001.htm and http://europa.eu.int/comm/external_relations/cfsp/intro/. 164. WEU was formed in 1948 as a military alliance between the United Kingdom, the three Benelux countries, and France. In 1954 Germany and Italy joined. With the establishment of NATO in 1949, WEU lost much of its appeal until around 1990 when the idea of an European defence resurfaced. 165. Official journal of European Communities L157/1, 24 June 1999, available at http://europa.eu.int/comm/external_relations/ceeca/com_strat/russia_99.pdf.

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166. Official journal of European Communities L1331/1, 23 December 1999, available at http://europa.eu.int/comm/external_relations/ceeca/com_strat/ ukraine_99.pdf. 167. Official journal of European Communities L183/5, 22 July 2000, available at http://europa.eu.int/comm/external_relations/euromed/common_ strategy_med_en.pdf. 168. h t t p : / / e u r o p a . e u . i n t / e u r - l e x / p r i / e n / o j / d a t / 2 0 0 4 / l _ 1 2 5 / l_12520040428en00610076.pdf. 169. http://ue.eu.int/uedocs/cmsUpload/l_30220031120en00340036.pdf. 170. http://www.sussex.ac.uk/Units/spru/hsp/1999-0517/20AHG/20CP.pdf. 171. http://europa.eu.int/comm/external_relations/mepp/docs_links.htm. 172. http://europa.eu.int/eur-lex/lex/LexUriServ/site/en/oj/2006/l_071/ l_07120060310en00570057.pdf. 173. The fact that the Special Representatives work under the supervision of the High Representative illustrates that foreign and security policy does not fall under supranationality, which would mobilize the Commission, but is still intergovernmental in character. 174. For a description of how the special representatives work, what they are doing, and who they are, see http://www.consilium.europa.eu/cms3_fo/ showPage.asp?id=263&lang=EN and http://www.consilium.europa.eu/uedocs/ cmsUpload/EUSRs-REV_Jan07.pdf. 175. Communiqué de presse 2469 Ëme session du Conseil, version provisoire available at http://www.eu2005.lu/en/actualites/conseil/2005/03/16conclusionscagre/ 84199.pdf, or go directly to http://www.eu2005.lu/en/actualites/conseil/2005/ 03/16conclusionscagre/cddh.pdf. 176. The United Kingdom and Ireland of the original fifteen before enlargements in 2004 and 2007. All the twelve new member states are on their way in, depending on technical adjustments and improvements. 177. Here we speak about persons moving for reasons other than to work in another member state. The freedom to move to work is enshrined in the original Treaty of Rome of 1958, and the Single Act of 1987, as one of the four freedoms — goods, services, persons, and capital. 178. The Treaty of Amsterdam transferred jurisdiction from intergovernmental cooperation to supranationality for the first groups of items. 179. For a good overview of the European Union’s plans, see http://europa.eu.int/ comm/justice_home/fsj/asylum/fsj_asylum_intro_en.htm. 180. h t t p : / / e u r o p a . e u . i n t / c o m m / j u s t i c e _ h o m e / f u n d i n g / r e f u g e e / funding_refugee_en.htm. 181. http://europa.eu.int/comm/europeaid/projects/eidhr/calls-for-proposals/ cfp2004-aeneas-guidelines_en.pdf. 182. http://europa.eu.int/scadplus/leg/en/lvb/l33081.htm. 183. Green Paper on “An EU Approach to Managing Economic Migration”, COM (2004) 811 Final, 11 January 2005, available at http://ec.europa.eu/justice_home/ doc_centre/immigration/work/doc/com_2004_811_en.pdf.

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184. Council Directive 2003/86/EC published in Official Journal L251/12 of 3 October 2003, available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/ l_251/l_25120031003en00120018.pdf. 185. http://www.belgium.iom.int/StopConference/Conference/20Papers/ brudeclaration.pdf. 186. OECD Observer, October 1999, available at http://www.oecdobserver.org/news/ fullstory.php?aid=63. 187. An overview with references can be found at http://europa.eu.int/comm/ internal_market/company/financial-crime/index_en.htm. 188. The latest version adopted in 2005 is available at http://europa.eu.int/eur-lex/ lex/LexUriServ/LexUriServ.do?uri=CELEX:32005L0060:EN:NOT. 189. http://en.wikipedia.org/wiki/Operation_White_Whale. 190. http://www.europol.eu.int/. 191. The Schengen system collects data for people entering EU countries and operates a common passport control system allowing free movement inside the area. 192. http://www.eurojust.eu.int/. 193. http://europa.eu.int/comm/justice_home/funding/agis/funding_agis_en.htm. 194. h t t p : / / e c . e u r o p a . e u / j u s t i c e _ h o m e / f s j / c r i m i n a l / e x t r a d i t i o n / fsj_criminal_extradition_en.htm. 195. The idea of a “People’s Europe” gave birth to a report submitted in 1985 named “The Andonnino Report” after its chairman. It proposed, among other things: simplification of border crossing, increasing duty-free allowances, reciprocal recognition of diplomas and professional qualifications, and giving rights to those living abroad to participate in local and European elections in their country of residence. The report is printed in the Bulletin of the European Communities, supplement 7/85, and available at http://aei.pitt.edu/992/01/ andonnino_report_peoples_europe.pdf. 196. http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/06/ 179&format=HTML&aged=1&language=EN&guiLanguage=en. 197. Cheap fares on railway systems around Europe, opening the door for young Europeans to travel inside Europe. 198. In the United Kingdom, tuition fees for EU citizens are the same as for British citizens, while considerably higher for non-EU citizens. 199. Full text see http://www.auswaertiges-amt.de/www/en/willkommen/ einreisebestimmungen/schengen_html. 200. For permanent residence, such as to work or study, a national visa is still required. 201. This happened with the Treaty of Amsterdam coming into force on 1 May 1999. 202. One of the reasons for this is a Nordic Convention in 1957, allowing citizens to cross borders without showing passports. That agreement could only be maintained by drawing the non-member Nordic countries into the Schengen agreement.

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203. In the traditional Swiss way, a referendum was held before ratification could be finalized. A majority of the Swiss voted Yes barely a few weeks after a majority of the voters in France and the Netherlands had rejected the proposed Constitution. 204. With these three non-member states in the Schengen, twenty-six European countries will operate without border controls. 205. To symbolize the political importance of this chapter, the Commission has a special website exclusively dealing with Growth and Jobs, see http:// www.ec.europa.eu/growthandjobs/index_en.htm. 206. A good definition and description of these items can be found at the following two websites: http://cordis.europa.eu/era/knowreg_faq.htm. http://ec.europa.eu/ education/policies/educ/bologna/bologna_en.html. 207. Presidency Conclusions, Barcelona European Council, 15 and 16 March 2002, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/ en/ec/71025.pdf. 208. http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 72921.pdf. 209. http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 00100-r1.en0.htm. 210. http://ec.europa.eu/invest-in-research/index_en.htm. 211. Com (2006) 30, available at http://www.ec.europa.eu/growthandjobs/pdf/ illustrated-version_en.pdf and for a list of policies and measures taken by member states in pursuit of the objectives, see http://www.ec.europa.eu/ growthandjobs/pdf/2006_annual_report_appendix_en.pdf. 212. COM (2000) 412 Final. 213. http://ec.europa.eu/internal_market/indprop/patent/index_en.htm. 214. http://www.european-patent-office.org/legal/epc/e/ma1.html. 215. http://ec.europa.eu/internal_market/indprop/docs/patent/2004-05-faq_en.pdf. 216. See for example http://en.wikipedia.org/wiki/United_States_patent_law. 217. http://ec.europa.eu/education/policies/educ/eit/index_en.html. 218. http://www.iue.it/. 219. The Lisbon Review, 2004, An Assessment of Policies and Reforms in Europe, World Economic Forum, available at http://www.weforum.org/pdf/Gcr/ LisbonReview/Lisbon_Review_2004.pdf. 220. http://cordis.europa.eu/esprit/src/srchhelp.htm#phase. 221. Memorandum from the Commission of the European Communities, COM (85) 350 of 25 June 1985, available at http://aei.pitt.edu/6350/01/ 003627_1.pdf. 222. http://ec.europa.eu/research/fp6/index_en.cfm?p=0. 223. COM (2005) 119 Final available at http://eur-lex.europa.eu/LexUriServ/site/ en/com/2005/com2005_0119en01.pdf. 224. For a good, short description see http://www.bit.ac.at/7RP/doks/050406_The/ 20Seventh/20Framework/20Programme.doc.

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225. European placements for pre- and post-doctoral researchers, usually up to the age of 35, and for experienced researchers. 226. http://ec.europa.eu/research/consultations/index_en.html. 227. An introduction to the European Research Council (ERC) with links to more concrete texts can be found at http://ec.europa.eu/research/future/basic_research/ index_en.html. 228. Council of the European Union, 19 December 2006, Doc 15915/05. Available at http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/misc/87677.pdf. 229. The Commission’s original proposal asked for 1,025 billion Euros corresponding to 1.26% of the EU Gross Domestic Product. 230. http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/01/ 1630&format=HTML&aged=0&language=EN&guiLanguage=en. The Commission refers to http://ec.europa.eu/enterprise/enterprise_policy/ competitiveness/index_en.htm, with further references to documents about European performance in competitiveness and innovation. 231. Communication from the Commission, European Benchmarks in Education and Training: Follow-up to the Lisbon European Council, COM 2002 (629 of 20 November 2002), available at http://ec.europa.eu/education/policies/2010/ doc/bench_ed_trai_en.pdf. 232. http://ec.europa.eu/education/programmes/socrates/erasmus/what_en.html. 233. http://ec.europa.eu/education/programmes/socrates/erasmus/erasmus_en.html. 234. Erasmus includes some non-member European countries. 235. http://www.coleurop.be/. 236. http://ec.europa.eu/education/copenhagen/copenahagen_declaration_en.pdf. 237. http://ec.europa.eu/education/programmes/newprog/index_en.html. 238. COM (94) 659 of 23 February 1995. 239. Com (2006) 105 Final of 8 March 2006, available at http://ec.europa.eu/ energy/green-paper-energy/doc/2006_03_08_gp_document_en.pdf. 240. In the beginning of 2007, the Commission forwarded a new communication “An Energy Policy for Europe”, COM (2007) 1 of 10 January 2007, available at http://ec.europa.eu/energy/energy_policy/doc/01_energy_policy_for_ europe_en.pdf. 241. http://www.eia.doe.gov/cneaf/nuclear/page/nuc_generation/gensum2.html. 242. Commission Communication COM (2003) 262/final2 of 26 May 2003, available at http://europa.eu.int/eur-lex/en/com/pdf/2003/com2003_0262en01.pdf. 243. http://news.bbc.co.uk/2/hi/europe/6433503.stm and http://cordis.europa.eu/ fifth/src/ms-uk.htm. 244. Article 3 f, in the Treaty of Rome and in the updated Treaties (Treaty of Nice). 245. Article 74–84 in the Treaty of Rome, now Article 70–80 in the updated Treaties (Treaty of Nice). 246. The European Parliament invoked Article 175(Article 232 in the updated Treaties [Treaty of Nice]). “Should the European Parliament, the Council or the Commission, in infringement of this Treaty, fail to act, the Member States and

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247.

248. 249. 250.

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252. 253.

254. 255.

256. 257.

258.

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the other institutions of the Community may bring an action before the Court of Justice to have the infringement established”. Case 13/83 of 22 May 1985, available at http://eur-lex.europa.eu/smartapi/ cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc= 61983J0013. Article 84 in the Treaty of Rome, now Article 80 in the updated Treaties (Treaty of Nice). Council Regulation 3356/91. Official Journal L 318/1 of 20 November 1991. Council Regulation 3118/93 of 25 October 1993. Official Journal L 279 of 12 November 1993 available at http://europa.eu.int/smartapi/cgi/sga_doc?smart api!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=31993R3118&model= guichett. The latest ruling is the so-called Altmark case C-28/00 of 24 July 2003. Press release 64/03 from the European Court of Justice, available at http:// curia.europa.eu/en/actu/communiques/cp03/aff/cp0364en.htm. Article 92 in the Treaty of Rome, now Article 87 in the updated Treaties (Treaty of Nice). Commission Communication COM 2001 (370) of 12 September 2001 — not published in Official Journal — available at http://ec.europa.eu/comm/ energy_transport/library/lb_com_2001_0370_en.pdf. The European Commission, Summaries of Legislation, Transport, available at http://europa.eu/scadplus/leg/en/lvb/l24040.htm. Council Regulation 2004/51 of 29 April 2004. Official Journal L 220 of 21 June 2004, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri=CELEX:32004L0051R(01):EN:HTML. Commission Communication (2004)140 of 3 March 2004, available at http://ec.europa.eu/transport/rail/package2003/doc/com140-en.pdf. Council of the European Union, Press Release 10046/06 (presse 167), available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/trans/ 89954.pdf. A package of four Council Regulations. Official Journal L 96 of 31 March 2004, available at http://europa.eu/eur-lex/en/archive/2004/l_09620040331en. html. The United Kingdom Parliament, Select Committee on European Union, Fourteenth Report, Chapter 3, available at http://www.publications.parliament. uk/pa/ld200001/ldselect/ldeucom/79/7905.htm Press Release IP/04/515 of 21 April 2004, available at http://europa.eu.int/ rapid/pressReleasesAction.do?reference=IP/04/515&format=HTML&aged= 1&language=EN&guiLanguage=en. Commission Communication Com (2006) 314 of 22 June 2006, available at http://ec.europa.eu/transport/transport_policy_review/doc/2006_transport_ policy_review_en.pdf. David Kernohan, “Integrating Europe’s Transport System: Practical Proposals

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264. 265. 266. 267. 268.

269. 270. 271. 272. 273.

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for the Mid-Term Review of the Transport”, White Paper, CEPS task force reports (2006). EPC working paper No. 16 (2003), twelve prescriptions for a European Sustainability Policy, available at http://www.theepc.be/TEWN/pdf/ 607050276_EPC/20Working/20Paper/2016/2012/20Prescriptions/20for/20a/ 20European/20Sustainable/20Mobility/20Policy.pdf. For a description, see Wikipedia http://en.wikipedia.org/wiki/Galileo_ positioning_system. Commission Communication SEC (72) 666 of 22 March 1972, available at http://aei.pitt.edu/4647/01/002302_1.pdf. P. 7 op. cit. Paragraph 8 of the communiqué — the communiqué, available at http:// aei.pitt.edu/1919/02/paris_1972_communique.pdf. Case 92/79 of 18 March 1980, available at http://eur-lex.europa.eu/smartapi/ cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc= 61979J0092. Article 2 in the Single Act. Article 3 k, in the Single Act. Article 130R–130T in the Single Act, now Articles 174–176, as slightly amended in the updated treaties (Treaty of Nice). An overview of the European Union’s activities can be found at http://europa.eu/ scadplus/leg/en/lvb/l28066.htm “The European Environment, State and Outlook”, published by the European Environmental Agency; see the report for 2005 p. 19, and chapters 9 and 10, available at http://reports.eea.europa.eu/state_of_environment_report_2005_1/ en/SOER2005_all.pdf. The Report is the most thorough analysis of the state of the environment in the European Union and contains 566 pages packed with information. Edie News Centre, http://www.edie.net/news/news_story.asp?id=5450. G. Dowell, S. Hart and B. Yeung, “Do Global Corporate Environmental Standards Create or Destroy Market Values?”, Management Science, Vol. 46, pp. 1059–74. An extract is available at http://www.socialinvest.org/areas/research/ Moskowitz/2001_summary.pdf. Figures based on “Environmental Business International 1999” (a synthesis is available on the net http://dsp-psd.pwgsc.gc.ca/Collection/C2-540-2000E.pdf). Article 38 in the Treaty of Rome, now Article 32 in the updated Treaties (Treaty of Nice). The Mediterranean constitutes a special area with regard to the Common Fisheries Policy. Decisions concerning market conditions (e.g. prices) and structural policy (e.g financial support for restructuring of fleets) apply to the Mediterranean, but the 200 nautical miles exclusive fisheries zone does not. Council Declaration of 30 May 1980 on the Common Fisheries Policy. Official Journal C 158/2 of 26 June 1980, available at http://aei.pitt.edu/1365/01/ UK_budget_decision_OJ_C158_80.pdf.

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280. Council Regulation 3760/92 of 20 December 1992. Official Journal L 389 of 31 December 1992, available at http://europa.eu.int/smartapi/cgi/sga_doc? smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=31992R3760& model=guichett. 281. Forwarded by The International Council for the Exploration of the Sea (ICES) and the Scientific, Technical and Economic Committee of Fisheries STECF). 282. Council Regulation originally 3759/92, but revised in Council Regulation 104/2000 of 17 December 1999. Official Journal L 17/22 of 21 January 2000, available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2000/l_017/ l_01720000121en00220052.pdf. 283. It did not become easier as control and related measures are highly technical. See Council Regulation 66/98 of 18 December 1997. Official Journal L 6/1 of 10 January 1998, available at http://europa.eu.int/eur-lex/pri/en/oj/dat/1998/ l_006/l_00619980110en00010017.pdf. 284. “A Strategy for the Sustainable Development of European Aquaculture”. Commission Communication COM (2002) 511 of 19 September 2002, available at http://www.europa.eu.int/eur-lex/en/com/cnc/2002/com2002_0511en01.pdf. 285. http://ec.europa.eu/comm/fisheries/reform/index_en.htm. Reform adopted in December 2002 286. Press release of 23 December 2002, Outcome of the Fisheries Council 16–20 December 2002, available at http://ec.europa.eu/comm/fisheries/news_corner/ press/inf02_61_en.htm. 287. European Commission. 288. For figures and statistics, see for example Commissioner Viviane Reding’s Speech to BITKOM, 27 June 2006, European Commission Press Release Speech/06/422 of 27 June 2006, available at http://europa.eu/rapid/ pressReleasesAction.do?reference=SPEECH/06/422&format=HTML& aged=0&language=EN&guiLanguage=en. 289. The Commission introductory communication — on the review of the EU Regulatory Framework for electronic communications networks and services — is COM(2006) 334 final of 29 June 2006, available at http://ec.europa.eu/ information_society/policy/ecomm/doc/info_centre/public_consult/review/ com334_en.pdf. Commission Press Release memo/06/257 of 29 June 2006 contains a complete list of proposals with a short explanatory note, available at http:// europa.eu.int/rapid/pressReleasesAction.do?reference=MEMO/06/257& format=HTML&aged=0&language=EN&guiLanguage=en.

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4 THE MECHANICS

GENERAL OBSERVATIONS The creation of a single market where goods, services, capital, and persons can move freely without meeting any obstacles happens in two steps. The first one may encounter political and administrative difficulties, but is conceptually fairly easy: removal of tangible barriers for movement of goods, services, capital, and persons across frontiers. Such obstacles take the form of customs duties, excise duties discriminating between domestic and foreign products, and other forms of restrictions that try to protect the domestic producer. For the European Union, these obstacles were removed in the 1970s. The second one is more difficult and much trickier. It aims at removing rules and regulations, which in practice — without necessarily being introduced to do so — discriminate between domestic and foreign products, and hence serve as barriers to trade between member states in the European Union. Until the 1970s very little had been done to remove such differences in rules, regulations, and legislation. Many of these rules were implemented by member states without considering the effect on international trade. The purpose was to protect public health, improve labour conditions, safeguard the right of consumers, and ensure technical efficiency and reliability. Many of them had origins going back even to medieval times.1 260

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Trade vocabulary classified them as technical standards and/or non-tariff barriers. The challenge for the European Union embarking on their removal was to find the narrow path between, on the one hand, accepting the genuine goals of these rules (i.e. public health), and on the other hand, fulfilling them without also letting them constitute barriers to trade. The member states should consent not only in name, but also in practice, to free trade and implement domestic administrative rules to ensure this. It was not sufficient to agree on declarations and/or political will. EU legislation, which the Court of Justice could enforce in the same way as measures under the first step (removal of tangible barriers), would have to be invented and put in place. The European Union took a major step forward in this respect with the Single Act coming into force in 1987. The two key instruments were Article 100A and Article 100B. Article 100A states that the Council acting by qualified majority can decide on measures of approximation of provisions in the members states (laws, regulations, or administrative steps) to establish the internal market. Article 100B states that an inventory of laws, regulations, or administrative provisions, which had not been harmonized under Article 100A, should be drawn up before the end of 1992, and that the Council with a qualified majority may decide that a provision in a member state must be recognized as being equivalent to those applied by another member state.2 This was a political and technical watershed. Article 100A falls in the traditional mould of the economic integration. It stipulates that barriers to trade are removed by harmonizing national provisions. EU provisions replace national provisions. As the European Union, when the Single Market was launched, had twelve member states, the consequence was that twelve potentially different and divergent national provisions were replaced by one single EU provision. This is implementing a Single Market by harmonization. The major breakthrough in this Article was not a new method, but qualified majority voting instead of unanimity. Article 100B introduces new methodology. Member states were forced to recognize provisions in other member states as equivalent to their own provisions. This method ruled out the use of national provisions as hidden barriers to trade. Administratively it had the advantage of being much simpler than the cumbersome and often technically time-consuming and tiresome harmonization. Politically it stipulates that member states may (not that they must) use this method. If harmonization (Article 100A) did not work or was found to be too difficult, the European Union could revert to the principle of equivalence of national provisions (Article 100B).

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Qualified majority voting combined with the new method of equivalence of national provisions proved to be a success. Harmonization had never been popular. The public perceived it as an attempt by the European Union or the Commission to “harmonize” everything. As neither the member states nor the public wanted to be “harmonized”, this word created animosity. Even if harmonization meant simplification, as a number of national provisions were replaced by one EU provision, it was often perceived as bureaucracy.3 This attitude explains why the Treaties use the word “approximation” and not “harmonization”. In the negotiation process qualified majority pushed member states to negotiate, as the alternative was a vote not incorporating their preoccupations. At the same time the door was opened to speedier results. The choice of method between harmonization and equivalence provided the European Union with alternative methods. When dealing with production standards, harmonization would often be the preferred method. When liberalizing services, equivalence of national provisions would often be the best way to proceed.

FREEDOM FOR GOODS i) The customs union means that tariffs between member states are dismantled, while at the same time goods imported from abroad are subject to a uniform tariff, regardless of in which member states they are imported.4 A community preference is established. In the early days the community preference was quite substantial, but as international trade rounds inside first, the General Agreement of Tariffs and Trade (GATT), and then its successor the World Trade Organization (WTO), have reduced customs duties, the effect of the community preference has subsided significantly and no longer plays an important role for the European Union. All member states had excise duties primarily for fiscal purposes to generate revenue for the nation state. The question arises, however, as to whether member states could use excise duties as some kind of hidden protection that have the same effect as a tariff. To prevent this, the Treaties stipulate that no excise duty could operate discriminatorily and give domestic production preferential treatment vis-à-vis other member states or have an effect leading to such a situation.5 This has led to a number of interesting cases some of which ended at the Court of Justice. Domestic excise duties, even if they were not for the purpose of discrimination, could do so in practice. This happens when domestic goods compete with goods from another member state that meet the same

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demand of the consumer without being exactly the same product. Formally there may be two different products on the market. The consumer, however, may look at them as competitors in the sense that his/her demand is met equally well by either of the two products. If a member state in such cases apply a lower rate of excise duties for the domestic product, it is likely that the Court of Justice will rule such practice discriminatory, and consequently, not in conformity with the Treaties. The other — after customs duties — traditional instrument for protecting domestic production against imports — quantitative restrictions — was equally prohibited. If not, member states would have had the opportunity to switch from one instrument of protection to another.6 There are exceptions to this general rule allowing quantitative restrictions. They are enumerated in the Treaties. An example is public health,7 but it is stated that these exceptions must not be used in a discriminatory way that constitute a hidden protection of domestic production. ii) As industrial production grew more sophisticated, accompanied by rising awareness among the public of health, environment, and labour conditions, the nation states started to introduce standards for industrial products sold on the market. These rules were not designed to protect domestic production — even if that was sometimes taken into consideration by a member state — but they originated inside the nation states, and were consequently different from nation state to nation state, in many cases constituting a barrier for imports. In conjunction with the efforts to establish a Single Market, the European Union agreed in May 1985 on a so-called new method for harmonizing technical standards. The idea was to harmonize technical standards applied in member states, thus preventing them from working as barriers to trade. The main principles in the new method8 — which together with Articles 100A and 100B in the Single Act — paved the way for real and tangible progress towards dismantling technical barriers to trade were: •

•

•

Harmonization is limited to essential safety requirements (or other requirements of general interest) with which products put on the market must conform, and which will, therefore, enjoy free movement throughout the territory of the European Union. The task of drawing up the technical specifications needed for the production and placing on the market of products is entrusted to existing organizations dealing with standardization. The technical specifications are not mandatory and maintain their status of voluntary standards.

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National authorities are obliged to recognize that products manufactured in conformity with harmonized standards are presumed to conform with the essential requirements.

This approach worked. Harmonization of technical standards, combined with a more streamlined process, was welcomed by industry. By bringing in the existing organizations already working with standardization and which know the problems and exigencies of European industry, complicated and time-consuming procedures were avoided. Even more importantly, the potential criticism about more bureaucracy was eliminated. Since the introduction of the new method, the European Union has moved forward by applying either total harmonization or optional harmonization. Total harmonization means that only products in conformity with the provisions set out in an EU decision can be marketed. Optional harmonization means that a member state cannot prohibit a product from another member state fulfilling such provisions from being marketed, but opens up the possibility for the member state to operate a parallel — national — set of rules, provided they fulfil the same objective. iii) One of the most difficult issues when negotiating the Single Act, which introduced the Single Market, was the apparent clash between free trade and protection of the environment and working environment (labour standards). This could be a contradiction in terms. Free trade based on harmonization of technical standards or whatever method envisaged meant that goods meeting these standards had to be admitted to the markets in all member states. Protection of environment meant that if an item produced in another member state did not live up to the standards for protection of the environment as defined by a member state, it should be banned. The problem would surely arise, and sooner rather than later, that a product would meet EU technical standards laid down to open markets, but not environmental protection standards in one or several member states. This would not be a problem if environmental protection levels were the same in all member states. When the Single Act was negotiated, that was clearly not the case. Prior to the Single Act, the environment was not incorporated in the Treaties. Furthermore some member states wanted to go further than others in protecting the environment and working environment. The protagonists for free trade wanted free access for goods living up to the technical standards, regardless of whether one or several member states felt that environmental protection was jeopardized. Protagonists of protection

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of the environment wanted to have the right to ban imports if they felt that environmental protection was jeopardized, regardless of the impact on free trade and the Single Market. Apparently it was a circle which could not be squared, but it was. After long and arduous negotiations, Article 100 A, subparagraph 4, was crafted saying that a member state could “apply national provisions on grounds of major needs referred to in Article 36,9 or relating to protection of the environment or the working environment”, and “it shall notify the Commission of these provisions”. The implication of this was that member states could introduce national provisions to protect the environment and/or working environment. But — and that was the all-important “but” — this was followed by an EU procedure. The phrase saying that the Commission should be notified meant that the Commission would investigate the matter and analyse the reasons behind the action of the member state in question. If the Commission came to the conclusion that the action was not justified and a solution was not found, it would refer the matter to the Court of Justice. The core of this procedure was the burden of proof put on a member state wanting to protect its environment by national provisions instead of relying on less rigorous EU provision. If it could justify its action and had solid evidence to support its case, it was likely that the Court of Justice would rule in its favour. It was not a free rider for member states to invoke national provisions, but a carefully weighted procedure opening the door to protecting the environment, even if it meant a break in access to the market in one or several member states. The Commission and then the Court of Justice would ask two fundamental questions: Why are EU rules deemed good enough by other member states to protect their environment and/or working environment not good enough for this particular country? What new or supplementary evidence, what scientific findings can be tabled that are not known to the Commission and/or other member states? The Commission and the Court of Justice would invoke the principle of proportionality and ask for evidence that if the objective was endorsed, the member state has found the right instrument to realize this objective. The question would run like this: could the member state have achieved the same degree of protecting the environment using another method that does not jeopardize the Single Market?

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This is a lesson in practical diplomacy and trust among member states. The procedure was agreed on despite some reservations, because member states trusted each other. Member states giving priority to free trade acknowledged the political pressure in other member states to protect the environment as a legitimate objective that could not just be brushed aside. Member states favouring protection of the environment realized that the Single Market should not be undermined even before it took off. They understood and acknowledged the need to argue and prove their case. One of the reasons a compromise was possible was the conviction among member states striving for this special provision that they were forerunners, and that the European Union and the other member states would eventually catch up with their higher standards of environmental protection — a judgement that to a certain extent has proved correct. The key to understanding this issue, why it was agreed on in the first instance, and how it has worked, is that the European Union is based on the assumption that no member state abuse the rules or take advantage of the rules to the detriment of others. This is a fine balance and Article 100 A, subparagraph 4, could only work in practice with careful judgement by those who use it and those who afterwards analyse whether it was justified. The first case before the Court of Justice came in 1993 after Germany limited the use of PCP (pentachlorphenol), referring to the risk of cancer linked to use of PCP.10 The ruling is legally quite complicated, but is generally interpreted as being in favour of protection of the environment. It showed unambiguously that if a member state had done its homework and introduced provisions to safeguard the environment, the Court of Justice would uphold these provisions. Besides being an important milestone in striking the balance between free trade and protection of the environment, the case is one of many illustrations of how the Court of Justice willingly or unwillingly exercises a political influence on the substance of the integration. When the subsequent Treaty of Amsterdam was negotiated in 1997, member states took one more step in recognizing the importance of environmental protection even in cases where a conflict with the Single Market and free trade of goods arises. Article 100 A was reformulated11 with an amended procedure generally perceived as being “environmental friendly”.12

FREEDOM FOR SERVICES i) When The Treaty of Rome was drafted, the service sector was not very important for the economies of member states. Europe was predominantly industrial and agricultural.

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The Treaties contained provisions for liberalization of the service sector, stipulating that, in principle, no member state could prevent the right of establishment of nationals from another member state and that the service sector should be opened up for citizens from other member states.13 However, it proved much more difficult to liberalize the service sector than manufacturing. Except for the liberalization of large economic activities such as banking and insurance, few steps were taken towards liberalization in practice, regardless of the principles laid down in the Treaties. There were several reasons for this. The service sector was still not sufficiently large and buoyant enough to warrant the effort to turn theory into practice. The pressure groups often pushing the European Union forward were not active to the same degree in the service sector. Most of the barriers to the right of establishment and services were linked to provisions in member states that lay down rules that such economic activity required qualifications in the form of a diploma and the ability to speak the language. Many citizens felt that if a doctor treated them, they would like to be sure that he/she was qualified and could communicate with them in their own language. While much of the liberalization in the manufacturing sector took the form of EU legal acts directly applicable in member states, most of the liberalization in the service sector had to be done by the European Union having to transpose this into national legislation (directives). That proved to be a cumbersome and time-consuming process, giving national pressure groups against liberalization ample ammunition to delay, or even prevent, the process from getting under way. ii) After the implementation of the Single Market, and the single currency, supplemented by the Lisbon Programme, the pressure grew, nourished by economic data that the European Union could reap considerable economic benefits from a liberalization of the service sector. In 2005 a report14 came to the conclusion that: Firstly, in monetary terms, total value added would increase by approximately 33 billion Euros. Secondly, total consumption in the European Union would increase by 0.6 per cent, corresponding to 37 billion Euros. Thirdly, prices of services would fall. Fourthly, productivity gains would benefit the EU economy. Fifthly, net employment could increase by 600,000 jobs across the European economy. The analysis was made with a database including approximately twothirds of the activity covered by the European Union’s proposed service directive and 275,000 firms in the European Union.

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This looked convincing, but the European Union ran into the problem that public opinion was turning against “globalization”. Public opinion in the “old” member states started to depict competition from the “new” member states in Central and Eastern Europe as unfair. Nonetheless, the European Union has been able to make progress by focusing on the two hard-core questions of mutual recognition of diplomas and conditions for offering services in another member state. At the meeting of The European Council in March 2001 (in Stockholm), the Heads of State and Government “welcomed the Commission’s intention to present a proposal in 2002 tackling the barriers identified in the internal market for services; on the basis of the ongoing evaluation of those barriers; within the internal market for services”.15 In September 2005, the European Union adopted a legal act (a directive) on mutual recognition of professional qualifications, which constitutes a watershed in the endeavours to allow professionals to offer their services in a member state other than the one where they hitherto lived and practised their profession.16 Fifteen directives agreed over forty years were consolidated into one directive, in spite of all kinds of obstacles and established rights. A more streamlined system for mutual recognition, combining free access to other member states for professionals, and the guarantees incorporated in existing national or EU legal acts to ensure that those offering their services are really qualified, was introduced. The directive contains detailed provisions for the following professions: doctor, nurse, dentist, veterinary surgeon, midwife, pharmacist, and architect. At the same time it contains general provisions covering procedures for approval of practically all other services. Hereafter very few obstacles of a legal nature remain intact inside the European Union for an EU citizen who is a qualified professional to offer his/her services in another member state under the same conditions as nationals of that member state. The language problem has been solved using a language test that ensures that those offering services are able to communicate with their customers in the language used where they offer their services. A follow-up procedure is incorporated in the directive, prescribing how member states shall facilitate the practical implementation: make information easily accessible, report to the Commission about the state of affairs every two years. The Commission will present a report every five years, setting out how the mutual recognition, on the basis of the directive, is working in practice. iii) Sponsored by the same meeting of the European Council, the Commission forwarded a proposal in 2004 for a legal act (a directive) to

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create an internal market in services. This proposal became known as the “Bolkestein directive” after Frits Bolkestein who was in charge of the internal market in the Commission, and consequently, the Commissioner in charge of drafting the directive.17 The proposal proved to be one of the most controversial ones ever put forward in the European Union. It played a considerable role in the political debate before the referenda on the proposed European Constitution in France and The Netherlands in the summer of 2005. The principle of liberalizing services, including services in the internal market, was not the main issue. Nor did it attract so much attention because the proposal virtually incorporated the whole range of services and only excluded services offered by public authorities. The sore point was that the proposal paved the way for services to be offered in a member state, on the basis of rules applied not in that member state, but in the country of origin for the person offering services. This idea was sensible. It offered the service provider the possibility to test the market without committing him/her to a long and maybe costly adjustment without any certainty of success. In fact it was a split between the richer member states on the one hand that have well-established rules guaranteeing the workforce privileges, and the new member states from Central and Eastern Europe that have less beneficial labour rules. The workforce in the established member states feared being out-competed by workers from new member states. This fear found its famous expression under the label of “the Polish plumber”, put forward in France during the referendum campaign as a bogey.18 The campaign against the proposal vilified the Commission and forced it to acquiesce when the European Parliament took over the political initiative. This led to the reinstatement of the principle of destination as a guideline for rules to be respected and followed. Following EU procedures with the interplay between the Commission and the European Parliament, the Commission incorporated the amendments proposed by the Parliament in a new version of the directive put forward in April 2006.19 It was formally approved in December 2006. Fear of the “Polish plumber” played a role, and was, at first glance, the dominating one, but so did uncertainty about the consequences of applying the principle of origin for consumer protection, labour laws, and environmental policies. Those who had drafted the proposal based on the principle of origin were not able to clarify the uncertainties. A number of member states and Members of the European Parliament were not prepared to live with this situation, which would probably have led to test cases before the European Court of Justice that did not look attractive. The final result was, therefore,

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the continuation of the destination principle, accompanied by a detailed prescription of the limits on the room for manoeuvre for member states based on non-discrimination. Despite all the turmoil and a legal text that seems unclear, the fact remains that the European Union is on its way to liberalizing its services, through mutual recognition of professional qualifications and the opening of domestic markets, to an overwhelming number of services. From historical experience, we can expect waters to calm, and liberalization to feel its way slowly, but surely, into the economic and industrial life of member states. iv) Financial services have their own action plan called the Financial Services Action Plan (FASP)20 to: • • •

Establish as Single Market in wholesale financial services. Make retail markets open and secure. Strengthen the rules on prudential supervision.

Under this action plan a large number of proposals have been put forward encompassing all sectors of the financial markets. Two Meetings in the European Council — Vienna in December 199821 and Cologne in June 199922 — have given the work strong political support. The work ran into difficulties as the legislative process proved to be slower than expected because among other things, a single market for financial services, had to include corporate governance in a broad sense, including member states’ supervision. To overcome this difficulty, the European Union established a Financial Services Policy Group (FSPG), composed of personal representatives of the Ministries of Finance and the European Central Bank. To bypass some of the red tape, a special procedure has been invented that is called the Lamfalussy procedure. The basic idea is borrowed from the procedure used when launching the Single Market for goods in the 1980s — only political guidelines are adopted by the EU institution and put into in legal acts, the technical implementation is delegated to other bodies.23

FREEDOM FOR CAPITAL i) Freedom for capital movements among member states was not an objective in itself, but followed from the Common Market and the Single Market to ensure that freedom of establishment could be implemented. As the European Union moved towards an economic and monetary union, freedom of capital movement assumed the role of an instrument to ensure achievement of this vital goal for the European Union.

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This explains why freedom of capital movements moved slowly in the first decades of the European integration. There was simply no need for it. The first steps towards liberalization of capital movements came in 1960 and 1963. These steps were modest and in reality little other than a confirmation and codification in the European Union of rules already in force through the broader organization of OECD.24 In 1964 and 1967 the European Union put forward proposals to further liberalize capital movements. Before they could be approved, the turmoil in the late 1960s in the international currency markets started, effectively stopping any attempts at liberalization. Member states became preoccupied with the need to protect their still fragile domestic capital markets against external shocks. In the aftermath of the Single Act, which introduced the Single Market and endorsed the Economic and Monetary Union, the European Union embarked on an ambitious programme to liberalize capital movements. These two objectives asked for free capital movements among member states, and the timing was right as national economies moved away from restrictions and protection against the outside world towards liberalization. The breakthrough came in 1988 with a legal act (directive), which in principle, liberalized all capital movements inside the European Union.25 This directive placed capital movements on the same footing as goods and services. In view of the experiences with external shocks, the directive contained a safeguard provision, allowing a member state to introduce protective measures — under EU supervision — in case of severe strains on its capital markets due to foreign exchange movements. With the Treaty of Maastricht, which included the Economic and Monetary Union, rules securing free capital movements were incorporated, thus replacing the legal acts. The relevant Article26 says “within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited”. ii) The first genuine step towards liberalization of financial services to introduce a Single Market for these services, much like the Single Market for goods, was taken in 1993.27 This directive was an important step in the right direction, but did not cover all financial instruments, thus allowing member states to manoeuvre so as to avoid or limit the full liberalization of financial services. Approximately ten years later, the European Union took the next step with a more comprehensive directive called MiFID.28 An analysis published by the European Capital Market Institute (ECMI) traces the development of

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liberalization with regard to financial services, and compares the directive of 1993 with the 2004 directive.29 The main findings show that the Commission has moved the European Union from principles of deregulating and liberalizing to a rule-based system, thus increasing the administrative and bureaucratic burden associated with opening the door to financial services in all member states. This will augment costs for companies and, in particular, be a heavy burden for small- and medium-sized companies operating in financial services. On the other hand, says the analysis, the removal of twenty-five national rule sets will do away with red tape and costs, which may compensate for the burden flowing from a rule-based and detailed regulation. There are three basic ideas behind the directives: Number one is to open the door for a company offering financial services in all member states, provided that it has received appropriation from a competent authority in its own country. Number two is to establish a comprehensive and harmonized regulatory regime for transactions, wherever they may take place in the European Union. This will end the monopoly of stock exchanges in some member states and hence increase competition. Number three is to ensure a higher level of protection for the investor with a higher degree of transparency. The directive was to be transposed by member states before January 2007. Firms and markets had until November 2007 to conform with the rules and regulations in the directive. Much will depend on the transposition of the directive into national legislation, and whether member states will try to skirt the idea behind the directive or genuinely aim at its implementation in all member states. The experience with free movement of capital shows that liberalization of this sector does not live its own life. Pressure for liberalization arises if it is necessary to guarantee free movement in goods and services, to make the right of establishment a reality, and if it is an element in the establishment of an economic and monetary union. Free movement of capital does not play any role on its own in the integration process. Such freedom on its own would, in case it was implemented, have no effect on economic life. Experience also underlines the fact that capital movements is one of the sectors where the integration is most vulnerable to repercussions coming from the outside. As long as an economic and monetary union is not established, international capital movements forcing member states to roll back earlier liberalization can undermine the integration and the Common Market as well as the Single Market. An economic and monetary union thus becomes not only an

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achievement in itself, but also a bulwark against attempts to roll back liberalization of movement of goods, services, and capital.

FREEDOM FOR PERSONS The present Treaties say “Every citizen of the Union shall have the right to move and reside freely within the territory of the Member States”.30 This means that every citizen of a member state and eo ipso for The European Union has the right to reside, study, and work in other member states. To go back to the origins of the integration, this right is an application of the non-discrimination principle, which stipulates that no member state must discriminate among citizens based on nationality. A citizen from another member state enjoys, in principle, the same right as national citizens, with regard to economic activities. In the early days of the integration, when member states fumbled for guidance and no legal practice existed, it was necessary to state more precisely what the principle of non-discrimination meant for free movement of persons and free movement of labour. The Treaty of Rome went some way towards this by stating “Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment”.31 As so often happens in the history of the European integration, this seemed clear enough, but proved to be disputed in practice. In 1976 the Court of Justice ruled that Article 48 containing non-discrimination principles for movement of labour was directly applicable in EU law.32 The implication of this ruling was, among other things, that a citizen from a member state feeling discriminated against could take a case directly to national courts. The European Court of Justice had once more pushed the integration ahead and stood firm on the basic principles governing the Treaties. Subsequently member states have approved two legal acts to clarify and improve the conditions for free movement of persons and free movement of labour. In 1968 member states approved a legal act (regulation) clarifying and defining the areas where a member state was not allowed to discriminate on the basis of nationality. The regulation includes social welfare and questions concerning taxation.33 This step was followed in 197134 with a legal act concerning social welfare for national citizens of one member state working in another. The

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idea was not to harmonize social welfare among member states. This has always been rejected by the member states. Together with a national policy of income distribution, the national social welfare system has been regarded as sacrosanct. The ambition was to ensure that social welfare was not used to discriminate against citizens from another member state, and even more importantly, that a citizen moving to another member state to work did not lose rights obtained for social welfare in his/her home country. It was clearly understood that harmonizing social welfare would not boost the integration. In fact, arguments could be forwarded that it would constitute a brake. But it was equally understood that if persons moving from one member state to another to work lost rights to social welfare benefits acquired in the first member state, such a practice would impede, and may be even stop, the free movement of labour. In this case, the worker would lose rights to unemployment benefits, pensions, and other social welfare benefits, and consequently feel strongly inclined to stay and work in the member state where the first “right” to social welfare had been earned. The rules governing free movement of persons have evolved gradually over the years from securing economic activities in another member state and implementing the principle of non-discrimination for persons exercising economic activity, to European citizenship with a broader and high-profile political perspective in today’s Treaties. The experience indicates that the principle of free movement for persons and the right to work and exercise economic activity will not be sufficient in the early stages of an integration when the focus is on economic activities. The accompanying legislation to be made is not so much about removing hidden or visible barriers, albeit these can also be important. The task is to introduce guarantees that workers moving around member states do not forfeit and lose rights and benefits already attained. In 2004 the European Union approved a directive streamlining the piecemeal approach hitherto adopted regarding the rights of the citizens to move and reside freely within the territory of member states.35 The directive merges into one single legal act, two regulations, and nine directives. The purpose was to simplify existing rules, make them more transparent, and thus easier for citizens to be aware of their rights and remove or reduce administrative hindrances for exercising those rights. Although the directive does not change existing rules, it is looked upon as an important step forward in the endeavours of the European Union to make rules more accessible to ordinary people, thus encouraging them to realize the opportunities provided by the free movement of persons inside the Union.36

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FREEDOM FOR PAYMENTS Despite the introduction of the Euro as the single currency on 1 January 2002, for twelve of the fifteen member states of the European Union,37 barriers and obstacles continue for payments from one member state to another. It is estimated that costs associated with these obstacles amount to between 50 billion Euros and 100 billion Euros per year.38 There are two reasons for members of the Euro zone starting to look at the possibility to introduce rules for payments across national borders, similar to rules for making payments inside a member state. Firstly, it falls under one of the basic principles of the European Union, namely, to remove any kind of discrimination based on nationality. So even if there were no tangible costs associated with running different rules, the Commission would have the obligation to introduce EU legislation about uniform rules. Secondly, the costs as mentioned above are substantial, and are one of the remaining barriers for increasing European competitiveness as stated in the conclusions of the Lisbon goals,39 which are a further attack on barriers, obstacles, etc. in the European Union. The European Commission and the European Central Bank have outlined the vision in a short, joint statement40 introducing SEPA (Single Euro Payment Area), which means that payments inside a nation state or between member states of the European Union are subject to uniform rules. The introduction of the Euro will not have its full impact until SEPA has started to be operative, thus removing all discriminatory practices. The timetable calls for this to be fully operative in 2010.41 The European Payments Council (an association of the European banking industry) set out the road map in March 2006.42 This way of proceeding is also a well known and proven tactic used by the Commission and the European institutions when the Single Market was set up: the European institutions and member states define the objectives — the political ambition and goals — but leave it to the industry to map out how to get there. This removes much of the criticism about bureaucracy and forced harmonization. The industry decides and shoulders the responsibility for introducing measures and proposing instruments to fulfil a goal.43 A politically interesting and partly sensitive question is: What about member states of the European Union not participating in the Euro zone? SEPA will be introduced as a priority for the members of the Euro zone. For other EU member states, there will be opportunities to participate and SEPA standards and practices can be adopted. Member states of the Euro zone

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define the scheme, while members of the Union outside the Euro zone can participate. They do not, however, take part in defining the system. Probably the terms for their participation will not be exactly the same as for members of the Euro zone.44 It remains to be seen how this will work in practice. Based on experience from other examples — the Common Market, the Single Market to mention a few — it may, in the longer term, be quite costly for EU member states outside the Euro zone. Another question that comes to mind is the impact on this dichotomy on mergers & acquisitions between banking institutions inside the European Union as banks will tend to fall into two groups: those participating in the SEPA on full terms, and those not doing so because they are domiciled in a member state not part of the Euro zone.

THE COMMON AGRICULTURAL POLICY (CAP) No common EU policy has been so hotly disputed, labelled a waste of taxpayer’s money by some, and praised for maintaining traditional European culture, lifestyle, and traditions by others, as the Common Agricultural Policy. No common policy has been so central in the European Union’s relations to the outside world, viewed as it is in the eyes of some observers as blocking the European Union from playing a constructive role, and in the eyes of others as keeping Europe’s role as a traditional agricultural producer and exporter. The economic flywheel for the European integration when it started in the 1950s was a German benefit accruing from the Common Market in industrial goods, and a French benefit accruing from the Common Agricultural Policy. As a kind of paradox, things did not continue to work exactly like that. Germany started to use the common agricultural policy to support its farmers. After British entry into the European Union in 1973, the CAP substantially boosted British agricultural production. The Germans and the British may have used strong words to speak for reforms, but in reality they did not do very much.45 As time went by, the agricultural scoreboard through increased production became less negative for them. The objectives of the Common Agricultural Policy are stated in the Treaties.46 The first objective is to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilization of the factors of production, in particular labour.

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The second objective is to ensure a fair standard of living for the agricultural community, in particular, by increasing the individual earnings of persons engaged in agriculture. The third objective is to stabilize markets. The fourth is to assure the availability of supplies. The fifth is to ensure that supplies reach consumers at reasonable prices. It is obvious that these objectives cannot all be met at the same time and that several of them actually contradict one another. The political climate in the European Union and the Franco-German understanding gave the objectives of standard of living and stability of markets the upper hand, pushing “reasonable prices” down the ladder of priorities. The method chosen was to maintain a guaranteed level of prices paid to the farmer. As a principle this is not wrong. The snag was soon revealed. Prices were fixed at a higher level than world market prices. That called for a mechanism to ensure that farmers inside the European Union were sheltered from competition from the outside and compensated when exporting to world markets with prices lower than the EU prices. Gradually a complicated, cumbersome, and expensive mechanism emerged as the foundation for the working of the Common Agricultural Policy. Guaranteed EU price applied to all farmers and for total production meant that farmers did not run any risk of not selling increased production. If the market — domestic or export — did not buy, the European Union would guarantee prices all the time. To protect the farmers against imports from abroad, the European Union put up not only a list of restrictions, but also of import levies equal to the difference between lower world market prices and EU prices. Regardless of the price offered on world markets, the European Union made certain that the price of imported products when sold in the EU markets was brought up to the EU level. The revenue went into the EU budget as part of the financing of the Common Agricultural Policy. World market prices were normally lower than the guaranteed EU price. When EU farmers sold abroad, export restitutions to bridge the gap between lower world market prices and the guaranteed prices in the European Union were required. The farmer was sheltered and the rules ensured that wherever he sold his products, he would always get the EU guaranteed price. When in the 1970s and 1980s currency rates among the member states started to fluctuate, a scheme called monetary compensatory amounts was introduced, again making sure that the farmer would get the same price, regardless of which member state he sold his production in.

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These mechanisms were logical and coherent. The policy worked. The farmer got the guaranteed price, regardless of where his production was sold — in the EU market (and if so, regardless of which member state), in the world market — or bought by EU agencies stepping in if production could not be sold on the market. The scoreboard was not as negative as it sometimes looked. The main problem was that European agricultural prices distorted economic structure and trade patterns. What happened in Europe, mainly in the 1970s and 1980s, was that prices became so high that marginal producers could survive, but if marginal producers could survive, not surprisingly it became very profitable for efficient producers to increase their production — which they did. There was a political reason behind this policy. Small and inefficient farmers were seen as instrumental and indispensable for keeping the countryside, and especially isolated areas, populated. Many economic instruments could have been used for this purpose, but the farmers wanted to be seen as farmers and not recipients of social or regional aid. For them it was vital to be paid for their production and not to receive a lump sum from the government. This political and social preference boosted EU prices, damaging both the European Union’s agricultural sector as an efficient part of the economy and the international perception of the European Union. These damages have never really been fully repaired. The problem was not the principles of the CAP. The system worked as it was designed to do. The problem was that overly high prices overloaded the system. Market mechanisms and exposure to free trade were only allowed to put their mark on the agricultural sector in a limited and controlled way. The criticism and problems led to many attempts to reform the CAP.47 Over twenty-five years, expenditure on the EU budget has been curbed from approximately 70 per cent of the total budget to approximately 35 per cent,48 while at the same time the surplus production has been brought down to almost nothing. Support to the agricultural sector via high prices was gradually replaced by other mechanisms less likely to boost production. The reform of the Common Agricultural policy took place in two stages.49 In the early 1990s, the European Union started to replace price support schemes with direct income payments which gradually reduced the incentive to increase production. In 2003 a further step in that direction shaped agricultural support in a way that did not at all link it to production or stimulate production. Today 95 per cent of the support is given though decoupled payments, which do not stimulate production.50

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These reform steps changed the Common Agricultural Policy and brought EU prices more in line with world market prices, reducing substantially export restitutions, which had been a thorn in the flesh of a large number of countries around the world. There are several lessons to learn from the mechanics of the Common Agricultural Policy: •

•

•

• •

•

When formulating objectives try to avoid conflicting goals, which complicate implementation at a later date. It may be politically convenient, in some cases, imperative, but in the long run the birds let loose come home to roost. If financial support is linked to price support, keeping prices higher than the market can sustain, production will grow with the inevitable result that production outgrows consumption, leading to disposal in a nonprofitable way of surplus production. A price level guaranteeing the standard of living for small farmers will stimulate production in large farms with high productivity, while prices fixed according to productivity at such farms are too low to ensure a reasonable income for small farmers. It is an acrimonious process to dismantle support once it has been set up and taken for granted by farmers. If the political objective is — as in the case in Europe — to maintain a farming community for not only economic, but also sociological and political reasons, make sure that no negative side effects occurs. In Europe the objective of reasonable income for farmers and price support as the instrument looked fine in the early stages of the integration, but soon ran out of control. Politicians must be aware of, and judge correctly, how the support is perceived. In Europe the farming community wanted subsidies, but saw and perceived them as support enabling them to live a productive life as farmers. The farmers rejected any notion of support that gives the impression that the Common Agricultural Policy was partly a social policy. They did not want social welfare benefits. They asked for prices that make it economically viable for them to stay and cultivate the soil. This outlook for a long time constituted a psychological barrier for switching support from prices to income.

STATE AID/SUBSIDIES Subsidies paid out by the state or state agencies are common phenomena. There are many good and many bad reasons used as pretexts or explanation

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for aid or subsidies. In many cases, they actually serve useful purposes and they promote purposes that are political, moral, and economic, and find broad support. Economically the “best” argument is comparable to the infant industry theory used to justify tariffs that states that in the start-up phase, a young and unproven industry needs a shelter or cushion against competition from enterprises that have been in the business for a long time. When the start-up phase is over, aid or subsidies will be withdrawn. In the context of economic integration two problems arise. State subsidies are a burden to public budgets. A state subsidy actually means that profitable enterprises are taxed to subsidize non-profitable enterprises. As long as it is a temporary measure with justifiable hopes of turning around the non-profitable enterprise, it may not escalate into a financial problem. If state subsidies are extended, which is often the case, those receiving them lose the incentive to restructure. Temporary and stopgap assistance politics turns into permanent assistance — a vested interest functioning as a pretext for doing nothing. In the long run, they constitute an obstacle to economic growth and burden the public budget. They complicate the efforts of member states to conform to economic guidelines and they make it more difficult to restructure industries. Furthermore, and even more importantly, state subsidies distort competition among industries in the economic integration. If one member state subsidizes enterprises, a more competitive enterprise in another member state less generous may be squeezed out of the market. From an economic point of view, state subsidies lead to a non-optimal allocation of production factors, thus keeping not only the member state in question, but the whole integration, on a lower growth path. This has been a genuine political and economic problem for Europe, which has a large proportion of old-fashioned so-called smokestack industries that need restructuring or are even facing the prospect of being closed down. Examples are shipbuilding, a large part of the coal and steel industry, and the textile industry, for which Europe was a world leader fifty years ago, but is today left with hardly a handful of globally competitive manufacturers. During the 1970s and 1980s the European Union faced obstacles trying to reduce or even dismantle subsidies to the steel industry. An acrimonious battle was fought over how to distribute the burden among member states, which found it almost intolerable to see the steel industry disappear. But in the end, economic logic won the day.

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To prevent the use of state aid/subsidies, the Treaties contain a general provision51 saying that “the activities of the Community shall include…a system ensuring that competition in the common market is not distorted”. The implementation of this general objective is to be found in two Articles in the Treaties52 that have been maintained unchanged since The Treaty of Rome came into force in 1958. There are three key provisions. Firstly, state aid is deemed to be incompatible with the Common Market “in so far as it affects trade between Member States”. This is in conformity with the basic principle of the Treaties and the objectives as they were seen in the 1950s, namely, to create a Common Market and reduce, or even better, eventually dismantle national policies distorting competition and trade. The litmus test for state aid is not political or moral; it may not even be economic in the broad definition of this word. It is focused on whether state aid affects trade or not. If it does not, regardless of how economically harmful the effects may be seen in another perspective, state aid has nothing to do with the European Union and the Commission is not entitled to take any kind of action. Secondly, this qualification and clarification account for the fact that some types of state aid are compatible with the European Union and enumerated in the Treaties. The Treaties distinguish between two such types of state aid: state aid that is compatible, and state aid that may be classified as compatible with the Treaties. Aid given after, for example, a natural disaster, is not a problem (compatible). Aid given to underdeveloped regions inside the European Union can be deemed to be compatible with the Common Market. The wording “may” signifies that such aid needs to be examined in the light of their effect on trade among member states. Thirdly, no member state can by itself introduce new state aid. In case such measures are contemplated, member states have to inform the Commission, which will undertake an analysis. Only if the Commission gives the green light afterwards, can they be implemented. Over the years the Commission has gained considerable influence on the application of state aid in the European Union. As is the case for anti-trust policies,53 the Commission has pursued a vigorous and extremely active role, and acted in the very best tradition in its role as “guardian of the Treaties”. The Commission has been tireless in its efforts to investigate cases of state aid and has relentlessly asked member states to justify state aid, and in countless number of cases, successfully forced member states to abolish, or alter, existing or newly introduced state aid.

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An example of the Commission’s activities can be found in the Commission’s communication on national regional aid.54 The Commission outlines the guidelines it applies for approval of national regional aid, providing member states with a tool that lets them know how to shape national regional aid to obtain subsequent approval from the Commission.

ENHANCED COOPERATION Enhanced cooperation is available in the toolbox, but has never been used really. Experience indicates that the European Union and member states prefer to make what could be called enhanced cooperation on an ad hoc basis and outside the institutionalized framework incorporated in the Treaties. The Schengen arrangement of free borders and the Economic and Monetary Union illustrate this. They are examples of British and Danish optouts and opt-ins,55 signifying that these two countries do not participate in certain areas of the integration without eliminating their option of joining at a later stage. Regardless of this the European Union is adamant that this window should be kept open. It was demonstrated in 1992 when Denmark, after a majority of the Danish population voted No to the Treaty of Maastricht, negotiated an opt-in clause covering four specific areas.56 During the negotiation before, and at the final stage, the other member states made it clear to Denmark that no agreement could be envisaged, which directly or indirectly, gave Denmark the possibility of blocking or preventing the other member states from moving ahead. The preamble to the Edinburgh agreement states “noting that Denmark does not intend to make use…in such a way as to prevent closer cooperation and action among the other member states…”.57 When the proposed European Constitution was negotiated in 2004, the Danish position — unchanged in substance — had to be formalized in a way that took into account what had happened with the Treaties and the integration since 1992. A protocol to the proposed Constitution58 repeats in the preamble that Denmark will not prevent closer cooperation among the other member states. The political signals over the last decades, given by incorporating provisions covering enhanced cooperation in the proposed Constitution, are meticulously clear in giving the message that a member state cannot prevent the others from moving ahead and that enhanced cooperation, albeit not in use, is very

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much in the mind of the European Union and its member states as an instrument, which may be useful, even indispensable, in the future.

BUDGET/FINANCIAL PERSPECTIVES i) Technically the budget is divided into appropriations for commitments and appropriation for payments. The first type shows how much the European Union can commit itself to payments taking place in the current or subsequent fiscal years. The second type indicates how much the European Union is actually paying in the current year as a consequence of commitments undertaken in preceding years or the current fiscal year. More interesting is the dichotomy between obligatory and non-obligatory appropriations.59 Obligatory appropriations follow from legal acts determining expenditure. If for example a guaranteed price to farmers has been fixed in a legal act, payments to farmers based on that legal act are classified as obligatory expenditure. Or in other words: obligatory expenditure ensures that the European Union posseses appropriations to fulfil commitments arising from legal acts. There is very little scope for adjusting or amending appropriations under this heading during the budget procedure. The similarity to national budgets is quite clear. If a national government/parliament determines a certain level of pension, the money to pay the pension to qualifying citizens must be available in the national budget. Typical examples of obligatory expenditures in the EU budget are found under the Agricultural chapter. Non-obligatory expenditures are discretionary in the sense that a certain level may have been indicated in a legal act, but not in a form specifying a right for a citizen or an enterprise to receive a specific sum of money from the European Union. Typical examples of non-obligatory expenditure in the European Union are found under the heading of Research and Technology or development assistance. This classification explains why most of the institutional interplay around the budget took place under the headings for non-obligatory expenditures where the institutions and, in particular, the European Parliament, had some room for manoeuvre. It also reveals why it lost its significance when pluriannual financial frameworks were introduced, reducing the annual flexibility for appropriations and making the annual budget procedure less important as the framework had already laid down the tracks. ii) The adoption of the annual budget follows the normal EU procedure. The Commission proposes and the Council takes a first stance after which it

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is forwarded to the European Parliament for consultation, giving the Parliament the opportunity to put forward amendments. After further consultation between the Council and the European Parliament, the budget is approved at the end of the year. According to the Treaties, it is the prerogative of the President of the European Parliament to approve the budget, which is scheduled for the last session of the Parliament, taking place in the middle of December. This procedure normally runs without glitches, but institutional interplay has led to conflicts a couple of times. In December 1979 the President of the European Parliament, acting in conformity with a majority of the Parliament, refused to approve the 1980 budget. With no budget because of legal and/or political problems, the institutions had to consider referring the matter to the Court of Justice or threatening to do so. As the heart of the matter was a struggle for political influence, with the Parliament trying to get more power at the expense of the Council, politicians in both camps have preferred to settle the matter between themselves each time instead of leaving it to the Court of Justice. It took six months to settle the matter, and a final budget for 1980 had to wait until June 1980 before it was approved. Especially in the 1970s and 1980s when the powers of the European Parliament were more limited, Parliament saw the budget as a battleground — actually the only one — for drawing attention to its wishes for more power. All in all, however, this annual procedure has worked quite well and produced an annual budget as the financial framework for EU activities. iii) In the late 1980s, when the Commission under the presidency of Jacques Delors, put forward grand designs for the development of the European Union, member states felt that an annual budget did not give a sufficient basis for the planning and execution of pluriannual programmes. Pluriannual financial frameworks or financial perspectives with guidelines on how much the European Union could, or should, spend every year on various policies were called for. This would provide a tool for better planning and give a clear idea of how the European Union developed, and in particular, how the spending was distributed among the common policies. The first financial framework covered five years from 1988 to 1992. The last one, presently being introduced, covers seven years: 2007 to 2013. The pluriannual financial framework defines expenditure flowing from common policies. Adoption takes place in the European Council (by the Heads of State and Governments). The financial framework for 2007 to 2013 was approved at the meeting of the European Council in December 2005 under the British presidency.60

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As the financial framework has to cover seven years and contains expenditures for all major policies, they are fairly large, complicated, and detailed, but highly political documents, which are illustrated by the approved financial framework for 2007 to 2013.61 An analysis of the expenditure side of the EU budget over the last thirty years shows basically two things. First, the budget’s share, measured in relation to total EU Gross Domestic Product (GDP), has crept upwards, but neither fast nor far, in view of the time span. Second, a redistribution to diminish the share of agricultural support has taken place despite the impression, sometimes given by the media, of the opposite.62 Total EU expenditure rose between 1973 and 1980 from 0.53 per cent to 0.80 per cent of the European Union’s GDP. The financial framework 2007–2013 puts an upper ceiling of 1.045 per cent of GDP on this, which corresponds to 862 billion Euros. In view of the effort to beef up a number of EU activities and common policies, this cannot be said to represent a substantial increase. It clearly shows that the European Union has only to a limited degree been able to float new common policies to replace or supplement national policies. It also shows that EU expenditure has been kept in rein and exclusively earmarked strictly for financing common policies. Any attempt to turn it into a driver for further integration, or an economic policy instrument to influence and even control, the business cycle, has been resisted. The attitude to the integration and how the institutions perceive themselves are reflected by positions taken towards the financial framework. The Commission is the driver of the integration and seen by others, but primarily by itself, as the institution to push the integration ahead and introduce new common policies. It proposed a financial ceiling of 1.24 per cent of GDP corresponding to 1.022 billion Euros or almost 20 per cent more than that approved by member states. The European Parliament, also a traditional supporter of the integration, opted for 1.18 per cent (975 billion Euros). The Council under the British presidency, with Britain being traditionally one of the member states trying hardest to reduce expenditure, proposed 1.03 per cent (849 billion Euros), while a group of six countries — Germany, France, the United Kingdom, Sweden, Austria, and The Netherlands) tried to fix the ceiling at 1.00 per cent of GDP, corresponding to 824 billion Euros.63 Support for agriculture in the European Union under various headings and with various purposes took up between 67 per cent and 78 per cent of total budget expenditure between 1973 and 1980, depending on market conditions and world market prices. In the present financial framework, a

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share of 35 per cent is going to agriculture. Market support for agriculture has thus seen its share of total budget being approximately halved over about thirty-five years. From 1973 to 1980 the Regional Fund, the Social Fund, and the Guidance Section of the Common Agricultural Policy used a little less than 10 per cent. Today they are labelled structural and cohesion funds and have risen to 35 per cent. Food aid and assistance to developing nations have been kept at about the same level, that is, approximately 6 per cent of the total budget. The same goes for administrative expenditure. It has been possible for the European Union to expand from nine member states in the second half of the 1970s, to twenty-seven member states without increasing the share of administrative costs.64 Competitiveness with 8 per cent in the financial framework, and citizenship and justice and home affairs with 1 per cent, did not exist in the period 1973–1980. The development of the budget, its total size, and its components underline the fact that the EU budget is an instrument for implementing common policies agreed by the Council, and that it has been possible to restructure the budget to take new priorities into account. What has not been possible, however, is to change the budget into a vehicle for further integration by channeling a substantially bigger share of total expenditure in the European Union (national and European Union) from national budgets to the EU budget. In the political debate in the European Union much focus is on competitiveness. It is true that expenditure earmarked for policies to improve competitiveness is more and more visible on the budget. The most striking observation is, however, that the share of support to agriculture has gone down and the share to structural and cohesion funds has risen markedly. This shows that the budget has actually assumed a political role in one area, namely, to redistribute income from the wealthier nations to the poorer nations, who get, by far, the lion’s share of the structural and cohesion funds. The European Union emulates in that respect, albeit a bit timidly, the policies of the nation states. For some of the smaller and less wealthier member states, the effect has been significant, but for the European Union as a whole, small. The political climate for growing expenditure on the EU budget has for the last thirty-five years been influenced by the tendency to be more stringent with public budgets. Figures65 reveal that in the last five-year period of the 1970s, public expenditure was approximately 46 per cent of total GDP in the

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European Union while the corresponding figure for EUROland in the first five years of this decade was approximately 48 per cent. Member states have had to follow a rigorous policy at home regarding public expenditure, which inevitably has made it much more difficult than before 1980 to increase the share of the EU budget measured to GDP. Given this fact, it is actually remarkable that the share has gone up almost 25 per cent from 0.8 per cent to 1.045 per cent of EU Gross Domestic Product. Another factor holding back EU expenditure is the member states’ comparison of what is paid into the budget and what is paid out from the budget to each member state. The whole idea behind a common budget fades away in such a context. Finally it must be borne in mind that the budget only reflects a part, and in reality, a small part, of the integration. The budget only comes into play when talking about common policies giving rise to expenditures such as the Common Agricultural Policy, social and cohesion funds, aid and development. A large part of common policies does not give rise to expenditure from the budget. The Economic and Monetary Union, the Single Market, the Common External Trade Policy, and the overwhelming part of the Common Foreign and Security Policy are run without financial consequences for the European Union. The same goes for policies such as protection of the environment, anti-trust policy, and restrictions for state aid and subsidies.

TAX There are three aspects of tax harmonization: • •

•

Indirect taxation (excise duties, value added tax — VAT). The European Union has moved substantially forward. Taxation of companies to facilitate activities across borders (for example, in the case of mergers) between member states. The European Union has undertaken some approximation measures. Direct taxation of persons (income tax). No EU legislation.

The Treaties do not — directly or indirectly — contain provisions for harmonization of taxes as an objective on its own. Tax harmonization comes into play only if non-harmonization jeopardizes one or more of the objectives mentioned in the Treaties. Tax harmonization is inscribed and controlled by the principle of non-discrimination between domestic economic activities and comparable economic activity offered by another EU member state. This explains why indirect taxation and taxation of companies with cross border activities have been, and are, objects for tax harmonization, while

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direct taxation of persons is not. The Treaties — from the original Treaty of Rome to today’s Treaties after a number of revisions — only contain Articles relating to indirect taxation found in Articles 95–99 in the Treaty of Rome.66 There are no Articles concerning harmonization of taxation of companies. The existing legal acts approved by the European Union aiming at such harmonization have as legal basis Article 100 in the Treaty of Rome,67 which is a provision used for harmonization to realize and secure the Single Market and its function that requires unanimity.

Value Added Tax In 1967 the European Union of six member stares decided to replace various general sales tax or comparable systems of indirect taxation68 with one, single major system — value added taxation (VAT). VAT was chosen because it is neutral for the supply chain and a fairly easy system to administer. Several of the then existing systems distortedly increased domestic economies’ production costs, thereby undermining international competitiveness. The six original member states adopted a VAT system in 1970. All countries later adhering to the European Union have joined the VAT system. Two main questions had to be addressed. First the assessment base, second, the rate, or rather, the rates. It was considered important to agree on a uniform assessment base (which goods and services are subject to VAT and which ones are not) for two reasons. The first was economic and had something to do with respective competitive advantages. It was felt that differences in the assessment base could distort competition among members. If a product was subject to VAT in one member state, but not in another one, they did not compete on an equal footing. The second one was more technical, but in the European Union, presumably equally important. The member states had agreed to include VAT in the financing of the European Union. The agreement meant that up to one percentage point of a uniform assessment base could be paid into the European Union to finance common policies. It was clear that to make this work, the assessment base needed to be uniform. If not, the burden of financing the EU would be unevenly distributed. Member states with a small assessment base (few good and services) subject to VAT would pay less than member states with a large part of goods and services subject to VAT.69 After long and, at some times, tortuous negotiations, the European Union approved the sixth VAT directive70 in 1977, which provides a uniform assessment base. Not only did it constitute a major breakthrough with regard

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to the financing of the European Union, but it contained a large number of common definitions that would help in cementing the removal of hidden barriers for trade in goods and services because of technical differences regarding indirect taxation. When putting its plan for the Single Market forward, the Commission aimed at an approximation of the VAT rates applied by member states. It proposed two bands: one between 14 per cent and 19 per cent, classified as the normal rate, and another one for goods deemed “necessary” and therefore subject to a lower rate, with a band of 4 per cent to 9 per cent. The member states were difficult to deal with. Rates had consequences for domestic budgets and redistribution of income. The Commission’s proposals never came close to being adopted. Instead,71 member states in the Council insisted that a minimum rate of 15 per cent was applied, with the option of a few reduced rates not falling below 5 per cent where special reasons were found valid.

Excise Duties The European Union started to look in earnest at excise duties after the introduction of the Single Market, and in the course of 1992, a number of directives concerning selected goods were approved, which established a common principle, decided definitions, specified goods to be taxed, and laid down rules concerning rates. The principle chosen is that goods subject to excise duties are taxed in the member state where they are consumed. Goods covered by the directives are: alcoholic beverages, manufactured tobacco, and mineral oils. As was the case for VAT, it proved difficult to agree on harmonization of rates so the European Union chose the same approach as for VAT, namely to opt for minimum rates.72 In 2003 the European Union introduced a general scheme of taxation of energy products and electricity which extended the principle of a minimum rate from mineral oils to coal, gas, and electricity. It is noteworthy that while the directives on alcoholic beverages and manufactured tobacco were in the traditional EU mould of preventing distortion of competitiveness, the directive on energy products had a wider ambition, including energy policy and conservation of energy, as envisaged for example in the goals set out in the Kyoto Protocol about global warming. It is one of the first times, maybe the first time, the European Union looked beyond the objectives enshrined in the original Treaties when introducing directives on fiscal harmonization.73

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Traveller’s Allowances When travelling inside the European Union travellers are allowed to tax-free allowances below a value of 600 Euros, provided the goods are for a noncommercial nature and bought in another member state in normal conditions, that is, tax being paid there for the goods. Travellers arriving from third countries face similar rules, but the standard value allowed is 150 Euros.

Duty-Free Sales Abolishing duty-free sales for those travelling between member states has been one of the most contested and disputed decisions, at least, compared with its significance for the economy. The decision to abolish duty-free sales for travellers between member states was taken in 1991, but was subject to one of the most intense lobbying from various business circles so much so that implementation had to wait until 1 July 1999.74 The economic significance of duty-free sales was fairly limited75 and can be estimated at around a little less than 6 billion Euros (less than one thousandth of EU total GDP). Approximately 18 per cent takes place in the United Kingdom, which explains why a large part of the lobbying to maintain the duty-free sales originated in the United Kingdom and was orchestrated from there. It is estimated76 that the revenue loss for the U.K. Exchequer by abolishing duty-free sales is approximately £100 million, a sum negligible for the U.K. economy as a share of total GDP. If it is negligible for the United Kingdom with the largest share of duty-free sales, the revenue loss would also be negligible for the other member states. One cannot argue the case for or against duty-free sales by weighing the increase or decrease in revenue for the public budget. The sums are simply too small. The debate also touched upon job creation or job losses, with the supporters of duty-free sales postulating that a number of jobs would be lost in case of its abolition. This is difficult to accept, as it must rest on the assumption that if the consumer does not buy duty-free goods, the sums will be saved instead for eventually buying something else. A loss of jobs in the European Union would only come about if the consumer either reduced total consumption or switched from EU produced goods to foreign produced (possibly a combination of both). This cannot be excluded, of course, but even if the consumer did so, the comparatively small sum would make the number of jobs lost limited. The point, however, is that for certain industries, there would be job losses as the consumption of certain highly taxed goods

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could be expected to go down. This explains the activity of pressure groups acting on behalf of a tiny fraction of total GDP and total number of jobs. In the same vein came the argument that certain ferry routes and/or flights would no longer be profitable as revenue from sales of duty free goods kept them alive. That may be correct, but the counter argument is that if duty free sales made them viable, why keep them alive as this was certainly a case of economic distortion. Both the Commission and independent analysts have looked into the consequences of abolition of duty-free sales and have come to the conclusion that the effect on the total economy is negligible.77 The problem was in reality a political and psychological one. Sale of duty-free items was one of the areas where many EU citizens felt the European Union had an impact on their daily lives. Every year they travelled primarily to the south of Europe, and on their way to the destination and back, they bought duty-free items — and enjoyed it. The basic human instinct to buy something at a lower price, and even more, the feeling that tax authorities were robbed of some revenue, made people feel happy. It became a part of life for many Europeans. This explains more than the target-oriented lobbying performed by business why European politicians were so reluctant to do away with sales of duty-free items. It is an example of how a very small issue creates psychological and emotional feedback way out of proportion to its genuine significance. It is, however, also an issue which tells other regions around the world looking at a future economic integration that such matters cannot or should not be taken lightly as they have an impact on the popular support for the integration. Due to the small geographical distances in Europe and differences in rates for highly taxed goods such as alcoholic beverages and tobacco, the European Union has been confronted with the question of derogation for certain member states from EU rules. The ability of the European Union as a problem grinder was demonstrated and the understanding between member states paved the way for such derogations, even if they ran counter to basic EU principles. When Denmark joined the European Union in 1973, the Danish excise duties for highly taxed goods were much higher than the German ones. Denmark got a three-year derogation, which subsequently was extended, albeit with some modifications for the restrictions. The EU institutions realized, and Germany78 accepted, that without restrictions for travellers’ allowances imported into Denmark, the high Danish excise duties would have to be lowered with unwanted financial repercussions. In short, Denmark

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was granted derogation because it could be proven that no restrictions on travellers’ allowances would undermine the Danish tax system. In 1991, the European Union granted Ireland and Denmark derogation.79 The European experience clearly shows that an economic integration is compatible with certain restrictions on travellers’ allowances. The point, however, is that to avoid disturbing the political climate, it seems wise to bring them under EU supervision.

Direct Taxation: Companies There is a strong case to be made for EU action with regard to taxation of companies to facilitate and encourage companies to look at the European Union as their home market and home base. Taxation should not only remove barriers, but also stimulate a much needed restructuring of European business to bring about higher competitiveness and productivity. So far the European Union has had to content itself with measures designed to remove obstacles for certain activities across borders and prevent harmful tax competition from attracting enterprises by offering better conditions than other member states. The two existing directives are: •

•

A directive to avoid double taxation on dividends paid by subsidiaries in one member state to parent companies in another member state.80 The basic idea is to ensure neutrality, but not to promote cross-border activities. The second directive establishes a common system, ensuring that any capital gains arising from mergers or comparable actions will be taxed where the gains are realized.81 Again the objective is to ensure neutrality.

In 1997 the European Union agreed on a code of conduct for business taxation,82 which lists a number of potentially harmful measures, including tax rates deemed to be excessively low. Member states undertook to roll back such measures, and new measures deemed to fall under the same label are subject to a stand still clause. This resolution opens the door for much wider and deeper cooperation regarding taxation of companies. Member states for the first time acknowledged the importance of tax not only as a competitive measure, but also its importance for stimulating genuinely European enterprises. This case has been made for a long time without much political followup in the European Union. The literature often disputes how important taxation is when foreign business chooses where to invest. Other factors such

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as labour costs/productivity, skill of labour force, facilities to promote business, etc. seem to carry more weight. This is probably true, but when looking at the European Union, it must be borne in mind that all these factors tend to be more, rather than less, uniform among member states. This explains why even small differences in taxation can be decisive for foreign business when selecting where to invest within the European Union.83 Inside economic integration, the trend towards convergence for basic economic conditions may make taxation play a bigger role compared with countries not participating in an economic integration. In 2003 the Commission, stepping into its role as driver of the integration, took the initiative and submitted a Communication about taxation of companies in the Single Market.84 The Communication started by following the traditional EU method. It identified a number of points where national tax rules constituted barriers or blocked company activities across borders. After doing this, the Commission called for these tax rules to be abolished. To a certain extent, that has already been achieved. The second part is a new approach and can be compared to the pathbreaking new ideas the Commission put forward when establishing the Single Market in the late 1980s and early 1990s. The Commission takes the view that the Single Market is now so well developed that it makes sense to look at a company’s result as a consolidated whole for the EU area. Consequently this result should be the taxable amount and not broken down into portions, subject to different rules of taxation in individual member states. Conceptually this removes the whole panoply of double taxation, parent companies, and subsidiaries, and consolidates the result for the company’s activities inside the European Union. Not surprisingly, this concept is linked to the legal possibility of establishing a European company. Not surprisingly, almost at the same time, the Commission put forward proposals to that effect.85 The challenge for the European Union is to gather support for the view that the taxation of companies is not, strictly speaking, a taxation issue, but a question of whether the European Union is able to shape the conditions for genuinely European companies perceiving the European Union as their home market and reaping the benefits arising from such a perception. It is a necessary step to do away with rules that block or complicate crossborder activities. It is even more important to establish genuine European tax rules treating companies as European ones, and not compartmentalizing them as national ones with activities in other member states.

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Direct Taxation: Persons The European Union does not deal with taxation of personal income. There is one directive in force and another one being negotiated in the periphery of personal income. Both of them are introduced not to harmonize personal income tax, but to put financial institutions in member states on an equal footing when competing for personal savings. They are thus enshrined in the “normal” EU pattern of non-discrimination to avoid distortion of basic economic factors. The directive on taxation on savings aims at ensuring that savings income of an EU citizen will be subject to minimum effective taxation regardless of whether the savings is placed in the home country or in another member state.86 In 2001 the Commission submitted a Communication87 aimed at removing obstacles and barriers for persons wishing to invest in pension schemes outside their home country. The objective is to level the playing field for financial institutions operating in the area of occupational pensions.

A Coherent EU Tax Strategy The European Union had to wait until 2001 to see a coherent proposal for a tax policy in the Union, when the Commission put forward a Communication to the Council.88 The Communication takes into account the development and the attitude in the member states and among the population towards the European Union and harmonization. It is a beautifully balanced policy document feeling its way forward in this very sensitive area. It confirms tax harmonization as being linked to the smooth operation of the Single Market, removing barriers and obstacles, and safeguarding respect for the non-discrimination principle. This is in conformity with traditional and well-known EU methodology going back to the goals enshrined in the original Treaties. This approach falls in line with the wish of a large majority of member states, namely, that EU tax policy and possible harmonization/approximation in this area should not be a goal in itself, but a policy supporting the genuine goals in the Treaties. To drive this point home, the Commission states unequivocally that there is no need for an across-the-board harmonization of the tax systems in member states. These clear principles connote two major observations of both a political and technical nature:

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Firstly, the European Union’s activities and policies regarding tax matters must be seen in a wider context and linked to other major policies such as the Lisbon Programme about enhanced competitiveness, energy policy, and environmental protection policies. Tax policies are classified as an instrument in the endeavours to achieve goals — not a goal in themselves. Secondly, tax policies must be measured and subject to two of the European Union’s major principles: Subsidiarity, meaning that the European Union only acts if member states are not able to deliver a solution, and proportionality, meaning that the European Union only acts when it is necessary to achieve one or more of the goals enshrined in the Treaties. The European Union has often been accused of seeking harmonization, for the sake of harmonization and behaving without any sensitivity for the feelings of people. The above-mentioned Commission Communication illustrates how the European Union is able to read the criticisms and adapt.

COMPANY LAW i) The European Union’s activities concerning company law were for a long time confined to free right of establishment and the non-discrimination principle. Member states should not require a company originating from another member state to comply with formalities other than those laid down for domestic companies.89 More specifically, the original Treaties specified that protection of shareholders, creditors, and third parties in general, should be equal, regardless of where in the European Union a company had its headquarters.90 It was not too difficult for the European Union to move ahead with that level of ambition. A number of legal acts (directives) were approved during the 1970s and 1980s, harmonizing various aspects of company laws and with all of them aimed at securing non-discrimination and the same level of protection, regardless of where in the European Union the company had its headquarters. A higher level of ambition focused on how to install a genuine European company law that facilitates and promotes the emergence of European companies. This law should apply irrespective of whether European companies had outgrown the national incubator, were formed by mergers and/or acquisitions, or built from scratch as a European company. The ambition, however laudable, proved evasive. Member states were simply not willing to accept the degree of harmonization required for that purpose. Proposals put forward in 1972 to coordinate the structure of public limited companies, and in 1985, to harmonize national rules for cross-border

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mergers, were left on the shelf by member states, forcing the Commission to realize that this method was a dead end. ii) When harmonizing company law, the European Union ran into a problem in that normal harmonization usually comes with provisions for a product or service, for example, for a lawnmower, noise standards are set, and for a profession such as, for example, an architect, what is required to qualify as one. Technically it may be difficult, but conceptually it is not. Company law to harmonize rules and regulations regardless of whatever they do, calls for a completely different methodology than “normal” harmonization/ approximation of laws. As was seen in other areas of the Single Market, the process of harmonization or approximation of national legislation and rules had its limitations. This was especially the case in legally complicated areas such as company law. Each member state had not only vested economic interests, but also a long tradition of providing a legal framework tailor made for domestic companies. Member states with support from strong industrial and legal interest groups were not disposed towards dismantling this framework to open the door for competition from other EU countries. A specific example to illustrate how member states used and are still using company law to their own advantage is the Dutch legislation concerning holding companies. Many companies from other member states find them so attractive that they have established holding companies in the Netherlands, while having their operational headquarters and industrial activities in other member states. There are several reasons for this, for example, tax provisions and a regulatory framework built up over many years that is friendly to holding companies and tends to their needs in a smooth way. The European giant, EADS (European Aeronautica Defence and Space Company), is legally anchored in a holding company in The Netherlands, while having only a minor part of its industrial activities in that particular country. Recently91 the international financial press focused on special provisions in Dutch legislation that allow for the establishment of a foundation holding shares with special voting rights, which constitutes a legal bulwark against attempts to buy its shares in a takeover bid. The Italian fashion maker Gucci and the European steel conglomerate Arcilor have both made use of these provisions.92 It is a clear illustration of how member states of the European Union compete with one another to attract favourable and rewarding business, and consequently an equally clear case of non-optimal factor allocation, as resources are allocated not strictly based on economic competitiveness, but differences in national legislation among member states.

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The Single Market and the gradual realization as manifested in the Lisbon Programme that the European Union was losing competitiveness, experiencing low economic growth, for example, because of national barriers for the establishment of genuine European companies, were instrumental in forcing the Europeans to take a hard look at the necessity of dismantling such barriers and pave the way for new — European — rules. And as was the case for the Single Market, a new method was called for. The Commission withdrew the two above-mentioned proposals in December 2001, thus virtually abandoning its efforts to see progress in these two crucial areas through harmonization/approximation. iii) A couple of months earlier the Commission had unveiled another itinerary. A group of High Level Law Experts was formed to initiate discussions on the need for the modernization of company law in Europe. The group’s report identified a long list of items (capital formation and maintenance rules, group and pyramid structures, and many others) calling for action. The Commission followed up on the report with an action plan submitted to member states in May 200393 — two years after the establishment of the group of experts and its withdrawal of the two major proposals. The main thrust of the Commission communication is to strengthen shareholders’ rights, protect employees, creditors, and other parties, and adapt company law and corporate governance rules to various kinds of companies. The Commission clearly opted for a modernization of company law and rules to make cross-border activities easier. It thus inscribed its new approach about company law not only in the traditional mould of nondiscrimination and protection of rights, but also with the view to enhance the European Union’s competitiveness. The experience gained in the 1970s and 1980s gave ample evidence that the European Union was in for the long haul, so the Commission chose a tenyear action plan with twenty-four different decisions on the table, including legislation and non-legislative measures. To accommodate the frequently heard criticism that the Commission chooses a haughty approach, a far-reaching consultative process was launched, inviting interested parties to submit reactions and answers to fourteen questions (before 31 March 2006), with the view to publish a report on the basis of the answers.94 EUROCHAMBRE’s (Association of European Chambers of Commerce and Industry)95 answer to the questions put forward by the Commission illustrates the responses. Representing all European companies, sometimes with divergent interests, EUROCHAMBRE found it difficult to be too specific, but the answers nonetheless provide an interesting

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and useful idea of how European businesses look at the Commission’s action plan. iv) The European Union has established a EU legal framework for two genuinely European legal basis for companies: •

•

European Economic Interest Group (EEIG).96 The idea behind EEIG is that companies, firms, or other legal entities wishing to make crossborder activities can set up a new legal body to solve the problems connected with cooperation among companies in individual member states. This should open the door to a simpler way of cross-border activities and remove some of the barriers and blocks associated with them, for example, distribution of profits and tax burden. Statute for a European Company.97 The name in Latin, “Societas Europaea”, or SE has been chosen for the European company. The idea is to scrap twenty-five national and domestic legal systems and replace them with one uniform and unique EU legal framework to merge companies or form holding companies. The question of tax, which has constituted a major barrier for cross-European companies is, however, not solved, as the SE is subject to the same tax rules as any other multinational company operating in Europe.

These two initiatives, adopted by member states, are useful steps forward, but European businesses have found them unattractive as can be seen by how little they have used them. v) The benefits flowing from deregulation or rather EU regulation, instead of national and frequently divergent regulations, seem intuitively obvious, but few academic studies have tried to verify it on the basis of empirical findings. One of the most recent ones,98 published in 2006, illuminates the economic benefits, and showed how rulings by the European Court of Justice followed by market forces can create a de facto regulatory framework in the European Union and introduce some kind of common standard. The starting point is three recent cases of the Court of Justice99 stating that firms have the right to choose their legal seat within the European Union, regardless of the location of directors, owners, or real activities. In one specific case, the Court of Justice ruled that Inspire Art Ltd could be incorporated in the United Kingdom, even if it operated entirely in The Netherlands. The study shows a dramatic increase in the number of firms from other member states moving to the United Kingdom to take advantage of the costs

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benefits associated with such a move. The figures are stunning. Between 1997 and 2005, more than 70,000 foreign private limited companies were incorporated in the United Kingdom. Firms have incorporated in the United Kingdom mainly because the minimum capital requirements are more favourable, and the direct and indirect costs of national incorporation procedures favour the United Kingdom. The abstract of the study formulates it this way: cross-country incorporations are driven by relative prices, in particular by minimum capital requirements, incorporation costs, and time to gain legal recognition. This has triggered changes in rules and regulations in other member states to match the EU rules to stop the exodus and keep firms in the home country. The UK rules have thus, through the rulings of the European Court of Justice, and through the firms’ awareness of comparative advantages, their adjustments, and willingness to reap economic benefits, become EU standards, even if no legal acts to this effect have been adopted by the EU institutions.100

SLOWER DECISION MAKING/DELAYS IN IMPLEMENTATION Number of Member States — Time for Decision Making The discussion — academic as well as political — about the decision making in practice focuses on whether the increasing number of legal acts can be handled by the EU machinery. It is often dominated by reports — frequently of an anecdotal nature — alleging a growing time lag from when the Commission puts forward a proposal on the table to its adoption by the Council and on to its implementation by member states:101 The interesting point is that neither academic studies of which there are some, but not that many, nor the Commission’s own analyses, confirm that view. On the contrary, the evidence points to a reasonably smooth-running decision-making procedure. The time lag from when a proposal is put forward to its adoption is decreasing and not increasing. A study by three academics in 1986102 looks at 472 EU decisions from 1958 to 1981 and finds no tendency towards a longer decision-making time. This analysis, however, does not include all proposals. Even if its findings are beyond dispute, the weak point is that it does not cover the whole panoply of proposals. A study published in 2000103 makes an analysis covering all proposals104 for binding EU legislation in the ten-year period from 1984 to 1994. This period in interesting for three reasons:

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Firstly, on 1 January 1986, the European Union was enlarged with Spain and Portugal (from ten to twelve members), a step seen by many as leading to a delay in decision making. Secondly, on 1 July 1987, the Single Act introducing the Single Market and going from unanimity voting to qualified majority voting in a number of areas, came into force. Most observers expected speedier decision making, as the Council could vote instead of waiting for unanimous approval. Thirdly, the Single Act meant that the European Parliament was integrated more strongly in the decision-making process by consultative procedures, which should lead to extended decision making. At the end of 2006, a study by the “Sciences Po” university in Paris revealed that decision making in the European Union is faster after enlargement with eight Central and Eastern European countries, plus Malta and Cyprus in 2004, than before. The somewhat surprising observation is that it took on average 459 days before enlargement, but only 331 days after enlargement to decide. The analysis is comparative in the sense that all kinds — and the same kinds — of decision making, are used before and after. The study offers some preliminary comments to explain why the shortening may have taken place. The Commission has put forward a smaller number of proposals, giving the Council and the European Parliament more time to find a compromise for the proposals on the agenda. The dialogue between the Council and the European Parliament seems to have improved significantly. Even if unanimity is still looked for in cases where qualified majority is also possible, there is an emerging tendency to move faster towards voting, when the first round or two signal that unanimity cannot be achieved. In other words, the time devoted to rallying member states whose position indicates that they cannot, or will not, be accommodated has been cut down.105 The overall conclusion is that there is no evidence of an increasing time lag in the period. The studies puncture the myth that as the number of members goes up, the time needed for decision making follows. In other words, there is no evidence to support the view that a larger number of member states automatically leads to a longer time for adoption of proposals. Institutional changes with a strong and tangible impact on the time needed for decisions emerge as much more decisive in influencing the time sequence for decisions. The conclusions can be summarized this way:

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Qualified majority voting instead of unanimity reduces time for decision making substantially. The voting rules applied by the Council are the most important element for decision making in all those looked at in the analysis. Improved consultative procedures for the European Parliament are the second most important element influencing decision making. Not surprisingly, more elaborate consultation engenders longer decision making. Efforts to invoke the Parliament, aimed at bridging the so-called democratic deficits, connotes longer decision making, but not to the extent of wiping out what qualified majority voting gained. It can be said with some justification that the European Union made a trade-off, accepting an extension of decision-making time to reduce the democratic deficit. Fortunately for the European Union, this took place at the same time as more efficient voting rules in the Council more than made up for an unavoidable extension of decision making as a negative spin-off. Time needed for decision making depends on what kind of proposal is looked at. The fastest decision making is found for agriculture, the Single Market, Competition, and Trade. One explanation is that these areas constitute the core of the European Union. Legal acts directly applicable in member states have a shorter decisionmaking time than legal acts (directives) that are to be transposed into national law later. There may be several explanations for this. One of them is that regulations are used in agriculture and some other “core” areas, while directives are more widespread in many “non-core areas”. Another explanation is that member states prepare themselves more thoroughly when negotiating directives than regulations, knowing that at a later stage, they have to argue the case for the transposition of the directive into national law. They need a deeper knowledge to answer possible questions in the domestic parliament to avoid domestic parliamentarian problems.

The conclusions nourish a few thoughts about the future. There seems to be two emerging trends in decision making: The time to wait in the Council when member states signal that they are not prepared to negotiate in earnest is being cut. It makes it extremely important for member states not inside an emerging qualified majority to give the right signal. The Council and the European Parliament look better able to negotiate than some years ago when confrontations could be seen at least from time to time.

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The main trend may be that with twenty-seven members, the Council is increasingly becoming difficult to handle, while the European Parliament, well organized with political groups, find it much easier to sketch a common position. This augurs well for even more influence and maybe competence for the European Parliament, but could lead to a downgraded role for the Council.

Transposition into National Law There are a number of academic studies and Commission analyses discussing how long it takes for member states to transpose EU legal acts (in practice, directives) into national legislation. The question, which these studies and analyses seek to answer, is whether a “deficit” exists in the sense that member states do not respect the date set in the directives for transposition. This is a sore point politically as the mass media and political movements in member states questioning the European Union often postulate that member states are lagging far behind and not fulfilling their obligations. The truth is more complicated than simplistic statements and depends to a certain extent upon which sector of the integration is analysed. A study in 2006106 looks at practically all directives regarding social policy from 1975 to 1999 in the following five member states: Germany, Greece, the Netherlands, Spain, and the United Kingdom. Social policy encompassing, for example, equal treatment, working time organization, and other areas of protection and rights for the European labouur force is almost 100 per cent approved in the form of directives calling for transposition into national law. Frequently the transposition is technically complicated and politically sensitive, touching on organization of the labour market in member states, which in some cases is far from congruous. Thus it is a sector where the observer would see a good deal of problems arising from the transposition. The five member states were chosen because they represent various degrees of federalism versus unitarism and various degrees of administrative efficiency. On the basis of 300 observations, the study concludes that there is a considerable, even significant, time lag in the transposition of directives. Only 42.7 per cent of all directives are transposed according to the timetable agreed when the directive was adopted. In 17.5 per cent of all cases, transposition is more than two years behind schedule. The picture is much brighter when analysing transposition of directives adopted in the process of establishing the Single Market.

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The European Council has at four recent meetings107 invited member states to improve their record in transposing directives into national legislation. The Commission108 concludes in its report in December 2005 that member states are following up. Not only is the number of legal acts considerably109 higher than in, for example, the social sector, but also the Single Market is a “core” sector in the EU integration. This explains why the European Council pointed the finger at the need to respect agreed time limits for the transposition of EU legal acts into national legislation. It did so not only for legal reasons. The real reason was to speed up the full implementation of the Single Market and give further impetus to the Lisbon Programme to enhance the European Union’s competitiveness. Quite rightly, the Heads of State and Governments saw that unless legal acts approved by the European Union were quickly put to work in member states, even the best of intentions would come to nothing. The figures show that in May 2000, 3.9 per cent of adopted legal acts related to the Single Market had not been transposed within the agreed time limit. The corresponding figure at the end of 2005 was 1.6 per cent — close to the target of 1.5 per cent mentioned by the European Council. It is even more encouraging to note that the ten member states joining the European Union in 2004 have managed to reduce the number of adopted legal acts not respecting the transposition time limit to 1.9 per cent. It shows a genuine willingness and administrative capability, and obliterates the fear voiced before their adhesion that they would not, or could not, live up to obligations. Of the twenty-five member states, seventeen have reached the target of 1.5 per cent or less, and three more were close, leaving only five member states trailing. Twenty directives, which should have been transposed, are four or more years behind schedule. It is, of course, twenty too many, but compared with the 1,639 directives adopted to implement the Single Market, it is actually a tiny number. The average time for transposition is 9.2 months, with Finland as the fastest member state, and Germany,110 the slowest.111 In case member states do not fulfil their obligations to transpose a directive into national legislation within the agreed time limit, the Commission in its capacity as guardian of the Treaties, has to step in, and if necessary, take the member state to the European Court of Justice. The procedure based upon the Treaties112 runs like this: First step. The Commission notifies the member state in question of the delay, asking for an explanation, which the member state has two months to put forth.

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Second step. If the answer is not satisfactory, the Commission starts the procedure to take the member state to court with what is called a reasoned opinion. The member state has another two months to reply. Third step. If the member state does not introduce measures pointing to transposition, the Commission may and will, unless special reasons can be put forward, take the member state to court. This is no empty threat. On 19 April 2006, the Commission announced113 that it had decided to initiate infringement procedures against nineteen member states for having failed to transpose eight directives concerning the Single Market into national legislation within the time stipulated in the directives.

Conclusion There are several lessons to draw from the studies/analyses about alleged drawn-out decision making, and the delays in transposition of directives into national legislation: • • • •

•

Institutional changes facilitate the decision-making process. An increasing number of member states do not in itself prolong decision making. New member states from Central and Eastern Europe have not lagged behind in transpositing legal acts into national legislation. Member states calibrate — perhaps unconsciously — their attitude to transposition, depending on whether we speak about “core” issues such as the Single Market, or issues such as social policy. The legal procedures forcing reluctant or even recalcitrant member states to respect the treaties are effective.

THE ROLE OF THE EUROPEAN COURT OF JUSTICE IN ENFORCEMENT If the European Court of Justice rules in accordance with the Commission’s point of view, member states must comply. If not, the Commission, again as guardian of the Treaties, invokes the procedure114 to call the member state to order. The procedure can stretch over two stages and if member states do not comply after the second stage, a fine can be imposed. The reason for introducing fines for non-compliance is, quite simply, that the reluctance of some member states to follow a ruling of the Court of Justice leaves a political problem at the table for the European Union. What else should be done in such cases?

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One of the best-known cases, also illustrating how the European Union works as a problem grinder, is the sheep meat case. Before the United Kingdom and Ireland joined the European Union in 1973, France was the only significant producer of sheep meat. That changed after 1973. France became exposed to competition, leading it to impose measures in contradiction to EU rules. France was taken to court, and the court ruled that France would have to change its practice. France agreed, but on the condition that a common sheep meat regime was established that follows the same principles as common regimes for many other agricultural products. After a couple of years with proceedings at the European Court of Justice and negotiations, agreement was reached about a common sheep meat regime.115 Some observers would say that it is an abuse of the system; others would take the view that this is precisely how the European Union works. A member state having a problem asks the institutions to propose a solution, which is finally approved by the Council of Ministers. Fines are actually imposed in case of transposition not taking place and the above-mentioned procedure abortive. In 2000 the Commission took France to court. The Court agreed with the Commission and ordered France to take action. France did not do so, and the Commission, applying Article 228, obtained a second court ruling saying that “France has failed to take the necessary measures to comply fully with the judgment in Case C52/00 as regards the transposition of Article 3(3) of Council Directive 85/ 374/EEC of 25 July 1985 on the approximation of the laws, regulations and administrative provisions of the Member States concerning liability for defective products, and has thereby failed to fulfil its obligations under Article 228 EC”. The court imposed a fine on France with the wording “Orders the French Republic to pay to the Commission of the European Communities”, into the “European Community own resources” account, a penalty payment of EURO 31 650 for each day of delay in taking the necessary measures to comply fully with the judgment in Case C-52/00 Commission v France from delivery of the present judgment until full compliance with the judgment in that case”.116 In 2003 the European Court of Justice fined Spain 624,150 Euros for not ensuring the quality of inshore bathing water in conformity with EU rules.117 In another case also from 2006, the European Court of Justice ordered Italy to comply with earlier rulings, but came to the conclusion that the imposition of a penalty payment was not justified.118

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Notes 1. An illustration of this is the “Reinheitsgebot”. The German “Reinheitsgebot” for beer originated in 1516 and laid down specific rules for ingredients in beer, regardless of whether the same ingredients could be and were used in other food products. After yearlong battles in the European Union, the Court of Justice ruled in 1987 that beer could be sold in Germany, even if it contained ingredients not mentioned in the Reinhetsgebot. The Reinheitsgebot did not aim at protecting the German beer industry against competitors from other member states, but obviously it did so. As the Reinheitsgebot went back more than 450 years, it had a special status in German “folklore”, making it politically difficult to remove. 2. Full text of the two Articles. Article 100a. 1. By way of derogation from Article 100 and save where otherwise provided in this Treaty, the following provisions shall apply for the achievement of the objectives set out in Article 7a. The Council shall, acting in accordance with the procedure referred to in Article 189b and after consulting the Economic and Social Committee, adopt the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishing and functioning of the internal market. 2. Paragraph 1 shall not apply to fiscal provisions, to those relating to the free movement of persons nor to those relating to the rights and interests of employed persons. 3. The Commission, in its proposals envisaged in paragraph 1 concerning health, safety, environmental protection and consumer protection, will take as a base a high level of protection. 4. If, after the adoption of a harmonisation measure by the Council acting by a qualified majority, a Member State deems it necessary to apply national provisions on grounds of major needs referred to in Article 36, or relating to protection of the environment or the working environment, it shall notify the Commission of these provisions. The Commission shall confirm the provisions involved after having verified that they are not a means of arbitrary discrimination or a disguised restriction on trade between Member States. By way of derogation from the procedure laid down in Articles 169 and 170, the Commission or any Member State may bring the matter directly before the Court of Justice if it considers that another Member State is making improper use of the powers provided for in this Article. 5. The harmonisation measures referred to above shall, in appropriate cases, include a safeguard clause authorising the Member States to take, for one or more of the non-economic reasons referred to in Article 36, provisional measures subject to a Community control procedure.

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5.

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9. 10.

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Article 100b. 1. During 1992, the Commission shall, together with each Member State, draw up an inventory of national laws, regulations and administrative provisions which fall under Article 100a and which have not been harmonised pursuant to that Article. The Council, acting in accordance with the provisions of Article 100a, may decide that the provisions in force in a Member State must be recognised as being equivalent to those applied by another Member State. 2. The provisions of Article 100a(4) shall apply by analogy. 3. The Commission shall draw up the inventory referred to in the first subparagraph of paragraph 1 and shall submit appropriate proposals in good time to allow the Council to act before the end of 1992. Technically harmonization can and has been done in two ways. (a) By EU decisions, often in the form of a regulation directly applicable in member states, replacing national provisions with a EU provision. This is what is generally understood by harmonization. (b) Approximation of national provisions making them sufficiently congruous i.e. national provisions are still in force, but governed by the EU decisions often in the form of a directive defining their content and prohibiting their use as a barrier to trade. Treaty of Rome, Article 9.1. The Community shall be based upon a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect, and the adoption of a common customs tariff in their relations with third countries. Treaty of Rome, Article 95. “No Member State shall impose, directly or indirectly, on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products’ be prohibited between Member States.” Treaty of Rome, Article 30. “Quantitative restrictions on imports and all measures having equivalent effect shall, without prejudice to the following provisions, be prohibited between Member States.” The full list: Public morality, public policy or public security; the protection of health and life of humans, animals, or plants; the protection of national treasures possessing artistic, historic or archaeological value. Council Resolution of 7 May 1985 on a new approach to technical harmonization and standards, Official Journal C 136, 4 June 1985 available at http:// europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc& lg=EN&numdoc=31985Y0604(01)&model=guichett. Health and related issues. European Court of Justice, 17 May 1994, Case C — 41/93, available at http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEX numdoc&lg=en&numdoc=61993J0041.

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11. To become Article 95 in the Treaty of Amsterdam. 12. The main points were: a) a clearer obligation for the Commission to incorporate a high level of environmental protection in its proposals and b) that if the Commission did not react within six months after having been notified by a member state invoking Article 100 A, subparagraph 4 — in the Treaty of Amsterdam Article 95 — the said national provision should be deemed approved. 13. For right of establishment, see title III, Chapter 2, and for Services, see Title III, Chapter 3 of the Treaty of Rome and subsequent Treaties. The European Union distinguishes between free movement for services and right of establishment, thus each has its own chapter in the Treaties. 14. Economic Assessment of the Barriers to the Internal Market for Services, Copenhagen Economics, January 2005, available at http://eur-lex.europa.eu/ LexUriServ/site/en/oj/2005/l_255/l_25520050930en00220142.pdf. 15. http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 00100-r1./20ann-r1.en1.html. 16. Directive 2005/36/EC, Official Journal L 255/22 of September 30, 2005, available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2005/l_255/l_25520050930en 00220142.pdf. 17. Proposal for a directive on services in the internal market, COM (2004) 2 final/ 3 of 5 March 2004, available at http://europa.eu.int/eur-lex/en/com/pdf/2004/ com2004_0002en03.pdf. 18. The “Bolkestein directive” in the talk in town sometimes became known as the “Frankenstein directive” to give an impression of how some people looked at it. 19. Amended proposal for a directive on services in the internal market, COM (2006) 160 of 4 April 2006, is available at http://www.europarl.europa.eu/ comparl/imco/services_directive/060404_amendedproposal_com_en.pdf. 20. For a summary, see http://europa.eu/scadplus/leg/en/lvb/l24210.htm. 21. Presidency Conclusions, European Council 11–12 December 1998, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 00300-R1.EN8.htm. 22. Presidency Conclusions, European Council, 3–4 June 1999, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ kolnen.htm. 23. About the Lamfalussy process, see Commission Staff Working Document, “The Application of the Lamfalussy Process to EU Securities Markets Legislation”, Doc. SEC (2004) 1459 of 15.11.2004, available at http://ec.europa.eu/ internal_market/securities/docs/lamfalussy/sec-2004-1459_en.pdf and the European Central Bank’s Review of 17 February 2005, available at http:// www.ecb.int/pub/pdf/other/lamfalussy-reviewen.pdf. 24. Organization for Economic Cooperation and Development with Western European countries, North America, Australia and New Zealand, and Japan as its members in the 1960s.

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25. Council Directive 88/361 of 24 June 1988, Official Journal L 178 of 8 July 1988, available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi! celexplus!prod!DocNumber&lg=en&type_doc=Directive&an_doc=1988& nu_doc=361. 26. Article 73 b. 1. 27. Council Directive 93/22 of 10 May 1993 on Investment Services in the Securities Field. Official Journal L 141 of 1 May 1993. Available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31993L0022:EN:HTML. 28. For a summary, see http://www.euractiv.com/en/financial-services/marketsfinancial-instruments-directive-mifid/article-152179. For the full text, see Directive 2004/39 of 21 April 2004 on Markets in Financial Instruments. Official Journal L 145/1 of 30 April 2004, available at http://eur-lex.europa.eu/ LexUriServ/site/en/oj/2004/l_145/l_14520040430en00010044.pdf. 29. http://www.eurocapitalmarkets.org/files/ECMI/20PB1.pdf. 30. Article 8. b. 1. in Treaty on The European Union. 31. Article 48. 2. 32. Case 13/76, judgement of 14 July 1976, available at http://eur-lex.europa.eu/ smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en& numdoc=61976J0013. 33. Regulation 1612/68 of 15 October 1969, on The Free Movement for Workers in the Community, Official Journal L 257 of 19 October 1968, available at http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEX numdoc&lg=EN&numdoc=31968R1612&model=guichett. 34. Regulation 1408/71 of 14 June 1971, on the application of social security schemes to employed persons, to self-employed persons, etc., Official Journal L 149 of 5 July 1971, available at http://europa.eu/eur-lex/en/consleg/pdf/1971/ en_1971R1408_do_001.pdf. 35. Council Directive 2004/38 of 29 April 2004. Official Journal L 158 of 30 April 2004. Available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2004/l_158/ l_15820040430en00770123.pdf. 36. A useful overview can be found at http://europa.eu/scadplus/leg/en/lvb/ l33152.htm. 37. Of the fifteen before the enlargement with the Central and Eastern European countries in 2004, only the United Kingdom, Denmark, and Sweden stand outside. Slovenia joined as Number 13 on 1 January 2007. 38. http://www.euractiv.com/en/financial-services/efficiency-payment-systems/ article-157011. 39. Presidency Conclusions, Lisbon European Council, 23–24 March 2000, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 00100-r1.en0.htm. 40. Joint Statement from the European Commission and the European Central Bank of 4 May 2006, available at http://ec.europa.eu/internal_market/payments/ docs/framework/joint-statement_en.pdf.

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41. The progress can be followed in ECB Annual Reports, available at http:// www.ecb.int/paym/pol/sepa/html/index.en.html. 42. European Payments Council, “How to Make ‘the Single European Payments Area a Reality’ ”, Doc epc059_06 of 31 March 2006, available at http:// www.europeanpaymentscouncil.org/documents/EPC059_06/20how/20to/ 20make/20SEPA/20a/20reality/201_0.pdf. 43. An example of a private bank pronouncing its views on SEAP can be found at Deutsche Bank Research, 29 August 2005, Number 27 available at http:// www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD 0000000000191004.pdf. 44. op. cit. xxxvii. 45. Figures revealing how the growing German and British agricultural production was helped by the Common Agricultural Policy can be found in J. Ørstrøm Møller, Member States and the Community Budget (København 1982), Chapters VII, IX, and XI. 46. Article 39 in the Treaty of Rome, now Article 33 in the updated Treaties (Treaty of Nice). 47. The first attempt was made in April 1970 — even before the first enlargement of the European Union — when the Commissioner responsible for Agriculture, Sicco Mansholt, tabled his proposal — thus the Mansholt Plan. See for example http://www.ena.lu/europe/crisis-recovery/indexEN.html. 48. For references, see notes 59, 60, 61. 49. For a brief outline of the reforms, see the European Commission on CAP Reform http://ec.europa.eu/agriculture/capreform/index_en.htm. For a more in-depth description of the measures taken in 2003, see EU Press Release IP/03/ 898 of 26 June 2003, available at http://europa.eu/rapid/press ReleasesAction.do?reference=IP/03/898&format=HTML&aged=0&language= EN&guiLanguage=en. For an analysis of the reforms, see OECD 2004 Analysis of the 2003 CAP Reform, Paris, available at http://www.oecd.org/dataoecd/62/ 42/32039793.pdf. 50. Information provided by Poul Skytte Christoffersen, Head of Cabinet for the Commissioner in charge of the Agricultural portfolio. 51. Article 3.g. 52. Article 92 and Article 93. 53. Article 85 and Article 86. 54. Commission Communication 98 C 74/06, Official Journal C 74/09 of 3 March 1998, available at http://europa.eu.int/eur-lex/pri/en/oj/dat/1998/c_074/ c_07419980310en00090031.pdf. 55. In EU vocabulary, an opt-out clause means that a member state with the consent of the other member states, has chosen not to participate in specific chapters of the integration, having disclosed neither the intention nor the opposite of joining at a later stage. An opt-in clause means that a member state with the consent of the other member states has chosen not to participate

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56. 57. 58.

59.

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in specific chapters of the integration, with the option to join at a later stage. Citizenship, economic, and monetary union, defence policy, justice and home affairs. Official Journal C 348 of 31 December 1992, available at http://aei.pitt.edu/ 1337/01/Denmark_treaty_changes_1992.pdf. Official Journal C 356/310 of 16 December 2004, available at http://eurlex.europa.eu/LexUriServ/site/en/oj/2004/c_310/ c_31020041216en03560360.pdf. For further elaboration of these various types of appropriations, see Daniel Strasser: Les Finances de l’Europe, Le droit budgetaire et financier des Communautés Europénnes (Paris 1990) and Møller, J. Ørstrøm: Member States and the Community Budget (Copenhagen 1982). Council of the European Union, Document 15914/1/05 REV 1 of 30 January 2006, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/ pressData/en/ec/87642.pdf. Council of the European Union, document 15915/05 of 19 December 2005, available at http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/misc/ 87677.pdf. The figures used to compare the years 1973–1980 and the financial framework from 2007–2013 are taken from J. Ørstrøm Møller, Member States and the Community Budget (København published by samfundsvidenskabeligt forlag, 1982) and the Council Document referred to above respectively. Due to the development of the European Union and some reallocation of expenditure from chapter to chapter, the figures are not 100% comparable, but nevertheless offer a correct picture of the trend. Folketingets EU oplysning, Temasider, Finasielle perpspektier 2007–2013, Danish text available at http://www.eu-oplysningen.dk/emner/fp20072013/. It is in fact remarkable that not only has the share of administrative expenditure been kept stable under those conditions, but that total expenditure level measured as a percentage of EU GDP has not risen. OECD, Economic Outlook, Half-yearly Publication. Articles 90–93 in the amended Treaties with the Treaty of Nice as the newest one. There are no substantial changes from the provision in the Treaty of Rome to the Treaty of Nice, despite the fifty-five years between their respective dates of coming into force. Article 94 in the amended Treaties with the Treaty of Nice as the newest one. At that time many European countries were operating production or consumption taxes without really looking at anything else other than the revenue. They did not take the repercussions on the economy and competitiveness into consideration. This has nothing to do with the rate of VAT applied because we do not speak

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71.

72.

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75. 76. 77.

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of revenue from VAT to member states, but the assessment base that is not influenced by the rate or rates applied. Council directive 77/388 of 17 May 1977. Official Journal L 145 of 13 June 1977, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= CELEX:31977L0388:EN:HTML. Council directive 92/77 of 19 October 1992. Official Journal L 316 of 31 October 1992, available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc?s martapi!celexplus!prod!DocNumber&lg=en&type_doc=Directive&an_doc= 1992&nu_doc=77. See, for example, Council directive on alcohol and alcoholic drinks 92/84 of 19 October 1992. Official Journal L 316 of 31 October 1992, available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod! DocNumber&lg=en&type_doc=Directive&an_doc=1992&nu_doc=84. Council directive 2003/96 of 27 October 2003. Official Journal L 283 of 31 October 2003, available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc?s martapi!celexplus!prod!DocNumber&lg=en&type_doc=Directive&an_doc=2003& nu_doc=96. A history, accompanied by an economic analysis including Repercussions on Some Member States, can be found in a House of Commons Research Paper 99/74 of 22 July 1999, available at http://www.parliament.uk/commons/lib/ research/rp99/rp99-074.pdf. op.cit. op.cit. A brief summary of the Commissions findings: http://www.eiro.eurofound. eu.int/about/1999/02/inbrief/eu9902154n.html. See, for example, A. Gebauer, Woon Nam Chang and R. Parsche, “Lessons of 1999 Abolition of Intra-EU Duty Free Sales for the New EU Member States”, CESifo Economic Studies, Volume 51, Number 1, 2005. The Danish land border with Germany was the problem. Danish citizens living up to 150 km north of the border could drive cars or coaches in to shop south of the border, and even after having paid for the trip, save money. In the 1970s, a standing joke in Denmark was that you should drive carefully towards the German border at night because cars travelling north had their headlights upwards, weighed down as they are by trailers full of beers bought in Germany at much lower prices. Council Directive 91/191 of 27 March 1991. Official Journal L 094 of 16 April 1991, available at http://europa.eu.int/eur-lex/lex/LexUriServ/LexUriServ.do?uri= CELEX:31991L0191:EN:HTML. Council Directive 90/435 of 23 July 1990. Official Journal L 16 of 18 January 1997, available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi! celexplus!prod!DocNumber&lg=en&type_doc=Directive&an_doc=1990& nu_doc=435. Council Directive 90/434 of 24 July 1990. Official Journal L 225 of 20 August

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82.

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85. 86.

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89. 90. 91. 92. 93. 94.

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1990, http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus! prod!DocNumber&lg=en&type_doc=Directive&an_doc=1990&nu_doc=434. Resolution of 1 December 1997. Official Journal C 2/2 of 6 January 1998, available at http://europa.eu/eur-lex/pri/en/oj/dat/1998/c_002/ c_00219980106en00020005.pdf. Sylvain Plasschaert, “The Rationales for Comprehensive Approaches to European Corporate Profits Taxation”, in Ludo Cuyvers and Filip De Beule, eds., Transnational Corporations and Economic Development (PalgraveMacMillan 2005). Commission Communication Com (2003) 726 of 24 November 2003. “An Internal Market Without Company Tax, Obstacles, Achievements, Ongoing Initiatives and Remaining Challenges”, available at http://eur-lex.europa.eu/ LexUriServ/site/en/com/2003/com2003_0726en01.pdf. To be discussed below under Company Law. Council Directive 2003/48 of 3 July 2003. Official Journal L 137 of 26 June 2003, available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_157/ l_15720030626en00380048.pdf. Commission Communication COM (2001/0214) on the “Elimination of Tax Obstacles to Cross-border Provisions of Occupational Pensions”, available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!Doc Number&lg=en&type_doc=COMfinal&an_doc=2001&nu_doc=214. Tax policy in the European Union — “Priorities for the Years Ahead”, COM (2001) 260 of 23 May 2001, available at http://europa.eu.int/eur-lex/en/com/ cnc/2001/com2001_0260en01.pdf. Article 58 in the Treaty of Rome, now Article 48 in the updated Treaties (Treaty of Nice). Article 54, 3, g in the Treaty of Rome, now Article 44, 2, g in the updated Treaties (Treaty of Nice). Wall Street Journal, 30 May 2006, available at http://yaleglobal.yale.edu/ display.article?id=7486 It did not prevent Arcilor from being “bought” by Mittal, but the case can be made that Arcilor’s defence helped in achieving a higher price for the shares. Commission Communication Com (2003) 84 of 21 May 2003, available at http://europa.eu.int/eur-lex/pri/en/dpi/cnc/doc/2003/com2003_0284en01.doc. The document used for the consultative process is available at http://ec.europa.eu/ internal_market/company/consultation/index_en.htm and an example of an invitation and a programme for a hearing is available at http://ec.europa.eu/ internal_market/company/docs/consultation/programme_en.pdf. Available at http://www.eurochambres.eu/PDF/pdf_position_2006/ EUROCHAMBRES/20position/20on/20Company/20Law.pdf. Council Regulation 2137/85 of 25 July 1985. Official Journal L 199 of 31 July 1985, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= CELEX:31985R2137:EN:HTML. Council Regulation 2157/2001 of 8 October 2001. Official Journal L 294 of

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10 November 2001, available at http://eur-lex.europa.eu/LexUriServ/LexUri Serv.do?uri=CELEX:32001R2157:EN:HTML. Marco Becht, Colon Mayer, and Hannes F. Wagner, “Corporate Mobility and the Costs of Regulation”, ECGI / Law Working Paper No 70/2006, May 2006. Abstract available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=906066 which also allows downloading of the article itself. Centros, Uberseering and Inspire Art. See, for example, the Inspire Art case C 167/01 of 30 September 2003. Official Journal C 275 of 15 November 2003. The ruling is available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/c_275/ c_27520031115en00100011.pdf. See, for example, an article by Dr. Christian Berger in “Avocado Rechtsanwalte”, discussing how the rulings of the Court of Justice put pressure on Germany. The article is available at http://www.avocado-law.com/Berger_ECJ_puts_ pressure_on_Germ.68.0.html. Implementation is only called for with directives because a legal act in the form of a regulation is directly applicable in member states. S. Kristol, Ehlermann, and J. Weiler, in “The Political Organs and the DecisionMaking Process in the United States and the European Community”, 1986. In Integration Through Law: Europe and the American Federal Experience, M. Capelletti, M. Secombe, and J. Weiler, eds. (New York: De Gruyter). Heiner Schulz and Thomas Konig, “Institutional Reform and Decision-Making Efficiency in the European Union”, American Journal of Political Science, Vol. 44, No. 4. October 2000. Available at http://dosei.dhv-speyer.de/pdffiles/ Schulz-Koenig_AJPS_00.pdf. From the 1970s to the 1980s, the total number of legal acts approved by the Council every year almost doubled from approximately 300 to approximately 600. Renaud Dehousse, Florence Deloche-Gaudez and Olivier Duhamel, Elargissement, Comment l’Europe s’adapte. Paris, 2006. Markus Haveland and M. H. Romeijn, “Do Member States Make European Policies Work? Analyzing the EU Transposition Deficit”, Paper presented at the CES Conference, Chicago, 29 March–2 April 2006, available at http:// www.europanet.org/conf/papers/HaverlandRomeijn.pdf. See Conclusions of the meetings of the European Council, 23–24 March 2001, 15–March 2002, 20–21 March 2003, and 25–26 March 2004. The European Commission, Scoreboard, Internal Market, December 2005, No. 14 bis, available at http://ec.europa.eu/internal_market/score/docs/ score14bis/scoreboard14bis_en.pdf. As of December 2005, 1,639 directives needed to be transposed into national legislation related to the Single Market. The number of regulations related to the Single Market, directly applicable and not calling for transposition, was 546. One of the explanations for the delay in Germany is its structure as a federal

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111.

112. 113.

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115. 116.

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state, leaving transposition in some cases to — not the federal government — but the Länder. The Commission needs to keep up vigilance though. This became clear when on 18 July 2006, the Commission announced at a press conference that the performance of member states was slipping. The overall proportion of EU legal acts not yet written into national law increased in the first half of 2006 from 1.6% to 1.9%; only fourteen instead of seventeen member states were below the 1.5% — the target. See press release speech/06/464 of 18 July 2006, available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/06/ 464&format=HTML&aged=0&language=EN&guiLanguage=en. Article 169 in the Treaty of Rome, now Article 226 in the updated Treaties (Treaty of Nice). Press release IP/06?03 of 19 April 2006, available at http://europa.eu/rapid/ pressReleasesAction.do?reference=IP/06/503&format=HTML&aged= 0&language=EN&guiLanguage=en. Article 171 in the Treaty of Rome was amended with the Treaty of Maastricht, introducing the possibility of fines in the case of non-compliance of member states and is now Article 228 in the updated Treaties (Treaty of Nice); http:// eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.htmlliance. For a description, see for example, http://statistics.defra.gov.uk/esg/evaluation/ shpmtreg/chapter1.pdf. Judgment of the European Court of Justice on 14 March 2006, in case 177/04, available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit= Rechercher&alldocs=alldocs&docj=docj&docop=docop&docor=docor&docjo= docjo&numaff=C-177/04&datefs=&datefe=&nomusuel=&domaine= &mots=&resmax=100. Judgment of the European Court of Justice 25 November 2003, in case 278/01, available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit= Rechercher&alldocs=alldocs&docj=docj&docop=docop&docor=docor& docjo=docjo&numaff=C-278/01&datefs=&datefe=&nomusuel= &domaine=&mots=&resmax=100. Judgment of the European Court of Justice 18 July 2006, in case 119/04, available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit= Rechercher&alldocs=alldocs&docj=docj&docop=docop&docor=docor&docjo= docjo&numaff=C-119/04&datefs=&datefe=&nomusuel=&domaine= &mots=&resmax=100.

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5 THE EUROPEAN UNION’S ROLE IN THE WORLD

INTRODUCTION The European Union has gradually built up a role for itself on the global economic and political stage. From forging bilateral agreements strictly of an economic nature that emphasize trade and development assistance, it has moved on to a Common Foreign and Security Policy (CFSP). The pursuance of the European Union’s interests has been supplemented by an effort to shoulder responsibility for global economic and political development. The guidelines are the principles shaping the European integration and the foundations for the individual nation states. Some observers confine the European Union’s foreign and security policy to so-called soft policy instruments (economics, trade, culture, persuasion, and appeal to common sense/moderation plus political maturity). This is, to a certain extent, correct as Afghanistan, the Middle East, and the Mediterranean illustrate. The European Union does not possess the military capability to project power abroad, unlike the United States. Shortcomings are visible, almost glaring, in cases where the European Union has encountered opponents that neither share these principles, nor wish to play on the basis of compromise, consensus, and conciliation. The European Union plays a vital role in global trade policy. There are three reasons for that of which one is about substance and the other two rest on institutional/procedural grounds. 316

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Firstly, the European Union is the world’s largest trading partner. Secondly, the European Union was originally built around economics and trade; sovereignty was pooled and exercised in common, allowing the European Union to represent member states in the trade area. Thirdly, it acts on behalf of all member states. If no mandate for the Commission is agreed, no member state can act on its own. Absence of an EU decision does not open the door for individual action by member states, but leads to no action at all. The exact opposite is true for foreign and security policy. The ambition is to act in common. The European Union takes action and the individual member states do not. But in case of disagreement preventing an EU common position, the door is open for individual member states to act — which they do. The classic — negative — example of the European Union as a foreign and security policy operator is the former Yugoslavia in the 1990s. The European Union, tried unsuccessfully to play a role as “an honest broker”. The parties fighting each other did not respond to soft measures and only came to the negotiating table after being threatened with combined U.S./ European military enforcement. Faced with the Iraq war in 2003, the European Union failed to even sketch a common position, leaving it to individual member states to act independently. The European Union mainly profiled itself through public national announcements, which underlined the schism among member states. The classic — positive — example is the enlargement of the European Union with ten Central and Eastern European countries. It is probably the most successful peacekeeping and stability operation undertaken since the end of World War II, ensuring that these countries did not slide into authoritarian rule after seceding from the Soviet Union. The so-called Barcelona process — EURO-Mediterranean Partnership (EMP) — illustrates how the European Union managed to open a dialogue with countries around the Mediterranean basin, based not only on economics and trade, but also culture, and foreign and security policy. It has grown out of the European Union’s original agreements with Western (Maghreb) and Eastern (Machrek) countries, plus Israel. The initiative was launched in the mid 1990s, but has not fully lived up to expectations, despite continuous and useful meetings. A major reason for disappointment was that the vision of Israel integrated into a multilateral framework with Arab countries did not materialize or rather, did not work in practice. Another reason was that the economic downturn at the time diminished the European Union’s attractiveness as a

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market and investor. It underlined — again — that the European Union is most successful as a foreign policy operator when it is able to bring economic strength into play. The observer can choose between being impressed that the European Union, despite the conflicting interests among member states, has been able to hold itself together and manoeuvre, albeit not always effectively; or noticing that the fault lines dividing member states are becoming more and more visible. The lack of a common EU position vis-à-vis the Iraq War was a stark reminder of the divergence. But this should not obliterate the many cases where the European Union played an important and, in some cases, indispensable, role on the basis of a common position. Originally the outside world looked on the European Union with suspicion and distrust. The United States favoured an European integration, but with the unspoken condition that it would continue to support the United States, and if not, regarded it as some sort of betrayal. The Soviet Union withheld for a long time its recognition, and refused to deal with the Commission on trade matters. The developing countries did not really know what the European Union was up to and whether it would replace or supplement the nation states with whom many developing nations had close links. The European non-member countries and industrialized countries in other parts of the world did not really trust the European Union, fearing that it would throw its weight around. The other international institutions, all of them anchored in intergovernmental cooperation, did not understand how the European Union, based on supranationality, worked. The challenges to find a place in the world, assume responsibility, carve out a niche, was enormous. The task did not become easier as member states themselves played their own game and did not really want the European Union to represent them, thus letting the outside world get a glimpse of the rivalry inside. When speaking about the role of the European Union in the world, most observers would focus on the Common Foreign and Security Policy (CFSP). It is true that this policy may be classified as some kind of flagship for the presence of the European Union in the global arena. It is, however, just as true to say that the European Union has carved out a respectable place for itself as a player and sometimes, leading player, in the global efforts to bring into play some of the many sector policies of the European Union, for example, Environment Policy and the Energy Policy. In many of these cases, the playing field is marked by the solid presence of the European Union not entering the spotlight in exactly the same way as an operator in foreign and security policy, but in a way that may be more effective.

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The link between domestic policies — in the case of the European Union, common policies or common positions agreed in the Council — and foreign policy is the main thread in the policy document, “A Secure Europe in a Better World”,1 submitted to the European Council and adopted at its meeting on 12–13 December 2003.2 In its conclusion, the policy paper says: This is a world of new dangers but also of new opportunities. The European Union has the potential to make a major contribution, both in dealing with the threats and in helping to realize the opportunities. An active and capable European Union would make an impact on a global scale. In doing so, it would contribute to an effective multilateral system leading to a fairer, safer and more united world.

The key words in this conclusion are “an effective multilateral system” standing out as the headline for the endeavours to define a role in the world for the European Union. A coherent, well thought out approach to extend the capabilities of the European Union from the European domestic scene/ politics to the international one. This is further refined by saying that “The development of a stronger international society, well functioning international institutions and a rule-based international order is our objective”. These policy objectives provide the platform for understanding the actions undertaken by the European Union to find a role in the world. The European Union sees the world developing into an international society governed by a political system and having institutions capable of functioning in conformity with what a rule-based society requires. In short — a projection of a well-functioning domestic or national political system to the international scene, precisely in the same way as the European Union itself is a projection onto the European stage of domestic/national political systems. The objective for such an effective multilateral system is human security, law and order, stability, prosperity, and higher equality. The parallel to the national society is obvious. To achieve this, the European Union enumerates four policy implications for Europe: being more active, more capable, more coherent, and working with partners. The policy adopted by European Union as the platform for its role in the world goes far beyond the traditional instruments of foreign and security policy, and mobilizes the whole panoply of policies available for a nation state or an international organization such as the European Union, to project influence and shoulder responsibility.

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The policy document is not the only one of its kind and much academic work3 has gone into analysing the broadening of its foreign policy and role in the world. It is, however, one of the most succinct examples of its kind. There is a long way from theory to practice and from ideas to actions. It is difficult enough for a nation state to define its international role, but even more challenging for the European Union which has to rally twenty-seven member states around its banner, taking into account what the Commission proposes and the opinions of the European Parliament. The first step to map out the principles was indispensable, but it was perhaps easier than the following steps to implement the principles. An overview of the full activities of the European Union’s Defence and Security Policy — a major element of the Common Foreign and Security Policy — is provided at the end of each year in a report by the Presidency to the European Council. It shows that the European Union has developed in a few years into a global player, supporting operations and activities sponsored by, for example, the United Nations, but also undertaking its own operations/activities.4

EU’S FOREIGN AND SECURITY POLICY: DEFENCE The Treaties The Treaty of Maastricht was drafted in 1991in the aftermath of the downfall of the Soviet Union, introducing a complete recasting of the European security picture. The risk of military aggression against the territory of Western Europe and its member states had disappeared. It could be said with certainty that the whole military organization — force structure — of EU member states had become obsolete with one stroke. This was, however, not the same as saying there was no need anymore for military forces to guarantee the safety and security of the Union and its member states. Three questions came to the fore: • • •

What kind of threat could be expected that could call for the use of military force? What role would the United States adopt in the European security picture in the new circumstances? What force structure should EU member states aim for after analysing the answer to the two above-mentioned questions?5

The immediate answer in 1991, incorporated into the Treaty of Maastricht and modified slightly by two subsequent treaty amendments, came in two parts:

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The first one was to decide that a common foreign and security policy covered all areas of foreign and security policy.6 The significance of this was not only that member states could debate defence matters — until then a taboo around the table, albeit not in the corridors — but also that they were expected to do so. The conclusion drawn was that the changed security perspective in Europe made the use of military intervention more, not less, likely. The second one was about a common European defence. The wording was cautious with the key sentence “the eventual framing of a common defence policy, which might in time lead to a common defence”.7 In 1991 member states certainly wanted a common defence. There was no longer any doubt that the contours of a common European defence would emerge. But, and this is an almost all-important but, future circumstances would define in what form, with what purpose, and who would be allies. Subsequent treaty amendments have stretched the wording, but basically not changed its tune.8

Yugoslavia — The Failed Test The European resolve and capability were soon to be tested, when the artificial nation state, Yugoslavia, created after World War I, started to fall apart in 1991. One after another, the individual states of Yugoslavia seceded. First Slovenia, then Croatia, and then several other states contemplated doing the same. The Serb majority of Yugoslavia intervened with armed force to keep the rest of the nation state together and a mixture of civil war and/or brutal repression, even genocide, emerged. This happened precisely as the negotiations on the Treaty of Maastricht went into the crucial, final phase. The Europeans were confident that the negotiations would succeed, and confident that the newborn Common Foreign and Security Policy would pass its test and solve the crisis in Yugoslavia. It did not turn out that way. But what Yugoslavia did for the Europeans was to provide a large input to answer the three questions about the future of European defence. The answer to the first question was that the threat to Europe came from unstable nation states in adjacent geographical areas that threaten European stability. The European Union did not face the threat of a full-scale attack, but turmoil just outside its border with spill over effects into the European Union itself. The answer to the second question was that the United States would like the Europeans to assume responsibility for these upheavals and turn chaos

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into order. Events showed that the Europeans were not capable of doing that without American participation. This made the answer to the third question easy. The European Union could not and should not detach its military force from the proven links built up with the United States in NATO (North Atlantic Treaty Organization). The new circumstances in Europe did not make NATO superfluous, which some observers thought would be the outcome. Instead it changed the role of the organization. In buoyant mood about a newborn European Union and its thrust forward, Jacques Poos, the foreign minister of Luxembourg, the country which assumed the rotating presidency of the European Union at the time, stated: “This is the hour of Europe, not the hour of the Americans.” He left for Yugoslavia with some of his colleagues to try and settle the escalating conflict. A political solution offered by the Europeans, and with them in the role as “an honest broker”, was simply not on the plate, seen from the Serb side. The Europeans discovered much to their chagrin that a gentleman’s agreement requires not only an agreement, but that both sides behave like gentlemen. The problem for the Europeans was, and still is, what to do if one, or both, of the parties simply do not want a negotiated settlement and are determined to fight it out. The broker has to move up the ladder of instruments and threaten to use force, ultimately actually using force. For the Europeans it was an enormous jump from peacekeeping to peacemaking. The United Nations was brought into a crisis in the autumn of 1991, and from spring 1992, an international UN force (UNPROFOR) was sent to Croatia9 and later also to Bosnia-Herzegovina. Its purpose was as the name suggests, protecting areas demilitarized and monitoring the demilitarization itself. Subsequently the mission was broadened to include tasks such as protection of humanitarian transport and safe havens. The disaster at Srebrenica on 11 July 199510 showed the Europeans what they were up against when trying to impose peace and stability in adjacent areas where one or more groups of the population did not want a settlement but preferred to fight. Srebrenica was declared a safe haven for the Muslim minorities to take refuge without fear of the Serb majority. However a force of 1,500 Serb troops overran a UN force of 500 lightly armed soldiers, took control of Srebrenica, faced up to the international community, which backed down. It is estimated that at least 7,000 men were massacred and 23,000 women and children were deported.11 For the Europeans, the message, even if not a very welcome one, was clear enough. Unless the European Union was willing to move from peace keeping to peace making, and if necessary, fight, the presence of American troops was

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imperative. Later in 1995 the Dayton-agreement12 confirmed the existence of a sovereign Bosnia-Herzegovina nation separated into two parts, each one with a large degree of self-rule. The decisive point in this context is that the Dayton agreement, drawing on the UN Charter,13 called for an international force to secure the implementation. It included a large contingent of American troops. It was put under NATO command. Considerable military clout was necessary to solve a crisis of this nature. The Europeans did not posses the capability and perhaps also lacked the will to deploy it, had it been available. If any doubts had existed, the Kosovo crisis removed them. Despite international agreement to the contrary, Serb security forces initiated a major offensive in March 1999 to secure the Serb hold on this former province of Yugoslavia with a Serb minority. This led to NATO air bombardments against Serb military targets, not only in Kosovo, but the Serb-ruled part of former Yugoslavia. After seventy-eight days of air bombardment, the Serb president Slobodan Milosevic´ gave in.14 The Kosovo conflict showed the Europeans not only their own incapacity to stage a military operation, but also how dependent the European Union and Europe were on advanced American weaponry.

The Lesson Learned: Britain and France Take the Initiative When undertaking operations such as this, which was correctly defined as the most important ones for European security, intelligence, logistics, and precisionguided weapons were called for. The Europeans had very little of all three. It actually showed that Europe’s military dependence on the United States had not diminished, but increased despite the disappearance of the threat from the Soviet Union. This lesson was not lost on Europe’s two major military powers: the United Kingdom and France, both of which had capabilities for military intervention and fighting experience. Britain and France had borne the brunt of the European Union’s intervention in Yugoslavia and felt their shortcomings. They drew the following two conclusions from this experience. The necessity of stepping up British-French military cooperation and equally, the importance of keeping the United States involved in European security matters. At a Franco-British summit in December 1998, Europe’s two major military powers15 agreed on such a two-pronged approach leaving behind many dreams about a European defence without American participation.16 The agreement between France and the United Kingdom was decisive and constituted a watershed. The two member states had advocated divergent

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attitudes with regard to these matters. France had traditionally been looking for an independent European capability. The United Kingdom on the other hand was seeking to keep the Americans involved. A European defence effort without agreement between these two powers was unthinkable. With the agreement it became thinkable. The Joint Declaration contains the following main points: • •

• • •

Europe needed a credible military force to support its common foreign and security policy. A European defence dimension was about crisis management while genuine defence (territorial defence) continued to be the prerogative of NATO. The European force structure should be adapted to intervention aimed at crisis management. A European defence industry was an indispensable part of this design. It was envisaged that the European Union could take decisions and approve military actions where NATO is not engaged.

The European Union Follows Up The Franco-British agreement paved the way for agreement among all member states. The European Council on 10–11 December 1999 in Helsinki17 decided that the European Union should have a defence dimension designed to deal with crisis management. Flesh was put on the skeleton with the stipulation that member states must be able, by 2003, to deploy within sixty days, and sustain for at least one year, military forces of up to 50,000–60,000 persons capable of the full range of crisis management, humanitarian assistance, and peacekeeping. On paper, the European Union had a rapid reaction force. These goals were met already in 2003 — the rapid reaction force18 was a reality, no longer only on paper — and the stage set for the next step. That took place on 17 May 2004, when the Council decided on what is termed the 2010 headline goals, with the key sentence being that member states should be able to respond with rapid and decisive action, applying a fully coherent approach to the whole spectrum of crisis management operations covered by the Treaties. Another key provision was the establishment of so-called battle groups, which is a rapid response force of battalion level, planned to be on the spot and operating within ten days of a decision to that effect by the European Union.19 So far thirteen battle groups have been constituted on the basis of commitments from member states. Four of the battle groups are composed of contingents from one country only (France, Spain, Italy, the United Kingdom), while one battle group is composed of contingents from five member states (Germany, Poland, Slovakia, Lithuania, Latvia).20

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It did not take long. Already in 2003 three operations were launched.21 The following gives an idea of the missions/operations: On 31 March 2003 the Concordia mission in the FYROM (Former Yugoslavia Republic of Macedonia) was launched. It replaced a NATO operation. The objective was to ensure a stable and peaceful environment in FYROM to allow the government to implement earlier agreements to settle the conflict between Macedonian Slavs and Albanians. The operation ended nine months later and was succeeded by a police operation. Three hundred and fifty lightly armed military personnel participated at a total cost of a little more than six million Euros. In 2003 the European Union staged a military peacekeeping mission called Artemis in the DRC (Democratic Republic of Congo) with a force of 1,800 soldiers. The objective was to protect camps of displaced persons, secure the Bunia airport, safety of the civilian population, UN personnel, and the wider humanitarian presence. The operation lasted about three months. In December 2004 the European Union took over the NATO mission (SFOR) in Bosnia-Herzegovina. The codename was Althea and it had a number of objectives, but it was mainly to secure the environment for the implementation of the earlier agreements about peace in Bosnia-Herzegovina. It was a large operation – the biggest so far for the European Union — with approximately 7,000 troops involved. Politically the operation conveys the image of European Union as a major power — and this time alone, without American participation — in not only the former Yugoslavia, but also the adjacent areas in the Balkans, what in EU jargon is called the Western Balkans.

European Union, Western European Union and NATO From 1991 when negotiations on the Treaty of Maastricht ended, up until today, the question of defence and military matters has revolved around the respective roles of the European Union, the WEU (Western European Union),22 and NATO. The verbal conundrum has in the course of fifteen years found an answer: The conclusion is that: • •

•

Military operations are an integral part of the European Union’s Common Foreign and Security Policy and incorporated in the EU Treaties. WEU, which for some time, was regarded as an upcoming organization framing a genuine European defence, is incorporated in the Treaties and does not play any independent role. Territorial defence is the prerogative of NATO.

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During the negotiations some member states wanted to promote the WEU, while others thought that WEU would never really be up to the task, but that there was no harm in preparing the ground for a stronger role and incorporating WEU in the Treaties in case the need should arise. Only a few member states hesitated,23 but in the end, did not oppose WEU as an integral part of the development of the Union that is requested to elaborate and implement decisions with defence implications. The wording looked fine, but left much to be done. No firm commitments to see WEU as a genuine military vector of the member states were visible. What WEU and its member states delivered to the European construction is labelled “The Petersberg tasks” after a hotel24 near Bonn — the capital of the Federal Republic of Germany before the German reunification — where a ministerial council in June 1992 mapped out what military units of member states could be employed to do: • • •

Humanitarian and rescue tasks. Peacekeeping tasks. Tasks of combat forces in crisis management, including peacemaking.

In the coming years when the military arm of the European Union’s Common Foreign and Security Policy was to be discussed, these three tasks dominated the agenda.25 The European Union and WEU had mapped out what they might do. The next step was to find some kind of link to NATO. It came in January 1994 at a summit in Brussels where NATO coined two new concepts linking its military capability to the European Union and the WEU, but also started the tilt to the advantage of NATO, which became more and more visible during the 1990s. NATO26 formulated the concept of a CJTF (Combined Joint Task Force) headquarters. The idea was to establish a headquarters only manned by a skeleton staff, but ready to move and be beefed up in case of the need to command mobile, multinational forces. This concept made it possible to tailor make the CJTF according to the mission and the forces made available. It was ideally suited to start the process of moving the EU/WEU efforts closer to NATO, while at the same time opening the door for American participation in European operations. It was accompanied by the decision to establish separable but not separate forces, which meant that forces from European Union/WEU and the United States could join in common operations and operate in common, but maintaining their respective labels as European or American forces.

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The real breakthrough came at the NATO summit in Berlin in 1996. It was agreed to establish a European Security and Defence Identity (ESDI27) inside NATO. When undertaking operations, WEU should be able to draw upon NATO’s resources. The implication was that the Europeans could use NATO’s assets and operate with NATO support, but without American participation.28 In an effort to clarify which kind of operations WEU could envisage undertaking that draw upon NATO assets, an illustrative list was sketched. It was in reality a repetition of the Petersberg tasks. The ESDI created a European segment or pillar inside NATO.29 The missing link in this jigsaw was a definition by the Europeans and for the Europeans of what they could and should do. The Franco-British summit at St. Malo in December 1998 had in reality determined the matter. The endorsement came at the meeting of the European Council in June 1999. The vital sentence30 in a longer declaration reads as follows: The Council should have the ability to take decisions on the full range of conflict prevention and crisis management tasks defined in the Treaty on European Union, the ‘Petersberg tasks’. To this end, the Union must have the capacity for autonomous action, backed up by credible military forces, the means to decide to use them, and a readiness to do so, in order to respond to international crises without prejudice to actions by NATO.

The decision by EU member states signified that formally the right of decision in matters of military nature has been confined to the European Council, that is, the Heads of State and Government, kept intergovernmental in nature, and was the prerogative of the top political leaders in the union. It also made it clear that what the European Union envisages to do was without much reservation defined as the Petersberg tasks. Finally it pushed the WEU away, parked it at a sidetrack, and specified that it is the European Union that acts. To underline that the European Union is in charge and WEU sidetracked, it was decided that the so-called High Representative,31 serving as EU’s face when presenting views on foreign and security policy matters, should assume the role of Secretary-General of WEU.32

The Way Ahead — Possibilities and Limitations The proposed Constitution speaks about defence in more absolute terms without distinguishing between the Petersberg tasks and territorial defence and with a vaguer reference to NATO. The key sentences are:33 •

The progressive framing of a common Union defence policy.

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This will lead to a common defence, when the European Council, acting unanimously, so decides. No prejudice in cases where certain member states see their common defence realized in NATO.

As the Constitution was rejected by a majority of the population in two member states, the depth of this wording will not be tested in the foreseeable future. When evaluating the European Union’s efforts to establish a European military capability, the verdict depends on the yardstick. The ambitious ideas from the beginning of the 1990s to build up an independent European defence capability, ready to tackle tasks similar to those taken on by the American military, were not realistic. Events proved this point beyond dispute. Even the most ardent Europeans changed course. The realities are a hard task manager. The ability to project power around the globe, even in adjacent geographical areas, required a massive military build-up. Funds must be marshalled into technologically advanced weapons supported by logistics and intelligence, including operations in European space. The Europeans were not willing to do so. This leaves the European defence in the position where territorial defence and complex operations abroad can only be undertaken with the United States on board. Either the Europeans support the United States, as was the case in the 1990–1991 war against Iraq, or the United States supports the Europeans, as can be said to have been the case in the former Yugoslavia. What Europe can do and what Europe has been doing is to mastermind and manage limited operations of the Petersberg type. That has been done in the Democratic Republic of Congo, Sudan, and is now taking place in the former Yugoslavia. Fifteen years after the first European intervention in the former Yugoslavia, the conclusion is still the same: Europe can contribute to peacekeeping and similar operations. Europe has no answer when confronted with a crisis where the parties do not by themselves want to make peace. This explains why the European Union has acted with success in some conflicts, has utterly failed in others, and is not regarded as a serious player in yet others. In a way the Europeans have been able to amalgamate realism and idealism to carve out a segment of foreign and security policy where the challenges match Europe’s capabilities. Europe is neither on its way to becoming a military superpower nor is it militarily irrelevant. It has become a middle-sized military power,

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positioning itself to step in and fulfil the Petersberg tasks if the need arises in adjacent geographical areas. The European force structure is being remodelled accordingly.34 This also defines the security or rather military, relationship with the United States. As the Iraq war in 2003 demonstrated, the United States can no longer take European support for this kind of operations for granted. The common threat from the Soviet Union before 1990 has disappeared and so has the willingness of a large part of the Europeans to provide undisputed support to the United States. The Europeans can, and, is actually (in the former Yugoslavia) relieving the United States of some of the burden accruing from intervention and helping the United States in restructuring its geographical redeployment of military personnel. In this, some kind of distribution of labour between the United States and the European Union can be glimpsed. We can go one step further in the analysis. There will be operations where U.S. participation is not welcomed or where the United States may not wish to join, but where the European Union for various reasons may be able to do so. There is actually such an example. In autumn 2006, the European Union agreed to provide half of a UN force of 15,000 troops for peacekeeping in Lebanon without U.S. participation.35 The role of the European Union is described in the following way by Finland, which held the Presidency during the second half of 2006.36 “The EU played a central role in the negotiations aimed at bringing the hostilities to an end and, through its commitment, the Union showed leadership in the strengthening of the UN peacekeeping operation.”

Militarily, the European Union has found its role in the world, on its own conditions, and with limitations. In 1973 then Secretary of State Henry Kissinger reportedly asked: “who picks up the phone if I call Europe?”. For many years there was no one to answer his question or to pick up the phone. With the ESDP,37 the organizational restructuring, and the remodelling underway of Europe’s military forces, the call will be answered and an answer given. The question now is whether the answer is the one that the United States would like to hear.

THE TRANSATLANTIC RELATIONSHIP The United States as Sponsor of the European Integration The United States not only accepted the creation of the European Union, it sponsored it and pushed the Europeans towards closer cooperation, albeit without specifying its form and/or substance.

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This has been a consistent theme in the U.S. policy vis-à-vis the European Union. In a speech in Philadelphia on 4 July 1962, President Kennedy38 said: We do not regard a strong and united Europe as a rival but as a partner. We believe that a united Europe will be capable of playing a greater role in the common defense, of responding more generously to the needs of poorer nations, of joining with the United States and others in lowering trade barriers, resolving problems of currency and commodities, and developing coordinated policies in all other economic, diplomatic and political areas. We see in such a Europe a partner with whom we could deal on a basis of full equality in all the great and burdensome task of building.

About ten years later (23 April 1973) Secretary of State Henry Kissinger spoke of the Year of Europe, while afterwards, vented his frustration, scolding the Europeans for acting as if the Alliance did not exist.39 For the United States the political motive was clear enough — burden sharing. For the Europeans, it was more complicated than that. At that stage in the European integration, no European capability existed in foreign and security affairs, and even less, if that wording can be used, in defence and military matters. The Europeans were divided not about the alliance with the United States, but about how far to go themselves. The United Kingdom was traditionally closer to the United States than the others. Germany, dependent on U.S. military protection against a possible Soviet attack, gave priority to the United States in security matters, but to the European Union and France in economic matters. France realized the limitations of European power, but tried constantly to find out where to draw them,40 often irritating the United States, which had global responsibilities. The European Union and the individual European powers may have felt that they were entitled to be taken seriously in global matters, although they shied away from shouldering global responsibility, confronted as they were with the harsh fact that they did not have the power to get on this stage. Since the establishment of the European institutions and NATO in the postwar years, three strong pillars have supported the Transatlantic Alliance. The first encompassed common political ideas born out of a common heritage based on right of freedom. The second is based on strong economic and trade relations, which for a long time classified both as each other’s largest and most important economic partner. The third was based on a common perception of where a threat might come from.

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These three factors were strong enough to overshadow, or even erase, disagreements over a whole string of concrete issues where the United States and the European Union actually did see things differently, but did not want — sometimes acrimonious — quarrels to break out.

Changed Circumstances Fifteen years after the end of the Cold War, the picture is not the same. The European Union and the United States still share the same basic principles. Cultural/identity bonds across the Atlantic are strong. But economic and trade ties, albeit strong, are not as important as they used to be. Both the United States and the European Union are looking towards the new economic powerhouse in Asia while downgrading their mutual economic relationship. A common threat from the Soviet Union no longer exists. The Europeans share the American fear of terrorism. They see it as a potential threat to their societies, but do not give it the same weight in their policy formulation as the United States does. What keeps the Alliance together is less robust than it used to be. The Transatlantic Alliance as a principle or an idea is no longer sufficiently strong enough to iron out differences as was the case before 1990. Now the two partners still feel that they are allies and they consult each other on all major issues, but at the end of the day, they decide on each issue whether they agree or disagree. In security terms, this was spelled out by Robert Kagan41 who saw the American policy as being influenced or controlled by strong military capabilities, often tilting the U.S. approach towards hard security policy measures, while limited military capabilities pushed the Europeans towards softer policy options.42 This may be an attractive analysis, but when we look at how the Americans and the Europeans have behaved for the past fifteen years, it falls short of explaining policy divergences. It may be more apt as a description of the different security problems for the Americans and the Europeans and how they see them. Major issues such as Iraq, and Israel versus Hezbollah, have proved in the years between 2003 and 2006 that the Europeans may agree about a threat, but that is not the same as agreeing about its character, the urgency to deal with it, and the method to choose. With regard to economics and trade, the United States and the European Union are each other’s most important trading partner, gobbling up approximately 40 per cent of global trade. They are also the most important

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investor for each other. The so-called transatlantic workforce is estimated to be between twelve and fourteen million workers.43 But neither of them sees the reciprocal trade and investment relationship as the dynamic part of their external economic development. The common ground is still there. It is strong on ideas and principles, but has grown weaker and thinner on substance. Paradoxically that means that the Americans and the Europeans have found it necessary to build up a larger, and to a certain degree, cumbersome machinery for consultation that is far more elaborate than before 1990. Almost out of breath after the upheavals in Central and Eastern Europe and the falling apart of the Soviet Union and its empire, the European Union and the United States decided on a Transatlantic Declaration formalizing the mutual relationship.44 The Declaration contains a preamble, common goals, principles, economic cooperation, education-science-culture, transnational challenges, and the institutional framework for consultations. There should be half-yearly consultations between the President of the United States and the President of the European Council, plus the President of the Commission. Similar half-yearly consultations were put in place between the Secretary of State of the United States and the foreign ministers of the European Union, plus the Commission. The format of the half-yearly summits has subsequently been adjusted to accommodate changes in the EU institutional set-up.45 The EU–U.S. summit (one of the two taking places every year) where all EU member states are present attracts the most attention for obvious reasons. Rarely do they lead to tangible results. Sometimes they disclose disagreements — to an extent that would have been unheard of in earlier times. The summit conclusions are — like the Presidency conclusions from meetings in the European Council — quite long and list a number of objectives. A list of summits’ text available on the Net can be found through the reference in Endnotes.46 The summit held in Göteborg in Sweden, under the Swedish presidency on 14 June 2001, serves as an example.47 Already in line five the observer finds a political statement saying, “What unites us far outweighs that which divides us.” It is not a cliché, it is a political statement of almost a seminal nature. In reality it conveys the message that there are disagreements and that the European Union and the United States do not necessarily choose the same itinerary when confronted with political and/or economic problems. This is confirmed further down the text when it relates what was discussed about global warming and the Kyoto Protocol.

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Without any attempt to gloss over disagreements, well known in public, the text states. “We disagree on the Kyoto Protocol and its ratification.” When the European Union and the United States met in Vienna, in June 2006, under Austrian EU presidency, the question of global warming was on the agenda once more. This time the wording was: “We will work more closely to address the serious and long-term challenge of climate change, biodiversity loss and air pollution and will act with resolve and urgency to reduce greenhouse gas emissions.”48 The media reports clearly reflect that the Transatlantic Alliance has sailed into new and sometimes troubled waters. After the Summit in Vienna, the following excerpts serve as illustrations of two things: • •

That there is disagreement across the Atlantic on major issues, but not to the extent that the alliance cannot work. That the media and the public increasingly are focusing on these disagreements.

Time Magazine49 reported: A foreign journalist asked President George W. Bush whether he regretted that “most Europeans consider the United States the biggest threat to global stability” — worse than Iran or North Korea. However debatable the premise, it was based on a Harris poll of 5,000 Europeans that had been featured on the front page of the Financial Times of London the day before Bush set off on his 15th trip to Europe. “That’s absurd,” the President shot back, describing it as “an absurd statement”. His top aides, sitting in the fourth row of the news conference at the ornate Hofburg Palace in Vienna, responded with visible shock, clearly hoping he would elaborate. He waited until two questions later, when he was asked again about failing “so badly to convince Europeans, to win their heads and hearts and minds”. This time, the President was more expansive, and softer spoken. “Look, people didn’t agree with my decision on Iraq, and I understand that,” he said. “For Europe, September the 11th was a moment; for us, it was a change of thinking. I vowed to the American people I would do everything to defend our people, and will.” Los Angeles Times50 reported: President Bush responded angrily to Europe’s differing views on the war in Iraq and the U.S. treatment of prisoners at Guantanamo Bay, even as he won renewed expressions of unity from the European Union on nuclear proliferation.

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The European newspaper the Observer51 wrote that leaders toned down their rhetoric on controversial issues highlighted before the meeting, despite not having any concrete commitments from Washington on visas, trade talks, or climate change. There is no reason to hide a growing list of contentious issues emerging in recent years. The most well known might be the question of whether or not the European Union should lift the embargo on sales of arms to China after the Tiananmen events in June 1989. For a time it looked like the European Union was going to do that. American pressure telling the Europeans that this could mean European weapons used against American troops led to the European Union backing down. It illustrates that the United States views foreign policy in a strategic perspective, while the Europeans are not capable of that. For the United States it was a question of whether the European Union gave the Atlantic Alliance priority over its relations with China and seen in a long-term perspective. For the Europeans it was — at least until they were informed otherwise by the Americans — a question about normalizing relations, and primarily, economic relations, with China. Another issue to mention is the International Criminal Court which the United States is strongly opposed to, allegedly fearing that U.S. military personnel may be prosecuted by such an institution. And a third issue, the Iraq war with divergent views across the Atlantic and inside the European camp, is well known.

The Future This short analysis points to three basic questions for the future of the Atlantic Alliance: Firstly, whether ideals and principles will continue to overshadow tangible and divergent interests. The Americans and the Europeans may disagree on the American policy of bringing democracy to the Middle East,52 but they do not disagree about the basic thrust of the U.S. policy, highlighting democracy and human rights. Chances are — and clearly so — that the common ideals and principles will withstand differences in opinion on how to pursue these goals. Secondly, whether the divisions inside the European Union will make it a less interesting alliance partner for the United States, drawing it towards a coalition of the willing with some European countries, instead of using time

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and effort to discuss with the more or less unwilling — which in U.S. eyes, may be recalcitrant allies — offering little prospect of support. The risks that the Atlantic Alliance may suffer from divergent views inside Europe is increasing with the entry of Central and Eastern European countries in the European Union. The European Union may agree on many aspects of the Common Foreign and Security Policy and be active in many parts of the world, but when the crucial question of strategic positioning arises, common positions worthy of that name and not only rooted in loose wording, are the exception to the rule. Thirdly, whether the difference in perceptions — the United States taking a strategic view, the European Union not capable of doing so — will jeopardize the Alliance. The main problem for the United States and the European Union when looking each other in the face is that the United States acts and behaves like a global superpower taking a strategic view of how problems affect U.S. interests in the long term. Europe fails to do so. When Kagan53 made his observation about the use and non-use of military power, it might have been more correct to talk about a strategic view of the United States and a tactical view of the European Union, which is simply not able to apprehend foreign policy matters in a strategic, long-term vision and act accordingly. This is what makes the United States and the European Union unequal partners, which find themselves in an asymmetrical framework, without understanding why and what the other partner is saying and aiming at. The Middle East, Iraq, weapons embargo directed against China, are all cases where the Europeans and the American communicate at different levels in the policy-making pyramid. If the alliance starts to crack, this divergent perception of foreign and security policy will be the decisive reason. In general terms, the lesson to draw from the Atlantic Alliance and its development over the years as the European integration evolved, can be summarized like this: There must be a strong common interest that is able to gloss over more trivial issues. It can be ideals and/or principles or a threat perceived as common and given the same weight by the partners in their policy analysis and formulation. The European Union needs to do more to shape a common policy to avoid divergent interests among member states, which, if allowed to dominate the agenda, makes the European Union a less interesting and attractive

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partner. Even if ideals and principles are strong, the old saying is still valid that “no alliances are permanent, only interests are”. The European Union must decide more clearly on the major issues confronting it, for example, where is its place in the world, how much global responsibility it is prepared and able to shoulder. The Atlantic Alliance is still a sound, even robust, alliance.54 There is no doubt that if, or when, a genuine and major threat should emerge, the Americans and Europeans would adopt a common stance. The politicians on both sides of the Atlantic need to face two basic facts to maintain the ties: • •

The Atlantic Alliance is no longer a given thing, something which can be taken for granted. The Americans and Europeans must learn to live with differences in attitudes to non-vital questions, and realize that the threshold is shifting, leaving few issues under the label of “vital”.

MEETINGS/SUMMITS WITH OTHER PARTNERS The United Nations Over the years the European Union has built up a solid relationship and cooperation with the United Nations, based on shared objectives such as peace and security, human rights, environment, fighting disease, promoting development, and reducing poverty. Politically the European Union voiced its support for the United Nations and the shared objectives at the meeting of the European Council in June 2001, which underline conflict prevention and crisis management.55 This general political support was transformed into a more tangible form when the European Union and the United Nations in September 2003 signed a joint declaration about cooperation regarding civilian and military crisis management, in particular, in Africa and the Balkans.56 The most spectacular operations where the European Union and the United Nations have joined hands are the humanitarian action plan for the Democratic Republic of Congo,57 temporary deployment of a military force to ensure the election process in the Democratic Republic of Congo in 2006, 58 and Operation Altea in Bosnia-Herzegovina to ensure the implementation of earlier agreements.59

Regional Organizations i) Meetings with regional organizations are normally designed to consult, listen to each other’s views, learn to understand the reasoning behind positions

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taken in international negotiations, and by doing so, promote confidence and trust among the players on the international scene. The European Union did not invent this kind of diplomacy, but has proved to be its foremost protagonist. The European Union has become a consultative partner for a large number of organizations and countries around the globe, and by this approach, has achieved influence in what can be called persuasive diplomacy. The European Union’s own internal negotiating process provides experience in the often tedious and tiresome art of negotiation and diplomacy. Many organizations and/or countries are amazed and astonished when they encounter the EU system. They discover that it may look as a monolith from the outside, but peeping inside its politics is much more complicated. When coming into contact with partners from abroad, EU member states actually use a considerable amount of time to negotiate internally to sketch a common position. Implicitly it conveys to the partners a visible introduction to the need to offer concessions as a precondition for a consensus. ii) ASEM (Asia Europe Meetings)60 is the forum for political, economic, and cultural dialogue and consultation between EU member countries, plus the Commission, and ASEAN member states, plus China, Japan, and Korea. The meetings started with a summit in 1996 in Bangkok and have since developed into biennial summit meetings.61 ASEM is a kind of mix between exchanges of views, development of understanding and confidence, and the launching of concrete projects. ASEM has agreed on statements in favour of the multilateral trade negotiations in the framework of the World Trade Organization (WTO); a dialogue on better understanding of culture and civilization has been launched; and a project about lifelong learning is up and running, to mention a few. ASEM established the only institution that is solely for Asia-Europe — the Asia-Europe Foundation (ASEF) with the purpose of broadening the understanding and exchange of culture between the two continents.62 iii) ASEAN and the European Union have had ministerial consultations since 1978 (Informal relations between the European Union and ASEAN go back to 1972, and 1977 is generally regarded as the year when relations really started) and the first EU-ASEAN agreement, concluded in 1980, took the form of a cooperation agreement.63 In 2001 and 2003 the Commission put forward a policy document64 classifying ASEAN65 as a key economic and political partner for the European Union. Institutionally the main vehicle for consultation and cooperation is AEMM (ASEAN-EU Ministerial Meeting), which is scheduled to meet at least every second year with the participation of foreign ministers. In recent years, meetings between Ministers for Economic Affairs have started to be held regularly.

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The European Union also takes part in the annual meeting of ARF (ASEAN Regional Forum), which has security problems and questions on its agenda and encompasses not only the ASEAN countries, but also a large number of other counties including the United States, China, Japan, and Korea. The European Union has mapped out six strategic priorities for its relations with Southeast Asia: • • • • • •

Supporting regional stability and the fight against terrorism. Promoting human rights, democratic principles, and good governance in all aspects of E.C. policy dialogue and development cooperation. Dialogue should incorporate issues such as migration, trafficking in human beings, money laundering, piracy, organized crime, and drugs. Investing dynamism by launching a trade action plan called TREATI. Supporting the development of less prosperous countries. Intensifying dialogue in specific policy areas.

All this is useful and gives the European Union a platform in Southeast Asia. At the same time it reveals one of the weaknesses of the European Union in its relations with the outside world as was seen when analyzing the transatlantic relationship: the lack of a vision or a strategic idea of the long-term relations between itself and its partners. Often the cooperation conveys the impression either of a piecemeal approach, or an attempt to do everything by listing a number of topics as priorities — none of which would encounter opposition, but, equally, none of which really conveys the impression that the European Union knows what it wants to achieve. For years the relationship has been harassed by the contentious issue of Myanmar, which the European Union does not want to grant the same status as to the other ASEAN countries, which take the view that Myanmar, as a member of ASEAN, is entitled to equal status. The deeper problem is, however, the lack of a policy platform from the European Union and whether it wants to establish a long-term presence in Southeast Asia. This is most clearly seen with regard to trade and economics. During the financial crisis in 1997–1998, the European countries actually accounted for a larger share66 of the financial assistance to the countries in need than the United States, but the European Union and/or its member states were simply not capable or willing to capitalize on this politically. The United States has negotiated free trade agreements with several countries in the region, while the European Union offered a closer trade arrangement, but

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stopped short of offering a free trade agreement until April 2005 when the Commission floated the prospect of an EU-ASEAN free trade agreement.67 This paved the way for deliberations in an EU-ASEAN vision group established in 2005. The group reported in May 2006. The key sentence ran as follows:68 “a strong case for such an agreement, suggesting that it would boost trade in goods and services and help attract new EU investment to ASEAN, as well as encouraging ASEAN’s increasing investment in the EU.”

The U.S. policy stance reflected a combination of economics, trade, and foreign policy. Several countries in Southeast Asia wanted a free trade agreement for various reasons. The United States did not hesitate to enter this game whether or not U.S. business asked for such an agreement. It was one of several items in the U.S. long-term strategic presence in the region. The European Union looked at it as solely economics and trade. As European business did not express strong interest, the matter was left half-baked. The EU-ASEAN relationship illustrates what the European Union can do and what it cannot or will not do. The European Union is a good dialogue partner. In many specific areas, useful common projects can be launched and implemented. The scope for searching the ground and mapping out where the European Union and its dialogue partners can support and help each other, based broadly on common points of view and common interests, is fairly large. But often the European Union finds it difficult to cut through sensitive questions and make hard decisions. The EU system is geared to consensus and has not yet reached the stage where interests are weighed against each other to decide which issues to delete from the agenda and which ones to pursue. iv) SAARC stands for South Asian Association for Regional Cooperation, and since 1996, a technical cooperation has grown up between the European Union and SAARC aimed at facilitating trade matters and market access. There are no regular meetings scheduled at the political level.69 v) The Gulf Cooperation Council (GCC) is a regional organization set up in 1981 with six countries in the Gulf as its members. In 1989 the European Union signed a cooperation agreement with GCC to promote and facilitate cooperation between the European Union and the GCC. Institutionally, the consultation and cooperation work through an annual meeting between foreign ministers from both sides. The joint communiqué from the meeting held in May 200670 provides an example of the points put on the agenda. As can be seen, current issues such as terrorism, the Middle

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East, Iraq, Iran, and the proliferation of weapons of mass destruction were not only on their agenda, but the deliberations resulted in statements to reduce the risks for both EU member states and GCC countries. It almost overshadowed the main economic and trade issues, which were the reasons for beginning the dialogue. vi) The starting point for the European Union’s policy vis-à-vis Latin America is a Communication from the Commission to the Council forwarded in December 2005.71 The Commission called for a strategic partnership with associations and free trade agreements, a political dialogue, help from the European Union to achieve a sustainable development and to attract investment from Europe. There are two main vehicles for strengthening the relationship between Latin America and the European Union: the EU-LAC (Latin American, Caribbean Region) and the Rio-Group. For both, fora meetings at a high political level (summits and/or ministerial meetings) are held regularly. There have been four summits — 1999, 2002, 2004 and 2006 — for the EU-LAC with thirty-three Latin American countries meeting the European Union. They have gradually progressed from being a mere consultative forum to one discussing tangible and specific items such as political dialogue, economic and trade links, multilateralism, and regional integration. At the fourth summit held in Vienna in May 2006, an agreement was reached to launch negotiations between the European Union and Central America.72 The Rio-Group — originally established in 1986 with six Latin American countries — now counts almost all Latin American countries and has a small Secretariat. With the EU-LAC meetings following a regular pattern every second year, it is becoming a bit unclear how the respective roles of EU-LAC, and the European Union and the Rio-Group, are going to work out. The most recent EU Rio-Group ministerial meeting took place in May 2005 and the declaration73 followed similar lines as the one agreed at the EU-LAC summit the following year. The European Union maintains links geared to consultation with three other regional groupings in Latin America: Mercosur — a regional grouping encompassing Brazil, Argentina, Paraguay, and Uruguay — set up in 1991;74 Central America with the socalled San Jose dialogue;75 and the Andean Community.76 Two countries in the region — Mexico and Chile — do not participate in any of the regional groupings. For both countries, consultations and political dialogue will normally take place in the margin of the EU-LAC summits, with the European Union represented by the Troika. The European Union has entered into association agreement with both countries.77

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vii) Recently the European Union has initiated a dialogue with the African Union (AU)78 and its socio-economic programme, NEPAD. The dialogue is still in its embryonic stage, but the start of consultations conveys the wish of the European Union to play a global role as a consultative partner.

Countries79 The European Security Strategy calls for developing a strategic partnership80 with Japan, China, India, and Canada. Japan European Union-Japan relations go back to a declaration from 1991. Over almost fifteen years the respective partners’ foreign policy and international relations have included consultations in a normal pattern.81 In 2001 the European Union and Japan agreed on an action plan with four basic objectives. Promoting peace and security, strengthening the economic and trade partnership, coping with global and societal challenges, and bringing people and cultures together. The joint press statement82 from the fourteenth summit, taking place in May 2005, concentrated on the two partners’ common objective to work together to strengthen the multilateral system. On the specific point of the Kyoto Protocol, the joint press statement says that “Summit leaders stressed that close cooperation between the EU and Japan had greatly contributed to the entry into force of the Kyoto Protocol, a major step forward in addressing global environmental and development challenges”.83 Institutionally the consultations foresee an annual meeting between the President of the European Council, plus the President of the European Commission, and the Prime Minister of Japan. Half-yearly meetings between the EU troika and the Japanese Minister for Foreign Affairs are incorporated in the consultative framework. China The starting point for analysing the Atlantic Alliance was its foundation in common political ideas, strong economic and trade relations, and a common enemy, or to rephrase, a common perception of where a threat might come from. The same three starting points can be used to analyse the relations between the European Union and China, but the verdict is quite different.

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The European Union and China do not have common principles — indeed one of the contentious points is about human rights. The increasing economic, trade, and technological links are the mainstay of the deepening relationship. They do not have a common perception of where a threat might come from, but definitely do not regard each other as potential political, much less, military, opponents, albeit as economic competitors. The last point is the most interesting one. The United States may classify China as the most dangerous challenger to its dominance on the international scene. China may fear that the United States at some point down the road will try to derail the emerging Chinese economy, thus ruling it out of the great game for a foreseeable future. But Europe and China do indeed look each other as totally respectable partners despite the recurrent hiccups about human rights and other issues complicating the agenda. The main point is that there is no congruity between the U.S. view and the EU view on China. The United States looks at China in an imperial strategic way, the European Union looks upon China as one of several partners in the global political and economic game. This is indeed borne out by the basic document about the European Union’s position on China,84 which says:85 “The EU and China have an ever-greater interest to work together as strategic partners to safeguard and promote development, peace and stability.”

This sets the tone. The European Union looks at China as a strategic partner and associates China with the development of the international multilateral system. At the beginning of 2005 all signals coming from the European Union and its member states were that the arms embargo would be lifted. The most telling one was a BBC report in January 2005 with the headline “Straw backs ending China embargo”, adding in the next lines that the British Foreign Secretary was defending plans to end the embargo despite opposition from the United States and Japan.86 As is known, the United Kingdom and the European Union changed tack allegedly after American pressure, and the embargo was not lifted. It must have been painful for China to watch the development, and in particular, see the Europeans shift position, not because they had changed their opinion, but because they were under pressure to do so from the United States. China chose to let it pass without much noise. At the eighth summit meeting held in Beijing a little more than six months later, the two partners had to acquiesce with its continuation, and could not, as some had hoped, celebrate the end of the embargo. They did so with good grace, opening the

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door to China to say that “lifting the arms embargo would be conducive to the sound development of the China-EU comprehensive strategic partnership” and to urge the European Union to “lift the arms embargo at an early date” and the European Union to state its “willingness to continue to work towards lifting the embargo”.87 The other contentious issue is about human rights. Since the events at Tiananmen in 1989, this has been an item on the agenda for the relations between the European Union and China. It has led to half-yearly meetings in the caucus of a dialogue on human rights. The weapons embargo and human rights are connected. When the European Union in 1989 adopted the weapons embargo, it was with reference to China’s violation of human rights. When it debated to lift it, the main argument was that China’s human rights record, albeit still leaving much to be done, had improved. At the 2005 summit the two partners could agree on the following wording “The two sides underlined their commitment to the protection and promotion of human rights and continued to place a high value on the EU-China human rights dialogue”.88 The European Union describes its policy towards China under four main aims: • • •

•

To engage China further, both bilaterally and on the world stage, through an upgraded political dialogue. To support China’s transition to an open society, based on the rule of law and respect for human rights. To encourage the integration of China in the world economy through bringing it fully into the world trading system, and supporting the process of economic and social reform that is continuing in China. To raise the European Union’s profile in China.

It is revealing to note that two of these four points talk about bringing China into the multilateral system, a third one points at reform of the Chinese society, and the fourth — the briefest — about the European Union’s profile in China. At the summit in 2005 a large number of projects either in the form of common projects, or China joining EU projects, were announced. One of the most spectacular one was China’s participation in the Galileo project to put a number of satellites in orbit to provide global positioning. The joint statement reveals an intensified effort to boost and strengthen cooperation with regard to science, technology, and education. The two partners also

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stated that their partnership would fully complement the UN Framework Convention on Climatic Change and the Kyoto Protocol.89 The joint statement contains twenty-six paragraphs. Global warming and the Kyoto Protocol are mentioned in Paragraph 4, leaving the observer with the impression that both the European Union and China wanted it to be highlighted, and make the difference to the U.S. position clear.90 Institutionally annual summits and regular meetings between foreign ministers encapsulate the dialogue. India The relationship between the European Union and India goes back to the early 1960s, but was for many years not rated highly by either partner. It was in the mid-1990s that the relationship moved forward with agreements between European Union and India going beyond pure economics and trade, and institutionalizing a political dialogue. The framework for cooperation and consultation is constituted by a Commission Communication on 16 June 200491 that was subsequently endorsed by the Council. The starting point for the European Union were the rapid changes in India with economic reforms launched at the beginning of the 1990s, and the role of India as the world’s largest democracy. This forms the setting for a strategic partnership seen in the prism of the European Union. The next conclusion is that both the European Union and India support and work for the multilateral system, hence making a stronger and strategic partnership obvious. A third conclusion is the prospect of building up a solid relationship in economics, trade, and technology in view of the robust economic growth in India registered in the second half of the 1990s, and the first half decade of the twenty-first century. The direction of the cooperation was confirmed at the sixth EU-India summit92 held in New Delhi on 7 September 2005. The two parties stated their common commitment to democracy, pluralism, human rights, and the rule of the law, followed by a comprehensive joint action plan93 putting flesh on the political declarations. Institutionally the EU-Indian relationship foresees summits on a regular basis, ministerial meetings on a yearly basis, and Senior Official meetings twice a year. The recent development, and in particular, the joint declaration plan, signify a much stronger and deeper commitment to cooperate not only on the political level, but also with underlying activities such as student exchange,

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civic society, energy and water management, just to mention a few tangible and important activities for economic and technological development.94 The relationship between the European Union and India has gradually been deepened. As the political declaration states, they share to a large degree views on the development of the global political and economic system. This common vision has pushed them towards each other, but even if the partnership is called strategic, the lack of genuine strategic common interests has set limits to how far the relations can go. Neither of the two actually operates in areas — geographically, politically, or economically — where the other one has vital interests, nor do they link up with, or find themselves in potential confrontation with, countries of vital interest to the partner. The European Union and India look at the other partner as a useful, good, and friendly partner, sharing many views, but not as one of the most important partners in the priorities of interests. Canada The relationship between the European Union and Canada is conceptually inside the same box as the relationship between the European Union and the United States, a partnership grown out of a common heritage, common strategic and vital interests, membership of NATO, and strong economic and trade links across the Atlantic. As member of the G-8, Canada certainly plays on a field much larger than its economic weight would warrant, making it an interesting partner. Relations between the European Union and Canada, first formalized in 1976, culminated in a partnership agenda agreed in 200495 which outlined five main objectives: Firstly, advancing international security and effective multilateralism. The EU priority to promote a multilateral system is found at a prominent place, reflecting its importance on the EU agenda as well as the Canadian one. Both parties make reference to their participation in the G-8 group. They support an International Criminal Court, fully aware of the U.S. — negative — stance on this issue. Politically speaking, there is little doubt that the European Union and Canada are aware of the possibility to distance themselves from the United States, not in principle, but on specific issues, such as the International Criminal Court. Secondly, advancing global economic prosperity. The two parties refer to international trade as a driver for growth and express their support for a successful conclusion of the international negotiations to liberalize trade further.

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Thirdly, advancing cooperation on Justice and Home Affairs. An increased effort to enhance the effectiveness of measures to combat terrorism is called for and Canada’s participation in Europol and Eurojust is on the plate. Fourthly, cooperating on global and regional challenges. The partnership enumerates a number of items where the two parties agree, among them, the Kyoto Protocol. Fifthly, fostering people to people links. The exchange of various sorts is being implemented, among which are parliamentarians and young people. The links between the European Union and Canada may be among the closest institutionally, but despite their strong and solid base of commonality in many aspects, Canada’s size and clout in global politics and economics — not to mention its geographical position — set limits beyond which the cooperation cannot or will not go. v) Russia, Korea, Pakistan, Bangladesh, Australia, New Zealand, and Israel do not form part of the group of countries mentioned as strategic partners in the European Security Strategy, but the European Union has nonetheless built close relationships with these countries. Russia For obvious reasons relations between the European Union and Russia are of vital importance to both parties. They have changed considerably over the years between around 1990 to 2006. Geography places them as neighbours thus classifying Russia as a country under the European Union’s neighbourhood policy.96 Russia’s significance as a nuclear power and permanent member of the United Nations Security Council gives it, however, a special political role. This is not matched by its small economy (except in oil and gas), thus limiting its attractiveness for European enterprises. The importance of exports from Russia of oil and gas to the rest of Europe is a key issue. The status and future prospects for former parts of the Soviet Union, now independent nation states, some of which (for example, Ukraine, Georgia) are looking to the United States and the European Union for support and inspiration, is a sensitive point. Certain political leaders/member states feel that they had the opportunity to build a privileged partnership with Russia. France and Germany especially tried to play this card from the end of 1990s to 2006. The partnership or cooperation between the European Union and Russia shows knotty problems from time to time and sometimes of a magnitude that brings into the open that the relationship, despite a calm surface, is unstable.

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The European Security Strategy does not classify Russia as a strategic partner, but considers Russia a key player. From around 1990 to the end of the 1990s, relations between the European Union and Russia were good, even warm, from time to time. The European Union launched programmes to support Russia’s transformation from a central planning economy to a market economy.97 As it emerged from economic carnage following the dissolution of the Soviet Union, Russia wanted to assert itself again, in particular, vis-à-vis some of the states seceding from the Soviet Union, but which are probably still regarded by Russia as belonging to some kind of community or commonwealth as expressed in the term CIS.98 The CIS is regarded by some as a vehicle for Russia to regain some of its former influence, and by others, as a suitable vehicle for closer cooperation among states which were torn apart with the dissolution and disappearance of the Soviet Union in 1990, by drawing on its experience, logistics, and economics. This might look like a problem solely for Russia and the relevant nation states, but has posed an awkward dilemma for the European Union, which has to strike the right balance. This explains the somewhat sceptical views99 expressed in the literature about the prospects of a partnership between the European Union and Russia. Some observers draw the conclusion that in reality the two parties have different conceptions of what a strategic partnership should entail,100 which obviously limits how far and deep the cooperation can and will go. The underlying tensions surfaced in a rather brusque way when Russia, around the turn of the years 2005/2006, discontinued or threatened to discontinue gas deliveries to Ukraine unless Ukraine agreed to a substantial increase in prices.101 For the European Union it was a double crisis. It forced a position vis-à-vis the Russian-Ukrainian dispute, and it uncovered how dependent the European Union was/is of gas supply from Russia, and indeed, how vulnerable its position is. The underlying question was, of course, whether Russia was a partner controlling gas exports to the European Union solely in terms of economic considerations, or whether Russia might one day take a course similar to the one applied to Ukraine and see gas supply in a political perspective. Despite all the nice words and summits between the European Union and Russia, the relationship must be classified as good, but unstable. The lack of a common vision for the multilateral system, as the European Union has with countries such as India, or shared strategic goals with, for example, the United States, or the significance such as that of its ties with a rising economy like China, makes it difficult to find the main thread that would catapult the relations above what normal, good relations will dictate.

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Institutionally the relationship is governed by The Partnership and Cooperation Agreement going back to 1997,102 which is a fairly comprehensive agreement covering a vast number of items.103 It foresees half-yearly summits and meetings at a ministerial level as often as the situation requires. The existing agreement expires in 2007. In the summer of 2006, the Commission submitted104 its proposal for a mandate to the Council to start negotiations with Russia about a new agreement. The Commission envisages an updated agreement reflecting developments since 1997. It is interesting that the Commission sees no need to reclassify the European Union’s relations with Russia, but operates in the same analytical and political framework as was the case when the 1997 agreement was adopted. Korea The first ministerial meeting was held in March 1983.105 The two parties had to wait until 1995 before flesh was put on the relations with a Framework Agreement on Trade and Cooperation coming into force in 2001. The delay was due to, not substance, but shared competence between the European Union and member states requiring ratification in all EU member states. From the European Union’s perspective, the relations are guided by increasingly shared values, strong mutual economic and trade links, and support for South Korea’s engagement with the North. The third summit took place on 9 September 2006, in Helsinki under Finland’s EU-Presidency, with the participation of the Prime Minister of Finland, the President of the European Commission, and the President of the Republic of Korea. In a fairly long press statement,106 the two parties confirmed the wish to strengthen and deepen relations. A number of bilateral projects is welcomed, including Korea’s participation in Galileo. On global issues, support for a peaceful resolution of the North Korean nuclear issue was voiced. Pakistan The European Union and Pakistan concluded a third-generation Cooperation Agreement that came into force in 2004.107 It is basically a non-preferential agreement, focusing on commercial, economic, and development cooperation. Bangladesh The European Union and Bangladesh have concluded a third-generation Cooperation Agreement. Compared with the first agreement between the

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European Union and Bangladesh, the third-generation agreement broadens the scope considerably.108 Australia The relationship between the European Union and Australia is relatively new, and started with a joint declaration in 1997.109 The joint declaration sets out the principles and ideals shared by the two parties and calls for consultations at ministerial level, and possibly, summits, without stipulating a timetable. The two parties have launched agreements in specific areas of common interests, such as a wine agreement in 1994, and a scientific and technical cooperation agreement also from 1994. New Zealand A joint declaration in 1999110 constitutes the framework for cooperation and consultation along similar, but not exactly the same lines, as is the case for relations between the European Union and Australia. Israel The European Union’s relations with Israel are, to a large degree, governed by the foreign and security policy in the Middle East, and find their institutional place in multilateral fora such as the Euro-Mediterranean Partnership, and the European Union’s neighbourhood Policy. Bilateral consultations and cooperation are held in the context of an association agreement between the European Union, its member states111 and Israel, which is a Euro-Mediterranean agreement and offers meetings in the association council for consultations. The most recent meeting was held in December 2004.112 The European Union’s policy, as set out in an opening statement, is clearly inscribed in the general picture of the Middle East and the fight against terror, and can be summarized like this: The European Union underlines the shared common values such as respect for human rights and fundamental freedoms, democracy, the rule of the law, good governance, and international law. The majority of the remaining text is devoted to — not bilateral projects — but the situation in the Middle East, the fight against terrorism, proliferation of weapons of mass destruction, and Iran. With regard to bilateral issues, mention should be made of Israel joining the Galileo project and its ratification of the Kyoto Protocol.

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The European Union’s relations with Israel have always been rather straightforward with regard to economics and trade, but sensitive politically. The European Union has tried to strike the right balance and find its own feet, which isn’t always easy bearing in mind the vital interests of Israel and the other parties in the Middle East and the heavy American involvement, including its strong military support to Israel.

HUMAN RIGHTS CLAUSE IN AGREEMENTS i) When the European Union was established with the Treaty of Rome in 1958 it was based on liberty, democracy, and the rule of the law, although the preamble did not state that explicitly. This omission was corrected with the Treaty of Maastricht, negotiated in 1991, and which came into force in 1993,113 by referring explicitly, among other things, to the European Convention for the Protection Human Rights and Fundamental Freedoms.114 These political declarations have since been elaborated on, and deepened by the subsequent amendments of the Treaties (Treaty of Amsterdam and Treaty of Nice). The present text is quite explicit in mentioning “principle of liberty, democracy, respect for human rights and fundamental freedoms and the rule of law, principles, which are common to the Member States”.115 The European Union has gone one step further. The Treaty of Amsterdam introduced provisions for a mechanism to sanction a member state found guilty of serious and persistent breaches of human rights. The procedure to start such sanctions is heavy and cumbersome, but it is there, and the sanctions can be so severe as to “suspend certain of the rights” of the said member state.116 These are not empty words. In 2000 the European Union actually debated whether to take such steps when the Freedom Party joined the Austrian government.117 ii) With this background, it was natural for the European Union to start looking at its relations with the outside world and the role to assign to human rights and fundamental freedoms. The first real step in this direction came in 1991118 when it classified human rights and democracy as legitimate elements of the EU’s development policy. This step was modest and, apart from the clear political direction, did not put much flesh on how to implement these measures in the European Union’s relations with the outside world. This happened, however, in 1995, when a watershed took place. The Commission forwarded a communication to the Council,119 proposing that all association agreements, partnership, and cooperation agreements with third countries, contain a clause stipulating that human rights are essential

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elements. If partners do not uphold these principles, the European Union may introduce appropriate measures, ranging from refusal to grant visas to actual suspension of the agreement. The Council agreed to these policy measures and adopted them subsequently.120 There are two points to add to that policy. The first is that potential measures primarily constitute a threat to push partners towards an appropriate policy vis-à-vis human rights and fundamental freedoms. As the European Union is running agreements of various kinds with more than 120 countries, the number of countries affected is quite high. The second is that if the threat does not succeed, the European Union actually acts. It is no empty threat. According to the European Union’s annual report on Human Rights in 2003,121 the clause has since 1996 been used against Niger, Guinea-Bissau, Sierra Leone, Togo, Cameroon, Haiti, Comoros, Ivory Coast, Fiji, Liberia, and Zimbabwe in the form of actions ranging from consultations to suspension of aid.122 The respect for human rights and fundamental freedoms has been incorporated as a cornerstone in the Cotonou-Agreement that replaces the earlier Lomé-conventions with seventy-eight developing countries in Africa, the Caribbean, and Pacific (ACP countries). This agreement contains a specific Article dealing with the suspension of aid or trade concessions in cases where human rights are not respected.123 iii) There are at least two cases where a country’s human rights record or stance towards the standard clause has played a role when defining relations to the European Union.124 The first case is China where the events at Tiananmen in 1989 led to a suspension of all political and economic relations with China, which have since gradually normalized. However the agreement between the European Union and China goes back to 1985 and is thus a rather old fashioned instrument in the arsenal of the European Union. There can be little doubt that the issue of human rights is the main reason that it has been possible to beef up cooperation in many areas, but not in updating the legal basis. The EU policy makes it imperative that a clause (and in the eyes of the European Union, the standard clause) is inserted about human rights and that may not be acceptable in China. There were hints in 2006 about run-ups to starting new negotiations.125 This was confirmed at the Ninth Summit between the European Union and China that took place on 9 September 2006,126 when paragraph 4 of the joint statement announced: In order to reflect the full breadth and depth of today’s comprehensive strategic partnership between the EU and China, the two sides agreed to launch negotiations on a Partnership and Cooperation Agreement which

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will encompass the full scope of their bilateral relationship, including enhanced cooperation in political matters. These negotiations will also update the 1985 EEC-China Trade and Economic Cooperation Agreement, and will be administered in a relatively independent manner, taking into consideration the global objectives of the EU-China strategic partnership

This statement indicates a willingness of both parties to seek an updated framework for their cooperation. It remains to be seen, however, whether China will move sufficiently with regard to human rights to satisfy the political forces inside the European Union that see this as a condition for a new and updated agreement. China warned in the immediate aftermath of the Ninth Summit that trade and human rights could not be linked.127 At its meeting in December 2006 the Council followed up on this statement and formally agreed that the EU-China partnership should be developed to its full potential, “it must be balanced, reciprocal and mutually beneficial”.128 The second case is about Australia and New Zealand. In the mid 1990s, both countries were negotiating a normal framework agreement. The European Union wanted, as its policy dictated, to insert the standard clause about human rights. This was not acceptable to Australia and New Zealand. As a result of these divergent views no agreement emerged. The foundation for the relations between the European Union and Australia, and respectively, New Zealand, is joint declarations. The official Australian view says “we do not think a choice needs to be made between trade and human rights. We pursue both issues in the most appropriate means on a country-by-country basis”.129 According to a research paper submitted to the House of Commons,130 Australia found that “the existence of operative human rights and non-fulfillment provisions as proposed by the Community remains in Australia’s view inappropriate in an agreement on trade and co-operation”. It says something about the importance of human rights to the European Union, and its determination to incorporate this aspect into its Common Foreign and Security Policy, that potential partners’ problems vis-à-vis the standard clause have blocked agreements. This happened first with China, regarded as the rising economic superpower, and second, with countries such as Australia and New Zealand, with which the European Union and several of its member states have deep and emotional links. From the outside, the European Union is often perceived as a strong driver of human rights and fundamental freedoms — in some circles, maybe even too strong a driver. Inside the European Union there is, however, some criticism directed at a too-low profile. When discussing the new financial

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perspectives for the European Union, covering 2007–2013, a number of human rights organizations voiced criticisms against the method chosen, and called for a more coherent commitment to the promotion of human rights and democracy.131 Prior to Finland assuming the EU presidency in the second half of 2006, Amnesty International forwarded a ten-point plan for the promotion of human rights. Amnesty International finds that human rights abuse inside the European Union is increasing and underlines that the higher priority given to terrorism and irregular immigration on the EU political agenda raises human rights concerns. With regard to the European Union’s policy vis-à-vis the outside world, Amnesty International, in the petition mentioned above, calls for a more coherent attitude to replace what it labels a rather fragmented approach.132 The importance of human rights for the European Union and primarily, as an instrument in its Common Foreign and Security Policy, has led it to publish an annual report on human rights, that analyses the global development and explains the EU’s policy.133

DEVELOPMENT AND HUMANITARIAN ASSISTANCE i) The European Union administers annual development assistance amounting to approximately 7 billion Euros134 to more than 150 countries.135 In 2001 the internal administration of this aid was streamlined by setting up one single department to replace various offices incorporated in several departments. The new department is called EuropeAid,136 or more formally, EuropeAid Co-operation Office. There are seven priority areas for the aid forthcoming from the European Union. •

• • • •

Better access to clean and safer water with the aim of reducing by 50 per cent, by the year 2015, the proportion of people without sustainable access to safe drinking water. Food security. Forty-two million people are estimated to be undernourished worldwide, of which 95 per cent is found in developing countries. Health care in an effort to combat diseases and ensure healthcare for all. Education, where the European Union aims to achieve a balanced education pyramid, providing learning opportunities for all. Prosperity, with the European Union aiming to help developing nations to reap benefits from the world trade system and improve infrastructure.

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Freedom and democracy as the European Union takes the view that freedom is a basis for sustainable development. Security, bearing in mind that without this, no economic development will be forthcoming.

The aid is channeled to developing countries mainly through the European Union’s agreements — multilateral or bilateral — with the developing countries. ii) By far the most important one is the Cotonou. The instrument chosen for aid in this context is the European Development Fund (EDF). The Cotonou Agreement builds on the five-year Lomé-Covention, of which the European Union has had four in the twenty-five year time span between 1976 and 2000.137 The main new points in the Lomé/Cotonou agreements reveal something about the European Union’s view on the global economy, its role in helping developing countries, and the increasing importance of regional integration. The main invention in the Lomé-Convention was an arrangement to stabilize agricultural and raw material prices.138 The Cotonou Agreement introduces EPA (Economic Partnership Agreements), designed to help developing nations create regional integration, thus enhancing their competitiveness and ability to penetrate the EU market. From the start of the Yaounde-Convention in 1964 to the present Cotonou Agreements, the European Union has shaped a solid political and economic relationship with an increasing number of developing nations, from eighteen African nations to seventy-eight nations in Africa, the Caribbean, and the Pacific. For these countries, the European Union has become an indispensable economic and trade partner and a political dialogue partner with which they exchange points of view of common interests, while recognizing that, as explicitly stated, the European Union tries to push their political systems in the direction of human rights, fundamental freedoms, and democracy. iii) The European Union has steadily built up its performance level with regard to humanitarian assistance and aid. An annual budget appropriation of approximately 500 million Euros139 may not seem much compared with the exigencies, but actually places the European Union as number one donor140 in this particular area. In recent years the European Union has been very active in providing help to alleviate the onslaught of earthquakes in Pakistan, with aid of 48.6 million Euros, and in the Tsunami catastrophe in Southeast Asia, with aid of 123 million Euros,141 to mention a few examples. This assistance was given

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regardless of what may be termed an absence of strong EU foreign and security interests in the areas, so it was truly humanitarian aid without any kind of hidden agenda. The key phrase in the European Union’s policy on humanitarian aid is to help the people hit by disasters to return to self-sufficiency, thus opening the door to a return to normal life.142 The European Union’s development policy and humanitarian aid are, according to the Treaties, not an integral part of the Common Foreign and Security Policy because, among other reasons, development assistance and humanitarian aid were started before this common policy was born. The objectives do not include pursuance of the European Union’s foreign policy strategies. This sounds nice in theory. In practice it is obviously more difficult. The crossroads meet in the image or picture these two policies convey about the European Union abroad. Both of them converge in projecting not power, but how the European Union sees itself, and even more important, projecting an image of the European societal model, by assuming its responsibility to help people hit by natural disasters. As the Common Foreign and Security Policy grows in importance, it is more than likely that development assistance and humanitarian aid will become part of that policy. Another convergence may emerge with the European Union’s view on threats coming from terrorism and various forms of extremism pointing to poverty as one of the main explanations for the growing recruitment base for terrorists. By stepping in to reduce poverty to help people to a decent life, and to be ready in case of natural disasters, the European Union is actually following its own foreign policy strategy by giving assistance and aid. The European Union can kill several birds with one stone, as its European Security Strategy explicitly mentions that poverty, fundamentalism, and failed states feed the sentiment of a world that does not offer justice and equal opportunity to all.143

GLOBAL TRADE POLICY The European Union’s impact on global trade needs to be seen in the context of three major issues. The European Union’s own external trade policy, with the Commission negotiating on behalf of all member states on the basis of a mandate approved by the Council with qualified majority.144 The combination of the European Union’s external trade policy and its internal liberalization, primarily in the

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form of the Single Market. Linking the policy patterns of these two sectors — it is simply not possible to imagine a liberal internal trade policy combined with a restrictive or semi-protectionist external trade policy. And the participation in the multilateral trade system, while at the same time building a network of bilateral and regional trade agreements. The European Union is by far the world’s largest trading partner. Almost 20 per cent of the total global export of goods goes to the European Union, it receives more than 20 per cent of the total global exports of services, it is the world’s leading source of foreign direct investments; the main export market for some 130 countries around the globe, and has a more open economy than either the United States or Japan, with international trade amounting to approximately 14 per cent of Gross Domestic Product, compared with 12 per cent for the United States, and 11 per cent for Japan.145 It is unavoidable that its external trade policy attracts attention and is the focus of a good deal of analysis, praise, and criticism. Global trade is one area where the European Union’s power is clearly seen and felt. The following questions are normally posed, highlighting sensitive issues for the European Union’s trade policy: • • •

Does the European Union push for a liberal multilateral trade system? Has the establishment of the European Union led to trade diversion instead of trade creation, thus diminishing welfare and not increasing it? Does the Common Agricultural Policy act as a hindrance to exports from other countries, including developing nations of agricultural products?

The answer to these questions are partly of a political nature, but the Organisation for Economic Co-operation and Development (OECD) published a report in 2000146 that tried to provide some factual and analytical answers. According to this study the centralization of most decisions on foreign trade policy at the EU level tends to strengthen Europe’s negotiating position. It gives the European Union more clout than if individual member states negotiate on their own. While the European Union has resisted the opening up of certain sectors, its overall track record is encouraging. What is more, the experience of far-reaching regional integration in Europe shows that such policies do not necessarily undermine the multilateral trading system. Rather, the study suggests, that external and internal liberalization have gone hand in hand and have provided significant growth benefits. These diplomatic and carefully weighted words reveal that the creation of the European Union’s Single Market from the mid 1980s and onwards has

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not jeopardized global trade. The Single Market has not served to protect the European Union’s home market to the detriment of other producers around the globe. There is very little trace of trade diversion shifting trade patterns from more efficient producers to less efficient ones. On the contrary, the European Union’s trade policy has promoted efficient producers. It also shows that the expected struggle between the liberal-minded member states and the less liberal or outright protectionist ones has not really materialized, and if it has, the winner has been the liberal-minded member states. When the Single Market was introduced, it was feared that it would be abused by member states in the South of Europe. It did not happen. When the European Union was enlarged with Spain and Portugal, it was feared that these two member states would tilt the balance against a liberal trade policy. It did not happen. And when the Central and Eastern European countries were admitted to the European Union the same fear was heard, but so far no evidence of a swing in the trade policy has been visible. The sore point in the arsenal of trade policies in the European Union is the Common Agricultural Policy. Together with several other developed nations such as the United States, not to speak of Japan, Korea, Switzerland and Norway, the European Union has been unwilling to liberalize agriculture fully. The Common Agricultural Policy has been the target of criticism both inside and outside the European Union.147 The critics say that the Common Agricultural Policy is harmful to developing countries in two respects. First, because it is difficult to penetrate the EU home market, thus preserving it for EU producers. Second, because the European Union sells its own products abroad at subsidized prices, crowding out producers from developing countries. In a report from 2002, the World Trade Organization (WTO)148 voices criticism against the Common Agricultural Policy. The WTO regrets that the European Union has not used earlier opportunities to reform the Common Agricultural Policy. With regard to the manufacturing sector, both the OECD and the WTO conclude that apart from textile and apparel, where tariffs remain rather high, EU barriers to market access, including tariffs, have fallen considerably. With amendments of the Common Agricultural Policy in 1992,149 2000150 and 2003,151 the European Union has actually moved towards a less restrictive and less protectionist agricultural policy, which is also acknowledged in the OECD study, which cautiously adds that it remains to be seen how effective the measures will be. Despite the remaining barriers for agricultural products and textile plus apparel, the European Union is the most important market for the least

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developed countries, taking approximately 52 per cent of these countries’ exports and being the biggest importer of goods from forty-nine least developed countries.152 The European Union has from its start been an extremely active player in the multilateral trading system,153 while at the same time building up a network of bilateral agreements. It has been a cornerstone of the EU trade policy that bilateral agreements should not jeopardize the multilateral trade system and/or serve as some kind of substitute. The European Union has thus been careful not to indicate a willingness to see bilateral agreements as a framework that could eventually or potentially replace a well functioning multilateral system. In its report on the European Union, the WTO states that “the EU played a leading role in building support for the launch of the Doha Development Agenda”.154 The European Union was instrumental in achieving multilateral agreements on information technology, basic telecommunication, and financial services liberalization. These are all crucial sectors for future liberalization of world trade in new sectors that are more difficult to bring under a multilateral regime than the well-known sectors where liberalization has been going on and negotiated for several decades. The cornerstone of the European Union’s negotiation position in first, GATT, and then WTO, has been to avoid sectoral approaches, opting instead for a global approach, which makes it easier to obtain a result offering benefits to all partners.155 With an increasing number of participants, and not the least, the greater economic clout of players such as China, India, Brazil, South Africa, and Egypt, the global approach has proved to be more and more difficult. The negotiating picture quite simply seems to be so complicated that it makes the tested and proven method less likely to succeed. For the European Union, this marks the time for a reconsideration of the existing balance between the multilateral and bilateral approaches. The OECD156 made this point in its year 2000 study, noting “while the World Trade Organization received a mandate to work on new trade issues, the European Union is pressing ahead with bilateral agreements, as multilateral progress probably will be slow”. The question arises as to whether the strong support for the multilateral system shall be pursued or whether the time has come to tilt the balance more towards bilateral agreements. The European Union already has about 100 bilateral agreements now, against twenty-seven in 1970, and on top of that, forty countries receive preferential treatment under the Generalized System of Preferences (GSP).157

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Politically the question is to what extent trade policy is seen as a part of the Common Foreign and Security Policy. The stance so far has been not to do so. But if the evolution of world trade runs against deepening the multilateral system, and brings in bilateral or regional arrangements in its place, the European Union can hardly afford this luxury. The implication of a more bilateral approach will be a tendency to gradually, but clearly enough, “politicize” external trade policy. Operating in a multilateral system gives few, if any, openings for using external trade policy as a foreign policy instrument. Mobilizing bilateral agreements/arrangements in a more vital role than they have today, makes it almost equally difficult not to do so. So far at least one case has emerged illuminating how bilateral trade deals may, and sometimes have, to be seen in a larger and foreign and security policy context. In December 2003, the European Union and Syria signed an association agreement in the framework of the Euro-Mediterranean Partnership. The European Union has, however, deliberately delayed ratification based on political reservations.158 Economically the question arises as to whether the European Union stands to gain or lose from a switch from multilateralism to bilateralism/ regionalism as the dominating factor in global trade. So far the European Union has taken the view that it was advantageous to follow the multilateral track. There are many arguments behind this stance. The European Union is trying to introduce new issues on the international trade agenda that do not automatically find unanimous support. Illustrations are environmental issues and labour standards. Not all developed countries agree with the European Union and many developing nations feel that the European Union is operating a hidden agenda by putting these issues on the agenda in an attempt to protect its own industries which are burdened with EU and/or national regulations. The European Union’s choice or preferences vis-à-vis the balance between multilateralism and bilateralism is thus not only a political and economic issue, but also depends on the link between national policies, such as protection of the environment, and the place allocated to such issues on the international trade policy agenda. The European Union has avoided these awkward choices by keeping the trade system on the multilateral track. If multilateralism gradually gives way to bilateralism/regionalism, it may have to face them.

INTERNATIONAL MONETARY POLICY The Euro has certainly managed to create quite an impact on the international financial markets, but it has not really opened the door to a common stance

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in the debate about the future of the global monetary system by the members of EUROland. The comparison is thus not with the External Trade Policy with its pooling of sovereignty and consequent common positions, common negotiator, etc., but rather with the Common Foreign and Security Policy, where the European Union may adopt a common policy, but not always do so and have no treaty obligations to do so. This is most clearly seen in the discussions about reform of the International Monetary Fund (IMF), where member states still sit at the board, maintaining an influence on decisions by their quota, as if national currencies were still the order of the day and the single currency never born.159 In the IMF, the Europeans have 32 per cent of total votes and sit on seven of the twenty-four chairs at the board. The ECB is a permanent observer. Its role is limited, however, to participating in discussions that relate to the EURO area.

ENERGY POLICY i) The European Union is a major player on the global energy market, with a dependence on imported energy of approximately 50 per cent of all energy consumption, which is expected to rise to approximately 70 per cent in 2020, and 90 per cent for oil,160 on present trends For these economic as well as political reasons, the European Union has built up a solid panoply of measures to implement relationships with a large number of countries and international organizations. Broadly speaking, the European Union’s endeavours, as outlined by the President of the European Commission, fall into three categories: security of supply, the EU stance on global environmental questions such as climate change, and foreign policy considerations.161 At its meeting on 15–16 June 2006, the European Council endorsed policy guidelines along these three axes, labelling them “a sound basis” for future work to map out an external energy policy.162 As it does not have sufficient energy inside the European Union itself, the starting point for the Union is how to get access to energy sources Interestingly enough the European Union highlights that supply and demand, while being the most important factor, is far from being the only factor in securing supply. Aspects such as transportation network and the energy infrastructure are becoming major strategic policy issues. In the same context, we find risk of sabotage and terrorism. These issues have to be addressed by the buyers of energy, the producer countries, those nation states whose territory is used for

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pipelines or other supply infrastructure, and finally there are foreign and security policy goals, as was seen when Russia applied pressure on Ukraine around New Year’s Eve of 2005/2006 in an attempt to force Ukraine to reconsider some policy steps, which put the European Union in the (un)comfortable position of rethinking its dependence on supplies from Russia and what could be done to assist Ukraine. ii) All this leads to a long list of arrangements and agreements between the European Union and other countries. The first step was taken in June 1990. The European Council, on the initiative of the Netherlands, gave the green light for analysing how the security of supply to the European Union could be combined with assistance from the European Union to the recovery of Eastern Europe and what was then still the Soviet Union. This political initiative was converted into an Energy Charter signed in The Hague on 17 December 1991, by fifty-one nation states,163 and in the following three years, amended to become The Energy Charter Treaty, and the Energy Charter Protocol on energy efficiency and related environmental aspects.164 The Energy Charter Treaty is built around the following three provisions: Firstly, investment protection by stable, favourable, and transparent conditions for foreign investors, offering most favoured nation treatment or national treatment, whichever is the more favourable. Secondly, trade in energy materials and products by application of the rules embedded in the international trade system (GATT). Thirdly, transit and dispute settlement procedures incorporated in the treaty by requiring, among other things, free transit and prohibiting any attempt to interrupt or reduce the flow of energy materials and products, prior to the conclusion of the dispute resolution procedures provided for in such cases. The Treaty also deals with items such as competition, transparency, sovereignty, taxation, and the environment. Recently the Energy Charter Treaty has been supplemented by institutionalized bilateral consultations and/or dialogues165 with a large number of countries166 or regional organizations around the globe, all of them looking at the same target: security of supply, but also opening the door for the European Union to pursue foreign and security policy considerations. •

In October 2000, the EU-Russia Energy dialogue was launched in view of the European Union’s dependence on Russia as a supplier primarily of natural gas. The dialogue has mirrored EU-Russia relations, which have been up and down over the last six years. So far the dialogue has not provided tangible results.

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In June 2005 the European Union started a dialogue with OPEC. The European Union has been active in the construction of the BTC (Baku.Tbilisi-Ceyhan) pipeline,167 linking Azerbaijan on the Caspian Sea with Turkey’s East Mediterranean coast, and tilting the economic advantage in favour of a number of small countries in the Caucasus region to the detriment of Russia. The EURO-Mediterranean Partnership is a broader concept and does not explicitly target energy, but that sector is incorporated in the partnership as several of the participating countries, for example, Algeria, has large reserves of natural gas. The ECSEE (the Energy Community of South East Europe) aims at establishing an integrated energy market between five EU member states and seven non-member states168 in that part of Europe The Basrec (Baltic Sea Region Energy Cooperation) gathers eleven countries169 in Northern Europe, plus the European Commission, to discuss security of supply. The Arctic Agenda with Norway, Russia, the United States and the European Union, started to meet in 2005. The EU-Norway dialogue was set in motion in 2005.

The Energy Charter Protocol on energy efficiency and related environmental aspects form part of the Energy Charter Treaty. It promotes energy efficiency policies consistent with sustainable development; induce producers and consumers to use energy as economically as possible, and foster cooperation in the field of energy efficiency. All the signatories to the Energy Charter Treaty have signed the protocol, thus conveying a political signal to subscribe to the energy and environmentally related objectives inscribed in the protocol. iii) The European Union ratified the Kyoto Protocol in May 2002 and has since been one of the staunchest supporters of the protocol’s provisions to reduce emission of greenhouse gases. In practically every summit with other nation states and/or international groupings of various sorts, there is a reference to the Kyoto Protocol or emission and /or global warming. It can be said without exaggeration that the European Union is one of the most important drivers, and perhaps, even the most important driver, of the international efforts to combat global warming. The European Union has set up a trading system for companies to use less than their emission allotment and sell the remaining rights to other companies. By so doing, the European Union is well placed to play an important role in the global emissions trading system, which forms an integral part of the Kyoto Protocol.

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iv) With its growing dependence on supplies from outside, particularly for oil, the European Union will find an increasing need to see the foreign energy policy as part of the Common Foreign and Security Policy.170 The first steps have been taken by incorporating energy into the European Neighbourhood Policy and the string of bilateral and/or multilateral arrangements with countries and organizations geographically adjacent to Europe. The European Union is gradually discovering the harsh truth that its dependence on energy from its neighbours forces it to adapt a foreign and security policy taking this into consideration. It is, however, easier said than done. The relations with Russia illustrate the dilemma. The European Union is heavily dependent on deliveries of primarily gas from Russia, which speaks for friendly and good relations. In recent years Russia has adopted a more self-confident attitude that has led to policies vis-à-vis some of the new born nation states, formerly part of the Soviet Union, aimed — at least for some of them — at bringing them back under Russian influence, albeit not as part of Russia. The European Union supports most of these new nation states and in some cases look at them as promising partners not to be let down in their efforts to reform themselves politically and economically. They want the European Union as some kind of implicit bulwark towards an overly strong Russian influence. Russia regards them as its so-called “near abroad” and looks upon an EU interference with displeasure. In North Africa, Algeria with its vast reserves of gas, poses a dilemma, though of a different kind. The quest for security of supply pushes the European Union towards a deeper relationship, but Algeria wants economic and trade concessions, which the European Union finds difficult to grant as more competitive goods — agricultural and industrial ones — from Algeria will create problems for European producers. The European Union has taken a step in that direction with an offer to all Mediterranean countries of free trade in industrial goods from 2010, plus major opening of markets for agricultural goods.171 It is difficult to escape the observation that the European Union has not really found the rightful place for energy as a composite in its Common Foreign and Security Policy. The variety of policy objectives blurs the picture. Even if recent changes in the Treaties introduce a more coherent policymaking mechanism for the Common Foreign and Security Policy, there is still a long way to go. The same picture appears when looking at the attempts by the European Union to shape alliances between energy consuming and energy importing

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countries to secure supply and reduce dependence on import of energy, in particular, oil. The President of the Commission, José Manuel Barroso, took a step in this direction in February 2006,172 inviting the United States to join the European Union in what he termed a Strategic Energy Dialogue composed of five main points. Assisting in the development of hydrocarbon resources; increasing the role of market rules in the energy sector; improving energy efficiency and diversifying the use of energy; striving to achieve these goals without reducing competitiveness; and setting up a permanent network of EU-U.S. energy experts. The long-term vision behind this initiative is to start talking with a common voice. To be credible and have real impact on security of supply, such strategic energy dialogues should not be confined to the United States, but offered to emerging economies such as China and India, which may not be the largest consumers, but are taking up the lion’s share of increasing demand.

ENVIRONMENTAL POLICY The breakthrough for the global role of the European Union in environmental matters came in June 1990 when the European Council met in Dublin. In a special declaration173 the European Union states, among other things, that the Community and its member states have a special responsibility to encourage and participate in international action to combat global environmental problems and the Community must use more effectively its position of moral, political, and economic authority to advance international efforts to solve global problems and to promote sustainable development and respect of global commons. The European Union is part, or signatory, to a long list (59) of international environmental agreements and/or protocols.174 Among the most important ones are: Concerning air pollution and climate change: Convention on Longrange Transboundary Air Pollution (1979); UNFCC Framework Convention on Climate Change (1982); the Kyoto Protocol (1997); Vienna Convention for the Protection of the Ozone Layer (1985); and the Montreal Protocol as amended. Concerning Chemicals: The Stockholm POP Convention (on Persistant Organic Pollutants) in 2001. Concerning Nature and Biodiversity: Rio CBD (Convention on Biological Diversity) in 1992, and the Cartagena Biosafety Protocol in 2000. Concerning Waste: The Basel Convention on Hazardous Wastes in 1989.

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In international trade policy rounds under first, GATT, and then WTO, the European Union has steadily pursued the question of environmental standards as a so-called new issue to be incorporated on the agenda for liberalization of international trade. In 2001 the European Union took the step to adopt a Sustainable Development Strategy (SDS), integrating provisions for protection of the environment in its aid policy vis-à-vis developing countries. The main idea is to see development aid inside a triangle of economic, social, and environmental considerations.175 The Cotonou agreement176 allocates priority to safeguarding the environment and natural resources, with the implication that projects will be judged, among other things, for their ability to improve the situation for the recipient countries in these areas. Since the question of the environment was put on the agenda for the European Union in the early 1990s, it has grown in strength and importance and has now become an integral, almost vital, part of the European Union’s role in the world, feeling its way into agreements between the European Union and other nation states and/or organizations. Not everyone, however, is happy, and from various sources, criticisms have been forthcoming that not only can much of the European Union’s policy vis-à-vis global environmental issues be labelled more or less hypocritical, but that the European Union itself is not putting in sufficient effort to improve its own environment.177

FISHERIES POLICY The European Union is the world’s biggest player in fisheries. Between 30 per cent and 40 per cent of total EU consumption comes from trade, making the European Union interested in incorporating fish products and fishing rights in trade arrangements. Of the remaining share, approximately 50 per cent comes from the European Union’s own fishing grounds and approximately 20 per cent from distant waters.178 This serves to explain why a large high seas fleet of fishing vessels comes from several member states. The starting point is the extension, during the 1970s, of exclusive economic zones which totally changed the environment for the fisheries sector. In 1982 the European Union joined the United Nations Convention on the Law of the Sea179 with the purpose of negotiating access to fish stocks, and striking a balance between coastal states and nation states fishing on the high seas. In 1993 the European Court of Justice179 ruled that the European Union had competence instead of its member states, but without specifying whether

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the European Union had exclusive competence, or mixed competence with the member states. As approximately 20 per cent of all fisheries product consumed in the European Union originates from waters outside the European Union, but caught by fishing vessels under the EU flag, access to waters with fish stocks has to be negotiated with the coastal states. Generally, the European Union has managed to do so by securing such access with either trade concessions in other areas, or direct financial assistance. The arrangements fall into four types: Firstly, arrangements with the ACP — countries grant the European Union access to coastal waters by specifying provisions to that effect in the various agreements — the latest one being the Cotonou Agreement. The vehicle chosen in these agreements has been to trade access to fishing rights for financial aid. Greenland has the same kind of arrangement. Secondly, trade agreements with groups of countries such as Mediterranean countries (MED agreement), or countries such as South Africa, Mexico, and Chile.181 Thirdly, reciprocal agreements negotiated with countries such as Norway and Iceland, where the parties have exchanged fishing rights in each other’s waters. The European Union as well as the other party are interested in fishing rights, and not in either trade concessions or financial aid. Fourthly, bilateral agreements with a number of countries, for example, Senegal and Angola, giving the European Union fishing rights. Over the years, the European Union has negotiated twenty-three such bilateral agreements of various sorts.182 On behalf of its members states, the European Union in the course of the 1990s negotiated to achieve an active role in three major international agreements: • • •

The agreement to promote compliance with conservation and management measures by fishing vessels on the high seas.183 The Code of Conduct for Responsible Fisheries.184 The “New York Agreement” on implementation of the United Nations convention on the Law of the Sea, especially with regard to highly migratory fish.185

The external fisheries policy of the European Union suffers from the same drawbacks as the internal fisheries policy, namely, the effort to strike the right balance between, on the one hand, the supply of fish to the consumer and

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employment in the fisheries industry, and on the other, conservation to make the industry a sustainable one. The European Union is seen in many parts of the world as a rather aggressive partner projecting its high seas fleet around to the detriment of local, less well-equipped fishing fleets, and moving from place to place as fish stock is run down by high technology fishing methods. Even if the criticism of its external fishing policy is not as vocal as the criticism of some aspects of the Common Agricultural Policy, and certain parts of its external trade policy, the external fishing policy does not contribute to a positive image of the European Union around the world.186

DIPLOMATIC RELATIONS187 The representation of the European Union abroad goes back to 1954. In 1951 the treaty establishing the European Coal and Steel Community was signed. Just three years later the first representation abroad was opened and Washington was, for obvious reasons, where it happened. Since then what is termed the Delegations of the European Commission has been set up, representing the European Union to more than 130 countries or international organizations.188 The delegations are incorporated in the administrative structure of the European Commission. Both the head of delegation and the staff are recruited from within the ranks of officials working for the European Commission. Their main role is to act where the European Union has exclusive competence (member states have pooled their sovereignty to exercise it in common), meaning that it is neither the member state nor the EU presidency, but the Commission that acts on behalf of European Union and its member states. This responsibility necessitates that the Commission get information comparable to what an embassy from a nation state collects for its national Ministry of Foreign Affairs. The delegations function on an equal footing with the embassies of member states and take full part in the intensive and elaborate cooperation, which has evolved over the years among embassies of the EU member states. In practice the delegations offer assistance to delegations of parliamentarians from the European Parliament, even if formally, the Commission and the Parliament are two separate institutions. After the implementation of the Common Foreign and Security Policy, the troika plays an increasingly important role when representing the views of the European Union, and the Commission delegation forms part of the troika.189

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In the eyes of member states, the delegations were initially seen as superfluous and even irritating, but over the years the wrinkles have been ironed out and replaced by genuine cooperation. In the eyes of the countries, the initial reaction was some uncertainty about the role of the delegations — when to speak with member states and when to speak with the Delegation of the European Commission. This uncertainty was mainly due to a lack of willingness among the member states to acknowledge that the European Commission has competence to speak for all, for example, with regard to trade policy, which nourished the perplexity of host countries not being used to offer analogous status to the representatives of an international institution. The United States was the first nation to accord the head of the European Commission diplomatic status,190 other countries followed suit, and since then the delegations have operated like embassies with the head of mission as ambassador. The delegations have contributed to the European Union’s role in the world as tangible, on-the-spot evidence of the European Union. The most important factor is, however, that it reflects the distribution of competences between member states and the Commission, and even more importantly, that the European Union when and where the delegations operated, actually had a common position to put forward.

CONCLUSION The role of the European Union in the world is based on an extension of the European Union’s common policies. The European Union is able to play, and actually plays, a major and important role in areas where a common policy and a common stance exist. The best illustrations are the international trade policy, other aspects of the Common Agricultural Policy, and the environmental policy. The European Union does not negotiate only instead of member states, it negotiates on behalf of member states; the competence rests with the European Union. Where the European Union does not have exclusive competence, the foundation for the Union is weaker, albeit still there. In these cases, it negotiates after deliberations in the Council to define the EU position. The matter of who is representing the European Union becomes blurred if member states disagree, and if the distribution of competences between the European Union and member states is divided. Looking at the international picture, one is struck by how rarely EU member states fail to map out a

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common position. In most of the cases with divided competence, member states actually manage to stay together to negotiate on the basis of a common position, and by doing so, get much more clout than if negotiating separately. The third possibility is where there is no EU competence, for example, part of the Common Foreign and Security Policy. If member states do not agree on a common position, they negotiate separately and in their full right, exposing the lack of a common EU position. The verdict is — not surprisingly — that the European Union’s position and influence in the world depend on how it uses its competences on behalf of member states and/or common positions. Foreign policy in its broadest context — perceived as influence in the world — depends on how robust its domestic policies are and how forceful domestic policies are used internationally. Foreign policy cannot be evaluated separately from domestic policies. Perhaps the greatest achievement of the European Union when one analyses its role in the world is its growing ability and determination to promote the European model and European societal values. This may be a controversial statement, but as this chapter shows, the European Union has consistently incorporated two basic ingredients in its endeavours to shape a role in the world: — Support for the multilateral system and cementing this as a common principle in practically all major agreements with other countries, in particular, those chosen by the European Union as strategic partners. — European societal values in the form of human rights, fundamental freedoms, and democracy. The United States and the European Union may both pursue the promotion of democracy as one of the most important goals for their roles in the world, but the instruments chosen differ, to say the least. When looking at countries adjacent to the European Union, this policy must be credited with a certain success. The Central and Eastern European countries that have joined the European Union or are on their way towards membership have all moved in this direction. The repercussions are felt in Ukraine and some countries in the Caucasus region. The network of agreements with a large number of developing nations may not have produced an overnight change in political conditions, but nevertheless serves as one of several catalysts for a better record in these areas.

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Notes 1. “A Secure Europe in a Better World”, European Security Strategy, Brussels on 12 December 2003, available at http://ue.eu.int/uedocs/cmsUpload/78367.pdf. 2. Presidency Conclusions, Meeting of the European Council on 12–13 December 2003, Document 5381/04 of 5 February 2004, available at http://www. consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/78364.pdf. 3. One of the best-known works is Joseph Nye, The Paradox of American Power: Why the World’s Only Superpower Can’t Go It Alone (Oxford, 2002). 4. The report submitted at the end of 2006 can be found at Council of the European Union, document 16696/06 of 12 December 2006, COSDP 1044, PESC 1279, CIVCOM 585. The document is available at http://66.102.9.104/ search?q=cache:srJmnJSg9d4J:www.eda.europa.eu/WebUtils/downloadfile.aspx/ 3Ffileid/3D160+eu+presidency+report+esdp+2006&hl=en&ct=clnk&cd= 2&gl=sg. 5. An answer was forthcoming twelve years later with the European Security Strategy op. cit. saying on p. 12 “to transform our militaries into more flexible, mobile forces, and to enable them to address the new threats, more resources and more effective use of resources are necessary”. 6. Article J. 1 in the Treaty of Maastricht, now Article 11, 1 in the updated Treaties (Treaty of Nice). 7. Article J. 4 in the Treaty of Maastricht. 8. Article 17.1, 1st subparagraph says: “The common foreign and security policy shall include all questions relating to the security of the Union, including the progressive framing of a common defence policy, which might lead to a common defence, should the European Council so decide. It shall in that case recommend to the Member States the adoption of such a decision in accordance with their respective constitutional requirements”. 9. UNPROFOR. See, for example, http://www.un.org/Depts/DPKO/Missions/ unprof_p.htm. 10. See for example, http://news.bbc.co.uk/onthisday/hi/dates/stories/july/11/ newsid_4080000/4080690.stm. 11. See for example, http://news.bbc.co.uk/2/hi/europe/675945.stm. 12. See for example, http://www.ohr.int/dpa/default.asp?content_id=380. 13. Based on Chapter VII of the Charter of the UN Resolution 1031 (1995) of the Security Council. Available at http://www.nato.int/ifor/un/u951215a.htm. 14. For a description of the crisis, see for example, International Crisis Group: Conflict History: Kosovo. Available at http://www.crisisgroup.org/home/ index.cfm?action=conflict_search&l=1&t=1&c_country=58 15. Despite its respectable conventional military forces Germany did not take part, because of (1) its past (2) its status as a non-nuclear power and (3) it not being a Permanent Member of the UN Security Council. 16. Franco-British Summit. Joint Declaration on European Defence. 4 December

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18.

19.

20.

21.

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23. 24.

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1998. St. Malo, France. Available at http://selene.uab.es/_cs_iuee/catala/obs/ DOSSIER/20MISSIONS/20PESD/declaracion/20de/20saint/20malo.pdf. Presidency Conclusions. Helsinki European Council, 10 and 11 December 1999. Available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/ pressData/en/ec/ACFA4C.htm. The EU Rapid Reaction Force must not be confused with the Eurocorps, which was created in 1992 with contributions from France, Germany, Spain, Belgium, and Luxembourg. The Eurocorps is the size of an army corps under the command of a Lieutenant General. Its purpose is to act like a rapid reaction force and was in 1992 regarded as the first step towards a common European defence effort. It is not a sleeping force, but has seen action in SFOR (Bosnia) in 1999–2000; KFOR III (Kosovo) in 2000, ISAF IV (Afghanistan) in 2004– 2005. The full text of the agreement is found in a Council Decision from the meeting on 17 May 2004, available at http://ue.eu.int/uedocs/cmsUpload/2010/ 20Headline/20Goal.pdf and welcomed by the European Council at its meeting on 17–18 June 2004. Presidency Conclusions, document 10679/204 /Rev 2 of 19 July 2004, available at http://www.consilium.europa.eu/ueDocs/cms_Data/ docs/pressData/en/ec/81035.pdf. Military Capability Conference, Brussels on 24 November 2004, Available at http://ue.eu.int/uedocs/cmsUpload/MILITARY/20CAPABILITY/ 20COMMITMENT/20CONFERENCE/2022.11.04.pdf. For a full list of operations, see Institute for Security Studies, “ESDP Operations”, a paper written by Giovanni Grevi, Dov Lynch, and Antonio Missiroli, available at http://www.iss-eu.org/esdp/09-dvl-am.pdf. WEU, also called The Bruxelles Treaty, was formed in 1948 between the United Kingdom, France, the Netherlands, Belgium, and Luxembourg, as a military alliance in view of the emerging threat from the Soviet Union. Germany and Italy joined in 1954, Greece, Spain, and Portugal later. WEU lost its significance when NATO was formed in 1949. See http://www.weu.int/. Denmark, traditionally against defence and military questions on the agenda of the EU, and Ireland being a neutral country. It was not the first time the hotel inscribed itself in the history of Europe. In the 1920s and 1930s the hotel did not want to house Hitler and his entourage. Despite being the finest hotel around, that prompted Hitler in 1938 to invite the then Prime Minister of Britain, Neville Chamberlain, to meet him on the other bank of the Rhine, at Hotel Dreesen, owned by a Nazi party member. This snub by the Petersberg Hotel did not go unnoticed in then Nazi-Germany, and the hotel languished for a long time, making it costly to renovate after the end of the war. They are without any amendments found in Article 17 in the present updated (Treaty of Nice) Treaties.

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26. For an exposition of the decisions, but also the American view, see Lee Aspin (former US Secretary of Defence) in NATO Review, Volume 42, available at http://www.nato.int/docu/review/1994/9401-3.htm. 27. The Europeans apply two acronyms easy to confuse as they deal with the same substance, but they are not the same. ESDI means European Security and Defence Identity and is the European role inside NATO established at the NATO summit in 1996 in Berlin. ESDP is the European Security and Defence Policy as first fleshed out in Annex III to the Presidency Conclusions from the meeting of the European Council in Cologne on 3–4 June 1999, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ kolnen.htm. 28. The agreement did not preclude independent WEU operations without any link to NATO, but it was clear that this was more theory than practice. 29. A description of the decision plus other decisions taken at the summit and an evaluation of their implications can be found in the speech by NATO’s SecretaryGeneral at the Institute for International Strategic Studies on 19 September 1996, available at http://www.nato.int/docu/speech/1996/s960919b.htm. 30. Annex III of the conclusion available at http://www.consilium.europa.eu/ueDocs/ cms_Data/docs/pressData/en/ec/kolnen.htm. 31. The office of High Representative was created with the Treaty of Amsterdam and came into force in 1999. Formally the High Representative is Secretary General of the Council of Ministers. In reality, the post serves as a flywheel for mapping out and presenting EU foreign and security policy. The wording in the relevant paragraph of the Treaties (Article 18, 3, formerly Article J.8) which says that “The Presidency shall be assisted by the Secretary General of the Council who shall exercise the function of High Representative for the common foreign and security policy”, formally maintains that the Presidency is in charge. 32. The decision took the form of the nomination of Javier Solana to both posts. Javier Solana was formerly Foreign Minister of Spain, and from 1995 to 1999, Secretary General of NATO. Many birds were killed with one stone by this nomination. 33. The European Convention, the Secretariat, Document 850/03 of 18 July 2003, available at http://european-convention.eu.int/docs/Treaty/cv00850.en03.pdf. 34. Denmark may not be a good example as it does not participate in the EU defence, but is nevertheless given as an example as I have examined the remodelling of the Danish armed forces in Australian Army Journal, Volume III, Number 1, Summer 2005–06. 35. An excellent summary describing the reasons behind the European Union’s position is found at http://www.msnbc.msn.com/id/14508070/. The U.S. position is described in the following way: “The United States has explicitly ruled out participation in the peacekeeping force. The U.S. often provides logistics for U.N. peacekeeping forces — which it is expected to do in Lebanon — but as a rule, it does not provide troops unless it is commanding the force.”

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36. http://www.government.fi/ajankohtaista/tiedotteet/tiedote/en.jsp?oid=178623. 37. For a definition of ESDP, see note 25. 38. Quoted in a speech on 9 March 2002 to the French American Chamber of Commerce, Washington, by the French Ambassador to the United States, available at http://www.ambafrance-us.org/news/statmnts/2002/bujon 030502.asp. 39. Foreign Affairs, January 1974. Preview available at http://www.foreignaffairs.org/ 19740101faessay10089/z/the-year-of-europe.html. 40. Somewhat unkindly John Lewis Gaddis calls President de Gaulle of France the “ultimate dodger” in his book The Cold War: A New History (2005), p. 180 in the Danish edition. 41. Kagan, Robert, “Power and Weakness”, Policy Review, June and July 2002, pp. 3–28. 42. Sometimes called the Mars versus Venus approach after the respective Greek Gods. 43. Source: The European Commission, Trade Issues, available at http://ec.europa.eu/ comm/trade/issues/bilateral/countries/usa/index_en.htm. 44. The European Commission, “External Relations, The European Union’s Relations with the United Sates of America”, available at http://ec.europa.eu/ comm/external_relations/us/economic_partnership/declaration_1990.htm. 45. There are still two summits each year. One of them takes place in Europe where all member states participate and the venue is decided by the member state assuming the EU presidency for that six-month period, normally in the first half of the year. The High Representative whose office is incorporated in the Treaties in 1999 with the Treaty of Amsterdam, participates in the both summits and in the meetings between the foreign ministers. 46. http://www.eurunion.org/partner/summit.htm. 47. EU-US summit: A guide. Göteborg, Sweden, on 14 June 2001, available at http://www.eurunion.org/partner/summit/Summit0106/Statement.htm. 48. Vienna Summit Declaration, available at http://www.eurunion.org/partner/ summit/Summit06212006/2006EUUSSUmmitDecl.doc. 49. Article by Mike Allen, available at http://www.time.com/time/nation/article/ 0,8599,1206899,00.html. 50. Article by Jim Gerstenzang and Alissa J. Rubin, 22 June 2006, available at http://eccentricstar.typepad.com/public_diplomacy_weblog_n/guantanamo_ detention_centers/index.html. 51. Quoted on the Atlantic Review website, available at http://atlanticreview.org/ archives/345-Transatlantic-Communication-Failures-Surrounding-the-EU-U.S.Summit.html. 52. Second Inaugural Address, 20 January 2006. 53. Kagan op. cit. 54. In the European Security Strategy, op. cit. p. 13, the wording used is “the transatlantic relationship is irreplaceable”.

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55. Presidency Conclusions, meeting of the European Council on 15–16 June 2001, the relevant paragraph, 53, is available at http://ec.europa.eu/comm/ external_relations/un/docs/pres_concl.htm. 56. http://www.europa-eu-un.org/articles/en/article_2768_en.htm. 57. http://www.europa-eu-un.org/articles/hu/article_6903_hu.htm. 58. http://www.consilium.europa.eu/cms3_fo/showPage.asp?id=1091&lang=EN. 59. http://www.europa-eu-un.org/articles/it/article_6810_it.htm. 60. See for example, http://ec.europa.eu/comm/external_relations/asem/intro/ index.htm. 61. For an analysis of Asem, see Yeo Lay Hwee, ASEM The Asia-Europe Meeting Process: From Sexy Summit to Strong Partnership? (Copenhagen, 2002), and Yeo Lay Hwee, Asia and Europe (London, 2003). 62. See www.asef.org. 63. Official Journal L 144, 10 June 1980. 64. The latest one from 2003 is Commission Communication “A New Partnership with South East Asia”, Com (2003) 399/4, available at http://ec.europa.eu/ comm/external_relations/asia/doc/com03_sea.pdf. 65. For the ASEAN presentation of its relationship with the European Union, see http://www.aseansec.org/5612.htm. 66. Through their quotas in the International Monetary Fund (IMF). 67. In a speech by Commissioner Mandelson on 29 April 2005, at a WEF Asia Forum meeting in Singapore, available at http://72.14.235.104/search?q= cache:GUVt7tRHeHEJ:europa.eu/rapid/pressReleasesAction.do/3Freference/ 3DIP/05/511/26format/3DPDF/26aged/3D1/26language/3DEN/26gui Language/3Den+eu+asean+free+trade+agreement+mandelson&hl=en&ct=clnk &cd=7&gl=sg. 68. Press release IP/06/624 of 16 May 2006, available at http://europa.eu/rapid/ pressReleasesAction.do?reference=IP/06/624&format=HTML&aged= 1&language=EN&guiLanguage=en. 69. http://ec.europa.eu/comm/external_relations/saarc/intro/index.htm. 70. Joint communiqué, 16th E.U.-GCC Joint Council and Ministerial Meeting, Brussels on 15 May 2006. GE-GOLFE 3501/06 (Presse 134) of 15 May 2006, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/ en/er/89619.pdf. 71. Commission Communication, “Stronger Partnership between the European Union and Latin America”, COM (2005) 636, available at http://ec.europa.eu/ comm/external_relations/la/doc/com05_636_en.pdf. 72. The result of the IV EU-LAC summit, held in Vienna on 12 May 2006, called the The Declaration of Vienna, is available at http://www.eu2006.at/includes/ images/EULAC/EU-LACViennaDeclarationEN.pdf. 73. XII Ministerial meeting between the RIO Group and the European Union, in Luxembourg 27 May 2005. Council document 9486/05 (Presse 130) on 27 May 2005, available at http://ue.eu.int/ueDocs/cms_Data/docs/pressData/ en/er/84988.pdf.

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74. A summit was held in 2002 in Madrid. For an overview, see http://ec.europa.eu/ comm/external_relations/mercosur/intro/index.htm. 75. The most recent summit was held in May 2006 with the European Union represented by the Troika, see Pres/06/139 of 13 May 2006, available at http://europa.eu.int/rapid/pressReleasesAction.do?reference=PRES/06/ 139&format=HTML&aged=0&language=EN&guiLanguage=en. 76. The basis is a political and cooperation agreement of 2003, available at http://ec.europa.eu/comm/external_relations/andean/doc/pdca_1203_en.pdf. 77. For Mexico the most recent summit was held on 13 May 2006, see http:// europa.eu.int/rapid/pressReleasesAction.do?reference=PRES/06/ 138&format=HTML&aged=0&language=EN&guiLanguage=en and for Chile, the same day, see http://europa.eu.int/rapid/pressReleasesAction. do?reference=PRES/06/141&format=HTML&aged=0&language=EN& guiLanguage=en. 78. http://ec.europa.eu/comm/development/body/eu_africa/eu_africa_en.htm. 79. It is simply not possible to go through the European Union’s relations with all countries. I have chosen to follow the European Union’s own priorities and added relations with countries of particular interest to an Asian audience. 80. Op. cit. p. 14. 81. For an overview, see http://ec.europa.eu/comm/external_relations/japan/intro/ index.htm. 82. EU-Japan Summit on 2 May 2005, available at http://ec.europa.eu/comm/ external_relations/japan/summit_05_05/js.htm. 83. Paragraph 12 of the joint statement, op. cit. 84. Commission Policy Paper, “A Maturing Partnership — Shared Interests and Challenges in EU-China Relations”. COM (2003) 533 of 10 September 2003, available at http://ec.europa.eu/comm/external_relations/china/com_03_533/ com_533_en.pdf. 85. Second paragraph of the executive summary. 86. Website BBC News of 21 January 2005, available at http://news.bbc.co.uk/2/ hi/asia-pacific/4193331.stm. 87. Joint Statement from the E.U.-China summit in Beijing on 5 September 2006, available at http://ec.europa.eu/comm/external_relations/china/summit_0905/ index.htm paragraph 8. 88. Joint statement, op. cit. paragraph 10. 89. For specifics, see the joint statement from the summit, op. cit. 90. China has joined, and ratified the Kyoto Protocol, but is not required to reduce carbon emissions under the present agreement. 91. Commission Communication, “An E.U.-India Strategic Partnership”, COM (2004) 430 of 16 June 2004, available at http://ec.europa.eu/comm/ external_relations/india/news/2004_comm.pdf. 92. Political Declaration on the India-EU Strategic Partnership, available at http://ec.europa.eu/comm/external_relations/india/sum09_05/05_pol_decl_ 070905.pdf.

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93. The India-EU Strategic Partnership, joint action plan, available at http:// ec.europa.eu/comm/external_relations/india/sum09_05/05_jap_060905.pd. 94. Like several other partners, India has joined the Galileo project. 95. EU-Canada Summit (Ottawa, 18 March 2004), the EU-Canada Partnership Agenda, available at http://ec.europa.eu/comm/external_relations/canada/ sum03_04/partnership_en.pdf. 96. After the enlargement in 2004, with ten countries, including eight Central and Eastern European countries, the European Union launched a neighbourhood policy, see http://ec.europa.eu/world/enp/policy_en.htm. Reference is made in Chapter VI on the Enlargement. 97. Tacis was started in 1991 and offers assistance to a number of countries in Eastern Europe (apart from the countries in Central and Eastern Europe, applying for membership, which enjoyed their own programmes) and Central Asia, with Russia being the most important one. See e.g. http://ec.europa.eu/ comm/external_relations/ceeca/tacis/. 98. Commonwealth of Independent States. 99. See for example, Laurnet Vinatier, “E.U.-Russian Relations: Moscow Lays Down Its Conditions”, Notre Europe, March 2006, policy paper No 20, available at http://www.notre-europe.asso.fr/IMG/pdf/Policypaper20-en.pdf. 100. See for example, Marius Vahl, “A Privileged Partnership, EU-Russian Relations in a Comparative Perspective”, DIIS working paper 2006/3, available at http://www.diis.dk/graphics/Publications/WP2006/3_m_vahl_privileged_ partnershi.pdf. 101. See for example, “Russia-Ukraine Gas Dispute hits E.U. Countries with Major Cuts in Deliveries”, The Independent on 2 January 2006, available at http:// news.independent.co.uk/europe/article336173.ece. 102. Legally it is an interesting agreement as its comprehensive character prevents it from falling under EU competence solely. It actually falls under what is termed mixed competence; the European Union and member states have competence over some of the topics dealt with in the agreement, forcing both the European Union and member states to be signatories. 103. Agreement on Partnership and Cooperation, available at http://ec.europa.eu/ comm/external_relations/ceeca/pca/pca_russia.pdf. 104. Press Release IP/06/910 of 3 July 2006, available at http://europa.eu.int/rapid/ pressReleasesAction.do?reference=IP/06/910&format=HTML&aged= 0&language=EN&guiLanguage=en. 105. For an overview, see http://ec.europa.eu/comm/external_relations/south_korea/ intro/index.htm. 106. http://www.eu2006.fi/news_and_documents/press_releases/vko36/en_GB/ 1157790059136/. 107. http://ec.europa.eu/comm/external_relations/pakistan/intro/index.htm. 108. http://ec.europa.eu/comm/external_relations/bangladesh/intro/index.htm. 109. For the text, see http://www.dfat.gov.au/geo/european_union/jointdec.html.

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110. For the text, see http://www.delaus.ec.europa.eu/newzealand/EU_NZ_relations/ jointdeclarationnz.ht. 111. Another example of a mixed agreement where both the European Union and its member states have competence and are signatories to the agreement. 112. For the statement of the European Union, see General Secretariat of the Council, Fifth Meeting of the Association Council, 10 December 2003, available at http://ec.europa.eu/comm/external_relations/israel/intro/eu_decl_121204. pdf. 113. Article F, 2 in the Treaty of Maastricht. 114. Published on the web by the Council of Europe, see http://conventions.coe.int/ Treaty/Commun/QueVoulezVous.asp?NT=005&CL=ENG. 115. Article 6 having replaced Article F in the earlier Treaties and amended. 116. Article 7, 3 of the Treaties in their newest and updated version — Treaty of Nice. 117. See for example, International Herald Tribune, 1 February 2000, “Bilateral Contacts to be cut……”, available at http://www.iht.com/articles/2000/02/01/ austria.2.t.php. 118. Council Resolution of 28 November 1991, available at http://ec.europa.eu/ comm/external_relations/human_rights/doc/cr28_11_91_en.htm. 119. Commission Communication COM (95) 216 of 23 May 1995, available at http://ec.europa.eu/comm/external_relations/human_rights/doc/ com95_216_en.pdf. 120. Council Press Release 7481/95 of 29 May 1995. 121. Available at http://ue.eu.int/uedocs/cmsUpload/HR2003EN.pdf. Corresponding information is not given in reports from 2004 and 2005. 122. A full list of EU sanctions can be found at a constantly updated website over sanctions or restrictive measures in force available at http://ec.europa.eu/comm/ external_relations/cfsp/sanctions/measures.htm. 123. Article 96 in the agreement, available at http://ue.eu.int/uedocs/cmsUpload/ HR2003EN.pdf. 124. Trade and Economic Cooperation Agreement. 125. Xinhua, 11 May 2005, “EU to Start Talks with China on a New Partnership pact”, available at http://news.xinhuanet.com/english/2005-05/11/ content_2942725.htm. 126. “China, EU issue joint statement after summit”, available at http:// news.xinhuanet.com/english/2006-09/10/content_5071239.htm. 127. Reuters, see http://in.today.reuters.com/News/newsArticle.aspx?type=business News&storyID=2006-09-10T001005Z_01_NOOTR_RTRJONC_0_India266784-1.xml. 128. http://ec.europa.eu/comm/external_relations/china/intro/index.htm. http:// register.consilium.europa.eu/pdf/en/06/st16/st16291.en06.pdf. 129. See http://ec.europa.eu/comm/external_relations/cfsp/sanctions/measures.htm. 130. The Human Rights Clause in the European Union’s External Agreements,

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131.

132.

133. 134.

135. 136. 137. 138. 139. 140. 141.

142. 143.

144. 145.

146.

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House of Commons Research Paper 04/33 of 16 April 2004, available at http://www.parliament.uk/commons/lib/research/rp2004/rp04-033.pdf. Penned letter to the European Commission, the European Council, and the European Parliament of 13 December 2004, available at Open Letter http:// www.omct.org/pdf/omct_europe/2004/openletter_financialpersp_131204.pdf. Amnesty International, the Search for a Coherent and Credible EU Human Rights Policy — Amnesty International’s Ten-point Programme for the Finnish Presidency of the European Union, available at http://www.amnesty-eu.org/ static/documents/2006/Finnish_Presidency_AI_recommendations.pdf. The latest — 2005 report — is available at 2005 http://ue.eu.int/uedocs/ cmsUpload/HRen05.pdf. This is the sum channeled through EU systems. If we add national aid, the EU and its member states are expected to raise approximately 39 billion Euros in 2006. http://ec.europa.eu/comm/europeaid/general/mission_en.htm. http://ec.europa.eu/comm/europeaid/general/mission_en.htm. The Lomé-Conventions were the successor to the Yaounde-Conventions (two, each one for five years) from 1964 to 1975. Called Stabex and Sysmin. European Parliament, see http://www.eupolitix.com/EN/News/200608/ fd1e942d-a95b-43b3-812a-c68a82ad7538.htm. http://www.eu2001.be/Images/vitiny/NewYorkUNDoc/Humanitarian/ 20aid.pdf#search=/22european/20union/20humanitarian/20aid/22. The European Commission’s Directorate-General for Humanitarian Aid (ECHO) — 2006 Operational Strategy, available at http://ec.europa.eu/echo/ pdf_files/strategy/2006/strat_2006_en.pdf. This is set out in the strategy document op. cit., which includes a report of what the European Union is actually doing, its policies and strategies. This is set out nicely by Jose Antonio Sanahuja in a CIP report of 2004, “The Dilemma of the European Union’s Development Policies”, available at http:// w w w. c i p re s e a r c h . f u h e m . e s / p a z y s e g u r i d a d / d o c s / dilemaEUdevelopmentpoliciesINGOK.pdf#search=/22eu/20aid/20to/20nonassociated/20countries/22. Trade policy belongs to those policies where member states have pooled or transferred sovereignty to exercise it in common. All figures from the European Commission manuscript, “Making Globalisation Work for Everybody”, available at http://ec.europa.eu/publications/booklets/ move/37/en.doc. http://www.oecd.org/document/15/0,2340,en_2649_34487_2004303_ 1_1_1_1,00.html and http://www.oecd.org/dataoecd/16/16/1886277. pdf#search=/22the/20european/20union/20trade/20policies/20and/20their/ 20economic/20effects/22. See for example, Oxfam briefing note, of 5 May 2003, “EU Hypocrisy Unmasked:

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Why EU Trade Policy Hurts Development, available at http://www. maketradefair.com/assets/english/eu_hypocrisy.pdf#search=/22oecd/20eu/ 20trade/20policy/22. 148. WTO, Trade Policy Reviews, Press Release Press/TPRB/198 of 26 July 2002, European Union: July 2002 available at http://www.wto.org/english/tratop_e/ tpr_e/tp198_e.htm. 149. http://www.tcd.ie/iiis/policycoherence/index.php/iiis/eu_agricultural_ policy_reform/the_cap_reform_processss. 150. http://europa.eu/scadplus/leg/en/lvb/l60002.htm. 151. http://ec.europa.eu/agriculture/mtr/index_en.htm. 152. European Commission manuscript, “Making Globalisation Work for Everybody”, op. cit., p. 14. 153. Some observers argue that the creation of the European Union in 1958 was one of the most important reasons for the Dillon and Kennedy rounds of world trade negotiations in the 1960s and 1970s, as other countries feared trade diversion. See OECD op. cit. 154. P. 2 WTO op. cit. 155. P. 15, OECD op. cit. 156. P. 14, OECD op. cit. 157. P. 11, OECD op. cit. GSP is a system offering developing countries access to the market of developed countries with a lower tariff than applied to developed countries, thus giving developing countries preferential treatment. It was negotiated in UNCTAD in the 1970s. 158. See http://ec.europa.eu/comm/external_relations/syria/intro/ip03_1704.htm and http://www.epp-ed.eu/Press/showpr.asp?PRControlDocTypeID=1&PR ControlID=5633&PRContentID=10030&PRContentLG=en and http:// ec.europa.eu/world/enp/faq_en.htm. 159. It is neither fully correct nor fully wrong to compare this with the membership of France and the United Kingdom in the UN Security Council, where these two EU member states still sit, regardless of the European Union having a Common Foreign and Security Policy. 160. JGCRI (The Joint Global Change Research Institute) Paper is available at climate http://www.globalchange.umd.edu/?energytrends&page=eu.3. 161. See Speech by the President of the European Commission José Manuel Barroso at Georgetown University, 9 February 2006, available at http://www. eurunion.org/News/speeches/2006/060209jmb.htm, JGCRI op. cit. and “An External Policy to Serve Europe’s Energy Interests”, Paper from Commission, SG/HR for the European Council, available at http://www.consilium.europa.eu/ uedocs/cmsUpload/st09971.en06.pdf. 162. Paragraph 23 of Presidency Conclusions, European Council, 15–16 June 2006, Doc. 10633/1/06 Rev. 1 of 17 July 2006, available at http://www.consilium. europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/90111.pdf. 163. The European Union is part of the Charter and the subsequent Treaty, together

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165. 166. 167. 168.

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with its member states, as competences are divided between the European Union and member states — the so-called divided competence making it necessary for both the European Union and member states to sign. Signed in Lisbon on 17 December 1994 by all fifty-one original signatories except the United States and Canada. All documents assembled by the Energy Charter Secretariat and are available at http://www.encharter.org/upload/9/ 120520674515751158192049714743532131935190860213f2543v3. pdf#search=/22European/20Energy/20Charter/20adopted/20in/20the/ 20Concluding/20Document/22. http://www.euractiv.com/en/energy/geopolitics-eu-energy-supply/article142665. Russia has at the end 2006 not ratified. For a list of participants, see http:// en.wikipedia.org/wiki/Energy_Charter_Treaty. Opened on 25 May 2005. Austria, Greece, Hungary, Italy, and Slovenia on the EU side, and Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Romania, Serbia & Montenegro, Turkey and Kosovo. Denmark, Estonia, Germany, Iceland, Latvia, Lithuania, Norway, Poland, Russia, and Sweden. http://72.14.235.104/search?q=cache:RLlfCcJXijAJ:www.ceeisaconf.ut.ee/ orb.aw/class/3Dfile/action/3Dpreview/id/3D167748/ rulska_energy.doc+eu+foreign+policy+and+energy&hl=en&gl=sg&ct=clnk&cd=73. For an analysis, see the Middle East Review for International Affairs, Volume 9, No. 2, article 6, June 2005, available at http://meria.idc.ac.il/journal/2005/ issue2/jv9no2a6.html. Speech in Washington on 9 February 2006, see note 161. Annex II (p. 2) to the Presidency Conclusions of the meeting on 5–6 June 1990, of the European Council, available at http://www.europarl.europa.eu/ summits/dublin/du2_en.pdf. The full list can be found at http://ec.europa.eu/environment/ international_issues/pdf/agreements_en.pdf, and a more accessible list showing the most important ones at http://ec.europa.eu/environment/ international_issues/agreements_en.htm. The strategy was adopted at the meeting of the European Council on 15–16 June 2001, see Presidency Conclusions doc. SN/200/1/01 REV.1, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 00200-r1.en1.pdf. http://ec.europa.eu/comm/development/body/cotonou/index_en.htm. See for example, Frank Arnalric and Marikki Stocchetti in a publication by Society for International Development, available at http://www.sidint.org/ Publications/Docs/EU_Responsibility_Summary.pdf#search=/22the/ 20european/20union/20and/20the/20global/20environment/22. CFFA — Coalition for Fair Fisheries Arrangements, 2006. “Comparing E.U.

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179. 180.

181. 182.

183. 184. 185.

186.

187.

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189. 190.

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Free Trade Agreements: Fisheries” (ECDPM InBrief 6J) (Maastricht: ECDPM). Available at http://www.ecdpm.org/Web_ECDPM/Web/Content/ Navigation.nsf/index2?readform&http://www.ecdpm.org/Web_ECDPM/ Web/Content/Content.nsf/0/AF3D02EE55874433C1257187002B 424C?OpenDocument. http://www.un.org/Depts/los/convention_agreements/texts/unclos/unclos_e.pdf. Court case c — 405/92 of 24 November 1993, available at http://europa.eu.int/ smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en& numdoc=61992J0405. ECDPM op. cit. contains the full list of trade agreements covering fisheries. The full list can be seen in a paper published by the European Commission, available at http://ec.europa.eu/fisheries/cfp/external_relations/bilateral_ agreements_en.htm. http://www.fao.org/legal/treaties/012t-e.htm. http://www.fao.org/figis/servlet/static?dom=org&xml=CCRF_prog.xml. Council Decision of 8 June 1998. Official Journal L 189/14 of 3 July 1998, available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/1998/l_189/ l_18919980703en00140041.pdf. For a critic’s analysis, see for example: Barry Haynes, “European Community Third Parties Agreements and the Future of Partnership Agreements within the Common Fisheries Policy”, Joint Nature Conservation Committee. Available at http://www.jncc.gov.uk/pdf/TPFA2.PDF#search=/22critic/20of/20the/ 20european/20union’s/20external/20fisheries/20policy/22. The best reference is “Taking Europe to the World, 50 years of the European Commission’s External Service”, published by the European Commission, 2004. Available at http://ec.europa.eu/comm/external_relations/library/publications/ 07_50_years_broch_en.pdf#search=/22Taking/20Europe/20to/20the/20world/ 22. Technically and formally the delegations represent the European Commission. Over the years they have gradually assumed functions justifying the informal label of “EU delegations” even if that term is never used officially. The troika consists of The Presidency, the High Representative for Foreign and Security Policy, the Commission and the next presidency. In 1972, with an Act passed by both Chambers of Congress.

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6 THE RATIONALE BEHIND THE ENLARGEMENTS — WHY THEY WORKED

CENTRAL ISSUES IN THE DEBATES ON ENLARGEMENT FROM THE 1960S TO 20061 The debate about enlargement drives home the central point that the European Union has always nourished a grand strategic design. It has had repercussions for the political and economic architecture of Europe. The European Union fast became the flywheel for Europe’s politics and economics, thus attracting those European countries that had chosen not to join as founding fathers. Overriding political reasoning explains why the adhering countries wanted to join: •

The United Kingdom joined in 1973, not because it really wanted to, but because the political leaders of Britain had come to the conclusion that staying outside the European Union, Britain would be confined to low economic growth, be marginalized economically with inevitable negative political repercussions for Britain’s influence in Europe, relations with the United States, its role in the Commonwealth, and worldwide status in the long run. To a certain extent, Britain joined to preserve its place in the world and not because it was inspired by the ideas behind the European integration. 382

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Greece in 1980, and Spain plus Portugal in 1986, saw membership as a guarantee against a reversal of the democratization of their countries after the fall of dictators, and access to the EU markets, combined with economic assistance as a driver for economic growth. Politically their societies might have been thrown into chaos without the solidity brought along by membership. The EFTA countries (Sweden, Austria, Finland)2 took their decision after the end of the Cold War removed the raison d’être for neutrality, which they felt suited them during the military stand-off between NATO and the Warsaw Pact from 1949 to 1990. In the Cold War years they had been willing to live with the economic costs of staying outside the European Union. After the end of the Cold War, this was no longer the case. The Central and Eastern European countries grasped instantaneously that the European Union could and would give them the implicit security guarantee they wanted against a potential threat from Russia. After having seceded from the Soviet/Russian Empire, they feared the resurrection of the old imperial power. If such was to be the case, membership of the European Union would be convenient. An act of aggression would be against the European Union and not against isolated Central and Eastern European countries.

For all its life the European Union has been the strongest, almost irresistible, magnet for adjacent countries. The overwhelming majority of political leaders in countries not among the founding fathers came to the conclusion that it would serve their interests to join the Union. The European model of pooling sovereignty to exercise it in common has been accepted without much hesitation and/or reservation. For the six member states of the original European Union,3 enlargement has been less straightforward. They feared all along that enlarging the Union would water down the substance of the integration and, most important of all, the objective of “an ever closer union among the peoples of Europe”. The European Union has never been willing to yield one inch with regard to this principle or long-term objective. In all negotiations, be they Treaty amendments or accession negotiations, the principles and objectives have been classified as “untouchables”. Gradually the original six member states have come to realize that a larger European Union gives more economic clout and opens the door to more political influence. This can be explained by the sheer fact that the enlargements have not watered down the substance — have never been allowed to. After

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the enlargements, the European Union was stronger than before. The reservation of the original member states was overcome partly by the ardour of some of the newcomers. The sceptics such as Britain and Denmark did not find any support for holding back the integration, either among the newcomers, or among the original members. Their scepticism was sidelined, and as they did not want to be so themselves, they had to join the chorus and accept the goals of the Union. Technically a proven trick helping the enlargements to run smoothly was a step-by-step approach.4 The adhering countries were not taken in without preparatory work. For most of them, agreements of various kinds implemented before enlargement adapted their economies to EU rules before accession.5 The accessions went surprisingly smoothly — surprisingly, for those not aware that most of the adjustments had taken place before accession. During the 1960s an acute political question for the European Union was whether it would continue to be a closed club that was deepening the integration and moving towards a federation/confederation, or open the door to new members, knowing quite well that such a move would slow down the course towards “an even closer union among the peoples of Europe” or perhaps even worse, make that goal unattainable. The first major crisis for the European Union emerged in 1965 with the French objection to replacing unanimity for certain treaty provisions with qualified majority. The schism between France on the one hand, and the other five on the other hand, surfaced. It was well known that France under the political leadership of Charles de Gaulle did not favour the supranational approach and in 1962 had flirted with transforming the integration into some kind of intergovernmental cooperation.6 The indirect implication of this schism was a growing interest among at least five of the original member states in enlarging the European Union. The reasoning was that a fast move towards a supranational Europe was blocked anyway with the French policy, and therefore not much was lost by enlarging, even if the main contender for membership was the well-known sceptic, Britain. Without this schism, and if all six member states had been united in pursuing a strong supranational Europe, it is doubtful that the European Union would have been enlarged with Britain in 1973. Instead a course towards a genuine European Union based on supranationality would probably have taken place, perhaps blocking British entry for a long time, in view of the United Kingdom’s reluctance vis-à-vis the end goal of the union. The original six members of the European Union would not have seen much virtue in British membership. With the United Kingdom remaining outside the European Union, other enlargements would have faded out of sight.

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THE FIRST ENLARGEMENT: THE UNITED KINGDOM, DENMARK, AND IRELAND, 1973 At the beginning of the 1960s Prime Minister Harold MacMillan came to the conclusion that what was known as stagflation or stop-go economic policy haunting Britain for a decade or more would gradually kill the British economy. Entry into the European Union that was enjoying high economic growth rates was the recipe for getting the British economy back on track. Accession negotiations started and actually went quite well with five of the original member states willing to accommodate Britain. France, however, was not ready to do so. The United Kingdom wanted to preserve entry into the British market of agricultural products from The Commonwealth, which, in the eyes of France, would have jeopardized the Common Agricultural Policy. The French attitude was that “community preference” was one of the main principles and achievements of the European Union in its early days and could or should not be endangered or questioned. The political nature of the European Union was underlined by what many observers regard as the main reason for France’s No to British entry into the European Union announced in January 1963. In December 1962 President John F. Kennedy of the United States and Prime Minister Harold MacMillan met at Nassau, Bahama.7 The two leaders agreed that the United States would sell Polaris missiles to the United Kingdom, allowing the United Kingdom to establish its own nuclear deterrent.8 The meeting took place shortly after a meeting at Rambouillet in France between President Charles de Gaulle of France and Prime Minister Harold MacMillan where Prime Minister MacMillan allegedly did not mention his plan to purchase missiles from the United States. For President de Gaulle the political and economic rationales worked in the same direction.9 The British wanted to join the European Union, but — in his eyes — not to adopt the basic economic principles, in particular, the community preference and the Common Agricultural Policy, both of them vital to French interests. And the British wanted politically to maintain a special relationship with the United States, which without being said loudly, was clearly contradictory to an emerging European voice in world politics. Together these two reasons were sufficient to warrant a French “No”, delivered by President de Gaulle at his press conference in January 1963.10 The new British Prime Minister, Harold Wilson, heading a Labour government after an election victory in 1967, tried to put the question of British membership back on the agenda, but only succeeded in getting a second French “No”, albeit the circumstances this time were a bit murky.11

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After a change of president in France from Charles de Gaulle to Georges Pompidou, the road for British membership was gradually cleared. At the end of the 1960s the Common Agricultural Policy was firmly established and the risks of derailing it by actions from new member states were almost non-existent. French advantages gained by this policy did not seem to be endangered by British membership. Politically the United Kingdom under Harold Wilson was less close to the United States than under the previous government, as could be detected, for example, by its stance towards the Vietnam War when it refused to support the United States. France itself saw the Franco-German axis as the cornerstone of European integration, but was not blind to the growing German economic power and feared that it could spill over into political power. Britain could be expected to side with France in the political game to keep the lid on possible German political ambitions, the French thought. The enlargement negotiations lasted from the summer of 1970 to the end of 1972, with the accession treaty being signed on 22 January 1972. The main problem during the negotiations was the distribution of costs and benefits among member states after the enlargement. The British pointed out that with only one genuine common policy giving rise to expenditures from the budget — the Common Agricultural Policy — Britain, as a major net importer of agricultural goods, would be at a disadvantage compared with the rest of the European Union members. The solution found was a compromise with a gradual phasing in of Britain’s payments to the EU budget, supplemented by a political pledge to set up a regional fund, which would channel funds to less developed regions in the European Union, among them, regions in Britain, thus offering possibilities of financial support from the European Union to Britain. For many reasons, the United Kingdom did not push the question of access to the U.K. market for agricultural products from Commonwealth countries with the same determination as it did in 1961–1962. The negotiations with Britain revealed a pattern that was to be seen again and again over the years when adhering countries felt their way into the European Union: • •

•

Applicant countries join the European Union as it is, the European Union does not transform itself to accommodate acceding countries. To avoid being blocked by fear among existing members that the existing cost-benefit balance will be changed, the adhering country adopts the tactic of signing on the dotted line regardless of the terms. Once in, the time has come to start reforming or transforming the

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European Union, and incorporate what the newcomer sees as its central interests. That may take time and in cases where patience is absent, problems may occur.

The United Kingdom was well aware of the first sentence, but felt that as a major European, perhaps even global, power, the European Union should show more flexibility. The European Union did not share that feeling. At the end of the day, the United Kingdom accepted terms determined by the political wish to get in, fully realizing that once it is in, chances to change the structure of the integration would present themselves. Britain looked to Germany as its potential ally. The British felt the two countries shared fundamental economic interests such as the internal market, a liberal external trade policy, and a less “dirigiste” economic policy than that sought by the French. Germany may have shared these policies, but was not comfortable breaking away from the Franco-German axis. Britain never managed, and some will say, did not try, to overcome its scepticism towards the final goal of the European Union and the institutional set-up favoured by the Germans. The British did not see “an ever closer union among the peoples of Europe” as a commendable goal nor did they favour more use of qualified majority voting; they did not really like the European Parliament and was adamantly against Political Union, all of which were high on the list of German political priorities. This observation gives birth to a fifth sentence: •

The scope for manoeuvre is fairly large with regard to the substance and the common policies. Any member state, including newcomers, can play the game at full throttle, but that is not the case with regard to the ultimate goal and the institutional set-up.

The institutional set-up, including the role of the European Parliament, was almost sacrosanct for the original six member states and every British (or for that matter, Danish) attempt to limit the power and/or influence of the European Parliament was not only doomed to failure, but also cost them heavily in goodwill. The British succeeded in getting special treatment with regard to budget contributions and had a strong hand and influence in creating the Single Market.12 That enabled the United Kingdom to feel that the substantial structure of the integration had changed to tip the cost/benefit balance of membership for Britain in favour of benefits.

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But the United Kingdom never managed to stop the process towards either an economic and monetary union or a European Union and today the hitherto much despised European Parliament is stronger than ever and playing an increasingly important role. British attempts to form alliances with Germany, and at some stages, with Italy — never really with France13 — illustrate a sixth key phrase about adhering countries’ integration in the European Union. •

The original six member states feel that the European Union is their invention (their baby). They are perfectly ready to accommodate newcomers on an equal footing, but if a newcomer wants to enjoy the same reciprocal trust, the goals and the institutional set-up of the European Union must be convincingly subscribed to.

In the daily workings of the European Union when manoeuvring around proposals in the Council, alliances may shift as fast as night turns into day, but those alliances are ephemeral ones.14 A newcomer is accepted as member of the inner circle forming closelyknit alliances to forward the integration if, and only if, the original six and, in particular, France and Germany, find the newcomer a reliable partner in building the European Union according to the political goals. Britain might have succeeded in doing that if the premiership of Edward Heath15 had continued for a considerable period after 1973, but it ended in February 1974. When John Major replaced Margaret Thatcher in 1990 and pronounced the policy phrase that “Britain should be in the heart of Europe”,16 it looked like a bid to join the inner circle. He added, however, that “Europe is made of nation-states” and elaborated his and Britain’s stance on the institutional set-up by rejecting “a European federal super-state”. This bid failed precisely because he a priori excluded one of the options for “an ever closer union among the peoples of Europe”. Furthermore the role of the nation states made it clear that there were limits to how far and how fast Britain would go. The original six member states, or some of them, may not have disagreed with him at this stage of the European Union, but all of them disagreed strongly with eliminating one of the potential options.

THE SECOND ENLARGEMENT: GREECE IN 1980; THE THIRD ONE: SPAIN AND PORTUGAL, 1986 The common denominators for these accessions are to consolidate newborn democracies after long spells of dictatorship and a strong increase in the

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production of Mediterranean agricultural products (Portugal less than Spain and Greece), threatening Italy, and to a certain degree, France’s benefits from Mediterranean agricultural products. At the same time, a large pool of lowpaid labour gave them a potential competitive advantage, compared with the original six and the three member states joining in 1973, in labour-intensive manufacturing such as textiles and apparel. There was almost unanimous support for the entry of these three countries in the European Union. The downfall of dictatorships was greeted universally and the wish to consolidate democracy in the three countries carried the day without much arguing. The political motive was so strong that scepticism was brushed aside — and as events were to prove, rightly so. Membership of Greece in the European Union meant that the Union inherited or imported the Greek-Turkish conflict. This has tormented the European Union since Greek entry. Few observers at the time realized the implications for the European Union of the Greeks insisting that the Union took its side against Turkey. These two countries had for a long time kept a mini-crisis going in the Eastern Mediterranean, exemplified by the Turkish invasion of Cyprus in 1974.17 On numerous occasions Greece tried to slow down improved EU-Turkish relations, not surprisingly infuriating Turkey and adding fuel to the sentiment that the European Union was not offering Turkey the treatment foreseen in the association agreement of 1963. Positions change, however, dictated by interests. Today Greece is an advocate of EU enlargement with Turkey as new circumstances are driving home the point for both countries that confrontations rarely bring about mutual advantages, but cooperation does. Only time will show whether the trade-off between consolidating democracy in Greece and bringing this country closer to the rest of Europe was worth the long deterioration of relations between the European Union and Turkey. Spain and Portugal did not carry any negative political baggage along with them. Indeed the close relations nourished by these two countries with Latin America provided the European Union with a foothold in that part of the world, and added a further geographical dimension to its growing external relations. Economically and technically the negotiations with Spain and Portugal proved to be the most difficult one of all five enlargements and was spread over eight years. The two countries applied on 28 March 1977 (Portugal) and on 28 July 1977 (Spain). The Treaty of Accession was signed for both countries on 12 June 1985. Several reasons explain this long negotiating time.

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Spain and Portugal were in 1977 economically backwards compared with the rest of Europe. They had suffered under dictatorships, missing the boom that started in the late 1950s, and were still predominantly agricultural societies relying on agricultural products and manufacturing for the domestic market. The dictatorships meant that economic agreements with the European Union, preparing them for membership, and which mastermind a large part of the adjustment before membership, were ruled out. All the adjustments had to be done after the application, making the enlargement negotiations tiresome, very technical, and time consuming. They constituted an economic “threat” to Italy and France with their reliance on Mediterranean agricultural products, and the whole European Union, with their low paid labour forces, seen as a potential risk for employment in the European Union. There was widespread fear that rich and old Europeans would emigrate to these two countries, taking tax revenues away from their home countries, and that the free movement of labour would lead to a downward pressure on wages in the European Union itself. As underdeveloped regions, they would be eligible to receive substantial funds from the European Union’s Regional and Social funds, thus reducing benefits from these funds flowing to net beneficiaries, among them, the United Kingdom. That would augment the political pressure for higher appropriation to these funds, triggering off higher payments into the EU budget. This was unwelcome news for countries already paying — to their mind — large sums into the European Union (Germany, and to a certain degree, The Netherlands, are cases in point). Most, if not all, these fears proved to be unfounded. Spain and Portugal (and Greece) proved to be fast adapters to a modern economy, helped along by substantial financial support from the European Union. Their high growth rates in the 1980s and 1990s contributed to the high growth in the whole European Union. They modernized their economies and, although backward sectors such as textiles in Portugal still accounted for a visible share of GDP, transformed themselves into countries with a lower Gross Domestic Product per head than the EU average, but not to an extent as to paint a picture of nations on a different stage of economic development. Economically all these countries were integrated smoothly enough into the European Union. Institutionally the battle was primarily whether Spain should be treated as a member state on an equal footing with France, Germany, Italy, and the United Kingdom or whether its slightly smaller size should place it somewhere

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between these four countries and The Netherlands. Spain fought hard to achieve parity with the four large member states, but lost. The gap in size, and even more important, economic weight, was simply too big. For Italy it was of paramount importance to maintain an undisputed leading role for the Mediterranean countries that is not to be shared with the newcomer Spain.18 The enlargement negotiations with Spain and Portugal ended at a meeting of the European Council on 29–30 March 1985.19 It was no coincidence. In the first half of 1985, Italy assumed the presidency of the European Union, and it was left to Italy to choose whether it would like to play the role of a petty minded country blocking Spain and Portugal, or play the role of statesman paving the way for their entry. Italy chose the second role.20 The negotiations succeeded even if everybody knew that it would reduce Italy’s economic benefits and bring in a competitor for the role as leader of the Mediterranean countries. It underlined the well-known fact in politics: those having spoken out against them are often best to take agonizing decisions. They may rightly be rated as painful, but even more important is that they are unavoidable. In the EU context it proved to be one more example of the often-quoted sentence that the presidency can be a costly affair, making it difficult to pursue national interests. As a consolation prize, Italy managed to get approval at the same meeting of the European Council for the Integrated Mediterranean Programmes,21 which have gradually escalated into an EU policy for not only member countries in that particular geographical area, but also a number of other nation states. The second enlargement brings into the open once more that the great decisions, grand designs and strategic outline of the European Union may be influenced, and to a certain degree, steered by economics, but the decisive factor is political — the image and substance of the European Union. Very few, if any, of the member states before the entry of Greece, Spain, and Portugal thought that admitting these three countries would benefit either themselves or the European Union as such. As events turned out, this enlargement actually benefitted the European Union, but that was not the perception during the negotiations.

THE FOURTH ENLARGEMENT: THE EFTA COUNTRIES, 1995 The enlargement negotiations with the EFTA countries22 proved in many respects to present a picture almost diametrically opposite to what was seen with Greece, Spain, and Portugal.

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They were predominantly Northern European countries at the same or higher economic level than the existing European Union, in particular, after the entry of Greece, Spain and Portugal, which had lowered the Gross Domestic Product per head. Their main industrial sector was manufacturing, with Sweden as a world-class country in high quality investment goods. Their domestic policies gave high priority to items such as improving the environment. Even if two of them were geographically situated in Central Europe, they were associated with the Nordic welfare model (Switzerland, not driving its application with much vigour, being the exception). They would pose a competitive threat to the manufacturing member states such as Germany. With the exception of Norway, they were not members of NATO — which had been the case for the three Southern European countries. During the Cold War they had been neutral. There was one common denominator with the Southern European countries: again with the exception of Norway, they had not really taken part in the key organizations among the European countries. Dictatorship had kept the three Southern European countries out. Neutrality had had the same effect for the EFTA countries. Five of the EFTA countries applied for membership.23 Negotiations started in February 1992 and ended in April 1994, a little more than two years later. Sweden, Finland, and Austria joined on 1 January 1995. Politically there were no problems associated with the accession of the EFTA countries. Economically they all had analogous economic systems and operated at a comparable level with the EU average or above, posing no obvious difficulties to integrate. Over the years their agreements of various sorts with the European Union had prepared them for membership so very little adjustment had to be made. The main problems at the negotiating table were confined to what in the outside world’s opinion were technicalities, even if for the countries concerned, they could be politically important issues.

THE FIFTH ENLARGEMENT: CENTRAL AND EASTERN EUROPE, 2004 Political Considerations There is a strong political, even ethical, label for the fifth enlargement of the European Union that took place in 2004, fourteen years after the communist system fell apart in Central and Eastern Europe. The Central and Eastern European countries moved from a communist authoritarian rule to democracy,

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and from centrally planned economies to market economies. They did so in less than a decade, in a peaceful and orderly fashion. The European Union played a crucial and indispensable role in this transformation. For the Central and Eastern European countries, it was of vital importance to join the European Union. It legitimized them as European countries on an equal footing with the Western European countries. It gave them an implicit security guarantee. It opened the markets in the richer Western European countries for them. Without joining the European Union, they would have been left in a vacuum in Central and Eastern Europe between Russia, which they did not trust, and Germany, which for historical reasons they did not trust either. Russia and Germany had for centuries competed to control the soft belt of nations between them. The experience from the interwar period suggested that most of these countries were likely to slide into some kind of autocracy (or worse), if they were not anchored in an international framework acting as a bulwark against such a development. In the European Union the feelings were mixed at the outset. There was some apprehension that it would be too costly to bring the Central and Eastern European countries into the European Union because they were backward, heavily reliant on agriculture, and would unquestionable take a large part of the funds available under the European Union’s structural funds. Gradually, however, it dawned on all members of the European Union that after decades of encouraging the Central and Eastern European countries to leave the communist system, the European Union could not reject their application after they had done exactly that. It would have tainted the image of the European Union, to put it mildly. Politically the price of rejection might have turned out to be high, very high indeed. An unstable Central and Eastern Europe with chaotic political systems, repressive regimes towards their minorities, and facing an economic slump, was not exactly the recipe for neighbouring countries seen from the EU point of view. It might easily have triggered waves of refugees from the Central and Eastern European countries seeking asylum in Western Europe. From Estonia in the north to Macedonia in the south, we find twenty-three nation states, twenty ethnicities (each one having its own language) without counting the very small ethnic minorities, three alphabets and four main religions — and the ethnicities plus religions spread over several nation states; auguring ethnic and religious conflicts.24 Economically the negative scenario predicting a heavy drain on EU funds proved to be wrong. The enlargement would cost the European Union something — nobody disputed that — but compared with the costs of facing an unstable Central and Eastern Europe, these costs would be negligible.25

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At the beginning of the 1990s a positive interaction emerged. The European Union realized that it was not only inevitable, but also beneficial, for all parties to open the door to the Central and Eastern European countries. It would be the greatest foreign policy engineering for decades, and would constitute a masterful piece of peacekeeping, perhaps even peacemaking, in Europe, serving as a showcase for the European Union’s ability to promote peace, security, and stability. Russia, which certainly had misgivings over the Central and Eastern European countries’ potential membership in NATO, let it be known that this was not the case for EU membership. For the Central and Eastern European countries, membership of the European Union would be the fulfilment of their dreams. In the beginning of the 1990s, a large majority of the population wanted membership. The politicians saw the window of opportunity; many of the reforms needed in the Central and Eastern European countries would hurt in the short term, as benefits would start to flow only after the economy had been restructured. Popular support would be difficult to mobilize, but if such reforms were unavoidable as a ticket for EU membership, the population might accept them — which is what happened. In several of the Central and Eastern European countries, minority problems belonged to the traditional political agenda. Fears of repression were not unfounded. Again the prospect of EU membership played a role. The European Union made it clear that repression would make a country ineligible for membership.26 Politicians thinking along such lines were steered away; instead legislation protecting the minorities was introduced. Such lucky positive interaction and congruous interests are rarely seen in modern history, but it was the case with the European Union and Central and Eastern Europe, justifying calling it one of modern political history’s greatest achievements.

Transitional Economies The Central and Eastern European countries transformed their economies, helped not only by the European Union, albeit this was the most important factor, but by other countries, such as the United States, and international organizations such as the International Monetary Fund (IMF) and the World Bank.27 The European Union itself set up a regional development bank, European Bank for Reconstruction and Development, EBRD, to channel funds to these countries. Without almost universal support for the transformation of these countries’ economies, their membership of the European Union might not have been possible.

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What the IMF calls transition of these countries’ economies cannot be delinked from the movement towards membership of the European Union. It is two sides of the same coin.28 The difficulties spoke for themselves and the critics did not hesitate to point them out. The facts spoke another language. Compared with when Spain and Portugal adhered, the divergence was similar, maybe even smaller, at least for some of the Central and Eastern European countries. When Greece and Portugal joined the European Union in 1980 and 1985 respectively, their Gross Domestic Product per capita were approximately 40 per cent of the EU average for Greece and 50 per cent for Portugal. In 2000, the Gross Domestic Product per capita for Slovenia (the richest of the adhering countries) was 71 per cent, for Hungary, it was the same as Portugal at the beginning of the 1980s, and for Poland, 37 per cent.29 Experience gained from the enlargement with Greece and Portugal showed clearly that convergence took place by lifting backward countries towards the EU average.30 All in all the economies of the adhering countries equalled the Dutch Gross Domestic Product, which is approximately 5 per cent of the total EU Gross Domestic product.31 In October 2006, figures published by The Economist32 showed that most of the Central and Eastern European countries had reached a comparable economic level or above, to what was the case for Greece, Spain, and Portugal when these countries joined in 1980 and 1985 respectively.

TABLE 6.1 Growth in Gross Domestic Product (GDP) percentage in 2006 GDP per capita (EU average 100) Slovenia Czech Republic Estonia Hungary Slovakia Lithuania Latvia Poland

5% 6% 12% 4% 6% 7.5% 11% 5%

83.6 77.9 68.3 63.8 59.5 56.7 53.1 53.3

Admittedly these figures include two years of membership, but are nonetheless striking as evidence of progress and how manageable the gap in living standards actually is.

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It soon boiled down to the real problem: agriculture, with 22 per cent of the population employed in that sector for the adhering counties, compared with 5 per cent for the European Union.33 And it soon became clear that Poland with approximately thirty-eight million people34 would be the decisive factor. In fact, only Poland and Romania (approximately twentytwo million people) posed real economic problems. The three Baltic States were not only small, but also moving fast towards a modern economy.35 Slovenia was already an industrial country. Hungary and the Czech Republic were also well developed. Slovakia a bit, but not much less, developed. Bulgaria was in the same box as Romania, but with a smaller population, making the problems manageable. Sober analysis showed that the burden for the European Union to integrate and assimilate these ten countries with about 100 million people, and a Gross Domestic Product corresponding to 5 per cent of the EU total could never constitute a real hurdle, unless it was chosen to be so politically. And this was not the case. Politically, the Central and Eastern European countries had their hiccups in the initial phases of the transition from communism to democracy, but neither the original six member states of the European Union nor the newcomers from 1980 and 1985 were flawless. Spain had an aborted military coup a few years after the fall of the dictatorship (198136) and corruption scandals rocked Italy’s political life during the 1980s and 1990s.37 The enlargement process with the Central and Eastern European countries was the best prepared, planned, and executed enlargement in the history of the European Union. This is the key to understanding why it went smoothly in spite of all kinds of misgivings, apprehensions, and warnings.38 The European Union and the applicant countries started almost from Day One in 1990 to prepare for membership, even if it took some years before that particular word was put on the political agenda. Table 6.2 gives an idea of how the Central and Eastern European countries moved closer and closer to the European Union in a gradual, step-by-step process.

The Road Towards Membership The trade and cooperation agreements go back to the immediate period after the collapse of the communist system in Central and Eastern Europe. These agreements served as an appetizer for the presumed applicant countries and were a political signal that the door was open to them. The pivotal point came at the meeting of the European Council on 21–22 June 1993, in Copenhagen,39 which took three major decisions:

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TABLE 6.2 Relations between the Central and Eastern European countries and the European Union

Hungary Poland The Czech Republic Slovakia Bulgaria Romania Slovenia Estonia Latvia Lithuania

• •

•

Trade and Cooperation Agreements

Europe Agreements

Application for E.U. Membership

Actual Membership

1988 1989 1990 1990 1990 1991 1993 1994 1994 1994

1991 1991 1991 1991 1993 1993 1996 1995 1995 1995

1994 1994 1996 1995 1995 1995 1996 1995 1995 1995

1 May 2004 " " " 1 January 2007 " 1 May 2004 " " "

The associated countries in Central and Eastern Europe that so desired should become members of the European Union. The three Baltic States (Estonia, Latvia, Lithuania) were put at the same level as the Visegrad countries,40 composed of three countries in Central Europe. For a while at the beginning of the 1990s, it looked as if these three countries would join the European Union on their own, or at least, long before the rest of the Central and Eastern European nations, but this dichotomy was obliterated at the Copenhagen meeting. Objective criteria for joining (democracy, rule of the law, market economy, institutional capacity to cope with membership)41 was agreed and published. This made it difficult, almost impossible, to divide applicant countries based upon political considerations and ultimately led to all those countries fulfilling the criteria for joining the EU and at the same time.

After Copenhagen, the next step or the next breakthrough came at the meeting of the European Council in Luxembourg on 12–13 December 1997, which outlined a complete accession and pre-accession strategy.42 The two main points were: • •

Negotiations take place with all applicant countries on an equal footing and with the same possibilities for membership. Any applicant country is assessed on progress in the negotiations with

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that country — and that country alone — based on the Copenhagen criteria. These two main principles meant that no applicant country could be rejected by referring to lack of progress in negotiations with other countries. Until then, some circles in the European Union had seen the enlargement in the context of groups, linking applicant countries together, and making adhesion of one country dependent on progress in other — comparable — countries in the same group. The statement from the European Council seems rather obvious: any country has the right to be treated and assessed on its own merit; no applicant country can be rejected or delayed because of the state of affairs in other countries. It was not, however, so obvious at that time. Once more the political imperative dictated the solution. The European Union and its member states could not and would not be drawn into a strange game. The applicant countries adamantly refused to be divided into groups and risked their application being used as a pawn by other applicant countries. The Heads of State and Governments of the European Union realized the impossibility of sitting around the table with the Central and European countries saying Yes to some of them and No to others and afterwards having to explain why. At the same meeting of the European Council, it was decided to open enlargement negotiations with Poland, The Czech Republic, Hungary, Slovenia, and Estonia.43 In December 1999, the European Council44 decided at its meeting in Helsinki to open enlargement negotiations with Latvia, Lithuania, Slovakia, Bulgaria, and Romania.45 The enlargement negotiations followed the same pattern, even if they did not start at exactly the same time. Eight Central and Eastern European countries46 joined the European Union at the same time — 1 May 2004. The European Union had managed to negotiate with each one of these countries on their own, while at the same time keeping them together, offering, broadly speaking, similar terms and avoiding the risk that these negotiations could split or sow rivalries among the Central and Eastern European countries. The first leg of preparing the applicant countries for membership was trade; the second leg consisted of a substantial financial assistance known under the acronym PHARE.47 The programme started in 1990 with a four-year budget appropriation of 4.2 billion Euros that rose to 6.7 billion Euros for 1996–1999, and 11 billion Euros for 2000–2005.48 At an early stage it was predicted that the

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Central and Eastern European countries would become members of the European Union. PHARE was pinpointed to build institutions that help them to cope with the exigencies of membership and facilitate their adjustment to the set of rules already in existence in the European Union. Thus the objective of PHARE was obvious from the outset and the financial means allocated to clear and unequivocal purposes.

EU Prepared Itself for Enlargement The European Union realized at an early stage that not only the adhering countries, but also the European Union itself, had to adjust and prepare for the enlargement. There are two basic instruments for the adjustment and preparation inside the European Union: institutions and financing. i) Institutionally it was clear that with twenty-seven members, the existing machinery needed fine-tuning and perhaps more than that. The Nice Treaty — sometimes labelled the enlargement treaty — set out the changes in the institutions required to accommodate up to twelve new members, without upsetting the basic institutional balance.49 In the European Union with fifteen member states, the Commission consisted of twenty members with the United Kingdom, France, Germany, Italy, and Spain having two members and all other member states, one member. After the enlargement with the eight Central and Eastern European countries, plus Malta and Cyprus (1 May 2004), the rule was changed to one member of the Commission for each member state. At the same time, it was agreed that when the European Union had reached twenty-seven member states, which happened on 1 January 2007, after the accession of Romania and Bulgaria, an arrangement should be negotiated to reduce the number of members of the Commission to below twenty-seven, based on a principle of rotation and equality among all member states, regardless of size. The voting rules in the Council were amended and some decisions hitherto requiring unanimity were changed to qualified majority voting. Similarly the European Parliament saw its members adjusted to take account of a Union with twenty-seven members instead of fifteen. The conditions for launching enhanced cooperation were softened on the realization that with twenty-seven instead of fifteen members, this way of proceeding might be more attractive. At the meeting of the European Council in December 1999, the Heads of State and Government decided on a list of practical measures to make the working methods of the EU Council more efficient and effective. The

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foundation for their decision was a report by the Secretary General of the Council and the Council’s Chief Legal Adviser.50 ii) Financially the European Union had to adjust some of its own policies, in particular, the Common Agricultural Policy, not only to avoid putting stress on the policy after the enlargement, but also to create financial room for manoeuvre of funds to support the Central and Eastern European countries. The political decision was taken at the meeting of the European Council in Berlin in 199951 and later transformed into specific decisions by the EU institutions.52 It was given the name Agenda 2000 and maps out reforms or adjustments of a number of EU policies: The Common Agricultural Policy, which had originally been based on price support and guaranteed minimum prices, was further adjusted to operate less via price support and more through direct income support to farmers. This was in line with the pressure from the outside, in particular, international trade negotiations and growing resistance among the European Union’s own population to shoulder the financial burden associated with the Common Agricultural Policy. The Structural Funds were originally perceived to help the genuinely less developed regions and sectors in the European Union. Gradually the regional fund had been steered toward helping the adhering countries — the United Kingdom, Ireland, Greece, Spain, and Portugal — accompanied by a political wish to see the fund operate in all member states flying the flag. With the limited financial means available, the inevitable consequence was that the funds lost effectiveness. Facing the new enlargement, the regional fund was restructured to concentrate more on fewer regions to have a real impact. The same thrust was seen with regard to the Social fund. The EU budget was geared to meet the exigencies of the enlargement with the financial framework 2000–2006. iii) One of the politically sensitive issues was the free movement of labour. The EU member states feared that they would be flooded with cheap labour from the new member states, leading to a downward pressure on wages, and a deterioration of standards and rules on the labour market.53 Most of the EU member states insisted on a transitional period. As a result, free movement of labour between the new and the existing member states was postponed until 2010. This illustrates that enlargement negotiations are never about deviating from the Treaties, but only about the transitional period, be it demanded by the adhering countries or — as in this case — the EU side.

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Initial Reactions to Enlargement The feeling in Europe was almost euphoric when the enlargement negotiations were successfully concluded in December 2002. Politically it was indeed a milestone. History can show few if any precedents for this large number of European nation states and ethnicities that adhere to different religions with long historic animosities, coming together in a rule-based organization that pools a large part of their sovereignty to exercise it in common. Not all were happy though. Many Europeans are sceptical about the model chosen, but a large majority accepts that even with its shortcomings, the European Union is THE model available, having proved its worth over more than fifty years. Theoretically it may be interesting to discuss whether another model would be as good, or perhaps better, but theory is far from practice in international politics. The choice for the Europeans — founding members of the European Union, adhering member states from 1973 to 1995, and the Central and Eastern European countries — is between getting the model on the table to work, or letting it be degraded and undermine the European integration as such. A compilation of arguments that neither the European Union nor the enlargement is good can be found in an analysis put forward by the American Cato Institute.54 The Central and Eastern European countries could be expected to support a more U.S. oriented foreign and security policy than some of the Western European member states. They had just seceded from the Soviet/Russian Empire and looked upon the United States as the real guarantor of their newborn independence and freedom. Undoubtedly and with good reason they gave the United States more credit than the European member states of NATO for the breaking down of the Soviet/Russian Empire. When the Iraq War erupted in the spring of 2003 — before the enlargement took place but after the end of enlargement negotiations — member states of the European Union were divided, which, if it was not already known, became so when France and Germany opposed the U.S. policy, with eight other member states voicing another view and their annoyance with the Franco-German policy, in a newspaper article.55 The President of France, Jacques Chirac, jumped into the fray with the wellknown outburst that the Central and Eastern European countries had missed an opportunity to keep quiet.56 Not surprisingly a good deal of people thought that perhaps the Central and Eastern European countries should have kept quiet, and so should have President Chirac. The interesting thing in this context may not be this verbal mudslinging, but the obvious deviation adopted by the majority of the Central and Eastern

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European countries from the critical French line, which also became the German line after the departure of Chancellor Kohl, who was replaced by Gerhard Schröder in 1998. The newcomers wanted a more friendly policy towards the United States.

ROMANIA AND BULGARIA Enlargement negotiations with Romania and Bulgaria were initiated after the decision at the European Council in December 1999, but took a longer time than for the other applicant countries included. These two countries do not differ fundamentally from the majority of the Central and Eastern European countries, but they do differ with regard to their Gross Domestic Product per head — 2,250 U.S. dollars for Romania, and 2,510 U.S. dollars for Bulgaria57 — and the administrative capability to implement EU rules not only to the letter, but also according to the spirit. On top of that, Romania with 22 million people, is a comparatively large country that would put further strain on the European Union’s financial resources. There is thus little doubt that integration of these two countries into the European Union will be more difficult than was the case for the other Central and Eastern European countries.

EARLY BENEFITS OF EU MEMBERSHIP In 2006 the International Monetary Fund (IMF) analysed the recent economic performance in the eight Central and Eastern European countries, that joined on 1 May 2004, plus Romania and Bulgaria, that joined on 1 January 2007.58 The IMF comes to the following conclusion: •

•

• •

Many of the countries are paying, on average, 50–100 basis points less on their external debt than other emerging markets with comparable policies and economic conditions. Membership of the European Union for the eight countries, which joined in 2004 has brought major opportunities in the form of transfers that stimulate the economy and also made these countries more attractive as bases for off shoring and outsourcing from the fifteen other member states of the European Union. IMF sees the adoption of the Euro by these countries, when they fulfil the criteria, as “a major opportunity”. One of the major advantages, in the view of the IMF, is increased trade,

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403

both in the context of enlargement and when discussing the benefits flowing from the European Union as such for the Western European countries. It is interesting that the IMF adds that “IMF research shows that the establishment of the EURO area has resulted in significantly higher trade among the twelve current EURO area members than would have occurred had the single currency not been introduced”. The IMF sees two major benefits for the new member states in adopting the Euro: — They will be able to enjoy substantially lower emerging market risk premium. — People will start to change their behaviour by borrowing in foreign currencies and enjoying lower interest rates.

The IMF study deserves to be mentioned not only because it is one of the first analyses of the impact on the economies of the Central and Eastern European countries, but also because it was made by an international institution enjoying high reputation for the quality of its work. Table 6.3 illustrates the growth pattern for the ten Central and Eastern European countries.

TABLE 6.3 Real Growth in Gross Domestic Product (GDP): Percentage Change

All ten countries The three Baltic countries Estonia Latvia Lithuania Central Europe Czech Republic Hungary Poland Slovak Republic Slovenia Southeastern Europe Bulgaria Romania

2004

2005

2006 Proj.

2007 Proj.

6.6 7.8 7.8 8.6 7.0 4.9 4,2 5.2 5.3 5.4 4.2 7.1 5.7 8.4

6.2 9.2 9.8 10.2 7.5 4.7 4.1 4.1 3.4 6.1 3.9 4.8 5.5 4.1

6.6 9.1 9.5 11.0 6.8 5.2 4.5 4.5 5.0 6.5 4.2 5.5 5.6 5.5

6.1 7.8 8.0 9.0 6.5 4.7 3.5 3.5 4.5 7.0 4.0 6.0 6.0 5.5

Source: IMF, World Economic Outlook, September 2006.

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Immediately after the enlargement it looked like Slovenia, Estonia, and Lithuania would join the Euro in the foreseeable future. Slovenia, however, was the only one to qualify and joined on 1 January 2007. The picture is not so discouraging when looking at the statistics (Table 6.4). There are four criteria to be met: Inflation below 2.8 per cent, (A); deficit on Government’s budget below 3 per cent, (B); government debt below 60 per cent of GDP, (C); and prior participation in the exchange rate mechanism (fixed exchange rate), (D).59 According to an analysis by Denmark’s Nationalbank fewer countries exceeded the criteria in 2006 than in 2004 and those that did, did so with a smaller margin.62

THE NEXT ONE? i) There are several countries knocking on the door. Enlargement negotiations started with Turkey on 3 November 2005.63 Both parties will undoubtedly negotiate in earnest and for the European Union, the roadmap is very clear: the conditions for Turkey are the same as for the other adhering countries. There are no special provisions or conditions set out for Turkey. But even operating inside the box, there are big obstacles to overcome, obstacles higher and more difficult than for any other enlargement. Turkey has seventy-one million inhabitants and a large part of the population lives in the countryside.

TABLE 6.4 Status of criteria to join the EURO for countries adhering to the European Union on 1 May 2004

Slovenia Estonia Lithuania Czech Republic Cyprus Hungary Latvia Malta Poland Slovakia

(A, %)

(B, %)

(C, %)

(D)

2.3 4.3 2.7 2.2 2.3 3.5 6.7 3.2 1.2 4.3

–1.8 2.5 –0.5 –3.5 –1.9 –10.1 –1.0 –2.9 –2.2 –3.4

29.1 4.0 18.7 30.9 64.8 67.6 11.1 69.6 42.4 33.0

Yes Yes Yes No Yes No Yes Yes No Yes

Source: ECB Convergence Report, May 200660 and December 2006.61

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Agriculture is still the main economic activity for a large part of the population. There are areas of the country, especially around Istanbul, Ankara, and in the southwestern part of the county, where living standards are comparable to what can be found in the European Union, but large areas in the central and eastern part of the county have a long way to go. A comparison with Poland — the largest of the new member states in 2004 — gives the following picture.64 Population Poland Turkey

38.6 million 71.3 million

GDP per head US$5.430 US$3.370

Agriculture: % of GDP 5 10.3

% of employment 17 30

These figures suggest that it will be difficult — not insurmountable. The main problem the European Union and Turkey has to answer is a strategic and geopolitical one: •

•

•

Will the European Union admit Turkey and risk the continued smooth running of the common policies, but gaining the advantage of having a regional power with links to the Middle East and Central Asia? Or will the European Union come to the conclusion that the existing structure of the integration cannot survive intact with the drain from Turkey weighing out the geopolitical advantages? Will Turkey itself be prepared to transform its society and industrial structure sufficiently fast enough to integrate in the European Union?

All these questions remain to be answered in the coming negotiations, which unquestionably will be long and hard. One way to proceed is to go for a long negotiation process, using the time to transform the Turkish economy — as was done with Spain and Portugal and the Central and Eastern European countries. Membership will be less difficult than envisaged, as Turkey, or rather the Turkish economy, de facto has been integrated in the EU framework. This may be a good recipe seen from the EU point of view. For Turkey, the difficulty is that the preceding adhering countries accepted that model because they felt certain of a successful outcome of the negotiations. Turkey cannot do so. Technically the negotiations can succeed, if the political will is there. It will certainly pose heavy strains on the European Union to admit Turkey, and for Turkey, much and fast adjustment is called for, but seen in the context of earlier enlargements, the difficulties look manageable.

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The politically sensitive problem is Islam. Many Europeans will feel that a country with a predominantly Muslim population should not form part of the European Union. Seen in the Turkish perspective, this animosity, of course, promotes the speculation on whether it is worthwhile to join under circumstances where you are not welcome. For the European Union and for Turkey the outcome of the negotiations for membership of Turkey is of a seminal nature. It determines whether a large nation on the doorstep of the European Union will feel degraded after having played the game for more than forty years. At best that will lead to a sullen “partner” for Europe in a strategically sensitive area between Europe and the Middle East. Turkey’s strategic position makes it crucial for the security of the supply of oil and gas from sources in the Middle East and Central Asia. This will be a litmus test for Europe’s attitude vis-à-vis a country where an overwhelming part of the population is Muslim, but is yet a secular state. Despite all conjurations to the contrary, the European Union’s Yes or No to Turkey, provided Turkey fulfils the conditions, will be taken as a signal of the European Union’s tolerance and will to accommodate other cultures and civilizations, in particular, Islam.65 Sometime during the next five to ten years, the European Union and Turkey will have to decide which way to go.66 The Cyprus issue may complicate the way ahead.67 Cyprus was admitted to the European Union in 2004 despite failed efforts by the European Union and the United Nations to unite the island partitioned in two parts since the Turkish invasion in 1974.68 Originally the European Union took the line that joining the European Union would facilitate reunification. It was explicitly stated that membership was for the whole island and not only part or parts of it. For a while it looked as if this plan might succeed, but the hopes proved to be in vain. A United Nations plan was rejected on 24 April 2004, just a week before the membership, and Cyprus joined the European Union without the part controlled by Turkey, that is, as a divided country and a divided island. Politically, both the European Union and Turkey can use Cyprus as a pawn in the future negotiations. Economically the problem is the growing disparity between the Turkish controlled northern part of the island and the rest of Cyprus, with living standards in the northern part falling behind the rest of the island. The way the Cyprus problem was handled illustrates that both the European Union and Turkey are hostages to the future as they had not

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mustered the political courage and determination to cut a deal when Cyprus membership of the European Union, with the United Nations strongly involved, presented an opportunity. There is a certain parallel to the admission of Greece in 1980, which is taking in a country for a good and valid reason, but without having thought through and analyzed the implications for the future. ii) Another country knocking on the door is Croatia, which, appraised on objective criteria, should not be difficult to admit. Negotiations started with Croatia on the same date as with Turkey — 3 November 2005.69 Politically membership for Croatia without any solution for Turkey will nourish the suspicion that the European Union is a Christian club and, as such, enhance the political problems associated with a Yes or No to Turkey. iii) The Former Yugoslav Republic of Macedonia was granted status as a candidate country at the Meeting of the European Council in December 2005, but without a date for the start of enlargement negotiations. The progress achieved by this country in implementing the Stabilization and Association agreement since 2001 as preparation for membership is acknowledged, but the European Council adds that further steps will have to be judged in the light of the European Union’s enlargement strategy.70 iv) At its meeting in December 2006, the European Council71 stated that the future of the Western Balkans72 lies in the European Union. It clarifies these countries’ progress towards the European Union by stating that each country’s progress depends on its individual efforts to comply with the Copenhagen criteria and the stabilization and association process. The policy adopted by the European Union towards the Western Balkans, consisting of two countries with status as candidate countries, and four others, bears a striking similarity to the policies adopted vis-à-vis the Central and Eastern European countries from 1990 onwards. Agreements are concluded, setting in motion the adjustment process, thus facilitating the potential member countries’ way into the European Union without a prior decision about membership — a decision, which for obvious reasons, has to wait for genuine enlargement negotiations. For Central and Eastern Europe, the flywheel became the Europe Agreements; for the Western Balkans, it is the Stabilization and Association Process.73 v) Other countries such as the Ukraine are talking about membership, but this is not really on the agenda for the foreseeable future. The International Monetary Fund (IMF) published in 2006 a study about recent reforms in the Ukraine and the impact of the Ukraine’s approach towards market-oriented institutions.74

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The study explicitly refers to the positive impact the prospect of EU membership had for transition in the Central and Eastern European countries from centrally planned economies to market economies. According to the study, the existence of what is termed an anchor as a sort of benchmark has played an important role for these economies and could do the same for the Ukraine. Reforms since year 2000 are the main reason for rapid growth in the Ukraine. These reforms were, as it is put, anchored in the EU-Ukraine Action Plan, which has as its main point, the harmonization of the Ukraine’s standards with that of the European Union. This pushed the Ukraine towards a marketbased economy in line with what is applied in the European Union. Looking at the future, the study comes to the conclusion that moderate reforms will lead the Ukraine to have the same institutional quality in 2015 as Romania75 has today, while a stronger drive for reforms could speed up the process. Even more interesting for such economies that are often having difficulties in getting capital to finance investment is the observation that growth depends more on increased efficiency than on higher investment. The Nice Treaty covered an enlargement to twenty-seven member states, stating that further enlargement will require a new amendment to the Treaties. The proposed Constitution was rejected by a majority of voters in France and the Netherlands. This situation means that the Union is, plainly put, not capable of taking in more new member states without further changes to the Treaties. This more — let us classify it as cautious — approach is reflected in the new enlargement strategy adopted at the meeting of the European Council in December 2007.76 The European Union acknowledges earlier commitments and pledges not to back-pedal, but adds two main sentences, which can only be read as a kind of reservation: •

•

The European Union’s capacity to integrate new members is mentioned as one of the elements to be taken into account. That has always been the case and explains the adjustment to financing and decision-making, but this is the first time the European Union openly states it. The Union will refrain from setting any target dates for accession until negotiations are close to completion. This is not the kind of statement encouraging adhering countries — especially not recalling how the European Union has always relied on target dates when implementing grand designs.

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CONCLUSION ABOUT ENLARGEMENT The five enlargements since 1973 give rise to the following observations and conclusions: Regardless of the difficulties — politically and economically — the European Union has mobilized the political will and determination to see them through. It was politically, and to a certain degree, also economically, difficult to admit the United Kingdom, and upset the balance of the original European Union, but it was done. Greece, Spain, and Portugal were likewise admitted and so were the Central and Eastern European countries — all ten of them. All three enlargements had their difficulties and challenges. For all three, you could say with some justification that the European Union did not change when enlarged, but it was understood that the newcomer(s) would work for new trends in the structure of the integration. Only enlargement with the EFTA countries did not augur a drive for changes or amendments. The European Union has effectively killed the accusation of being an inward looking club and instead demonstrated the political will to shoulder responsibility for transforming the political and economic structure of Europe. All the enlargements have been initiated and brought to a successful conclusion because they basically had a political motive: to overcome divisions among European countries. Economic considerations have defined the terms for admitting newcomers to distribute costs and benefits in an equitable way. The terms have always been — without the slightest deviation — to accept in full the goal and the ambitions of the Treaties and the full panoply of measures implemented by the European Union. Negotiations have always been about transitional periods and terms for implementing EU measures, not whether these measures should or should not be applied by the adhering countries. Permanent derogations do not exist. Nor do changes in the EU structure to accommodate newcomers. New member states adjust and adapt to EU rules, not the other way round. That was the painful lesson learned by the United Kingdom at the beginning of the 1970s. An adhering member state is not without openings and opportunities for changing the EU structure. Being in, the door is open for proposing new policies, new measures, or amending/changing existing ones. The institutional structure is stretched with twenty-seven member states, but the original concept has shown how robust it was by functioning for more than fifty years and extending membership from six to twenty-seven without any changes to the fundamental structure, workings of the institutional

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set-up, or delay in decision making. There have been changes in the balance between institutions initiated for other reasons than enlargements. The newcomers have accepted one of the basic principles of the European Union, namely that all member states take part in all common policies. They do not — of course — do so to the same extent as the established members, but all are in the game, so to speak. This is one of the basic lessons from the European Union and one of the foundations for what is called community solidarity. For the established EU members states, this does not need explanation, but every time the European Union was enlarged, newcomers were surprised to feel the strong community solidarity linking member states together. Being involved in the formation and implementation, receiving and giving of all common policies, member states get first-hand knowledge and experience of the problems of other member states, which in other circumstances, would be ignored.

NEIGHBOURHOOD POLICY The European Union’s neighbourhood policy (ENP) was born as the enlargement with the Central and Eastern European countries — plus Malta and Cyprus — took place in 2004 and 2007.77 The basic idea was that the enlargement pushed the political borders and the sphere of interest of the European Union further into European geographical space, transforming countries from being distant ones to qualifying as neighbours. These new neighbours had seen — some of them with envy — the enlargement of the European Union, and their neighbours move from being outside to inside. A political signal was deemed necessary, indeed, imperative, to assure these new neighbours that the European Union, despite the drain on its resources, would not forget its obligations towards them. It thus inscribes itself in a wider foreign and security policy serving the strategic interest of Europe,78 stabilizing adjacent geographical areas, and doing it by bringing them closer to the Union. The European Union is active in peacekeeping in the wider European geographical theatre, serving as a stabilizing force that uses its economic strength and the ambitions in neighbouring countries to draw closer to the European Union. The ENP offers a privileged partnership without the prospect of membership. It has “borrowed”, so to speak, some of the Copenhagen criteria in the sense that partnership depends on how strong and deep the shared values are. It is an outstretched hand from the European Union to adjacent countries. The offer depends on these countries’ interests in adopting a societal system comparable to, but not necessarily congruous with, what is applied in EU member states.

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It is still in the embryonic phase. Countries encompassed are: Algeria, Belarus, Egypt, Israel, Jordan, Lebanon, Libya, Moldova, Morocco, the Palestinian Authority, Syria, Tunisia, the Ukraine, Armenia, Azerbaijan, and Georgia. In 2005 the first seven ENP action plans were launched with Israel, Jordan, Moldova, Morocco, the Palestinian Authority, Tunisia, and the Ukraine.79 The ENP is clearly inscribed in the European Union’s broader foreign and security policy. Belarus, Libya, and Syria are all encompassed by the policy, but the European Union for the following reasons has put implementation of the benefits on hold: Belarus must establish a democratic form of government, following free and fair elections. Libya would need to become part of the Barcelona Process before further progress. Syria and the European Union have agreed an Association Agreement, but the European Union has put its ratification on hold for political reasons.80 The ENP is a bold attempt to square the circle. It is very unlikely that any of these countries will join the European Union, but it is very likely that their dependence on the European Union will grow economically, and probably, also politically. They can be compared to the Central and Eastern European countries in the early 1990s in one respect: they want a token of appreciation from the European Union that gives a credible signal that they have not been forgotten.

Notes 1. A splendid overview of the many intricacies connected with enlargement is, provided by Dr Fraser Cameron in a paper, “The European Union and the Challenge of Enlargement”, submitted to Halki International Seminars; available at http://www.eliamep.gr/eliamep/files/OP97.38374.pdf#search=/22duration/ 20of/20enlargements/20negotiations/20with/20spain/20and/20portugal/22. 2. Norway negotiated entry terms in 1972 and 1994, but they were in both cases rejected by a majority of the Norwegian population. Switzerland and Iceland have never applied for membership leading to negotiations. 3. France, Germany, Italy, the Netherlands, Belgium, Luxembourg. 4. The first enlargement falls outside this approach. Ar the beginning of 1970s joining the European Union was less difficult than in later years when the integration had developed further. The adjustment was easier in the early phases as the number of legislative acts — Acquis Communautaire — was smaller. 5. This was the case for the EFTA countries having agreements with the European Union long before accession and for the Central and Eastern European countries with the so-called Europe agreements.

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6. See a short description at http://europa.eu/scadplus/treaties/introduction_en.htm. 7. http://news.bbc.co.uk/onthisday/hi/dates/stories/december/21/newsid_3815000/ 3815251.stm. 8. The United Kingdom had tried to develop its own nuclear deterrent, the Skybolt missile, but it proved too costly. 9. Centre for European Studies, Working papers series, working paper series 8.5, May 1998, available at http://72.14.235.104/search?q=cache:XMWk DWIYd_oJ:www.ces.fas.harvard.edu/publications/DeGaulleMorav.pdf+ rambouillet+meeting+de+gaulle+macmillan&hl=en&gl=sg&ct=clnk&cd=17. 10. http://www.cercles.com/review/r0/capet2.html. See also note (1) to Chapter III. 11. http://news.bbc.co.uk/onthisday/hi/dates/stories/november/27/newsid_4187000/ 4187714.stm. 12. The member of the Commission responsible for implementing the Single Market was Lord Cockfield of whom Prime Minister Margaret Thatcher allegedly said “he has gone native”, which was not meant as a flattering remark. 13. Except in defence matters, which had to wait for 1999 to happen. 14. They are the kind of alliances allegedly described by General de Gaulle with the words: “Alliances are like young girls and roses, they last as long as they last”. 15. Edward Heath was the chief negotiator for Britain from 1961–1963 and became Prime Minister in 1970, when he oversaw the enlargement negotiations. He was regarded as a genuine European, but lost the election at the beginning of 1974 and was succeeded by Harold Wilson of the Labour Party. 16. http://www.bbc.co.uk/radio4/history/sceptred_isle/page/254.shtml? question=254. 17. See for example, Wikipedia http://en.wikipedia.org/wiki/Turkish_invasion_ of_Cyprus. 18. The four large countries had ten votes when qualified majority voting took place in the Council. Spain got eight. They each had eighty-seven members in the European Parliament. Spain got sixty-four. But Spain managed to get two members in the European Commission, adhering to parity with the four large countries, while the other member states had one. 19. http://aei.pitt.edu/1434/01/Brussels_march_1985.pdf. 20. The Chairman of the Council during the decisive negotiations in first half of 1985 was Italy’s Foreign Minister, Guilio Andreotti, who, without any doubt, can be described as an old fox in politics, who knows all the tricks — and he used them to get a result. 21. The Commission produced a communication already in February 1983 (Bulletin of the European Communities 2/1983), fully aware of the political need. Available at http://aei.pitt.edu/2831/01/013.pdf . The European Council decided on such programmes at its meeting on 29–30 March 1985, reference, http://aei.pitt.edu/ 1434/01/Brussels_march_1985.pdf.

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22. Members of the European Free Trade Agreement. 23. Norway’s application for 1967 was still standing even if Norway had decided in 1972 not to join, Austria applied on 17 July 1989, Sweden on 1 July 1991, Finland, 18 March 1992, and Switzerland, 26 May 1992 (negotiations never started). 24. I have analysed this potential tinderbox in my book, Folkeslag i Central og Østeuropa, København 1993). 25. At the beginning of the 1990s, the concept of peace dividend arose in Western Europe, meaning the savings on military budgets after the end of the Cold War. Some enlightened Europeans pointed out that the peace dividend was indeed much higher than even the highest prognosis for costs for enlarging the European Union. 26. One of the clear signals given to the Central and Eastern European countries was the “Stability Pact for Europe”, also known as the Balladur Pact, after the then Prime Minister of France, which focuses on protection of the minorities. See for example p. 7 in “The European Neighbourhood Policy as a Conflict Prevention Tool”, EPC Issue Paper No 47, June 2006, available at http://www.epc.eu/ TEWN/pdf/754245583_ENP/20IP.new.pdf. 27. The Europeans set up a regional development bank (EBRD, European Bank for Reconstruction and Development) to assist not only the Central and Eastern European countries, but all of Eastern Europe after the falling apart of the communist system. 28. A description is found in IMF’s quarterly journal, Finance and Development, September 2000, Vol. 37, No. 3, available at http://www.imf.org/external/ pubs/ft/fandd/2000/09/index.htm. See also Moeller, Joergen Oerstroem Moeller, “Toward a Unified Europe”, Singapore Institute of International Affairs, Vol. 3, No. 2, July 2003, with an abridged online version available at http://www.inthenationalinterest.com/Articles/Vol2Issue26/Vol2 Issue26Moller.html. 29. All figures published by the Royal Danish Foreign Ministry in “Danmark og Europa”, Copenhagen 2001. 30. In 1998 when enlargement with the Central and Eastern European countries gained approval, Greece had moved to 63 per cent and Portugal to 65 per cent of the EU average, according to World Economic Indicators, 2000 edition. 31. Royal Danish Foreign Ministry op. cit. 32. The Economist, 14 October 2006, p. 61, based on Eurostat and national sources. 33. Royal Danish Foreign Ministry, op. cit. 34. 40 per cent of the total population in the adhering countries. 35. They belonged to the richest part of the Soviet Union before 1990. 36. See for example, http://www.thinkspain.com/news-spain/9830. 37. See for example, http://en.wikipedia.org/wiki/Christian_Democracy_(Italy) and http://en.wikipedia.org/wiki/Bettino_Craxi.

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38. The key Commission document is called the “The Strategy Paper 2000” and is available together with references to other key documents from the Commission at http://ec.europa.eu/enlargement/archives/key_documents/reports_2000_ en.htm. 39. Presidency Conclusions, European Council, 21–22 June 1993, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 72921.pdf. 40. Poland, Czechoslovakia (later the Czech Republic and Slovakia) and Hungary. 41. The full wording is “Membership requires that the candidate country has achieved stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities, existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces inside the union. Membership presupposes the candidate’s ability to take on the obligations of membership including adherence to the aims of political, economic and monetary union”. See Presidency Conclusions, European Council on 21–22 June 1993 in Copenhagen, available at http://www.consilium. europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/72921.pdf. 42. Presidency Conclusions, European Council, 12–13 December 1997, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 032a0008.htm. 43. And Cyprus, although it is not a Central or Eastern European country. 44. Presidency Conclusions, European Council, 10–11 December 1999, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ ACFA4C.htm. 45. And Malta, although it is not a Central and Eastern European country. 46. Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary, and Slovakia were ready to join on 1 January 2004. So were Cyprus and Malta. 47. The official Commission website can be found at http://ec.europa.eu/ enlargement/financial_assistance/phare/index_en.htm and includes references to programmes for individual applicant countries. 48. http://www.eucenter.org/index.php?action=programs&process=detail&id=12. 49. A description of the Treaty, summarizing the main points, is presented by the Secretary General of the European Commission in a memorandum to the members of the Commission, Doc. SEC (2001)99 of 21 January 2001, available at http://ec.europa.eu/comm/nice_treaty/summary_en.pdf#search=/22treaty/ 20of/20nice/22. 50. Presidency Conclusion, European Council, 10–11 December 1999, Annex III available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/ en/ec/ACFA4C.htm. 51. Presidency Conclusions, European Council, 24–25 March 1999, in Berlin, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/ en/ec/ACFB2.html. 52. An overview with references to specific decisions can be found at http:// ec.europa.eu/agenda2000/index_en.htm.

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53. This fear came to the surface during the referendum in France on the European Constitution when the “Polish plumber” was used as an example to show — quite erroneously, by the way — how labour from the new member states could undermine labour conditions and wages in the existing European Union. 54. See for example, Marian L. Tupy, “EU Enlargement, Costs, Benefits, and Strategies for Central and Eastern European Countries”, published by the CATO institute No. 489 of 18 September 2003, available at http://72.14.235.104/ search?q=cache:TxdLG6NTL1wJ:www.cato.org/pubs/pas/pa489.pdf+world+ bank+on+costs+benefits+enlargement+eu&hl=enere&gl=sg&ct=clnk&cd=1. 55. For an exposé, see for example http://www.opendemocracy.net/content/articles/ PDF/987.pdf. 56. See for example, New York Times, 19 February 2003, available at http:// www.policy.hu/ionita/pics/NYT-sorin.pdf. 57. The Economist, Pocket World in Figures, 2006 edition. 58. IMF Survey of 20 November 2006, available at http://www.imf.org/external/ pubs/ft/survey/2006/112006.pdf. 59. Strictly speaking, the criteria call for participation two years prior to joining the European Union. The Yes indicates whether the countries participate, not necessarily whether they have fulfilled the two-year criteria. 60. Available at http://www.ecb.int/pub/pdf/conrep/cr2006en.pdf. 61. Available at http://www.ecb.int/pub/pdf/conrep/cr200612en.pdf. 62. Denmark’s Nationalbank, Monetary Review 1st Quarter 2007. “EU Enlargements Status and Future”. Available at http://www.nationalbanken.dk/C1256 BE9004F6416/side/8EE92C9183E6F1C0C12572AB0028EAB3/$file/ mon_1qtr_07_web.pdf. 63. http://ec.europa.eu/enlargement/enlargement_process/accession_process/ how_does_a_country_join_the_eu/negotiations_croatia_turkey/index_en.htm. 64. Unless otherwise stated, figures are from The Economist, Pocket World in Figures. 65. Without oversimplifying, there is a degree of linkage between the admission of Turkey and the endeavours to include in the proposed Constitution a reference to the European Union as based upon Christianity, even if that was not approved. 66. An overview of the history of EU-Turkish relationship is provided by Euroactiv, including a description of the forthcoming negotiations on enlargement and the position of EU member states. Available at http://www.euractiv.com/en//euturkey-relations/article-129678 67. A description of the Cyprus problem, including possible repercussions for Turkey’s bid for membership, can be found at BBC http://news.bbc.co.uk/1/hi/ world/europe/5314194.stm and Aljazeera.net http://english.aljazeera.net/NR/ exeres/3BC92826-9D5F-4C86-9BA4-384A4BE6991B.htm 68. The Turkish invasion came more than ten years after problems between the Greek majority and the Turkish minority forced the United Nations to send peacekeeping troops to the island.

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69. http://ec.europa.eu/enlargement/enlargement_process/accession_process/ how_does_a_country_join_the_eu/negotiations_croatia_turkey/index_en.htm. 70. Presidency Conclusions, European Council, 15–16 December 2005, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 87642.pdf. 71. Presidency Conclusions, European Council, 14–15 December 2006, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 92202.pdf. 72. Albania, Bosnia-Herzegovina, Montenegro, and Serbia. 73. For a brief outline of the Stabilization and Association Process (SAP), see a Commission paper available at http://ec.europa.eu/enlargement/enlargement_ process/accession_process/how_does_a_country_join_the_eu/sap/index_en.htm and for the specific content, see for example, the proposal for legal acts for agreement with Croatia, available at http://trade-info.cec.eu.int/doclib/docs/ 2004/july/tradoc_117947.pdf. 74. IMF Working Paper No. 06/167, “Ukraine: The Cost of Weak Institutions”, by Andrew Tiffin, available at http://www.imf.org/external/pubs/cat/longres.cfm? sk=19281.0. 75. In an EU context, it is interesting because Romania entered the European Union as a member state on 1 January 2007. 76. Presidency Conclusions, European Council, 14–15 December 2006, available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/ 92202.pdf. 77. Commission Communication 104 of 11 March 2003, “Wider Europe — Neighbourhood: A New Framework for Relations with our Eastern and Southern Neighbours”, available at http://ec.europa.eu/world/enp/pdf/com03_104_en.pdf. And Commission Communication 373 of 12 May 2004, European Neighbourhood Policy, Strategy Paper, available at http://ec.europa.eu/world/ enp/pdf/strategy/strategy_paper_en.pdf. 78. This can be deducted from the European security strategy — “A Secure Europe in a Better World” — adopted by the European Union in December 2003, ref. Chapter V. The strategy is available at http://www.consilium.europa.eu/uedocs/ cmsUpload/78367.pdf. 79. A complete list of documents, including action plans for the seven countries, can be found at http://ec.europa.eu/world/enp/documents_en.htm. 80. http://ec.europa.eu/world/enp/faq_en.htm.

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7 CONSTRAINTS — RISKS — CHALLENGES

A number of issues have arisen over the years indicating constraints, risks, challenges, and opportunities. Conflicts or positive interactions between various policy goals may arise. The integration can produce a backlash or question marks and, in some cases, unexpected results, or itineraries pop up that shape the integration in unexpected ways.

CLASH BETWEEN GROWTH AND IDENTITIES Economic integration and many of the rules set are geared to the following items: economics, transport, logistics, and technology. The whole idea is to produce growth and distribute the advantages in a more or less equitable way. Not surprisingly the ordinary citizen perceives the integration as predominantly about economics and economic growth. That may be fine when living standard through growth is the overriding priority, as it undoubtedly was for Continental Europe in the 1950s, but as living standards increase people put new objectives on the political agenda. In the European Union that has produced two waves. The first one switched interests from high growth to the quality and sustainability of growth. That was accommodated by incorporating efforts to combat pollution and turn the European Union into one of the leading, 417

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maybe the leading, international force to improve the global environment, as has been seen, for example, in the European Union’s stance concerning global warming and the Kyoto Protocol. The second wave has proved to be much more difficult as it has brought people’s identity into the picture. After the end of World War II, many Europeans felt that being European was nothing to be particularly proud of. Having initiated two World Wars, killed six million Jews in the Holocaust, and produced Nazism, Fascism, and Communism did not exactly place you at the pinnacle of civilization. But as the feeling of guilt subsided, while the standard of living has risen steadily for several decades, many Europeans have started to feel conscious of being “European” once again. That has placed a number of sensitive issues on the agenda of the European Union: whether or not to have multicultural societies, given the wave of immigration, the role of Islam, and the uncertainty of the identity of the citizen associated with the region, the nation state, or Europe as a somewhat vague concept. A look at the political debate in today’s Europe shows that such questions are controlling the political debate both inside the member states of the European Union and at the European level. Turkey’s application for membership encapsulates this new politics. People feel baffled under the onslaught of globalization, internationalization, and the strong impact of international news media and entertainment coming from the outside. They search for identity and the European Union has so far not being capable of offering one. This may not be the fault of the European Union, as the nation states and/or the regions have proven to be mute when facing the same questions, but the citizens do not associate the nation state and/or the regions with these problems — they associate the European Union with them. Most of today’s acute and hot political issues at the national and/or regional level are international in their character. They have originated abroad and appear in the eyes of many citizens to be linked with the international world, globalization or “the foreigners” quite simply. Therefore the citizens exonerate the nation states and/or the regions and put the blame on the European Union instead. The European Union has tried to intercept this new political trend with the pillar called “Freedom, Security, and Justice”, but has only been partly successful, if at all. In the longer run, the future of the European Union may well depend on its ability to read the mindset of the Europeans and understand that today’s

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and tomorrow’s politics is about something quite different from the old days. The European Union must come up with an answer on how to tackle not only the economic problems, such as outsourcing linked to globalization and internationalization, but even more importantly, the question of identity and how to relate to the strong cultural insecurity brought to the individual European citizen. The European integration is political engineering on a grand scale. It can only survive if it adapts and addresses current issues regarded by the citizens as the most important ones. It has to prove itself constantly, as it has not yet matured into a fully accepted part of the political structure. The European Union has been put in place to solve political problems arising from internationalization, globalization, and the swirl and eddies emanating from the international world. This is today’s playing field. The nation states are not really players — the European Union is; that is the problem.

ALIENATION FROM DECISION MAKING Institutions are indispensable in any political construction, but what really matters is trust in the institutions and check and balances among the institutions. Institutions constitute the framework of decision making, ensuring transparency, introducing legitimacy, and making sure that those who make the decisions are held accountable. This is fine as long as the citizens trust institutions to do that, and this is supplemented by the will and capability of the institutions. Most national political systems — at least those in the member states of the European Union — deliver on these criteria. They are objective and can be measured. There is, however, another more subjective criterion making evaluations more difficult. That is whether citizens see the institutions as “theirs”. This feeling comes naturally in the national framework, but has to be earned in an international context. Few citizens would regard the United Nations (UN), The World Bank (WB or IBRD), the International Monetary Fund (IMF), or the World Trade Organization (WTO) as “their” institutions. These institutions are too far away and deal with too far-fetched issues. The institutions of the European Union have managed to get themselves on the daily screen of the citizens, the citizens know that these institutions are there, and that their decisions can be directly applicable to them and affect

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their daily life. It is far less certain that European citizens regard the European institutions as “their” institutions, and this opens a dangerous gap between the citizens and political decision making. As is sometimes the problem in politics, perception may matter more than reality. The perception among Europeans is that the institutions are not really theirs, but something artificial. It can be argued, and it is, whether this perception is justified or not. Regardless of the answer to this question, experience suggests that such a dichotomy with the institutions living their own life, separated from realities, is undermining confidence and trust in their ability to read the mindset of the population. When the European Union was established in the early 1950s, national political systems enjoyed low confidence among the population. That facilitated the creation of European institutions, as citizens in the founding member states of the union did not feel strongly about pooling sovereignty to exercise it in common. In today’s Europe, confidence in the national political system may differ, depending on which member states we look at, but the somewhat alarming observation is that despite a record of more than fifty years, the European institutions have not really been able to inspire confidence. That is partly due to the difficulties in dealing with the new political issues as mentioned above. Even more important is that Europe has not yet seen a genuine system of check and balances either between the European institutions and the national political systems, or — perhaps even more importantly — between the European institutions themselves. When asking the simple question, “Who is responsible and who is accountable?”, the answer is normally blurred. That undermines trust and confidence in a democracy, where the very heart and soul of the political system depends on the voter’s ability to reward or punish politicians judged on their record. Despite strenuous efforts — not really appreciated by the populations — to divide competences between the national level and the European Union, uncertainties still reign. The proposed Constitution was to have gone one step further in drawing the line, but its rejection by a majority of voters in France and the Netherlands put a halt to that effort. The institutional interplay in the European Union is understandable for a student of political science — when did you have several institutions without seeing them grapple for power — but in the eyes of the public, depicts something close to obscurity.

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The basic rules were clear enough — with the Commission as the initiator putting proposals forward, the Parliament having influence to propose amendments, and in some cases, to stop rules from being approved, and the Council as the decision maker. This is not the case anymore as the decision making has become more complicated with an increased role for the European Parliament. This should be fine, seen from the citizen’s point of view, but apparently isn’t. Instead of rejoicing in a stronger role for the Parliament, people get the impression of institutions fighting one another instead of doing what they are supposed to do: agree on solutions to political issues. The same picture is seen in member states between the government and the parliament, and in the United States, between the executive branch and the legislative branch. The problem is — again — that nationally, such institutional infighting is accepted. Institutional infighting has become part of the check and balances and is not seen as institutions trying to grab power from each other. In short, it is perceived as something good, even healthy — to a certain extent–– for a political system. The same perception does not work on the European scene where the institutions are new, and infighting gives rise to the suspicion — sometimes well founded one must say — that it is not only a question of check and balances, but attempts to grab power at the expense of other institutions. The new European institutions are trying to mark out their territory, as was the case for national institutions in their embryonic phase. The same forbearance shown towards national institutions is not bestowed on the European ones. It is difficult to escape the observation that the institutions of the European Union have not really been able to build trust in their performance and actually seem to have lost the confidence of the populations, partly because while the check and balances built into the system may work, they do not seem to doing so, seen from the outside. This assessment points to the conclusion that the European Union needs to devote more efforts to heightening the value of the institutions in the eyes of the citizens.

TRANSNATIONAL MERGERS AND ACQUISITIONS (M&As) It was hoped that the Single Market and the Economic and Monetary Union would promote the restructuring of European industry by mergers and acquisitions, not confined to the national markets, but using the European Union as a home market. This has not really happened.

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There has been a considerable number of mergers and acquisitions inside individual member states, but only a limited number across national borders. It can, of course, be argued that without the European Union, the Single Market, and the Economic and Monetary Union, there would have been even fewer cross-border mergers and acquisitions; maybe, but there is no evidence to support such a view. Seen from the layman’s point of view, mergers and acquisitions seem rather obvious as companies wish to grow. They can do that either by organic growth or through mergers and acquisitions. Choosing the second option opens the door to sharing of knowledge, access to R & D, management resources, having a larger size, increasing returns of scale — in short, more muscle in the market place. However many studies1 show that most mergers and acquisitions run into difficulties and do not give shareholders the benefits, and the companies, the advantages, expected. Economic literature is not unequivocal on this subject, as it is not blind to advantages outside the strict framework of the economic textbook, which makes an analysis that is solely economic, incomplete. A recent study2 admits that the issue, in the context of economic integration, is a complex one without a clear answer. Nonetheless it puts forward the conclusion that the harsher business climate producing stronger competition inside an economic integration may influence the price paid for the target firm. The study also offers interesting observations on the role of technology and comes to the conclusion that a technologically advanced company has an incentive to acquire a company from another member state, as technology can be freely applied, thanks to common rules. At the beginning of 2006 the European Commission published a study on cross-border mergers and acquisitions and the role of trade costs.3 The study covering the period 1990–2001 looks at the role of trade costs on crossborder mergers and acquisitions. It concludes that geographical distance and tariff barriers have a negative effect on mergers and acquisitions. EU tariff barriers have been removed long ago, but4 non-tariff barriers, of which some remain despite the Single Market, probably have the same effect as tariffs. The interesting part of the study is, however, that these impediments differ in their impact on mergers and acquisitions, depending on whether we look at horizontal mergers and acquisitions,5 where the impact is less, or for vertical mergers and acquisitions, where it is more visible. The European Commission has published a thorough study of mergers and acquisitions in the European Union from 1991 to 2001.6

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The conclusions and highlights of the study can be summarized in this way: The number of mergers and acquisitions (M&A) was relatively constant from 1991 to 1997, after which it rose and reached its climax in 2000 to fall again in 2001 (see Table 7.1). TABLE 7.1 Number of Mergers and Acquisitions, 1991–2001

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

No. of M&As

% that is Domestic

% that is EU

% that is International

% that is Unknown

10,657 10,074 8,759 9,050 9,854 8,975 9,784 11,300 14,335 16,750 12,557

54.3 58.1 57.4 58.7 57.4 54.8 56.0 53.5 55.7 54.7 54.1

11.9 11.6 11.7 12.9 12.9 12.6 14.0 14.1 14.2 15.2 14.9

14.5 14.2 18.8 20.5 22.8 26.0 26.0 28.4 26.4 25.4 24.1

19.3 16.1 12.1 7.9 6.9 6.6 4.0 4.0 3.7 4.7 6.9

100 100 100 100 100 100 100 100 100 100 100

Source: Table 1 and 4, European Commission (2001), European Economy, Supplement A, Economic trends, No 12. — December 2001.

Two major observations can be made from Table 7.1. The first one is the fall in numbers in1993 and the rise in numbers from 1998–2000. Even if it cannot be substantiated, it is remarkable that the fall in numbers happened exactly at the moment when the European’s love of the Treaty of Maastricht was punctuated by the rejection of a small majority in Denmark, a razor thin majority of Yes in France, and the consequent difficulties in getting the Treaty ratified in the United Kingdom and Germany. Business cannot have been immune to the feeling that the European integration was launching towards a new stage or phase that suddenly threatened to run aground. During the mid 1990s feelings were mixed about the European integration and the prospects for an economic and monetary union. After a year with Jacques Chirac as President of France, elected in 1995, it became clear that France would stay the course and adjust its economic policy to the demands of the economic and monetary union.

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At the end of the decade the Euro was launched. While a good many people were sceptical in the mid-1990s, almost everybody was convinced at the end of the 1990s that the Euro would be introduced as planned. It is debatable with no firm conclusion whether the economic and monetary union has had any effect on mergers and acquisitions in the European Union. The commission ventures cautiously the conclusion that there are some indications the Economic and Monetary Union may have accelerated the pace of restructuring in the financial services and distribution sectors. The Commission also looks at mergers and acquisitions inside the European Union and offers the figures shown in Table 7.2. Even if some of the fluctuations from year to year may be due to exceptional circumstances, Table 7.2 clearly conveys the picture of a growing number of mergers and acquisitions inside the European Union. A breakdown of these mergers and acquisitions by companies from member states, and a comparison of their share of Gross Domestic Product (GDP) reveal not unexpectedly striking deviations (see Table 7.3). According to the Commission study, the leading “target” countries are Germany, the United Kingdom, and France with about 15 per cent each, followed by Spain and the Netherlands with nearly 9 per cent each. The leading acquirer countries/companies are the United Kingdom with almost 20 per cent, followed by Germany with 16 per cent, France with 14 per cent, and the Netherlands with 10 per cent. TABLE 7.2 Growth in Mergers and Acquisitions, 1991–2001 Number of Community Operations

Value of community operations Billion in Euros

1,264 1,165 1,010 1,171 1,267 1,135 1,366 1,593 2,036 2,548 1,869

22.8 28.4 28.8 23.6 29.8 29.6 91.9 153.6 547.9 330.7 145.2

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: Graph 6 and 7, European Commission 2001, op. cit.

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TABLE 7.3 Mergers and Acquisitions, by State & GDP Share of M&As (%) Belgium Denmark Germany Greece Spain France Ireland Italy Luxembourg The Netherlands Austria Portugal Finland Sweden The United Kingdom

Share of GDP (%)

(Both columns are for 1991 to 2001) 2.83 3.2 2.55 2.1 16.28 28.2 1.12 1.4 5 7 13.5 18.1 1.68 0.9 6.23 12.6 0.48 0.2 6.45 4.9 2.09 2.7 1.21 1.3 3.85 1.6 5.34 2.8 31.39 13.2 100 100.2

Source: Table 2, European Commission 2001 op. cit.

These figures indicate that British companies may be more inclined to look outside the European Union for mergers and acquisitions, especially with American companies, which account for 42 per cent of British companies’ international acquisitions. The figures also reveal that ownership structure and the stock market in member countries play a role. Italy, which, by the size of its economy, should have ranked much higher, is probably a case in point where the ownership and small stock market explain its lagging behind. The opposite may be true for the Netherlands. Seen in the context of European integration, what is striking is that despite the integration, the Single Market, and the Euro, only approximately 14 per cent of all mergers and acquisitions involves the European Union. Admittedly the figures have grown from 11.9 per cent to 14.9 per cent in the period, but it is still low. There are several reasons explaining why mergers and acquisitions have not worked out as expected and hoped for. A study commissioned by the Trade Union Organizations7 enumerates the following reasons:

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• • • •

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Failure to take into account dimensional growth Failure to take into account the cultural climate Lack of managerial professionalism Insufficient understanding of the importance of human capital

Another study8 comes to the conclusion that mergers and acquisitions create value for shareholders in companies selling, but not for shareholders in companies buying, which naturally puts a damper on the endeavour to launch mergers and acquisitions. Only one out of every three mergers and acquisitions in Europe generates value for the shareholders, according to a study by KMPG.9

BARRIERS TO TRANSNATIONAL MERGERS AND ACQUISITIONS: TAX RULES The disappointment with regard to the number of cross-border mergers and acquisitions and the lack of success in boosting productivity, competitiveness, and rewarding shareholders and wage earners, have led to a number of studies to map out what the European Union could or should do. At the informal meeting of the European Union’s Ministers for Economic Affairs and Finance (EcoFin) in September 2004, this problem was discussed and the Commission prompted to do a background paper about the situation in the financial sector. Although the financial sector only covers part of the industrial spectrum in the European Union, the barriers and problems standing in the way of successful cross-border mergers and acquisitions are, broadly speaking, the same as in other sectors of the economy.10 The findings of the Commission focus on five types of barriers or impediments to cross-border mergers and acquisitions.

Legal Barriers The Commission study points to thirteen different obstacles of legal character to mergers and acquisitions. The most important are: Cross-border mergers and acquisitions are complex operations and a number of legal entities may be involved. Not only can national rules be different or even incompatible, but intransparent, and whether the purpose is to make a cross-border merger and acquisition difficult or not, this may actually pose quite important problems. To overcome these problems, the European Union adopted a takeover bid directive in 2004,11 primarily to increase transparency and protect the interests of shareholders, employees, and other interested parties.

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In some member states, privatization of financial institutions has been accompanied by legal measures capping the participation of non-resident shareholders. In other cases the member states allow or even encourage certain types of defence mechanism as double voting rights or so-called poison pills.12

Supervisory Rules and Requirements Imperfections or gaps may arise with regard to supervision, as national supervisory bodies may not always be perfectly aware of their competitiveness. Such uncertainty may in some cases lead to delays or other unwanted costs, and in extreme cases, may constitute a barrier to a cross-border merger and acquisition.

Economic Barriers If the companies involved in a cross-border merger and acquisition are listed on different national stock markets, the operation may be hit by high costs. By tradition the product mix may be different in different countries, making potential savings less predictable for a cross-border merger and acquisition than for a national one possessing full knowledge of product mix and customer reaction.

Attitudinal Barriers These barriers are more difficult to specify as they may not always be known in public, but governments may not wish a company to be controlled by a foreign company, even if the foreign company originates in another member country. Labour unions may feel that jobs are threatened by a cross-border merger and acquisition, as they have to deal with management from another member state. Shareholders may fear for the future of the target company even if the acquiring company comes forward with assurances.

Taxation The most important obstacle however, seems, to be found in the tax area. For many years the question of where the profit was taxable posed barriers to cross-border mergers and acquisitions. The Commission lists nine different tax obstacles/barriers. Unquestionably the most important is divergent national tax rules for

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companies, which the European Union, despite obvious needs, have not succeeded in harmonizing, faced with the difficulty that taxation questions still require unanimity. As member states operate different tax systems and different tax rates, it is not difficult to see that some member states will benefit and attract companies, and are consequently less willing than others to embrace EU rules in this area. This has led the Commission to start an ambitious plan to remove tax obstacles to cross-border mergers and acquisitions. The flagship idea is to harmonize the corporate tax base across the European Union.13 After having studied the various alternatives, the Commission has opted to propose a Common Consolidated Tax Base (CCTB). The reasoning leading the Commission to prefer this option was outlined at a meeting organized by the Institute of European Affairs in June 2006.14 The Commission highlights the following advantages and problems:15 The logical approach would be to offer companies a single tax base for all activities inside the European Union. That would reduce compliance costs, as companies would not have to deal with up to twenty-five different tax systems. It would reduce transfer-pricing problems and allow cross-border consolidation among companies in various member states. It would simplify and facilitate corporate restructuring across the European Union, thereby boosting productivity and competitiveness among EU companies. Double taxation would disappear and so would a number of other national, and consequently discriminating rules, regulations, and practices. There are several ways to achieve this ambition, but the Commission opts for a CCTB as the best and most efficient one. These are all convincing arguments seen from a European view, but do not really deliver an answer to the problem that some member states actually benefit from operating a more business-friendly system than other member states — there would still be losers and winners with the introduction of CCTB. This came to the forefront when the topic was discussed among the Ministers of Economic Affairs and Finance and a minority16 of member states expressed opposition to this approach. As of June 2006,17 the matter had moved to a status where member states fall into three groups: those against, those supporting a CCTB, and those preferring to wait and see. The Commission in this case has found it opportune to flag the prospect of using enhanced cooperation, according to the Treaties, in case the necessary unanimity cannot be obtained. This is undoubtedly an element in the negotiating process of exercising pressure on member states opposing the CCTB, but it may also reveal an underlying

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wish to go ahead if this opposition prevents the adoption of a CCTB. If so, it will be the first case of enhanced cooperation, and as such, will not only attract attention with regard to the substance, but will also serve as a test case for enhanced cooperation. The timetable points to 2008 as the date for the Commission to submit a formal proposal of a directive to the Council and the European Parliament. Analysing the working method of the Commission, one sees that it bears a striking resemblance to how the Commission acted when pushing a uniform assessment basis for value added taxation (VAT basis) through the Council at the end of the 1970s. The Commission rightly perceives the main problem as being different rules and not different rates. If the basis is uniform, most, if not all, of the discriminatory measures will be dealt with, and the barriers and obstacles for a genuine EU platform disappear. This is what happened with the VAT basis. The rates will then be left to the market. To a certain extent, different rates can be applied by the member states. There is always a certain amount of flexibility before persons and companies prefer to take advantage of economic differences — thresholds, people, and companies have to overcome. The market will test the threshold. If the rates are outside the bracket, market forces will push member states to bring them in line. This is a solid approach that has proved its value several times. The European Union removes the basis for discriminatory practices, and the market will do the rest. By choosing such an approach, the European Union does not need to tackle tax rates, an area where it is well known and has been seen in many cases, that member states are sensitive, often hyper sensitive. The debate on cross-border mergers and acquisitions touches on a number of economic, financial, legal, political, and emotional issues. It is not only in the European Union that something which is generally classified as being “good” for the economy runs into opposition. In the United States, the clash about the purchase of a company running U.S. ports by a Dubai-based company showed how raw the nerve can be. It came at approximately the same time as the uproar was brewing over the State Department’s purchase of 16,000 personal computers produced by the Chinese company Lenovo.18 China’s oil company CNOOC was prevented from buying the American oil company Unocal in spite of that company’s marginal importance19 for oil supply to the United States. In Europe itself, Italy’s ENEL’s plan to buy the French company Suez was stopped by the French government.20 So was an attempt from a Swiss company to buy the pharmaceutical company Aventis. In the summer of

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2005, the French government announced that the purchase of Danone — a French food giant formed by mergers among French companies — by an American company (PepsiCo)21 was out of the question. The French government made it known that ten sectors had been selected as strategic sectors where foreign bids for companies could be expected to be thwarted.22 A planned merger between Germany’s E.On and Spain’s Endesa23 likewise ran into stumbling blocks. India’s Mittal Steel’s purchase of the Pan-European steel company Arcelor only went through after an almost acrimonious debate. It is interesting to note that many of the controversial proposed mergers and acquisitions are found in what used to be public utilities, but are now fully or partially privatized. Despite these steps, governments apparently find it difficult to part with the control over the supply of water, gas, energy, etc.24 The Commission has come out strongly against this tendency, advocating cross-border mergers and acquisitions and arguing unequivocally that the rules of the Treaties and subsequent EU legislation have to be followed and not bypassed by national efforts to keep certain companies and/or sectors under national control.25 These stories all have one common denominator. The public, the employees, and the national governments do not fear cross-border mergers and acquisitions as such. What they fear is that the acquiring company cuts the brain (R&D, financial headquarters, management, strategic planning, etc.) out of the company. Who needs two centres for strategic planning anyway? Who needs two financial headquarters? Who opposes the theorem that amalgamation of R&D is advantageous, while distribution of R&D efforts tends to lead to lower returns and waste of resources. Not only is there widespread fear of losing the brainpower or strategic centre of a company in cross-border mergers and acquisitions, but also of seeing a negative spin-off effect in the sense that the brain power invested in such companies was one of the factors making the said country or region attractive for other investors. The opposition is thus understandable. The big fight is about attracting talent, increasing R&D, and producing high value added products, be they in manufacturing or services. We can expect all countries to fight tooth and nail to preserve these assets for the national economy. In the European Union the question is not solely about growth in the Union as a whole. It is also about the distribution of growth and the longterm competitive advantages of countries. No country can be expected to part willingly with its crown jewels in the competitive game.26

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LABOUR MOBILITY The statistical evidence is quite clear: European workers are less mobile than American workers. Statistics put forward by the European Commission,27 reveal the following: •

•

•

8.2 per cent of the European workforce had moved to another job after one year. The United Kingdom and Denmark top the list with 13 per cent, Sweden and Greece come in next with 5 per cent. Workers in the European Union stay in the same job on average 10.6 years while the corresponding figure in the United States is 6.7 years. 1.5 per cent of the European workforce lives and works in a member state other than the home country. This figure has barely changed over the last thirty years showing that integration has had no positive effect. 7.2 per cent of the European workforce changes residence each year (16.2 per cent for the United States) and of those 15 per cent mentions occupational reasons (17 per cent in the United States).

It is interesting, but also a bit strange to note that when asked what advantages the European Union represents for them, 53 per cent of all Europeans answers “freedom to live and work in another member state”, when apparently only a small percentage of Europeans actually exploits these freedoms. When discussing mobility of labour in Europe compared with that in the United States, there are three fundamental things to mention: •

• •

Geographical mobility between member states is unquestionably lower than in the United States, but as the figures for change of residence indicate, mobility inside member states may not differ to the same extent. There is faster job rotation in the United States than in Europe, but this is not necessarily a consequence of lower geographical mobility. It is extremely difficult to compare the impact on compositeness of different labour markets and divergences with regard to mobility as total costs for business cover much more than labour costs.

Most of the interest in labour mobility in Europe is associated with the adjustment process in member states and/or regions after the implementation of the Economic and Monetarty Union. Conventional wisdom28 states that labour mobility is indispensable to make such a union work, but adds that in the case of rigid labour markets — which can be said of at least some of the

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European labour markets — other adjustment mechanisms have to be brought into play and/or strengthened. The Federal Reserve Bank of New York probably expressed the American point of view when stating that “the Emu faces the challenge of trying to increase international labour mobility” after earlier having said that “labour mobility has been much lower among Emu member countries than it is in regions of the United States”.29 The political and economic — academic — debate can go on without a clear conclusion. The focus on labour mobility as a condition for a smooth adjustment process is very much linked to a free market model economy such as the one run in the United States. The economic model practised on the continent of Europe is not a free market model, but a mixed model, which can perhaps be labelled the way the German Minister for Economics Ludwig Erhard did in the 1950s, as “social market economy”,30 with checks and balances and a much more developed social security system financed by the public than in the United States. The economy adjusts by bringing into play all its basic ingredients. The fact that labour mobility, in particular, with regard to geographic mobility, is limited in Europe means that business, the governments and labour react differently than in the United States. The European model illustrates this. The consequence is lower growth, at least, in the short run. As long as people react positively to an equation saying lower growth and high social welfare are preferable to high growth and low social welfare, the model may work. The EURO-members have no ambitions to transform their societal model into one more like the American, and to a certain extent, the British one. It is not an unavoidable conclusion that an economic and monetary union can only work in an economy modelled around the basic principles governing the American form of capitalism. Time will tell whether the European Economic and Monetary Union and societal model are capable of building in adjustment mechanisms, and work on political preferences different from the American model. The debate about the strength and viability of the European Economic and Monetary Union often looks as if we are operating in free air space. But the plain fact is that since 1993 the parities among the participating countries have not been changed. Historically, thirteen years may not be long, but thirteen years is not a bad track record for withstanding attempts to destabilize currency rates and build confidence for a brand new currency, even one created “artificially”.

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This does not prove that the Euro will survive in the future or that the European Economic and Monetary Union has reached the point of no return. It does prove, however, that the gloomy theories about a sudden and early death were completely off the mark.

WHERE DO WE STOP THE INTEGRATION? UNKNOWN DESTINATION? The objective in the preamble to the original Treaty of Rome, unchanged since its inception, speaks of an “even closer union among the peoples of Europe”. This is ambiguous and as such has its merits and pitfalls. The merits are that it sets the goal of a closer union as something worth striving for and aiming at. The pitfall is that precisely because it does not specify what it means, it is open to interpretation.31 The proposed Constitution would have changed this by defining what the European Union is, stands for, and how far the integration can and should go, at least, in the foreseeable future, but in a paradoxical twist, it was rejected by a majority of the voters in France and The Netherlands precisely at the moment when many Europeans asked for such a clarification. This brings out the schism between two schools of thought about European integration. Those who look upon the integration as a practical phenomenon, an enterprise primarily designed and aimed at facilitating economic integration to increase growth and welfare, and not embarking on further political integration. For that group of countries and politicians, the integration is useful as a tool, but clear political borderlines, visible and agreed upon once and for all, should be drawn. Those seeing the economic integration as a first step towards something which might become The United States of Europe, a European Federation, or a European Confederation or something else not yet known or defined, but definitely pointing towards some kind of United Europe in the sense of a politically united Europe. The Euro sceptics felt that, in a strange way, they had been hijacked boarding the train without really knowing where and when the train would stop. This was not really an issue in the 1960s and 1970s when the integration was still feeling its way forward. Most observers took the view that an amendment of the Treaties was unlikely to take place. After the first treaty amendment with the Single Act (1987), the Treaties have been amended, each time introducing stronger and deeper integration.

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What the Euro enthusiasts hoped and the Euro sceptics feared had actually happened. The integration seemed unstoppable — at least until a majority of the voters in France and the Netherlands in early summer 2005 said No to the proposed Constitution. It may facilitate the integration to feel its way forward without any firm skeleton and adapt to circumstances under the label of an even stronger union. It gives flexibility. Those in favour of a stronger European voice in politics, convinced that basically the Europeans share common interests and perceptions, favour such an approach. Those not so convinced that the European nations states and the Europeans automatically have the same interests, want to know what the integration is about, what the ultimate objective is, where to stop, when they get there, and how do they get to the end station? If these questions are not answered, they switch from being tacit supporters of the integration with a limited objective, to opposing the integration as they sail into unchartered waters. Vocabulary can do the trick for some time, as “European Union” shows, but not forever. Sooner or later the impertinent question about what it actually means and signifies will crave for an answer. The European integration is a prime example of how to sketch goals and how to get there: A long-term ambition supported by visible goals and roadmaps sketching how to get there. In the first phase the goals were the three common policies: Customs Union, Common Agricultural Policy, Common External Trade Policy. The implementation of these goals was a success. In 1970 when these policies had been established, the European Union did not know where to go. The first enlargement with the United Kingdom, Ireland, and Denmark did not offer much perspective in that respect. This explains why the European Union from around 1970 to the mid 1980s was caught in the doldrums. The second phase took off in the mid 1980s with the realization that Europe had lost competitiveness to the United States because of the small market, low R&D, etc., which paved the way for common policies to increase competitiveness and productivity. This was a clear objective, which was easy to understand and related to most people’s daily life. This approach was strengthened and supported by the need for Europe to tackle the political and economic repercussions in the slipstream of the falling apart of the Soviet and Russian empire in 1990. It was also easy to see the need for a Common Foreign and Security Policy in such a potentially disorganized Europe where no one really knew whether the United States

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would still be engaged, what would happen in the nation states that had seceded from the Soviet and Russian empire, and indeed the role of Russia itself. When a solution seemed to have been found for that problem after the enlargement of the European Union with the Central and Eastern European countries in 2004, the European Union suddenly found itself without any grand design. Now the question was put on the agenda, not by the politicians, but by the people: where the European Union should go and why it should do so.

SUBSIDIARITY All federations have managed to come to grips with drawing a line between competences for the federation, and competences for the states, or whatever the name is for the regional or local political entities forming the federation. This has sometimes been acrimonious and has frequently triggered off almost ferocious political battles, but the problem has been resolved. The challenge for the European Union is to do the same or see the integration gradually splutter and come to a halt. It forms part of the uncertainty picture referred to above. As long as the citizens do not know where the Union is going, how fast and how far, they tend to be somewhat sceptical. This scepticism is augmented in cases of blurred competences between the EU level, the national level, and the regional level, as some of member states are federations in themselves, as is the case for Germany. If there was a sharp and well-defined borderline between powers exercised by the federation, the member states, and the regional entities inside the member states, the rather loose political ambitions might not be judged as a blank cheque by the sceptical Europeans. The division of competences would constitute a barrier for the integration, explicitly or implicitly telling how far the integration can go. The union could not exercise powers conferred on the member states or the political entities inside the member states. If there was a clear definition of what the notion “European Union” actually meant, the blurred division of competences might not be a big problem, as powers could only be exercised in conformity with the definition of the Union. But the European Union is not like that. Admittedly the European Union excels in having both an open-ended goal and blurred competences, which are exploited by the sceptical or

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outright anti-Europeans in their efforts to stop, and in some cases, roll back the integration. This uncertainty about the Union is magnified by a similar uncertainty and blurring of competences between the institutions. Formally or theoretically, the division of competences is clear enough, but the permanent bickering and political battles among institutions convey the image of a decision-making machinery that has not found its balance. The EU institutions do not all share exactly the same outlook on the integration, which augments the uncertainty and scepticism. The European Parliament and the Commission were strong supporters of a drive towards some kind of “The United States of Europe”, even if it has never been defined. Their ardour in pursuing this goal faded away somewhat recently, after reading the changing mindset of the Europeans. This is, or rather was, especially the case for the European Parliament. At the beginning of 1980s the Parliament with the Italian MEP Altiero Spinelli in the forefront, actually took the lead in formulating a treaty on European Union, pointing towards some kind of federation that would change the institutional framework and institutional balance of the European Union.32 This proposal never came close to adoption. Nonetheless the antiEuropeans used it as some kind of bogey, interpreted more or less on purpose, as what the EU would look unless the integration was brought to a stop.33 There was little understanding of the fact that the European Parliament played a normal parliamentarian game seen in the European nation states decades, even centuries, before, when the King and the Parliament were fighting for power. In the European context it was pictured as one more element pulling the integration off its tracks in promoting a European federation. The Council is traditionally far more conservative, putting a brake on the large jumps and instead favouring a gradual approach, with member states still holding the reins of power — at least for the foreseeable future. The Court of Justice is not playing the institutional game, but is playing a political role, ruling in favour of integration, which to some observers, place it in the same box as the Parliament and the Commission. This blurring of competences and uncertainty of the distribution of powers around the goal of the integration, the role of the European Union, the member states and political entities in the member states, and the institutional interplay, have not stopped the European Union from moving to where it is today. But it is definitely one of the elements explaining the growing scepticism in Europe about the virtue, not of the European Union, but of further integration.

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BUREAUCRACY It is a commonly heard assertion that the European Union, and in particular, the European Commission, represent an overblown bureaucracy, inefficient at that, that costs the taxpayers a lot of money. This assertion has been put forward so many times and in so many forms that it has gradually been more or less accepted as the truth, despite being absolutely and completely untrue. It is a tenacious myth. The facts, which apparently are not finding an echo in the debate, speak for themselves. There were until recently 17,000 Commission officials, fewer than half the number employed in the Irish civil service and one-twentieth of the number employed in the Irish public service.34 After enlargement in 2004 and 2007, the number has gone up to 25,000.35 The criticism of the EU bureaucracy has often been spearheaded by the United Kingdom. It is noteworthy that in 2004, an independent review of the British Civil Service36 reported that “auditable and transparent efficiency gains of over £20 billion in 2007–08 across the public sector have been identified and agreed”. The report furthermore states that “the proposals also result in gross reduction of over 84,000 posts in the civil service and military personnel in administrative and support roles”. It is admirable that the British Civil Service can make such gains in four years’ time apparently without any loss to efficiency and output. The U.K. civil service cuts total expenditure by six times the administrative costs of the European Union and cuts total staff, which is almost five times the total number of staff in the European Commission. Figures like these set the record straight when talking about European bureaucracy, compared with the civil service, bureaucracy, and costs in member states. The total size of community legislation is 80,000 to 90,000 pages in the official journal, depending on which language is chosen. Fewer than 25,000 European legal acts are currently in force, far fewer than at the national level. And of these, fewer than 6,000 are truly independent, binding European laws.37 It is fewer than the 97,000 often put forward.38 It is conveniently forgotten that one EU legal act replaces twenty-seven national legal acts, and by doing so, actually constitutes a simplification. The argument about bureaucracy and red tape likewise conveniently overlooks the fact that without EU legislation, national legislation would be in force requiring far more red tape with different forms to be filled out when trying to trade with or invest in other member states. Administrative costs for all institutions together account for a total of 5 per cent of the total EU budget, corresponding to approximately39 to

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5 billion Euros per year, which is negligible, not only at the European level, but also compared with costs of running administrations in member states. It is often stated that the cost of the European Union is very high for member states and their citizens. An example was a public assertion in the United Kingdom that membership of the European Union costs each U.K. citizen £873 per year. The office of the European Commission in London went public with a rebuttal showing that the correct figure is £32, which corresponds to 3.7 per cent of the original claim.40 The problem for the European Union is perception. In the mindset of citizens, the European Union is associated with a bloated bureaucracy, costly and inefficient. Even if the figures prove that this perception is wrong, it maintains its grip on the mindset of people. There are several reasons for that. The most important one may be that very few citizens have actually been in contact with EU institutions. Those who have often meet schemas and formulas, which look very complicated, for example, when submitting requests for financial support for R&D. In some cases the language constitutes a barrier. Whatever the explanation and whatever the reasons, this image contributes to the problems the integration seems to face, and it is certainly one of the important tasks of the European Union to put things straight to get rid of this damaging image. The Commission has launched an initiative to take the bull by the horns. In November 2006,41 it outlined an ambitious plan to cut red tape by 25 per cent in the European Union through a combined effort by member states, regional and local authorities, the European Union, and primarily, the Commission. If implemented successfully, the combined effort will increase Gross Domestic Product by 1.5 per cent. The plan contains the following key measures: •

•

• •

A reduction of the administrative burden of existing regulations. The Commission pledged to forward a proposal for an action plan in spring 2007. Establishment of an Impact Assessment Board (IAB) to scrutinize Commission proposals before they are sent to the EU institutions and the member states. Further efforts to simplify exiting regulations. Withdrawing of unnecessary proposals and regular monitoring of pending EU legislation.

There is no guarantee that this assault on red tape and unnecessary administrative costs will be successful. Many similar efforts have failed due to

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the resistance of bureaucracies in the European Union itself and in member states. The initiative, however, is more than a token of the significance of the problem. It serves as a political signal and contains some bite, giving promise of progress on this front. It remains to be seen how member states will react; whether they will support the Commission, or whether they will let the initiative wither away. A specific point of criticism against the administration of the European Union is the approval of the Commission’s implementation of the annual budget. Each year the Court of Auditors examines the budget and forwards it to the European Parliament, accompanied by its comments.42 The Court of Auditors43 has for twelve consecutive years pointed at irregularities,44 going so far as to use the words “presumed attempts to defraud the EU budget”. The Commission has counterattacked vigorously,45 but regardless of where the truth lies, the plain fact is that the Commission has not been able to implement a budget that is above any criticism. This is a lamentable situation that gives ammunition to those who accuse the European Union and, in particular, the Commission, of inefficiency and bureaucracy.

CAN A MEMBER STATE LEAVE? The declaration in the Treaties saying that “this treaty is concluded for an unlimited period”46 belongs to the same category of declarations giving rise to ambiguity as the blurring of competences and uncertainty among citizens do. The text does not mean anything other than that member states stick together as long as they wish to stick together. It is, however, one of those articles and political text, a bit like the notion of European Union itself, which is always pulled out of the drawer to convince people in doubt that they should switch to being against. If we cannot leave, better not to be in it at all, the argument runs. Politicians, lawyers, and ordinary people may look at, and interpret, such a statement in their own way and these ways happen to be different. Politicians will say that if a member state wants to leave, it can do so, and a solution will be found. Lawyers will say that the principles of international law will take precedence. Ordinary people will believe what the Article says. The experience gained from the European Union tells us that it may be better to state the obvious, namely, that the treaty is valid as long as the partners want to respect it. If one or more of the partners prefer to leave, a mutually acceptable solution will be negotiated. This is what will happen anyway so better to remove the bogeyman.

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The proposed Constitution, like for so many other issues, sought to resolve uncertainties and problems by opening the door to a member state to leave. The relevant Article47 says: A Member State, which decides to withdraw, shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union.

INTEGRATION BY THE MARKET One of the elements in the European integration that has gone rather unnoticed is integration by the market as touched upon in earlier chapters. The European Union is often seen and depicted as a bureaucratic or centrally controlled economic adventure, but it is, in fact, quite different. When the European Union was forged in the 1950s, the idea, not the least seen from France, might have been to create a European economy comparable to the traditional French economic model, with a high degree of planning and intervention by the state. But things have turned out quite differently. Two major events have steered the European economies more towards a market economy than a centrally planned economy or an economy with the initiative in the hands of public authorities. The most important one, sometimes overlooked, was that removing discriminatory practices, based on nationality, would gradually enforce a domestic market encompassing the whole of the European economy. That would inevitably trigger off harsher competition and force through transborder competition, capital movements, investment etc. The removal of discrimination based on nationality from the arsenal of the nation states meant, regardless of whether it was the idea or purpose or not, stronger competition, thus giving market economy the upper hand. The next one came in the 1970s and 1980s with the wave of deregulation. That has dominated the European economies. Even countries such as France in the mould of the traditional “dirigiste”, model started to deregulate domestic companies and services, switching from state-owned companies to companies listed on the stock exchange, hence under the implicit rules of the market economy. In such circumstances, it was simply no longer possible to maintain the idea of national, and in particular, national public-owned companies. A third wave intervened to support the two listed above: the drive for economies in public budgets. In almost all member states, the ministry of

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finance took upon itself the role of a strong driver to find economies and/or to list companies on the stock exchange to make money and earn revenue for the state. The purpose of this drive might not have been to push for liberalization, but that is what happened. Together these three factors opened the door to an implicit driver of integration: integration by market forces. When more and more companies changed from state-owned to private companies, and the Treaties prohibit discrimination based on nationality, the market would almost automatically ensure that the most business friendly legislation became the EU standard. Otherwise, companies — from other member states and from abroad — when investing in the European Union would choose that member state and serve the whole European Union from there, thereby bypassing other member states, which would then have to choose between the following policies: • • •

Maintain national rules and see investment fall with dire consequences for the national economy. Adjust national legislation to the same standard as the one offered by the member state with the most business friendly legislation. Push for EU legislation thus harmonizing rules.

Invariably they have chosen option two or three. This is a key lesson for integration to be launched in other parts of the world. Deregulation and non-discrimination are powerful tools for pushing the integration, whether or not it is the purpose. And in most cases, this integration will take the form of member states themselves bringing their rules and regulations in the sector in question in line, or alternatively, reducing divergences to a point where they do not play any role in business decisions.

Notes 1. See for example, The McKinsey Quarterly, March 2005, available at http:// www.mckinseyquarterly.com/newsletters/chartfocus/2005_03.htm. 2. Kjetil Bjorvatn, “Economic Integration and the Profitability of Cross-Border Mergers and Acquisitions”, European Economic Review 48 (2004), available at http://www.nhh.no/sam/cv/paper/EconomicIntegrationMAEER2004.pdf. 3. European Commission, European Economy, Economic Papers, No. 242, February 2006, available at http://ec.europa.eu/economy_finance/publications/ economic_papers/2006/ecp242en.pdf. 4. Author’s remark. 5. Defined as taking place inside the same industry.

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6. European Commission, European Economy, Supplement A, Economic Trends, No. 12, December 2001, available at http://ec.europa.eu/economy_finance/ publications/european_economy/2001/a2001_12_en.pdf. 7. Stefano Palmieri, “Mergers and Acquisitions in the European Union: Observations for Trade Union Organisations”, Paper prepared for the PES Group Seminar in 2002 on Economic, Employment and Social Implications of Restructuring, available at http://www.ires.it/files/M&As_Report_finale_Eng.pdf. 8. Jose Manual Campa, “Mergers and Acquisitions in Europe: Still Pending a Resolution”, quoted in Finanzas e inversion, universia knowledge Wharton, available at http://www.wharton.universia.net/index.cfm?fa=viewfeature&id= 798&language=english. 9. Finanzas e inversion, universia knowledge Wharton available at http://www. wharton.universia.net/index.cfm?fa=viewfeature&id=798&language=english. 10. European Commission (DG Internal Market and Services — April 2006), Background paper: “Obstacles to Cross-Border Mergers and Acquisitions in the Financial Sector”, available at Com– http://ec.europa.eu/internal_market/ finances/docs/cross-sector/mergers/consultation_en.pdf. 11. A summary can be found at http://europa.eu/scadplus/leg/en/lvb/l26012a.htm. The Directive is Council Directive 2004/25 of 21 April 2004, Official Journal L 142, 30 April 2004, available at http://eur-lex.europa.eu/smartapi/cgi/ sga_doc?smartapi!celexplus!prod!DocNumber&lg=en&type_doc=Directive&an_doc= 2004&nu_doc=25. 12. A poison pill to prevent a hostile takeover is a plan or tactic intended to make a hostile corporate takeover prohibitively expensive by offering shares or stocks to the stockholders at a bargain price if a single suitor acquires a high percentage of the stock. 13. Press release IP/05/1352 of 26 October 2005, available at http://europa.eu.int/ rapid/pressReleasesAction.do?reference=IP/05/1352&format=HTML&aged= 0&language=EN&guiLanguage=en. 14. http://www.iiea.com/eventsx.php?event_id=178. 15. http://www.iiea.com/images/managed/events_attachments/Mors280606.pdf. 16. According to the Commission, The United Kingdom, Ireland and Estonia, see http://www.euractiv.com/en/taxation/commission-wants-harmonise-corporatetax-base-eu/article-146482. 17. http://www.iiea.com/images/managed/events_attachments/Mors280606.pdf. 18. In fact, Lenovo had just bought the computer division of IBM. 19. Unocal stands for less than one per cent of oil and gas consumption, see http://www.china-embassy.org/eng/xw/t200900.htm. 20. Earlier the French bank BNP had acquired the Italian bank BNL and rumours were around that an implicit understanding existed that France would be open to subsequent acquisitions of French companies. Italy evidently felt that it had come out a loser, seeing ENEL being stopped while giving in to BNP. According to press reports (International Herald Tribune, 23 February, 2006, http://

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21. 22. 23. 24. 25. 26.

27. 28. 29. 30. 31.

32.

33. 34. 35. 36.

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www.ft.com/cms/s/8994ecc6-a412-11da-83cc-0000779e2340.html), it contemplates changes in Italian national legislation to make it more difficult for foreign companies to acquire Italian ones. BBC news, 25 July 2005, see http://news.bbc.co.uk/2/hi/business/4713979.stm. http://www.europeanaffairs.org/current_issue/2006_spring_summer/2006_ spring_summer_05.php4. http://www.europeanaffairs.org/current_issue/2006_spring_summer/2006_ spring_summer_05.php4. Op. cit. http://www.euractiv.com/en/financial-services/kroes-nationalism-place-crossborder-mergers/article-153438. I have dealt with these problems in an article in Asiatimes online on 7 April 2006, available http://www.atimes.com/atimes/Global_Economy/HD07Dj01. html, and printed in the Straits Times on 12 April 2006, “New Globalization Debate Threatens Asia”. http://ec.europa.eu/employment_social/workersmobility_2006/index.cfm?id_ page_category=FF. See for example, OECD Observer, August 1999, “Getting European Workers Moving”, available at http://www.oecdobserver.org/news/fullstory.php?aid=66. http://www.ny.frb.org/aboutthefed/fedpoint/fed25.html. Sociale Marketwirtschaft. At the European Summit in Paris on 19–20 October 1972, prior to the first enlargement of the European Union, the chairman of the meeting, the French president Georges Pompidou, proposed to insert the words “European Union” in the text. This was difficult for, among other countries, Denmark, which had just had a referendum to join the European Communities and did not want to set a new lofty goal even before having joined. The Danish Prime Minister accepted the phrase, stating that he did so because it was open to interpretation from member states. President Pompidou acknowledged that this was the case. The author was present in the conference room when this exchange of words took place. The summit conclusion is available at http://aei.pitt.edu/1919/02/ paris_1972_communique.pdf. http://www.europarl.europa.eu/factsheets/1_1_2_en.htm. The draft treaty put forward by the Parliament can be found at http://www.ena.lu/europe/19801986enlargement-south-single-european/draft-treaty-establishing-european-union1984.htm. As an example, see “The European Beast Emerges”, http://www.nwchurch-ofgod.org.uk/docs/prophesy/europe.pdf. http://www.forumoneurope.ie/index.asp?locID=113&docID=967. http://europa.eu/institutions/inst/comm/index_en.htm. “Releasing Resources to the Frontline”, Independent Review of Public Sector Efficiency, Sir Peter Gershon, CBE, July 2004, available at http://www.hmtreasury.gov.uk/media/B2C/11/efficiency_review120704.pdf.

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37. Speech by the President of the European Commission Jose Manuel Barroso, EUI Florence on 31 March 2006, available at http://europa.eu/rapid/ pressReleasesAction.do?reference=SPEECH/06/213&format=HTML&aged= 0&language=EN&guiLanguage=en. 38. See for example, “E.U. Enlargement, Costs, Benefits, and Strategies for Central and Eastern European Countries”, Marian L. Tupy, CATO Institute No. 489, 18 September 2003, available at http://72.14.235.104/search?q=cache: TxdLG6NTL1wJ:www.cato.org/pubs/pas/pa489.pdf+world+bank+on+ costs+benefits+enlargement+eu&hl=enere&gl=sg&ct=clnk&cd=1. 39. http://ec.europa.eu/budget/budget_glance/what_for_en.htm and http:// www.euractiv.com/en/agenda2004/financial-perspective-2007-2013/article130497. 40. Press release from the office of the European Commission in London on 30 October 2006, available at http://today.reuters.com/news/articlebusiness. aspx?type=ousiv&storyID=2006-11-04T114056Z_01_L04129906_ RTRIDST_0_BUSINESSPRO-UTILITIES-ENDESA-EON-DC.XML& WTmodLoc=Home-C4-Business-ousiv-4&from=business. 41. European Commission Press release IP/06/1562 of 14 November 2006, available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/06/1562&format= HTML&aged=0&language=EN&guiLanguage=en, see also http://ec.europa.eu/ enterprise/regulation/better_regulation/index_en.htm and http://ec.europa.eu/ enterprise/regulation/better_regulation/simplification.htm. 42. The Court of Auditors does not have any powers, for example, to deny approval of the way the budget is implemented by the Commission. Such powers rest with the European Parliament. 43. The annual reports by the Court of Auditors can be accessed at the Court’s website http://eca.europa.eu/index_en.htm or go directly to http://eca.europa.eu/ audit_reports/annual_reports/annual_reports_index_en.htm. 44. International Herald Tribune, 24 October 2006, “EU Auditors Find Irregularities in E.U. Budget Spending for 12th Year Running”, available at http:// www.iht.com/articles/ap/2006/10/24/business/EU_FIN_EU_Budget_Audit.php. 45. International Herald Tribune, op. cit. 47. Article 51 in the Consolidated text of the Treaty on European Union. 47. I-60.

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8 BUILDING TRUST

SOCIAL CAPITAL Member states share common political objectives. They are steered by analogous interests and policies. They operate at approximately the same economic level with a comparable standard of living. Experience suggests that common values and a common history are useful elements to keep the integration together and even more so to deepen and strengthen it. But at the end of the day mutual trust is what keeps the integration together. The agonizing experience from two world wars and the Great Depression in the 1930s stimulated mutual trust among the six founding member states of the original European Union. It speaks mountains about the solidity of the construction and the idea of Europe that mutual trust continues to pull the enterprise together after fifty years, with twenty-seven instead of six member states. The notion of social capital is often used to describe what keeps a nation state together. It is not a perfect comparison, but probably the nearest thing at hand. Citizens and corporations act inside the nation state in accordance with unwritten rules — social capital — telling them what is right and what is wrong. Legislation codifies this social capital — common set of values, 445

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common behaviour. The stronger the social capital, the less cumbersome and less detailed the legislation needs to be — everyone knows how to behave. Legislation and the legal system are brought into action only in cases where this common behaviour is not respected and/or questions of interpretations arise. Trust between citizens and corporations make the daily functioning of society smooth, precisely because the common and accepted set of values is respected and adhered to. In an international integration the same principle is valid. The more member states share a common set of values telling them how to behave vis-à-vis each other, the smoother the daily functioning of the integration becomes. Most of the European nation states do have a common cultural background, which for many, goes back to the Roman Empire, which was succeeded by Christianity with the Roman Catholic Church1 as a force shaping a common cultural background for more than a thousand years. They united many European nations culturally until the Reformation. There may be discrepancies in identities, principles governing the legal system, forms of government, parliamentary traditions — the list is long. But all these discrepancies play out inside the same box; they are not fundamental in character. The difficulties in forging a common European rule set inside the European Union speak for themselves and attract attention from time to time, but as the European Union and the progress show, these difficulties are not insurmountable. The common background is sufficiently strong to support what can be termed social capital among the member states constituting the framework for mutual trust. It is true that a good deal of international legislation has to be provided, as member states in many cases embark on virgin territory and need some kind of banisters to hold on to. The main principle, however, is still valid: the stronger the mutual trust, the less cumbersome the legislation. As described in Chapter 7, European bureaucracy and number of legislative acts have, despite myths to the contrary, been kept at a fairly low level because social capital and mutual trust among member states are sufficiently high. The role of the European Court of Justice warrants such a conclusion. The rulings have been respected by member states. That is not because they fear what may happen if that was not the case, but because they want to do so, and that again, is due to trust in the European institutions and among member states. The common trust may partly flow from history and interests — as mentioned above — but it has to pass the test around the negotiating table.

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Member states have to behave in conformity with mutual trust and they need to build a capital of mutual trust, which opens the door to understanding and respecting other’s negotiating positions — not just registering them, but understanding and seeing the reasons for them.

NEGOTIATING POSITION OF MEMBER STATES Member states give and take at the negotiating table and by so doing reveal their character. A member state builds up trust by defence and the safeguarding of its own interest, as well as its willingness to understand, and make itself acquainted with, the problems of other member states. The way it behaves portrays its genuine and true character. Does it pursue its own interests regardless of repercussions on others? Does it understand and subscribe to the long-term objective of the integration with the inevitable consequence that sometimes it will have to settle for less than it would have liked? Does it drive a hard, but honest bargain, or does it sometimes operate under a veil with a hidden agenda? All these questions and observations are channeled into an image of a member state in the eyes of the others, and in the case of the European Union, in the eyes of the European institutions — ultimately in the eyes of the European public. Experience shows that it is easy to lose a reputation and difficult to earn 2 one. Reputation is like capital. For a member state this capital is of tremendous value, making it easier to achieve a result incorporating its own interests and putting it in a position where it can play the role of mediator. With reputation, a member state joins the inner circle that is able to yield influence much beyond its economic and political clout.3 No member state will come out on top in every negotiating round; winners and losers will change in conformity with the underlying principle that there are no permanent losers, all benefit from the integration even if the benefits may not be equally distributed. Member states need to comprehend that you win some and lose some. That is the reality. Next week or next month, the member states sit around the same table. If the winner overplays its hand, the bird let loose may come home to roost on a later occasion. The winner must show some degree of magnanimity. The losers should not grudge too much, next time it might be their turn to win. Many of the negotiations, in particular, about financing the European Union, reforms, and notably, negotiations to amend the Treaties, run over a long time. That may even be the case for a new legal act on a specific issue.

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Member states should define their long-term objective(s). A tactical victory along the road serves no purpose, if at the end of the negotiation, it is overshadowed by a strategic defeat. At each step, or every time a chapter is closed, member states compare what is achieved with the long-term goal. Often the negotiations take place under the recipe that chapters or segments are negotiated one by one, for example, Articles in a legal act, but nothing is finally settled or concluded until everything is settled or concluded. Such an approach allows member states to go back to specific concessions offered along the road, if the overall result does not correspond to expectations. This approach, which is common in all important and wide-ranging EU negotiations, can only work if member states exercise self-restraint. Frequently a concession is given with the implicit understanding that down the road on another item, where the said member state has flagged a crucial interest, it can expect a forthcoming attitude from the other member states and the institutions. For that to be the case, member states have to negotiate with mutually consistent positions. It cannot claim one principle when negotiating one item and another principle when the next item comes on the agenda. Otherwise it will be perceived as a member state, a partner, without principles, bending to whatever principle suits its current interests. That opens the door to unpredictability, with others not knowing which principles it will follow. Other member states may be reluctant to grant concessions, fearing they will not be repaid at a later stage. Threats are rarely commendable, but sometimes a member state has to resort to threats, not against other member states or the integration, but threats as to what may happen if it does not obtain a minimum of concession. All member states have a public opinion to cater to, and all know that to get domestic approval of a result, it must not fall below a certain threshold. Threats can therefore be used if they are diplomatically couched, but the vital thing is that they reflect a reality and are sparsely used. When used, the said member state should explain to other member states why it finds it necessary to resort to such a tactic. That can and should be done quite honestly. Explaining domestic political situation or other reasons is not the same as undermining its own negotiating position — no cards are shown which should not be known by the adversary — but is simply the seeking of a way with partners towards a mutually agreeable solution.

LINKAGES In the context of trust the question arises as to how far and to which extent member states can link progress in one sector to another. Can a member state

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make progress in one sector dependent on progress in other sectors? And do linkages between various sectors facilitate or hinder the integration? The fact that the integration covers many sectors makes it easier to achieve a balance of costs and benefits. It opens the door to every single member state to feel that overall, it has come out better compared with not being a member of the integration. To mention an example: in 2006 there were initiatives in the European Union to build a better infrastructure for energy. As some member states are net exporters of energy, others net importers, and a third group, operating with a relative balance of both, it would almost have been impossible to agree on a network that would make each member state feel better off. The net exporters would always contemplate whether they could sell their energy for a higher price to non-member states. The net importers would fear that in the long run, net exporters would be tempted to do just that. Both groups of countries would be reluctant to make money available for a large infrastructure investment, fearing that the other group might not respect the deal. Linkages should be, and are, played with diplomacy and skill, and exercised in a subtle way. It is, in fact, one of the fundamental pillars of the integration. Only by linking progress in one sector to other sectors can member states rebalance what they may lose during a negotiation on a specific issue. Without this overall approach played out by linking results, the integration would not work. It can only work if all member states exercise self-restraint and selfdiscipline knowing how far they can go and where to stop. In short, trust each other. Such deals cannot and will never be put on paper. Implicit understanding should be enough. There are cases where member states have tried to link issues, but failed because the other member states felt they overplayed their hand or went beyond what they thought was the common — unwritten — understanding. One of the most well-known cases dates back to May 1982. The United Kingdom tried to block the annual adoption of agricultural prices, referring to the lack of understanding among the majority of other member states for the U.K. position that its net contribution was too high. Britain invoked the clause — the Luxembourg compromise — saying that a single member state can block a proposal, also when qualified majority applies, if it feels that a vital interest is at stake. The other member states had an equivocal attitude to this principle, but what decided the issue was their feeling that the clause could only be invoked if the vital interest was found inside the same negotiating sector as the proposal the said country wanted to block. This was not the case, as the United Kingdom tried to link agricultural

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prices to net contribution. A majority in the Council chose to overrule the political pledge and resorted to qualified majority voting despite the British opposition. They took the view that if Britain had been successful, the range of applications for veto in case of a vital interest, would have been broadened and turned into a negotiating ploy instead of protecting vital national interests. The other member states did not trust Britain, fearing it was trying to change the principles of decision making to the detriment of the integration. This interpretation is borne out by events a couple of years later when the Heads of State and Governments met at a summit in Fontainebleau under the French presidency. The result became one of the best illustrations of linkages and mutual concessions.4 This time Britain successfully linked a solution of the British budget problem to the future financing of the European Union in the light of the enlargement with Spain and Portugal. Unless an offer deemed acceptable for Britain was on the table, no agreement could be reached on the European Union’s future financing. The other member states may have gritted their teeth, but they accepted this linkage. France and Germany won approval for the future financing of the European Union. Germany got, on top of this, what it wanted, regarding the complicated issue of monetary compensatory amounts having repercussions for prices paid to German farmers in Deutsch Mark. France had the presidency and could bag a breakthrough as a victory and a signal of France’s European credentials and the French role in Europe. The member states favouring further development of the integration saw the establishment of an ad hoc group on institutional affairs5 as a door opener for negotiations about a European Union, which indeed proved to be correct, as this was the initial step towards what became the Single Act, approved in December 1985 at a European Council meeting in Luxembourg. The group of member states irritated about the highflying plans was pleased to see the establishment of a working group on the People’s Europe.6 No member state left empty handed. Everybody linked progress in one area to areas of special interest to them. All linkages were tabled at the same meeting. The lesson was clear enough: progress in all areas or no progress at all. One of the most well-known case of linkages with a dubious role, and a case that can serve as a prelude to the point about negotiating alliances below, is the banana case. The introduction of the Single Market forced the European Union to establish a common banana regime. The negotiations became deadlocked in

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late 1992. The proposal on the table would increase prices for bananas in the European Union by accommodating inefficient banana producers among the ACP countries. A blocking minority with Germany as the lead country supported by The Netherlands, Belgium, and Denmark resisted such an outcome and was expected to stand firm. This was to not be so. In the course of a couple of months, the negotiating alliance broke up under threats from other member states, in particular France, to block proposals on the agenda for the Common Agricultural Policy, thus imposing negative consequences on farmers. France linked progress in other areas of agriculture to the adoption of a particular regime for bananas and hinted that it would choose to block proposals of special interest to the partners in the blocking minority. This threat was classified as credible by The Netherlands, Belgium, and Denmark, which left Germany isolated. The sequence of events has attracted a good deal of interest, not the least in academic circles. In this context the interesting observation is that France and those member states supporting the French threat got away with it, and The Netherlands, Belgium, and Denmark got away with changing positions. All of them did so without any harm to their credibility and solidity as partners in future negotiating alliances. The reason is that they changed positions because of tangible and visible interests. That was, and still is, regarded as sufficient explanation for changing positions. And they operated inside a closed circle of questions normally classified as interlinked with each other. Many observers and countries outside the European Union cried foul play, but within the European Union, it was in conformity with the accepted behavioural pattern: member states act in accordance with their interests.7

NEGOTIATING ALLIANCES Substance is the flywheel for partners to get together in alliances. This is the case for principles and long-term objectives and the daily routine in the Council and its working groups. The Franco-German axis is based on a solid common interest to make reconciliation work inside a European construction that brings in a number of European partners. This objective overrides many objections, allowing the two countries to forge a common view on where the European Union is going. A hard core of liberal-minded member states such as Germany, Britain, the Netherlands, and Denmark managed for a long spell to put their mark on the European Union’s foreign external trade policy.

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Germany, the Netherlands, and Denmark constituted in the same vein a hard-core group of member states pushing for progress towards a more environmentally friendly policy. The Mediterranean countries pushed together for greater weight to solve the problems they faced and managed to get approval in the Council of, for example, the integrated Mediterranean Programmes. This illustrates how member states manoeuvre to pursue their objectives and choose partners according to their interests. When looking at this in the context of building trust, two observations are crucial. The first one is that a member state can change partners as long as it is clear that its interests dictate such shifts. All member states face the same situation and all member states realize that alliances or partnerships cannot function unless they are in harmony with national interests. In practice it means that a member state needs to get its main interests across to partners and institutions and why they dictate this particular choice of partners. Once a member state has pledged its support for a specific item, it is difficult to change course. If a member state does so without justifying it on the basis of fundamental interests, its partners will not trust it anymore. They will always harbour the suspicion that the original pledge was not given in earnest. It will normally be a costly operation, measured in loss of goodwill and trust among the other member states, for it to change course and/or partners without being forced to do so by interests. The second one is that a member state must have something to offer when negotiating. The power game within the Commission to get the important portfolios illustrates this. A portfolio based on substance formulating draft legal acts (examples are agriculture, competition policy, the Single Market, external trade) is the way to influence for a member of the Commission. This gives it a strong negotiating position because the other commissioners will want to affect the substance of the draft legal acts put forward. The Commissioner in charge of such portfolios can trade concessions with other commissioners. Commissioners without one of these portfolios find it difficult to put a mark on draft legislation; they have nothing to offer in the game. Negotiating alliances is based on substance, the ability to offer partners something in sectors they are interested in, and a member state’s or a member of the Commission’s reputation as being trustworthy. This works because all member states are involved in all common policies. All legal acts apply to all member states. All member states are represented in

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all institutions. All member states pay into the budget and get something in return from the budget. It conveys a sense of being together, but it also lands on the negotiating table a whole string of possibilities to choose partners, explain interests, and pursue them, and not the least, build up trust and credibility. No member state, no member of one of the institutions, can be bypassed or neglected. They all count when the final adoption has to be made, even if their interest in the matter on the agenda is negligible.

FACTS AND DOCUMENTATION A negotiation in the European Union is a bit like trench warfare — not moving for long periods, but when it does, it does so in leaps over difficult terrain with minefields, tenacious opponents against whom any arguments seem to bounce off, and ultimately a solution is brought about through sheer exhaustion. Any method to break the deadlock will be tested and human ingenuity will produce many different variants of instruments and methods to wear down resistance around the table. Political power can do some of the work, but will not help in the long run. Meticulous planning that ensures that all aspects of the negotiating position is analyzed throughout and rehearsed, will be called for. A member state should bear in mind that behind the Commission’s proposals lie a long process of preparatory work at a technical level. The European Parliament has its own committees with staff; the other member states are in possession of technical expertise as well, and in many cases, nongovernmental organizations play a role with their own often elaborate and competent knowledge of the matter. If there are any holes or weak points in a negotiation position, it will be found — without question; and it will often be used in a ruthless fashion against the member state originally putting it forward. It will not only pull the carpet from under the member state in the matter under discussion, but also cast a doubt or suspicion over its negotiating positions in other sectors and other matters. In short, it will undermine its credibility. Whether or not it was the intention, the other member states and the institutions will feel that it was an attempt to fool them or maybe even cheat them outright. Gaining such a reputation will be detrimental to the member state’s ability to enter into negotiation alliances and may isolate it for some time, even if that word will never be used.

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That is why it cannot be stressed enough that a negotiation position may be able to withstand any counter arguments. This is especially the case when operating in technical or even scientific circumstances where facts and documentation count more than arguments, political power, influence, and negotiating skill. It can even be argued that a member state would do wise by mobilizing neutral scientific opinion to look for weak spots and put forward counter arguments instead of letting them be dug up by less friendly partners during the negotiations.

CONSISTENT, COHERENT, CREDIBLE There are three Cs to remember when mapping out a negotiation position: consistency, coherency, and credibility. Consistency means that a member state pursues the same objective from start to end of negotiations.8 The temptation may arise to exploit openings offered voluntarily or involuntarily by other member states, but in the long run, a consistent negotiation position, rejecting temporary or isolated gains, will reward the member state. It builds up trust among other member states and the institutions. It sounds good, even obvious, but can often be more difficult than most observers would think because domestically engineered pressure may arise to exploit openings. In such cases, the ability of a member state to build a domestic political and administrative system to coordinate and control negotiation positions will decide the issue. Those member states that have realized this and are in possession of a machinery that keeps a tight rein on negotiations, will be able to resist temptations, while those with a looser and sometimes even fragmented organization, will not. The same is the case for coherence. Member states should adopt the same attitude with regard to principles in all matters under negotiations. In the European Union a classic example is the case of the Luxembourg compromise on unanimity in cases of a vital interest. Those member states adhering to the view that the Luxembourg compromise shall be respected need to stick to that position even if another member state wants to invoke it in a matter where approval by qualified majority voting would be in their interest.9 Credibility follows from consistency and coherence. In the European Union, member states have grappled with these issues as reflected in the political and administrative organization of their participation in the European Union.10 Broadly speaking, the member states can be divided into three groups.

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The first is composed of those with a centralized and concentrated decision-making system where negotiation positions are hammered out and cleared at the appropriate political level. The key words are one string, unity in command, and one body authorized to issue instructions. This model produces the highest score when looking at consistency, coherence, and credibility. Most of these models have as their flywheel a senior officials committee under the presidency of either the Prime Minister’s Office or the Ministry of Foreign Affairs. On top of that, a committee of ministers, and in most cases, also a parliamentary committee, have a role to play, depending on domestic political traditions.11 As the role of the European Council has increased after its establishment in 1974,12 there has been a gradual, but clear and unequivocal slide towards a stronger role in domestic coordination for the Prime Minister and the Prime Minister’s Office. As the general guidelines for the evolution of the European Union, and larger specific cases, such as financial reforms, have been put on the agenda of the summits/European Council, the Prime Ministers have found it unavoidable to get a hand in the normal work of the European Union. Otherwise they risk surprises at the last minute, possibly in the form of having an untenable negotiation position landed at their desks shortly before a summit. All delegates, regardless of their position, or whether they come from the Ministry of Foreign Affairs or other ministries, have to negotiate in conformity with the instruction and can only change position or adapt after new instructions. Countries to adopt such a model were in the original European Union, for example, France with the SGCI13 as the senior officials committee. When the United Kingdom and Denmark joined in 1973, they adopted a model similar to the French one, broadly speaking. The second model is based on a decentralized system where each ministry issues instructions to representatives it has sent to the negotiations and does it without coordination with other ministries or agencies. This model finds it difficult to ensure consistency, coherence, and credibility as the lack of coordination means that the ministries do not know which instructions have been sent in sectors outside their own area of competence. Germany operated such a system for a considerable period. The third model is a mixture of the two first ones and is operated by most member states. As the European Union tends to be more incorporated into the domestic political system on the same footing as domestic and national legislation, the need for a special machinery to coordinate EU positions is less pressing than

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in the first decades when member states did not posses the same experience and skill to negotiate internationally as they do today. A factor often overlooked or neglected when shaping a national decisionmaking procedure to deal with the European Union is to mobilize other ministries than the three or four used to operating internationally. The more centralized a decision-making process is, the easier it is to ensure the three Cs, but at the cost of keeping the reins in the hands of the Ministry of Foreign Affairs, the Prime Minister’s Office, and maybe two or three other ministries. Officials outside the close circuit do not feel that they have really joined the integration, but are instead still operating under the tutelage of the Ministry of Foreign Affairs. In the long run it makes it more difficult to ensure an international minded civil administration, thus setting up barriers for how fast and how deep the integration can go. Over the last years member states have developed what is termed “Open Method of Coordination”,14 which is one of the new EU initiatives flowing from the Lisbon Programme. The basic idea is to help member states learn from each other’s administrative experience. This is done by jointly defining objectives, developing instruments to measure performance, benchmarking one another, and sharing of best practices. Participation is voluntary, no member states are forced to join. The activities take place outside the framework of EU institutions and EU decision making. The Commission is a partner, but not equipped with its competences as an EU institution; the other institutions such as the European Parliament and the European Court of Justice do not take part, albeit they can be associated in one way or other. It covers areas such as employment, social welfare, education, youth, culture, and health, where competence to act is still with the member states and does not fall under the heading of supranationality. It is intergovernmental cooperation voluntarily undertaken by member states. By getting together to improve performance, help and assist one another to develop “best practices”, member states open the door to how they run their own domestic and national administration. In the long run the impact may be almost seminal. It can only be initiated because of trust among member states and their politicians and civil servants. The lasting effect will be to multiply and deepen trust.15

KEEP OBJECTIVES SEPARATE FROM INSTRUMENTS To ensure consistency, coherence, and credibility, any member state should write two fundamental points down before the negotiating starts:

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What is the objective, what do we want to obtain, what concessions can we offer; and where can we not meet expected demands from other member states. What are the instruments, the negotiating tools we are going to put forward to achieve the objectives; are there other instruments which may do the same; and will any of the instruments be a problem for other member states?

This will create clarity of mind among the decision makers and the negotiators. It is a common mistake during a long negotiation, especially if it is complicated, and even more so if changes of government and/or ministers take place, to confuse objectives and instruments/means.

PREPARE FOR A COMPROMISE It goes without saying that a successful negotiation eventually produces a compromise with the inevitable consequence that all negotiating partners may offer concessions and swallow a solution, however inedible it may look compared with initial demands. One of the most difficult operations is to indicate, in a subtle way, where a member state is willing to compromise. If this is not handled with delicacy and skill, keeping timing and substance in mind, other member states may say, “thank you very much”, leaving it naked when the negotiation approaches the final stages. This is where a trinity of tactics on factors comes into the picture: prioritize objectives, keeping them separate from instruments; form alliances; the role of the presidency. A member state should know exactly how important each of its demands is and for each one of them, make fallback positions. Such a list of priorities should be accompanied by arguments explaining why these positions are being adopted. A priority list with fallback positions forces the member state to think through its own stance, especially when accompanied by arguments. A supplementary list to help the negotiators is an indicative list, suggesting when concessions might be tabled in view of similar steps by other member states. In the negotiation vocabulary of the European Union, this is often called “the dossier”, meaning a complete handbook for the negotiator or negotiating team, sketching the room for manoeuvre. When playing these cards, the negotiating alliance comes into the picture. Any member state will need the advice of others and together, pool their knowledge and evaluation of the negotiation. The alliance could decide that the time has come to move the negotiation forward and make concessions, at

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the same time shifting the potential burden, responsibility, and eventual blame for a possible stalemate, to other member states. A member state acting in isolation can rarely push the negotiation, but several member states doing so in tacit understanding may have this kind of power. The role of the presidency is to sense that such a movement is underway; indeed a good presidency may actually instigate scheming with a group of member states to use them as the spearhead when the crucial moment comes. It is a bit like a military battle when Napoleon threw the imperial guard into battle by telling soldiers that “le moment suprême est venu”.16

PREPARE PUBLIC OPINION The test of the decision-making machinery built at home will often come when a compromise has been accepted and it has to be explained to various political parties, pressure groups, and civil society engaged in mapping out the original position. They will all know that their own preferred position is not achievable, as is also the case when mapping out a political compromise among various parties on the domestic scene. But a new phenomenon has arrived on the scene. Trust in their own negotiators! To maintain credibility among the groups on the domestic scene, negotiators need to have a mechanism for dissemination of information to relate how negotiations go in the European Union. It is important, yes indispensable, that the negotiators know how to shift the pressure from themselves to their domestic backing groups. The political problem is that domestic pressure groups do not take part in the negotiations. They do not feel the rising pressure, the constant efforts of other member states and the presidency to force through changes in positions, so their instinct may be just to say thank you to concessions offered by other partners and resist being flexible themselves. The work of several EU institutions helps in making the backing groups aware of the situation. The European Parliament, for instance, has various committees where members of domestic pressure groups and/or political parties may be represented, so they have an opportunity to compare information from different sources. But the member state must itself organize its domestic system in a way that involves the backing groups in the work of the integration so that they do not perceive it as something far away and not really important for them. Committees, study tours, seminars, etc. can be brought into play to do this.

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The crucial point — and the difficult one — is that the backing groups must be privy to inside information. This is where trust, credibility, and confidence between the negotiators and the backing groups decide the issues. The backing group must be informed before a compromise is accepted, yes, before a member state moves to make a compromise feasible — with the risk that a leak will remove all cards from the hand of the negotiator. The backing groups must be informed of the negotiator’s evaluation of the position and room for manoeuvre of other member states, but if this information is leaked, the climate in the negotiation itself will sour, and the negotiators, judged to be unreliable, will be cut off from vital inside information from other partners.

THE ROLE OF BILATERAL DIPLOMACY Traditional Diplomacy Most of the relationships between member states are lifted out of the bilateral framework to be dealt with in a multilateral context. The traditional role of bilateral diplomacy cannot be maintained in these new circumstances. One of the reasons, in particular for smaller member states, to join the integration, was precisely to replace bilateral negotiations with multilateral diplomacy and avoid facing the larger countries alone, without potential allies and without rules applicable to all — small and large member states. This has triggered off a substantial debate among the members of the European Union about the role of the foreign services — once the pride of the chancelleries in European capitals. The argument has sometimes been heard that being a member of an economic integration reduces the need for a foreign service as all-important items are moved from bilateral diplomacy to multilateral negotiations. There is a conceptual flaw in this argument. Subjects under the competence of the foreign services have moved from the national capital to the headquarters of the integration — in the European case, Brussels — but only to a fairly limited extent. What has moved are primarily items under the competences of the various ministries dealing with economic and industrial policies. These policies were only a minor, and very minor part at that, of the work of the foreign ministries. The fact that a large part of the domestic policy making has moved does not necessarily signify that the same applies to foreign and security policy. The role of diplomacy shifts and a foreign service operating as in the old days will soon realize that it has made itself more or less irrelevant or redundant. The Foreign Service has become less operative, moving its focal

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point instead to information gathering about domestic policy, economic and industrial policies, and a role in building trust and confidence. It falls into three major parts: •

•

•

Before the actual negotiations each member state needs to know broadly where its partners stand. If not, it will be difficult to map out a negotiating strategy. This information is normally gathered by the embassies in member states, making contact with the relevant authorities to be briefed on the negotiating stance and the reasons behind it. At first glance, this may seem odd. Why should a negotiating partner reveal some of its cards before the negotiation? The explanation is that negotiations among member states forming economic integration aims at leading to a successful result; it is a plus sum game and not a question of outmanoeuvring others. If everybody keeps the cards close to the chest, no result would be forthcoming. What is more important is to get a background brief on what lies behind a member state’s negotiating position and supplement this with an evaluation of how much room for manoeuvre it actually has. This is difficult and requires knowledge about member states’ domestic politics, current issues, public opinion, and the position taken by organizations and pressure groups. The whole canvas, so to speak, explaining the negotiating position, must be available, and this is the job for the embassies, that replaces many of their traditional tasks. On top of that, a deeper understanding of each member state’s fundamental stance towards the integration must be available to fit the actual negotiating stance into a pattern. This is especially the case when member states embark on amendments of the Treaties. It is indispensable to know not only the current positions of others, but its background. Only embassies with a staff that has lived in a country for some time can produce this kind of broad canvas and set it into the present context and provide interpretations.

The relationship between foreign ministries and other ministries has changed completely. There is still rivalry, as there will always be in a bureaucracy. The other ministries have become clients, so to speak, of the foreign ministries by needing information about other member states, which they can get themselves only up to a point. The price the foreign ministries have had to pay is to enlarge the diplomatic staff abroad with officials, not exclusively from the diplomatic service, but also from other ministries posted to look after the interests of those ministries.

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One of the reasons the relevant ministerial departments cannot gather 100 per cent of the information is that the functioning of the EU decisionmaking machinery does not correspond to the domestic one. For example, it is more difficult for a relevant department to establish links to the European Parliament than for the Foreign Service which already has such links. The matter may be referred to decision at the very top — the European Council — and the relevant department may not have the same access to the Prime Minister’s Office as the ambassador does. But most important of all, a foreign service and embassies must take part in the mutual building of trust and confidence among member states. The embassies must act as moderators or interpreters, explaining their home country’s position to the authorities and the public in the host country, and assume the role of the friendly interpreter for the host country when conveying the host country’s negotiating position. By acting as a buffer in some cases, but a facilitator and interpreter always, bilateral diplomacy, even in the context of multilateral negotiations, can enter the stage as one of several players in the crucial task of building trust and confidence. The embassies in member states become less and less an advocate for their home countries, and more and more one of the many spokes in the wheels driving the integration forward. It is difficult to substantiate or prove, but it has been seen in the European context that ambassadors and embassies have been used as channels for smoothing out difficulties not suitable for the negotiating table where all member states are present.17

Common Embassies In non-member states a strong coordination between embassies of member states have developed to the extent that plans have been floated to switch from each member state having its own embassy to having common EU embassies.18 This idea certainly has a good deal to support it, not the least, the gradual building up of an EU common foreign and security policy. But equally it has some important drawbacks. The argument for common embassies is bound up in how solid a common foreign and security policy actually is. It seems difficult to see how common embassies can function as long as member states try to agree, but if they are not successful, each member state is free to adopt its own foreign and security policy stance. The commercial side of an embassy’s life is not very suitable for common measures as member states often compete with each other with regard to

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trade and investment. The same seems to be increasingly the case for attracting technology and students from overseas countries. At the present stage of the integration, the scope for common embassies looks likely to be limited and concentrated on practical measures, such as assistance to citizens from other member states and the pooling of resources for reports to the Commission or the High Representative in areas where member states broadly share the same views. This is useful and common reports about such items are probably the first step towards a more elaborate system of the common collection of information. The conclusion, however, falls in line with what is the case for other aspects of the European Union: the degree of integration among member states decides the issues. And as long as the Common Foreign and Security Policy is based on unanimity, allowing each member state to adopt its own position if no agreement is reached, even the most ardent supporter of the European Union must admit that the scope for common embassies narrows down to concrete and specific issues.19

THE PRESIDENCY MUST EARN TRUST; HOW? The presidency will be privy to much inside information provided by member states, otherwise it cannot perform the role as mediator or “honest broker”. How the presidency handles this information — which in some cases, if it gets a wider circulation may cause severe domestic problems for some member states and/or poison the climate among member states — can be decisive for trust and confidence. An adroit presidency builds up trust in itself by its performance, and by doing so, leads by example. All member states will know that the information given to the presidency will be used — if not, there is no reason to inform the presidency. On the basis of the inside information, the president maps out a course towards a compromise. The member states must sense and feel that the presidency knows what it is doing and acts on solid information even if its precise context is not revealed. It is the art of hints and tacit guidance. All presidencies occupy the chair for a limited period as etiquette dictates rotation. The main challenge is to get off to a good start. If a presidency achieves results in the first phase instead of running aground, it has already scored the first point in convincing member states that it knows how to handle the issue and use its powers and information. Two simple rules applied correctly open the door to a successful Presidency:

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Firstly, before the presidency starts, analyse the situation and select a few easy cases and push for quick results. Many presidencies commit the mistake of starting with heavy issues, requiring a long time to mature before agreement can be reached. Such stalemates where no results are visible and negotiations go on almost indefinitely, undermine confidence in the presidency. Regardless of how unimportant, and at first glance, unimpressive easy results can be, the confidence gained by scoring points in the first round is vital for the presidency itself and among member states. Secondly, the role of the presidency is to distil the common ground from the negotiating positions. Often the Presidency will devote all its efforts to disclosing points of disagreement, as these are the items needing its attention — where the negotiation has to take place and compromises to be hammered out. But if the presidency starts by doing so, it may traumatize the climate and spread the conviction that a compromise seems difficult to obtain, thus hardening member states’ positions. If, on the other hand, the presidency starts out by mapping down where common positions are found — even if they are very visible — member states feel encouraged to go on and feel that the presidency knows its business. The first paper put on the table by the presidency should sketch points of agreement to serve as the basis for negotiation. These points should be deepened and enhanced. Only at a later stage should the presidency list areas of disagreement. These two basic rules are unconditional for a good presidency and neglecting them leads a presidency to enjoy little or no confidence, and thus get no inside information without which no solutions can be found. In the European Union the presidency needs to include one other rule. Very little, if anything at all, can be achieved without trust between the presidency and the Commission. The Commission is a negotiating partner pursuing its own course and in no way a neutral partner. But the Commission has tabled the first draft of the legislative act under consideration and during its preparatory work collected a large amount of knowledge about the position of member states and the reasons explaining these positions. If the presidency is able to establish some kind of tandem with the Commission without being ensnared by the Commission’s ambitions, the chances of success will improve significantly. The Commission always resists, and rightly so, the role of Secretariat, as it is a full-scale institution in its own right. The Commission, however, has the information, the knowledge, and does not side with any member states, so it is often asked to be helpful in providing supplementary information and/or produce calculations etc.,

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which if they are done in collaboration with the presidency, may push the negotiations. A presidency and the Commission working in tandem convinces the other member states of a professional presidency, thus further enhancing trust and confidence around the table.

Notes 1. This has nothing to do with religion as such, but societal values, which may flow from religion without necessarily being embedded in religion. 2. Two famous quotes illustrate in the eyes of the author this phenomenon. Warren Buffett’s quote “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” See http:// en.wikiquote.org/wiki/Warren_Buffett. In May 1941 the British were defeated at Crete by the Germans and had to evacuate the island. In the fleet headquarters at Alexandria, the staff was against evacuation as large losses of warships could be expected. The commanding officer, Admiral Andrew Cunningham, later First Sea Lord, brushed this off by saying “It takes three years to build a ship, it takes three centuries to build a tradition.” See http://www.answers.com/topic/militaryhistory-of-new-zealand. 3. The influence of Luxembourg on the European integration may be the best illustration of this. 4. Conclusions available at http://aei.pitt.edu/1448/ 5. Report of the Ad Hoc Committee for Institutional Affairs to the European Council, 29–30 March 1985 (Dooge Report). Available at http://aei.pitt.edu/ 997/01/Dooge_final_report.pdf. 6. Reports from the ad hoc Committee on “A People’s Europe” (Andonnino Report). Available at http://aei.pitt.edu/992/01/andonnino_report_peoples_ europe.pdf. 7. A thorough analysis of the banana case also in this perspective can be found in an article by Olivier Cadot & Douglas Webber, “Banana Splits: Policy Process, Particularistic Interests, Political Capture, and Money in Transatlantic Trade Politics”, Business and Politics, Vol. 4, No. 1 (2002). See also Chapter III, 10 on the Banana Case and the ACP countries. 8. This is not the same as sticking to the same negotiating position. Ultimately a compromise has to be found, which for all member states necessitates flexibility in its stance. 9. Consistency and coherence on matters of principle can thus overrule tangible and specific economic and/or industrial interests. The explanation is that a member state may be trustworthy with regard to principles to count on the support of like-minded countries and not act like a weathercock swinging according to its isolated interests.

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10. During the years many studies have been made to compare the domestic political and administrative systems. I published an article in 1983 about the Danish model, J. Ørstrom Møller, “Danish EC Decision Making”, in Journal of Common Market Studies, Vol. XXI, No. 3, March 1983. A comparatively new study is Hussein Kassim, Guy Peters, and Vincent Wright, eds., “The National Coordination of EU Policy”, 2000, available at (subscription) http://www. oxfordscholarship.com/oso/public/content/politicalscience/0198296649/ toc.html. 11. The role of the Parliament has traditionally been stronger in countries with traditions for minority governments. The government needed to institutionalize a screening system to ensure that a majority in parliament afterwards transposes an EU legal act into domestic legislation. 12. Decision at the Summit meeting between the Heads of State and Government in Paris on 9–10 December 1974. Communiqué printed in Bulletin EC 12-74, available at http://aei.pitt.edu/1459/01/Paris_1974.pdf. 13. Sécretariat Général pour la Coordination Interministérielle, replaced in 2005 (http://www.sgci.gouv.fr/presentation/index.html) by the SGA (Sécretariat Général des Affaires Européennes). 14. http://europa.eu/scadplus/glossary/open_method_coordination_en.htm. 15. An example of how it works in the health sector can be found at http:// www.epha.org/IMG/pdf/EPHA_briefing_on_OMC_AJ_20050216final.pdf. 16. The supreme moment has arrived. 17. It has also been seen that his home country deliberately chose to torpedo any progress along the lines proposed, leaking information given to an ambassador in private. This was the case in February 1967 when President de Gaulle of France at a private dinner enumerated French conditions for British entry into the European Union. The ambassador (Christopher Soames) relayed the information to the British government, which leaked them. See for example, http://scpo.univ-paris1.fr/fichiers2/Lecture/20notes/20on/20UK/20and/ 20Europe.pdf. 18. See for example, Laura Rayner, “The EU Foreign Ministry and Union Embassies”, The Foreign Policy Centre, London, 2005, available at http://fpc.org.uk/fsblob/ 499.pdf. 19. The European Commission delegations are operating in areas where sovereignty has been pooled; for example, the Common Agricultural Policy and the Common External Trade Policy. But they do not assume the role of genuine embassies for the European Union.

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9 CONCLUSION

OVERVIEW Europe has been tremendously successful in its integration, when one bears in mind the obstacles from a war-torn and decrepit Europe, still in the mould of the old fashioned nation state, but which today has turned into the European Union, a supranational construction. In analysing the European integration, several key issues arise. The first one is the decisive choice between the supranational model and the intergovernmental model. By tradition international cooperation has followed the intergovernmental model, respecting the full sovereignty of participating member states and applying unanimity in decision making. Weak institutions, if any, form part of this model. The Europeans chose the supranational model and acquiesced with the pooling of sovereignty to exercise it in common. Strong institutions and international rule of the law are part of this model. It is difficult to escape the observation that the supranational model depends on a high degree of trust and mutual confidence among member states. It is also a projection of the fundamental characteristics of the political model in the nation state to the international level. Such a rules-based organization goes a long way towards emulating the national community founded on the rule of law. Some would add consensus and compromise to the characteristics. 466

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To shape such a kind of international organization, which in many ways breaks the traditional mould, not only trust, but also a feeling of sharing the same destiny, must be at hand. This has so far been the case for member states of the European Union, even with the enlargement from the original six to twenty-seven in 2007. Many nation states around the globe would find it difficult, and in some cases, beyond reality, to allow international institutions such powers, in particular, when recalling that rivals, competitors, even traditional enemies, may sit around the table. It is, however, encouraging to detect a growing interest in this model. Time will show whether some of its vital characteristics can be used outside the European geographical sphere. If so, nation states may be on their way to realizing how globalization changes the traditional pattern not only of economics, but also of politics. The second issue is the impact of economic globalization. The growing interdependence shows unequivocally that no nation state, not even the United States, can diverge substantially from the global economic development. The outstanding question is how to exercise political control over the global economy in the same way as national governments used it to exercise control over the domestic economy. One of the main schisms seen again and again is that economics operates globally, while the political steering mechanism is kept on a national level. This asymmetry is untenable in the longer run. Sooner or later political control has to be exercised internationally. The European model is one of the answers to how it can be done, but it also illustrates the political and administrative difficulties, and not the least, how sensitive the population is when confronted with the issue of where and by whom political control is exercised. Shifting political control from the national to the international level reveals a dichotomy between the elite, thinking and acting by logic and reason, and the majority of the population, being more susceptible to emotions and feelings. Experience tells us that it is not enough to have a full-fledged democratic model fulfilling all objective criteria if a large part of the population perceives it as the bureaucrat’s and not the people’s model. Perceptions may matter more than reality. The third issue is the imperative of pursuing economic interests internationally or globally and the wish of the people to maintain and shape their own daily culture. Very few, if any, nation states may be able to safeguard their economic interests without taking an active part in economic globalization. People accept this even if they grumble from time to time when some of the problems associated with economic internationalization (for example, financial

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crisis caused by capital movements or loss of jobs caused by outsourcing) surface, but, by and large, economic internationalization is not contested — not yet anyway. The rising inequality in the slipstream of the model may be its Achilles heel, and unless it is redressed so that a majority enjoys the fruits, the model may sail into stormy waters. This is not the same as accepting all kinds of rules and regulations said to be necessary to further economic internationalization. Experience shows that ordinary people have a fairly good instinct and know when this is the case and when it is not. Many rules and regulations in Europe have run into a stonewall because people felt that they affected their daily life without doing much, if anything, to bring along economic advantages. People may be willing to live with a fairly large degree of cultural — perceived as behavioural patterns — harmonization linked to the workplace. Much of daily life in workplaces all over the globe follows a congruous pattern, not the least because of multinational companies. Entertainment and leisure seem likewise to move towards a comparable, albeit not a similar pattern. Sport activities are often global, many countries have adopted their own version of American Idol, fast food is spreading, seemingly impregnable fortresses defending tea in China and Japan have been attacked by coffee chains such as Starbucks — the list is endless. Where people seem to draw the line is for daily culture, perceived as what is good and bad, whom to marry, how to raise children, relations with other members of the family, and the attitude we all show towards other human beings in the course of the day. Most people do not want economic globalization and/or participation in economic internationalization to interfere in their daily life and their daily culture, often based on centuries of behavioural patterns, again forged by religion, ethnicity, nationality, and language particularities. If or when economic internationalization collides with the ingrained preference for cultural decentralization, it is more often than not, economic internationalization that runs into problems. The fourth issue is how to make majority groups and minorities coexist inside a nation state. In a European context the integration has helped to solve problems or maybe rather, remove potential clashes between the majority and minority about cultural behaviour. One of the fascinating evolutions to watch in Europe over the second half of the twentieth century was the revival of well-known European minorities linked to regions, provinces, or states inside European nation states and, in a few cases, across borders. After World War II, the European nation states were weakened, and in some of them, the political system had lost legitimacy in the eyes of the population. The risk of clashes between resurgent minorities

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who did not see why they should respect the majority, who has led the nation state so badly, might easily have materialized. It did not. One of the reasons was the European integration which further weakened the nation state, but transferred power to the European Union, which took a different and much more relaxed attitude towards the wishes of the national minorities. It is not certain that the same would be the case in other parts of the world as circumstances are different, but it reveals how integration can be used or rather takes upon itself, to solve potential problems between majority groups and minorities. The European integration is unique. The fundamental model may not work outside the special European context. The reason for analyzing the European model as an answer to the challenges brought forward by globalization is to distil some lessons universally useful if, or when, other groups of nation states embark on their own endeavours to integrate. Economic globalization was a non-word when the Europeans embarked on the road towards integration in the early 1950s. The fascinating observation is, however, that economic integration has developed into what the historian Arnold Toynbee called “Response to Challenge”. The basic philosophy behind this concept is that civilizations develop by responding to challenges threatening their survival. The “threat” or rather challenge, in today’s world is the growing globalization that removes political control from national politicians without really replacing it with a comparable system at an international level. History is capricious and lessons are difficult to draw, but the grounds for saying that economic reality and political control thereof must be at the same level seem fairly solid. In the initial phases, the purpose of economic integration as formulated by the Europeans was to open the door to economic benefits through larger markets, specialization, etc., in conformity with traditional economic philosophy. This has been a success. Not the least because it has been possible to achieve integration through market forces. The free market steers economic activities towards the economic areas with the most beneficial rules, depriving other areas of growth, employment, and money. Economic integration has been used as a vehicle to allow this market-driven uniformization of rules and regulations as has clearly been seen in Europe over the last decade. Gradually, but surely, economic integration is being mobilized as an answer to the overwhelming force of economic globalization, offering to exercise political control at the same level as trade, capital, and investment, that is, internationally.

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It thus moves into the position of a response to challenge, being the instrument at hand to block strong economic forces operating from outside and without political control, thereby jeopardizing the stability of nation states, domestic societies, and international communities. The challenge for politicians is to get the message across that integration is not synonymous with surrendering political control to international institutions, but is regaining control lost in the transformation to economic globalization. The question looks more or less like this: Either political control is exercised at the international level as the other side of the coin to economic globalization. Or, it is preserved at the national level and proving ineffective, as globalization has catapulted economic events to the international level. Integration has become inextricably linked to globalization. It is no longer a simple question of opening markets and banning discrimination based on nationality. It has become the model — so far the only one — to prevent economic forces from running amok in a self-destructive game of profit-seeking that disregards potential negative impacts on domestic and international economies. The main reason for analysing the European integration might some years ago have been to see whether this model could be used to promote economic integration among other countries. This is, of course, still the case, but another, and perhaps more important and universal, issue — to create an international political steering mechanism — is taking the lead. Now the purpose has shifted to seeing whether this model offers guidance and assistance in endeavours to build international and global political steering mechanisms. With this background I have chosen to synthesize the lessons, experiences, and a few predictions for the European integration. They may be useful as a guide to seeing and understanding integration as an instrument to safeguarding interests amidst the turmoil globalization sometimes creates for nation states and their citizens. I would like to call it a pocket book with lessons from integration, which explains why it is a kind of staccato presentation instead of longer prose.

SUCCESS CRITERIA When mapping out the objectives of integration and later, when implementing it and running the daily business, member states and the institutions should always keep in mind, and focus on, what the integration can and should do:

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For each individual member state, open the door to solutions beyond reach without the integration, or offer something better. For the group of nation states coming together in the integration, improve their situation. For other parts of the world, be in the international concert as a player in global politics and economics which point to improved international relations and/or a better and more stable global economy. Step in as one of the partners in shouldering responsibility for global politics and economics to support economic globalization. The answer to these three rather simple, but vital questions, constitute a litmus test of the usefulness of the integration. If good answers are not forthcoming without much trouble, the integration does not really deliver and its raison d’être may be questioned. In short, to be successful and classified as such, the integration must provide added value for each individual member state, the group of countries forming the integration, and outside countries. If that is not the case, question marks will pop up as to whether the integration was the right thing to do.

STRATEGIC CHOICES The book is an attempt to analyse and explain how and why the European integration has done that since its inception in the early 1950s. To illustrate the point further we may look at the major challenges Europe faced at the beginning of this century as it looked to the European Union as the chief initiator of solutions. Three strategic choices remain as yet unsolved or unanswered for the European integration: First, which societal model to choose from at least three options: The Anglo-American one mainly pursued by Britain successfully from the mid 1980s until today? The continental one pursued by Germany and France successfully until the mid-1990s, but showing an almost dramatical weakness over the succeeding ten years under the onslaught of a more competitive edition of globalization? The Scandinavian model applied by the Scandinavian countries with remarkable results, but with doubts over its applicability in other European countries? This question is on the agenda because the European integration, to the surprise of some and relief of others, has not produced a convergence of the societal models and has left them largely as they looked several decades ago.

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Second, Yes or No to a multicultural European society being put on the political agenda by the emergence in Europe of ethnic and religious minorities. For the last decade the Europeans have seen immigration and the role of immigrants inside member states grow in importance. It has been difficult for national politicians to grasp this and even more difficult to find answers acceptable to the large majority of the population. It is even more difficult for the European political institutions and the European politicians to mastermind this switch of political priorities among the population. Third, Europe’s place in a world, without well-known enemies and allies in the form of nation states and/or political systems, becomes blurred and highlights the lack of an overall strategic vision. Europe has not been able to make up its mind whether it likes a unipolar world with itself as a sidecar to the United States, or if it prefers a multipolar world, and if so, what its role should be. The present stalemate of the European integration is not so much a question mark over what has been achieved and whether it was wise or right to do it, but reflects the arrival of the European Union at a stage where vital strategic decisions about its identity can no longer be skirted. The European integration tells how far integration can go — at least with surroundings like those in Europe — before fundamental choices emerge. One of the most contested issues is whether the integration is sponsored and kept together by economic factors or political considerations. The answer to the question may be ambiguous and various politicians and academics may come to different conclusions. Some guidance may be found in key characteristics of what has driven the integration from the early 1950s until now. Politics, and in some cases, grand strategy drives the overall design of the integration. The European Union started as a Franco-German reconciliation, was enlarged with Britain to broaden the membership and avoid too strong a German influence, welcomed Greece, Spain, and Portugal to cement these countries’ newborn democracies, and responded willingly to the tasks of helping Central and Eastern Europe in their transition from authoritarian rule and communist/socialist economies to democracies and market economies. The debate about the relationship with the United States reflects a deep and underlying schism among the Europeans about — not whether basically the United States and the European Union share the same fundamental values, and the Atlantic Alliance must persist — but what kind of alliance the future calls for. The hot issue of the membership of Turkey is a fundamental political choice about Europe’s relations with the Muslim world and the sensitive issue of religion and its role, if any, in the European integration.

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But while politics may be the driver for many of the grand designs, economics is what keeps the integration together. Being in, no member state can seriously consider leaving without looking dire economic consequences in the face. The economic advantages are so overwhelming that cutting links would be costly, so costly that even in the few cases where such options have been on the table, member states have refrained from doing so. France under President de Gaulle in the 1960s acquiesced with a compromise about all vital decisions to be taken be by unanimity. It was not the other member states that came to the conclusion — after six months of French boycott — that the European Union needed to get going again. It was France. Britain, under Prime Minister Thatcher in the early 1980s, decided after long and sometimes acrimonious negotiations that the time had come to settle for a compromise concerning Britain’s net contribution to the EU budget. Politics and economics play their respective roles in forming and keeping together the European integration. It is likely that this pattern will repeat itself in the integration process among other nation states around the globe.

KEY QUESTIONS Seen from the crow’s nest of the ship “European Integration”, the following key sentences commend themselves as guidance for countries and groups of countries contemplating embarking on the difficult cruise towards integration: •

A strong political will among an overwhelming part of the political elite, classifying the integration as indispensable and ready to campaign for it. The key observation is that the politicians understand that in today’s globalized world, they get more power, competence, and control by pooling sovereignty to exercise it in common, instead of standing firm on the well-known definition of national sovereignty to be exercised by the nation state alone. Their leverage to look after the well-being of their citizens — for whom they as political leaders are responsible — will be increased by joining an integration process. This leverage is exercised by sharing economic, social, and political factors inside the integration area. Pooling of sovereignty likewise multiplies its power and influence vis-à-vis the outside world. The overall key word is that integration must be built on common interests and a sense of common destiny among nation states pursuing analogous political objectives. The key observation is that mutual trust and confidence are the indispensable condition for the integration process to work as envisaged.

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•

•

•

•

•

•

•

European Integration

Integration is not an objective in itself, but a means to achieve political goals, for example, peace, higher economic growth, or better human security, or stability in adjacent geographical areas. The key observation is to define how integration supports domestic political objectives. In the globalized world, political objectives can rarely be obtained by a nation state acting alone. It needs to be done together with other nation states sharing the same political system and economic model, thus pursuing the same kind of objectives. The vehicle for integration is, and has been, in Europe’s case until the last decade, the economic life at large. Trade, capital movements, investment, technology, logistics, all these factors have turned the nation state into too small an entity to reap the available benefits. Indeed a nation state fending for itself may see most or all of these benefits accrue to other and bigger nation states. The key observation is that the integration runs relatively smoothly inside the economic box, but encounters tougher opposition and questions when moving outside economics. Politicians need to realize this shift in priorities among the population of Europe. All member states must be involved in all aspects of the integration, even if their interest in some of the sectors is negligible. The common budget must be financed by contributions from all, and in principle, all member states should have access to funds from the budget. The key observation is that such an approach creates solidarity and a feeling of commonality — common destiny. The institutions constitute the foundation of the integration. Without well-functioning institutions any integration will be ephemeral and superficial. Institutionalization is a key word. The key observation is that the European experience suggests that the public does not easily embrace international institutions. Without public endorsement of the institutions as “our” institutions, growing disenchantment is likely. Institutionalization risks — and easily so judging from the European experience — painting a picture of red tape, bureaucracy, wasteful, and sloppy procedures. Even if this seems of minor importance, it plays a substantial role in framing public opinion. The key observation is to avoid such an image by — of course — not being bureaucratic, but maybe even more crucially, by taking measures to pre-empt this label becoming synonymous with the integration. There must be a hard core of member states determined to drive the integration, supported by suitable institutional machinery. The key observation is that a rule-based system is the only way ahead. The integration must justify itself in the eyes of the population by

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•

475

offering solutions to the problems they face in their daily lives. The integration must argue convincingly and prove that these problems can be better, and, in some cases, only, solved by integration. The key observation is that it must earn its place. The integration needs to find a role for itself in the international world. First it must define its own interests — not always easy when one bears in mind that the nation states bring their original and often conflicting interests along. Second, other players and mostly other nation states need to recognize the integration as a new player. The key observation is that this transformation of national interests into some kind of common policy vis-à-vis the outside world seems to be one of the most difficult ones. The international role depends on the strength of the integration. In sectors with pooled sovereignty to be exercised in common, the international presence is strong and robust. In other sectors it is more doubtful, especially where no agreement among member states opens the door for individual action by nation states. The key observation is that the international role is proportional to the degree of integration.

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BIBLIOGRAPHY

I. Overview The literature about the European Union and the European integration is overwhelming. The Net gives access to an enormous amount of information. It is recommended to start with “Gateway to the European Union”. This website gives current information and, with some effort almost, all information about the European Union, its institutions, and how it works can be unearthed. http://europa.eu/index_en.htm A summary of EU legislation is available at: http://europa.eu/scadplus/scad_en.htm An extremely good website for the researcher wishing to find works on the European Union is found at: http://www.sipa.columbia.edu/ece/Bibliography,/20European/20Integration.pdf And for the researcher interested in the history of the European Union, plus current issues, the following websites can be recommended: h t t p : / / w w w. e u - h i s t o r y. l e i d e n u n i v. n l / i n d e x . p h p 3 ? m = 7 & c = 1 3 & g a r b = 0.9261349057307 http://aei.pitt.edu/ An Encyclopedia of the European Union can be found at: http://www.euro-know.org/dictionary/a.html II. There are so many books available that it is almost an insurmountable task to select and recommend some, but these four are my favourites. Together they give a deep understanding and knowledge of Europe and the European Union: Davies, Norman. Europe, A History. Oxford: Oxford University Press, 1996. Middlemas, Keith. Orchestrating Europe. London: Fontana Press, 1995. Moravcsik, Andrew. The Choice for Europe. New York: Cornell University Press, 1998. 477

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Wallace, Helen and William. Policy Making in the European Union (4th edition). Oxford: Oxford University Press, 2000. III. For the reader interested in a larger plate for selection, I list the following books: Archer, Clive. “The European Union as an International Political Actor”. In European Union Enlargement, edited by Neill Nugent. London: PalgraveMacmillan, 2004. Beetham, David and Christopher Lord. Legitimacy and the European Union. London and New York: Longman, 1998. Beetham, David and Christopher Lord. “Legitimacy and the European Union”. In Political Theory and the European Union: Legitimacy Constitutional Choice and Citizenship, edited by Michael Nentwich and Albert Weale, pp. 15–33. Bellamy R. and D. Castiglione. “Legitimising the Euro-polity and its Regime: The Normative Turn in EU Studies”. In European Journal of Political Theory 2, no. 1 (2003): 7–34. Bini-Smaghi, Lorenzo, Tommaso Padoa-Schioppa and Fransesco Papadia. “The Transition to EMU in the Treaty of Maastricht”. In Essays in International Finance, no. 194 (November 1994). Princeton: Princeton University. Bretherton, Charlotte and John Vogler. The European Union as a Global Actor. London: Routledge, 1999. Christoffersen, Poul Skytte. Traktaten om den Europœiske Union. København: Juristog Økonomforbundets Forlag, Købehavan, 1992. Cox, Pat: “Filling the Democratic Gap”. In Integration in an Expanding European Union, edited by Weiler et al., pp. 381–92. Blackwell, 2003. Corbett, Richard, Francis Jacobs and Michael Shackleton. The European Parliament (Fifth edition), London: John Harper, 2002. Dahl, Robert. Democracy and Its Critics. New Haven and London: Yale University Press, 1989. Dyson, Kenneth and Kevin Featherstonw. The Road to Maastricht. New York: Oxford University Press, 1999. Fort, Bertrand and Douglas Webber. Regional Integration in East Asia and Europe. Convergence and Divergence? New York and London: Routledge, 2006. Ginsberg, Roy H. The European Union in International Politics: Baptism By Fire. Lanham, Boulder, New York and Oxford: Rowman and Littlefield, 2001. Gros, Daniel and Niels Thygesen. European Monetary Integration (2nd edition). New York: Addison Wesley Longman, 1998. Gulmann, Claus and Karsten Hagel-Sørensen. EU-ret, 3 udgave, København: Juristog Økonomforbundets Forlag, 1995. Habermas, Jürgen. Die postnationale Konstellation. Frankfurt: Suhrkamp, 1998, Hansen, Lene. “Sustaining Sovereignty. The Danish Approach to Europe”. In European Integration and National Identity: The Challenges of the Nordic States, edited by Lene Hansen and Ole Wæver. London and New York: Routledge, 2002. Pp. 50– 87. 37 s.

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Heribert, Dieter, Jean-Christophe Defraigne and Richard Higgott. “Rapport sur l’integration en Asie de l’Est: occasions presentes par une cooperation economique avancee obstacles previsibles”. In Notre Europe, edited by Dieter Heribert. 2006. Available (in French) at http://www.notre-europe.eu/uploads/tx_publication/ Etud47-fr.pdf. Hill, Christopher and Michael Smith, eds. International Relations and the European Union. Oxford: Oxford University Press, 2005. Hix, Simon. The Political System of the Europan Union (Second Edition). Palgrave, 2005. Hoffmeyer, Erik. The International Monetary System: An Essay in Interpretation. Amsterdam: North-Holland, 1992. Hoffmeyer, Erik. Den politiske historie om den økonomiske og monetœre union, Syddansk Universitetsforlag, 2005. Jakobsen, Uffe og Morten Kelstrup, eds. Demokrati og demokratisering — teorier og begreber. Copenhagen: Copenhagen Political Studies Press, 1999. Kelstrup, Morten. “Integration Theories, Competing Approaches and New Perspectives”. In Explaining European Integration, edited by Anders Wivel, pp. 15–55. Copenhagen: Political Studies Press, 1998. Kjær, Anne Mette. Governance (Key Concepts). Cambridge: Polity Press, 2004. Kohler-Koch Beate and Berthold Rittberger. “Review Article: The ‘Governance Turn’ in EU Studies”. Journal of Common Market Studies Vol. 44, Annual Review (2006): 27–49. Leonard, Dick. Guide to the European Union (9th edition). London: The Economist, 2005. Lord, Christopher. “Democracy and Democratization in the European Union”. In Governing the European Union, edited by Bromley, Simon, pp. 165–90. London: Sage, 2001. Lord, Christopher, and David Beetham. “Legitimizing the EU: Is there a ‘Postparliamentary Basis’ for its Legitimation?”. Journal of Common Market Studies Vol. 39/3 (2001): 443–62. Marshall, Matt. The Bank. The Birth of Europe’s Central Bank and the Rebirth of Europe’s Power. London: Random House, 1999. Manners, Ian. “Normative Power Europe: A Contradiction in Terms?” Journal of Common Market Studies 40, no. 2 (2002): 235–59. Marks, Gary, Liesbet Hooghe, and Kermit Blank. “European Integration from the 1980s: State-Centric v. Multi-level Governance”. Journal of Common Market Studies 34, no. 3 (1996): 341–73. Moravcsik, Andrew. “In Defence of the ‘Democratic Deficit’: Reassessing Legitimacy in the European Union”. Journal of Common Market Studies 40, no. 4 (2002): 603–24. Møller, Jørgen Ørstrøm. Member States and the Community Budget. København: Samfundsvidenskabeligt forlag, 1982. Møller, Jørgen Ørstrøm. The Future European Model, with Foreword by James A. Baker III. Westport: Greenwood Publishing Group, 1995.

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Møller, Jørgen Ørstrøm. The End of Internationalism or World Governance, with Foreword by Jacques Santer. Westport, Greenwood Publishing Group, 2000. Nugent, Neill, ed. European Union Enlargement, London: Palgrave-Macmillan, 2004. Nugent, Neill. “The EU and the 10-2 Enlargement Round: Opportunities and Challenges”. In European Union Enlargement, edited by Neill Nugent, pp. 1–21. London: Palgrave-Macmillan, 2004. Rosamond, Ben. Theories of European Integration. London: Macmillan Press, 2000. Thomsen, Jens. Det Europæiske Monetære Samarbejde. København: Handelshøjskolens Forlag, 1990. Unwin, Derek W. The Community of Europe, Longman, 1999. Weiler, Joseph H.H. “A Constitution for Europe? Some Hard Choices”. Journal of Common Market Studies 40, no. 4 (November 2002): 563–81. Weiler, J.H.H. “In Defence of the Status Quo: Europe’s Constitutional Sonderweg”. In European Constitutionalism Beyond the State, edited by Weiler and Wind, pp. 7–26, 2003. Weiler, J. H. H. and Marlene Wind, eds. European Constitutionalism Beyond the State. Cambridge: Cambridge University Press, 2003. Wiener, Antje and Thomas Diez, eds. European Integration Theory. Oxford: Oxford University Press, 2004.

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INDEX

A A-points discussion by Coreper, 76 A Secure Europe in a Better World, 319 AbiBac German-French high school certificate, 36 acceding countries accommodation of, 386 accession, 384 pre-accession strategy, 397 accession treaty, 386 Aceh peacekeeping in, 195 Achilles heel, 468 ACP countries, 186, 351 preferential treatment as development assistance, 186 Acquis Communautaire, 12, 91 administrative cost, 437 advocate generals, 63 Aeneas five-year programme, 201 Africa, 184 African Union (AU), 341 Afghanistan, 196 Agenda 2000, 400 Agis, 203 agri-environmental measures, 127 promotion of, 127 Agricultural Fund, 125 agricultural levies, 3, 122 agricultural products imports of, 11 agriculture support for, 285 Air France, 133

air pollution, 232 air transport, 228 Albanians conflict with Macedonian Slavs, 325 alcoholic beverages, 289 Alexandria, 464 Algeria, 187, 188, 363, 411 Allen, Mike, 373 alliances formation of, 457 negotiation of, 451–53 Alsace, 36 Altavilla, Carlo, 176 Althea, 325 Altmark case, 257 amendments Treaties, 118 American Cato Institute, 401 American taxpayers, xxx Amnesty International, 353 Amsterdam Treaty, 100 Andean Community, 340 Andonnino Report, 254 Andreotti, Guilio, 412 Anglo-Saxons, xxi Angola, 366 Ankara, 405 anti-Americanism, 9 anti-trust policy, 132–35 Antitrust Improvement Act, 132 antitrust legislation, 133 scope of, 134 appropriations for commitments, 283 obligatory, 283 for payments, 283 approximation of national provisions, 307 481

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482

Index

Arab world, xxiv Arcilor, 296, 313 Arctic Agenda, 362 Argentina, 340 Armenia, 411 Arnalric, Frank, 380 ARTE bilingual French-German TV channel, 36 Artemis peacekeeping mission, 325 ASEAN, 337 ASEAN Regional Forum (ARF), 338 ASEAN-EU Ministerial meeting (AEMM), 337 Asia cost effective producers of, 9 potential adversary, 9 role of nation-states as defender of minorities, 43 Asia Europe Meeting (ASEM), 337 Asia-Europe Foundation (ASEF), 337 Assembly direct elections, 59 assessment base value added tax, 288 association council functions of, 184 Association of European Chambers of Commerce and Industry (EUROCHAMBRE), 297 asylum, 199 asylum policies, 198 audio-visual culture, xxiv, 15 Australia, 154, 349, 352 Austria, 383 entrance into EU, 100 autarchy jump from, xxvi autonomy drive for, xxv Aventis, 429 Azerbaijan, 411

11 Euro Integration Index

482

B Baden-Wurttemberg, 36 balance of payments deficit on current account, 17 pain of adjustment, burden of, 140 Baldwin, 178 Balkans Stabilization and Association Process, 407 Balladur Pact, 413 Baltic Sea Region Energy Cooperation (Bastec), 362 banana case, 186 banana regime, 450 bandwidth glut, 240 Bangladesh, 348, 349 Barcelona declaration, 189 Barcelona Objectives, 206 Barcelona process, 188, 190 Barre Plan, 138 French economic planning, 138 medium-term economic targets, 138 short-term credit among central banks, 138 Barosso, José Manuel, 61, 364 speech at Georgetown University, 379 Base Convention on Hazardous Wastes, 364 basic culture, xxiv basic rights, 87–89 battle groups establishment of, 324 Bavaria, 42 Bayer, 134 Becht, Marco, 314 beggar-my-neighbour policy, 136 Belarus, 411 Belgium coalition government, 21 Bendesbank, 148 Benelux countries views of on economic and monetary union, 148

4/8/08, 9:29 AM

Index

483

Benin, 186 Berger, Christian, 314 best practices, 456 Bhagwati, Jagdish, 243 Bicchi, Federica, 252 BiE Index of Corporate Engagement, 233 bilateral agreements mobilization, 359 bilateral diplomacy role of, 459–62 traditional, 459 bilateral relations transformation of, 20 biodiversity loss, 333 Biological and Toxic Weapons Convention (BTWC), 195 biotech funding from EU, 214 biotechnology, 214 Birmingham meeting of European Council, 97 Bjovatn, Kjetil, 441 Blair, Tony, 73, 74 BNL acquisition by BNP, 442 BNP acquisition of BNL, 442 Boegner, Jean Marc, 108 Boliden AB, 134 Bolkestein directive, 269 Bolkestein, Frits, 269 Bologna Process, 206 border control integration into supranational part of Treaties, 198 Bosnia, 196 Bosnia-Herzegovina EU takeover from NATO mission in, 325 Brandt, Willy, 35 Braun, Matlas, 180 Brazil, 340

11 Euro Integration Index

483

Bremen, 146 Bretton Woods system, xxxi, 137 Britain Germany as potential ally, 387 heart of Europe, as, 388 special relationship with U.S., 385 British sacrifice of rebate, 26 British Airways, 133 British budget rebate, 73 British Civil Service, 437 British dissatisfaction, 3 EU budget, 95 broadcasts EU legislative acts, 98 Brussels, 15 Brussels Declaration, 202 BTC pipeline, 362 budget perspective, 283–87 budget treaties, 63 Bulgaria, 100, 402 Bundesbank, 157 Bundesbank Gesetz, 150 bureaucracy, 437–39 business cycle, 137, 157, 176 business taxation code of conduct for, 292 Buttiglione, Russo, 61 C cabotage, 226, 227 Cadot, Olivier, 464 capital movements freedom for, 270–73 Treaty of Maastricht, 271 Cargolux, 133 Caribbean, 185 Cameron, Fraser, 411 Cameroon, 185, 351 Campa, Jose Manuel, 442 Canada, 345–46 support for International Criminal Court, 345

4/8/08, 9:29 AM

484

Index

Capalleti, M., 314 capital gains taxation of, 292 Cartagena Biosafety Protocol, 364 Cassis de Dijon case, 129 Catholic Church, 103 Catolonia, 42 Caucasus region, 369 Central America, 340 Central Asia, 196 Central Bank credit lines among, 147 independent, 150 right to issue money, 181 Central Europe, xxv, xxvi fifth enlargement, in, 392–402 impact of membership, 408 objective for joining, 397 political consideration for participation, 392 relations with EU, 397 road towards membership, 396–99 Centre for European Policy Studies, 229 CEPOL, 203 Chamberlain, Neville, 371 Chernobyl, 11 Chief Legal Adviser, 400 China, 341–44 embargo on sales of arms to, 334 integration into global economy, 152 Kyoto Protocol, 375 Chinese Yuan, 183 Chirac, Jacques, 246, 401 Christians, xxiv Christoffersen, Poul Skytte, 310 Churchill, Winston, 113 cigarettes imports of, 12 CIS, 347 citizenship, 204–206 civic society environmental issues, 232

11 Euro Integration Index

484

civil law, 198 civil servants, 69 Clash of Civilizations and the Remaking of World Order, The, xxiv Clayton Act, 132 climate change, 232 approach towards, 222 CNOOC purchase of Unocal, prevention of, 429 coal and steel industry, 280 Coalition for Fair Fisheries Arrangements (CFFA), 380 Cockfield, Lord, 412 Code of Conduct for Responsible Fisheries, 366 coherency, 454 Cohesion Fund, 127, 127–28 Cold War, xxx end of, 197, 331 collaborative projects, 215 College of Europe, 219 Cologne European Council meeting, 151 Combined Joint Task Force (CJTF), 326 Comenius, 220 Commission “An Energy Policy for Europe”, 256 financial ceiling, proposal for, 285 important portfolios, 452 initiator, as, 421 mid-term review of White Paper on European Transport Policy, 228 see also European Commission Commission officials number of, 437 Committee of the Permanent Representatives (Coreper), 69, 75–77 division of issues to be discussed, 76 EU’s main screening body, 76 semi-political role, 76

4/8/08, 9:29 AM

Index

485

Committee of the Regions, 67 Committee on Civil Liberties Justice and Home Affairs, 107 Common Agricultural Policy (CAP), 2, 77, 78, 95, 107, 114, 121, 138, 276, 277, 278, 357, 367, 368, 386, 434 criticism of, 122 disadvantages in dismantling of, 123 European Unions funds for, 212 fixed exchange rates, 143 lessons drawn, 123 mechanics of, 279 principle of guaranteed price, 122 view of British, 126 common armed forces, 107 Common Consolidated Tax Base (CCTB), 428 Common Defence, 99 common energy policy, 223 common environmental policy, 234 Common European Asylum System, 200 Common External Trade Policy, 77, 91, 434 common fisheries, 234–38 International Convention of the Law of the Sea, 235 total allowed catch, 236 see also Common Fisheries Policy Common Fisheries Policy adoption, 234 alternative to, 238 problems, 235 revised, 237 Common Foreign and Security Policy (CFSP), 74, 79, 190–97, 318, 352, 359, 363, 367, 369, 434 beginning, 190, 190–93, 191 evaluation of, 196–97 flagship, 195 objectives, 193

11 Euro Integration Index

485

pillar two of EU, 50 Treaty of Maastricht, 193–96 common history, 445 Common Market, 120 interlinking of national economies, 137 launching of, 121 problems of setting up, 78 transitional period, 78 common policies first batch, 120–24 common positions, 195 Common Transport Policy, 225 common values, 445 Commonwealth of Australia, 154 Communication about taxation of companies, 293 Communism, 418 Community agency legal personality, 68 community legislation total size, 437 Community of Technology, 214 community patent, 209 Comoros, 351 companies communication about taxation of, 293 direct taxation of, 292–93 parent, see parent companies taxation of, 287, 292–93 company law, 295–99 creditors, 295 harmonization of, 131, 296 modernization of, 297 shareholders, 295 shareholders’ rights, 297 competences blurring of, 31 distribution of, 30 competitiveness financial framework, share of budget for, 286 improving, 206–13

4/8/08, 9:29 AM

486

Index

competition prohibition on restrictions to, 133 compromise preparation for, 457–58 Conclusions meeting of the European Council, 107 Concordia mission, 325 concours definition of, 55 confederation moves towards, 384 Conference Board, 173 conservation over-fishing, 235 total allowed catch (TAC), 236 consistency, 454 Constitution Articles 1 to 5, 102 impact of rejection of, 420 incorporation of UN Charter, 87, 88 proposals, 74 protection of minorities, 82 consular service, 204 consultative bodies, 67–68 Committee of the Regions, 67 Economic and Social Committee, 67 consumer prices rise in, 157 consumer protection groups, 30 Convention for Protection of Human Rights and Fundamental Freedom, 109 Convention on Long-range Transboundary Air Pollution, 364 Cooperation Agreement Bangladesh, with, 348 Pakistan, with, 348 coordination and support actions, 215 Copenhagen, 146 Copenhagen criteria, 398 Coreper (Committee of the Permanent Representatives), 75–77 discussion of normal items, 77

11 Euro Integration Index

486

Coreu network, 192 corporate citizenship, xxiv corporate compliance, xxiv corporate culture, xxiv corporate governance, xxiv corporate tax base, 428 cost-benefit balance, 386 Costa del Sol, 202 Costa ENEL case, 89 costs factor driving incorporations, 299 Cotonou Agreement, 186, 351, 365 Council approximation of provisions, 261 decision maker, as, 421 focus on Common Transport Policy, 225 Council of Europe, 109 Council of Ministers, 16 common position in, 107 move towards a State Chamber, 50 similarity with U.S. Senate, 48 Council Secretariat, 75 Court of Auditors, 65–66 President of, 65, 66 Court of Justice, 23, 63–65 advocate generals, 63 comparability to U.S. Supreme Court, 48 competences, 64 interpretation of Article 5 (Treaty on the European Communities), 84 preliminary rulings, 65 ruling on Inspire Art Ltd, 298 The Guardian’s case, 97 credibility, 454 credit creation, 246 credit transfer, 246 creditor states assurance felt, 169 creditors protection for, 295

4/8/08, 9:29 AM

Index

487

criminal law, 198 Croatia, 321 Croats, 18 Crocodile Club, 242 cucumbers, 14 cultural background European nations, 446 cultural decentralization, 468 cultural imperialism, 42 culture audio-visual, xxiv, 15 basic, xxiv provision in Treaty of Maastricht, 102 culture of leisure, xxiv Cunningham, Andrew, 464 currency single (Euro), 7 currency anchor indispensability of, 172 currency cooperation, 143–45 custom duties, 3, 63 customs cooperation, 200 Customs Union, 77, 95, 120, 121, 434 Cuyvers, Ludo, 313 Cyprus, 74, 100 invasion by Turkey, 389 issue of, 415 Turkey, 406, 407 D D-Mark, 151 D-Mark zone, 172 daily culture, 468 Danish Constitution, 112 Danish referendum, xxvii Danone, 430 Davignon, Etienne, 191 Davignon Report, 191 Dayton-agreement, 323 De Beule, Filip, 313 de Gaulle, Charles, 113, 241, 384

11 Euro Integration Index

487

meeting with Harold MacMillan, 385 De Nardis, 178 DeRosa, Dean A., 243 debtor state enforcement of credible economic policies, 169 decentralization non-common policy, of, 69 Decimal Currency Act 196, 14 decimalization, 14 decision making alienation from, 419–21 slower, 299–304 declaratory diplomacy, 191 defence issues under Treaty of Maastricht, 79 defence industry, 324 deficit countries, 141 deficit on public finances, 17 definitions concours, 55 mixed competence, 110 net contribution, 95 shared competence, 110 supranational, 40 Dehousse, Renaud, 314 Delegation of the European Commission, setting up of, 367 Delors, Jacques, 54, 117, 130 White Paper, 129 White Paper on Growth, Competitiveness and Employment, 207 Delors report, 148 Deloche-Gaudez, Florence, 314 Democratic Republic of Congo, 326, 328 democratic deficit, 15 denazification process, 35 Denmark coalition government, 21

4/8/08, 9:29 AM

488

Index

deficit on public finances, 17 excise duties, 291 first enlargement, involvement in, 385–88 gross national product, 17 joining of EU, 38 push for environmentally friendly policy, 452 referendum for membership of EUROland, 160 rejection of Treaty of Maastricht, 96 request for special provision, 99 summer houses, 111 trust in nation state, xxvii deregulation wave, 130 destination principle, 270 Deutsche Mark (DM), 10 Deutsche Bank Research, 251 devaluation effect of, 164 developing nations relations with, 184–87 development assistance, 353 ACP countries, to, 186 DG Competition dealing with anti-trust legislation, 132 dictatorships, xxii Dillon round world trade negotiation, 379 dioxin cloud Northern Italy, 11 diplomacy bilateral, see bilateral diplomacy offensive, 46 traditional, 459 diplomas mutual recognition of, 268 diplomatic relations, 367–68 direct income payments, 278 direct taxation individuals, 287, 294 directives taxation on savings, 294

11 Euro Integration Index

488

dividends payment by subsidiaries, 292 doctors directives with detailed provisions on, 268 documentation, 453–54 Doha Development Agenda, 358 domestic budgetary discipline, 149 domestic political system links to, 13–16 domestic producers knowledge of technical specifications before foreign competitors, 129 dominant position prohibition on abuse of, 245 Doodge Report, 242 “dossier”, 457 double taxation, 428 avoidance of, 292, 293 Dow, 134 Dow Jones Sustainability Group Index, 233 Dowell, G., 258 driver’s licences, 204 Dublin regulation, 201 Duff, Andrew, 14 Duhamel, Olivier, 314 Duisenberg, Willem, 157 Dutch guilder, 10 duty free sales, 290–92 abolishment, 290 E e-commerce, 208 Eastern Europe, xxv, xxvii fifth enlargement, in, 392–402 impact of membership, 408 objective for joining, 397 political consideration for participation, 392–94 relations with EU, 397 road towards membership, 396–99

4/8/08, 9:29 AM

Index

489

Eastern Mediterranean, 389 EC Treaty antitrust prohibition, 133 Economic and Financial Affairs Council (ECOFIN), 16 Economic and Monetary Union, 99 exchange rate cooperation, 137 foundation being laid by Commission, 117 original Treaties, 136–38 Single Euro Currency (Euro), 136– 84 third phase, 38 Economic and Monetary Union advantages and disadvantages, 168, 172–84 Benelux countries, 148 conditions, 159–66 currency cooperation, 143–45 European Monetary System (EMS), 145–47 first ideas (1969), 138–41 lessons learnt, 166–72 objectives, 155–56 original Treaties, 136–38 realization, 147–55 rebalancing of, 153 Werner Plan, 141–43 Economic and Social Committee, 15, 67 economic downturn impact of oil crisis, 33 economic globalization, 467 economic integration, xxiv growth and identities, clash between, 417–19 ratchet effect, 138 recent study, 422 strength of, 3 economic interdependence, 166 economic internationalization, 468 Economic Internationalization and Cultural Decentralization, xxv, 43

11 Euro Integration Index

489

Economic Outlook, 249 Economic Partnership Agreements (EPA), 354 economics link to political goal, 8 Economist, 172 economists American, 55 Edinburgh meeting of European Council, 97 Edinburgh agreement, 282 education improvements to, 126 EFTA countries, 383 fourth enlargement, in, 391–92 negotiations for memberships, 392 eggs details, 14 eGov, 241 Egypt, 188, 411 eHealth, 241 Ehlermann, 314 Elysée Treaty, 33 embassies common, 461, 462 emergency procedure, 107 Employment Pact, 151, 152 employment rate falling in U.S., 173 EMU members synchronization of business cycles, 176 Endesa, 430 ENEL plans to purchase Suez scuttled, 429 energy, 214 Energy Charter, 361 Energy Charter Protocol, 361, 362 Energy Charter Treaty, 361 Energy Community of South East Europe (ECSEE), 362 energy efficiency, 222 energy policy, 221–25, 360–64

4/8/08, 9:29 AM

490

Index

energy sector EU funding, 214 enforcement role of Court of Justice, 304 English language use of, 103 enhanced cooperation, 282–83 ENI, 134 enlargement, 7, 409–10 central issue in debates on (1960s to 2006), 382–84 fifth, 392–402 first, 385–88 fourth, 391–92 initial reaction to, 401–402 second, 388–89 strategy, 407 third, 388–90 Turkey, as potential candidate, 404 environment EU funding, 214 environmental action programme, 230 Environmental Business International 1999, 258 environmental issues, 230–34 absence of provisions in treaties, 230 1970s, 230 polluter pays principle (PPP), 231 Single Act, 231 environmental policy, 79, 364–65 environmental protection, 308 E.On, 430 EPP-ED (Christian Democrats), 60 equilibrium achievement of, 142 Erasmus programme, 218, 219 Erhard, Ludwig, 432 Ericsson, 239 ERM, 154 ESCB, objective, 150 ESDI, 372 Esprit II, 214 Esprit programme, 213

11 Euro Integration Index

490

Estevao, Marcello M., 244 eTransport, 241 EU Approach to Managing Economic Migration, 253 EU budget analysis of expenditure side, 285 EU embassies common, 461, 462 EU institutions, 48–77 interplay with domestic political systems, 28 overview, 48–52 EU legislation transformation, 23 EU preference, 95 EU Special Representatives, 195 EU Transport Ministers, 227 EU treaties operation of, 77–80 EU-ASEAN agreement, 337 EU-ASEAN vision group establishment of, 339 EU-China human rights dialogue, 343 EU-China Summit, Joint Statement, 375 EU-India summit (2005), 344 EU-LAC (Latin American, Caribbean Region), 340 EU-Russia dialogue, 361 EU-Turkish relations, 389 EU-Ukraine Action Plan, 408 EURATOM, 3, 120, 213 Euro, 7, 24, 28, 149 international reserve currency, 167 status of criteria to join, 404 Euro zone, 132, 152 Euro-Mediterranean Charter for Peace and Stability, 190 Euro-Mediterranean Parliamentary Assembly, 189 Euro-Mediterranean Partnership (EMP), 188, 317, 349, 362 EUROCHAMBRE, 297

4/8/08, 9:29 AM

Index

491

Eurocorps, 107, 371 Eurocrat, 117 Eurodac system, 201 Eurojust, 203 Canada’s participation in, 346 EUROland, 140 advantages and disadvantages, 172– 84 debate on future of global monetary system, 360 increase in employment rate, 173 main objectives, 155, 156 Europe e-potential, 208 drive for autonomy, xxv Muslim societies in, xxiv nation-state, diminishing role of, 44 Europe agreements, 92 EuropeAid Co-operation Office, 353 European Aeronautical Defence and Space Company (EADS), 296 European Army, 190 European Arrest Warrant, 203 European Bank for Reconstruction and Development (EBRD), 394 European Brookings Institute, 211 European Capital Market Institute (ECMI), 271 European Central Bank (ECB), 149, 156, 156, 157 European citizenship, 204–206 European Coal and Steel Community (ECSC), 3, 6, 120 European Commission Director-General, 55 driver of integration, as, 54 ensuring member states on equal footing, 53 guardian of treaties, 53 implementation of policies under committee procedure, 57 President, 58 removal of existing barriers, 130

11 Euro Integration Index

491

right of initiative, 49, 106 speaking on matters under exclusive competence, 92, 93 staff of civil servants, 55 system of rotation, 53 technical implementation of common policies with Council, 57 European Confederation possibility of, 433 European Constitution, 3 European Convention, 372 European Convention for the Protection of Human Rights and Fundamental Freedoms, 350 European Council, 8, 25, 55–59 co decision with European Parliament, 62 common position, arrival at, 55 competence of, 56 directive to protect public from toxic chemicals, 28 meeting (1988), 147 meeting in Cologne, 151 meeting in Stuttgart, 115 meetings, 97 meetings on transposing directives into national legislation, 303 member state’s institution, 57 members of, 56 practical steps for SMEs, 208 technical implementation of policies with Commission, 57 European Council for the Integrated Mediterranean Programme, 391 European Court of Justice, 119 arbiter of diverging opinions, 117 Cassis de Dijon case, 129 judgement in Case C-52/00 Commission v. France, 305 role of, 446 ruling on competence of EU, 365 see also Court of Justice

4/8/08, 9:29 AM

492

Index

European Court on Human Rights, 109 European defence crisis management, 324 industry, 324 European Defence Community (EDC), 190 European Development Fund (EDF), 354 European Economic and Monetary Union, xxx see also Economic and Monetary Union features, 155–59 European Economic Community (EEC), xxvi, 3 French boycott of institutions, 2 question of vital importance, 2 European Economic Interest Group (EEIG), 298 European energy technology plan, 222 European enterprises, taxation of, 292 European Environment Agency, 68, 233 “European Environment, State and Outlook”, 258 European Federation possibility of, 433 European Funds, 125 European Galileo project, 229 see also Galileo project European grid calls for, 221 European identity, 102 European industry restructuring of, 132 European Institute of Technology (EIT), 211 European integration, xxiv basic principles, 1 clear political objective, 5–9 coherence, 4 compromise, 4 conflict, 4

11 Euro Integration Index

492

confrontation, 4 consensus, 4 consistency, 4 continuity, 4 daily life, improvement to, 9 discipline and self-discipline, 3 keywords, 4 member state assuming role of driver, 33–34 role of problem grinder, 9–13 step by step, 4–5 toolbox, xxxi European Investment bank (EIB), 66– 67, 128 loans disbursements, 67 ratings, 67 European Law precedence over national laws, 89–90 European model promotion of, 369 European Monetary Institute (EMI), 149 European Monetary System (EMS), 10, 145–47 European nation states minorities, xxx political systems, xxvi European Neighbourhood Policy, 363 European Parliament, 59–63 co decision with Council, 62 co decision on legislative matters, 50 committees, 60 complaint to ECJ re lack of decisions from Council, 225 direct elections, 118 evolution, 119 financial ceiling, proposal for, 285 formerly Assembly, 59 moves towards a People’s Chamber, 50 nomination of Commissioners, 61 nomination of the Commission, 60 power to dismiss the Commission, 61

4/8/08, 9:29 AM

Index

493

powers, 60 powers to block, 61 President of, 58 similarity with U.S. House of Representatives, 48 turnout of voters for direct elections to, 15 European Patent, 210 European Patent Convention, 209 European Patent Office, 209 European Payment Union, 139 European Payments Council, 275 European Police Chiefs Task Force, 203 European Police Force, 20 European Policy Centre (EPC), 229 European Political Cooperation (EPC), 191 European Refugee Fund (ERF), 201 European Research Area, 206 European Research Council (ERC), 215 European Security and Defence Identity (ESDI), 327 European Security and Defence Policy (ESDP), 372 European Security Strategy, 341 European Single Act, 3, 5, 32, 33 amendment, 118 Article 100A, 261, 263, 265 Article 100B, 261, 263 provision for sustainable economic growth, 231 work of five groups of wise men, 5 European societal values promotion of, 369 European Strategy for Sustainability, Competitiveness and Secure Energy, 221 European transport infrastructure, 228 European Union (EU) administrative expenditure, 286 agencies, 68–69 blurring of competences with member states, 31

11 Euro Integration Index

493

budget, 3, 62, 93 budget, discharge of, 66 budget treaties, 63 Commission, 15, 52–55, see also European Commission Council, 15, 55–59, see also European Council consultative bodies, see consultative bodies consultative partner, 337 continuous constitutional negotiations, 79 cooperation, enhanced, 98–101 decision making process, 15, 96 Economic and Social Committee, 15 enlargement, preparation for, 399 executive function, sharing of, 49 exclusive competence, areas of, 91– 93 expenditure, 285 Foreign and Security Policy, 50 founding of, xxvii funding for R&D, 214 honest broker, as an, 317 humanitarian assistance, 324 improving competitiveness, 206–13 institutions, see EU institutions Justice and Home Affairs, 50 legal acts decided by, 22 legislation, see EU legislation long-term financial perspective, 25 member states, see member states membership’ early benefits of, 402– 404 mixed competence, areas of, 91–93 most competitive and dynamic knowledge-driven economy, 8 Ombudsman, 98 openness, 96–98 operation as a bicameral system, 48 original decision making process, 49 overview, 206–207

4/8/08, 9:29 AM

494

Index

own resources, 63 Parliament, 15 peace keeping, 324 policy of promoting democracy and human rights, 189 pooling of sovereignty, 47 Presidency, 69 rationale behind enlargements, 382– 416 removal of nation-state as gatekeeper, 42 rules concerning monopoly and competition, 24 scoreboard for competitiveness, 209 strength of, 3 three pillars, 52, 55 transposition of decisions into national laws, 91 treaties, see EU treaties uniform prices, 11 world role, 316–81 world’s trading partner, as, 356 European University Institute (EUI), 211 European Union Neighbourhood Policy (ENP), 410 Europol, 202 Canada’s participation in, 346 exchange rate, 156 exchange rate adjustments, 164 exchange rates adjustments to, 10 fixed, 10 exchange rate cooperation, 137 excise duties, 262, 289 exclusive competence areas of, 91–93 expenditure factor holding back, 287 export subsidies, 122 external security focus on, 51

11 Euro Integration Index

494

F Fascism, 418 family reunification strict policy of, 202 Federal Reserve Bank of New York, 432 Federal Trade Commission Act, 132 federation move towards, 384 FEOGA fund financing agricultural policy, 127 Fiji, 351 financial crisis 1997–98, 338 financial institutions operation within union, 162 financial perspectives, 284 financial services liberalization of, 162, 271, 272 Financial Services Action Plan (FASP), 270 Financial Services Policy Group (FSPG), 270 financial services markets, 131 financial supervision, 162, 163 Financial Times, 333 financial transfers, 142 financing link to common policies, 93–96 fines anti-competitive behaviour, 133 failure to transpose directives into national legislation, 305 non-compliance of Court of Justice decisions, 24 producers and traders of synthetic rubber, 134 Finland, 383 entrance into EU, 100 transposing of directives into national legislation, 303 fiscal policy, 156 fish stocks dwindling supply of, 235

4/8/08, 9:29 AM

Index

495

Fisheries policy, 105, 365–67 fisheries products common, see common fisheries consumption in EU, 366 percentage of GDP, 237 fisheries zone, 235 fixed but adjustable exchange rates, 144, 146 fixed rate system when currencies come under attack, 171 flags symbol, 26 floating exchange rates, 137 fluctuating exchange rates, 143 food aid developing nations, to, 286 food agriculture funding from EU, 214 Fontainebleau summit of Heads of State and Governments, 450 foreign and security policy European Union, role of, 324–25 future of, 327–29 initiative of Britain and France, 323–24 relationship between EU, Western European Union and NATO, 325–27 treaties, 320–21 Yugoslavia experience, 321–23 foreign citizens residence of, 200 foreign policy cooperation on, 5 former Yugoslav Republic, 196 forward market use in buying and selling currencies, 175 Fouchet plan, 242 France acquiescence with British entry, 114

11 Euro Integration Index

495

coalition government, 21 common history books with Germany, 37 Council for Culture, 36 driving force of integration, as, 34 EU as platform for foreign/security policy, 20 national currency, 6 objection to replacing unanimity, 384 rejection of fundamental changes, 114 rejection of proposed Constitution, 25 unanimity to qualified majority voting, view on, 2 Franc, 170 depreciation, 143 Franco-British summit (1998), 323 Franco-German axis, 124 Franco-German reconciliation, 27, 33, 35–37, 472 cooperation in education, 36, 37 official network, 36 Franco-German War, 6 Frankel, Jeffrey A., 176, 178 free trade agreements (FTAs) negotiations, 123 freedom of movement, 273–74 Freedom Party, 350 French language dominating working language, 103 FTSE4Good, 233 Future European Model, The, 106 FYROM (Former Yugoslavia Republic of Macedonia), 325 G G7, 183, 252 G-8, 345 Gaddis, John Lewis, 373 Galileo project, 343 Korea’s participation, 348

4/8/08, 9:29 AM

496

Index

GAM movement, 195 Gebauer, A., 312 Geel, 213 General Agreement on Tariffs and Trade (GATT), xxxi, 262, 361 General Electric, 134 Generalized System of Preferences (GSP), 358 Genscher-Colombo plan, 242 geographical mobility, 431 Georgia, 346, 411 German Bundesbank, 157 German economic model adoption of, 17 German Constitution, 31 German Grundgesetz, 31 German Lander, 101 German reunification, 151 German-French rivalry, 8 German-French University, 37 Germany chancellorship of Helmut Schmidt, 34 coalition government, 21 common history books with France, 37 Constitutional Court of, 89, 90 Council for Culture, 36 D-Mark, 151 debate on distribution of competences between federal government and Länder, 30 driving force of integration, as, 34 excise duties, 291 Great Depression, xxvii global trade policy, 316 leaving political union aside, 148 limitation on use of PCP, 266 proposal of a stability pack, 151 push for more environmentally friendly policy, 452 rearmament, xxix, xxx

11 Euro Integration Index

496

reunification, 83 transposing of directive into national legislation, 303 war with Soviet Union, xxviii Gershon, Peter, 443 Gerstenzang, Jim, 373 gin bottles, 14 Giscard d’Estaing, Valery, 145 global environment improvement of, 418 global trade, xxii global trade policy, 355–59 global warming, 333 globalization drive towards, xxiii economic, xxvi effect of, 198 response to, 211 threat to, xxiii world’s view on, xxi gold, xxi Gold Exchange Standard, 10, 246 gold standard exit of United States, 143 Göteborg, 332 gravity model, 177 Great Depression, xxi, xxvi, 445 Germany, xxvii Great Lakes, 196 Greece deficit on public finances, 17 gross national products, 17 objective for joining EU, 383 second enlargement, in, 388 views on integration, 99 Greek Orthodox Church, 103 Green paper, 201, 221 Greens, 60, 152 greenhouse gases, 229, 333 Greenland, 105 exit from European Union, 105 Greek-Turkish conflict, 389 Grevi, Giovanni, 371

4/8/08, 9:29 AM

Index

497

gross domestic product (GDP), 21, 424 deficits allowed in, 156 growth in, 395 nation states’ contributions to EU budget, 94 real growth, 403 gross national product (GNP), 17 growth disparity, 165 Grubel-Lloyd index, 177 Grundtvig, 220 Guantanamo Bay, 333 guaranteed price principle of CAP, 122 Guardian, 97 Gucci, 296 Guidance Section of the Agricultural Fund, 127 guidelines right of access to documents, 97 Guinea-Bissau, 351 Gulf Cooperation Council (GCC), 339 H Hacker, Jacob, 250 hairnets for fishermen, 14 Haiti, 351 Hallstein, Walter, 54, 117 harmonization national legislation, 296 technical standards, 263, 264, 307 Harris poll, 333 Hart, S., 258 Haveland, Markus, 314 Haynes, Barry, 381 Heads of State and Government meetings in 1960s, 58 summit in Fontainebleau, 450 health sector funding from EU, 214 heart of Europe, xxvii

11 Euro Integration Index

497

Heath, Edward, 388 Helsinki Final Act, 193 Herzegovina, 196 see also Bosnia-Herzegovina Hezbollah, 331 High Level Law Experts modernization of company law, 297 High Representatives, 75, 372 Hitler, 371 Hofburg Palace, 333 Hoffmeyer, Erik, 247 holding companies, 296 Holocaust, 418 Honeywell, 134 human rights clause in agreements, 350–53 Hotel Dreesen, 371 human security focus on, 51 humanitarian aid EU’s policy, 355 humanitarian assistance, 324 humanities EU funding, 214 Huntington, Samuel Clash of Civilizations and the Remaking of World Order, xxiv, xxxi hymn symbol, 26 I Iceland, 68, 366 outside of EU, 37 participation in Schengen Agreement, 206 identity traditional, xxiii immigration irregular, 200 immigration policies, 198, 199 Impact Assessment Board (IAB) establishment of, 438

4/8/08, 9:29 AM

498

Index

improving competitiveness, 206–13 income distribution prerogative of nation-state, 48 income tax rates, 154 incorporations cross-country, 299 India, 344–45 indirect tax systems, 131 indirect taxation, 154 individual taxation, 294 industrial age role of nation-state, 41 industry restructuring of, 136 industry protection groups, 30 infant industry theory, 280 Information and Communication Technology (ICT), 44, 214, 238 future of, 239 inner circle member states, of, 447 inoptimal factor allocation, 175 institutional approach versus substance, 115–16 institutional imbalances, 116–20 institutional investors effect on, 180 institutions basic models, 39–41 competence of, 83 instruments objectives separate from, 456–57 integration deepening versus enlargement, 113–14 international, see international integration key issues arising from analysis of, 466 key question, 473–75 market, by, 440–41 political and administrative difficulties, 260 present stalemate, 472 question of where to stop, 433

11 Euro Integration Index

498

strategic choices, 471–73 success criteria, 470, 471 intellectual property rights harmonization of, 131 under WTO, 92 intergovernmental cooperation, 5 difference from international integration, 40 member states duty to incorporate into national law, 90 traditional form of cooperation, 39 Intergovernmental Conferences (IGCs), 148 intergovernmental model, 466 Internal Market, 243 international distinguished from supranational, 40 International Bank for Reconstruction and Development (IBRD), xxxi International Convention of the Law of the Sea, 235 International Council for the Exploration of the Sea (ICRS), 259 international crime, 198 International Criminal Court, 334 International Crisis Group, 370 international fraud, 200 international integration basis of supranationality, 40 difference with intergovernmental cooperation, 40 International Monetary Fund (IMF), xxxi, 360, 402, 419 study by, 179 working paper, 132 international monetary policy, 359–60 international obligations, 18 international organization rule-based, 19 international political system mutual trust, importance of, 24 international reserve currency Euro as, 167

4/8/08, 9:29 AM

Index

499

international terrorism, 198 International Trade Organization (ITO), xxxi Internet broadcast of EU deliberations, 98 Council of Ministers’ Meetings, transmission of, 16 Interpol, 202 interrail system, 205 intra-industry trade, 176 investment risk diversification of, 179 Iraq War, 317, 328 lack of common position on, 318 Ireland deficit on public finances, 17 first enlargement, involvement in, 385–88 gross national products, 17 special monetary supports needed, 147 Irish civil service, 437 ISAF IV, 371 Islam issue of, 406 Ispra, 213 Israel, 188, 349, 411 Israel-Palestinian conflict, 188 Islamic world, 9 Issing, Otmar, 248 Istanbul, 405 IT zone, 208 Italian lira, 154 Italy special support needed, 147 Italy accident at chemical plant (1976), 11 annexation of Ethiopia, xxii Ivory Coast, 351 J Japan, 341 military aggression, xxii

11 Euro Integration Index

499

Japanese yen, 172, 183 Jenkins, Roy, 145 job rotation, 431 joint actions, 195 Joint Global Change Research Institute (JGCRI), 379 joint research programme, 208 Jordan, 188, 411 judicial cooperation, 200 judicial system access to, 199 Justice and Home Affairs, 99, 198–204 overviews, 198–99 pillar three of EU, 50, 51 specific measures, 200–204 treaty provisions, 199–200 K Kagan, Robert, 331 Karlsruhe, 213 Kassim, Hussein, 465 Kenen, Peter, 181 Kennedy, John F., 330 meeting with Harold MacMillan, 385 Kennedy round world trade negotiation, 379 Kernohan, David, 257 Keynes, John Maynard, xxi Keynesian economic policy, 148 KFOR III, 371 Kindleberger, Charles, xxxi Kissinger, Henry, 329 Klassen, 178 KLM, 133 KMPG study by, 426 Kohl, Helmut, 33 at Verdun, 35 Konig, Thomas, 314 Korea, 348 Kosovo, 323 Kreil, Tanja, 64

4/8/08, 9:29 AM

500

Index

Kristol, S., 314 Krugman, Paul, 250 Kyoto Protocol, 229, 344, 362, 364, 418 China’s participation, 375 L la présidence côute chère, 73 l’Assemblée Nationale, 59 labour free movement of, 120, 124 mobility of, 161, 162, 163 labour force retraining of, 12 labour market reforms, 132 labour mobility, 431–33 labour standards, 264 Lamfalussy procedure, 270, 308 land transport, 226–27 languages, 103 Latin America, 186 learning centres, 208 Lebanon, 188, 411 peacekeeping in, 329 legal acts, 301 directly applicable, 90–91 legal principles legality, 83, 84 significance of, 78 legal tender, 149 legitimacy political systems, xxvi leisure culture, see culture of leisure, xxiv Leonardo da Vinci programme, 220 Lenovo, 429 Liberal group, 60 liberalization positive effects of, 180 pressure for, 272 Liberia, 351 Libya, 188, 411

11 Euro Integration Index

500

Liechtenstein, 68 lifelong learning, 218–21, 219 linkages, 448–51 overall results, 449 liquor imports, 12 Lisbon Programme, 8, 66, 206–209, 212, 221, 267 funding for, 216 litmus test, 471 usefulness of integration, 471 living standards, 28 lobbying abolishment of duty free sales, 290, 291 Lombardy, 42 Lomé Conventions, 184–87, 351 Lorraine, 36 Los Angeles Times, 333 Lufthansa, 133 Lutheran Church, 103, 112 Luxembourg Compromise, 2, 449, 454 Luxembourg process, 151 Lynch, Dov, 371 M M3 indicator, 248 Maastricht meeting of European Council, 148 Macedonian Slavs conflict with Albanians, 325 MacMillan, Harold, xxxi meeting with de Gaulle, 385 meeting with Kennedy, 385 majorities coexistence with minorities, 468 majority voting, 80–83 Malta, 74, 100 management committees description, 107 Mandelson, 374 Mansholt Plan, 310 Mansholt, Sicco, 310

4/8/08, 9:29 AM

Index

501

manufacture tobacco, 289 manufacturing sector liberalization of, 267 Marie Curie actions, 215 Marshall Aid, xxix mass media, 13 blowing up of silly or superfluous proposals, 13 Massachusetts Institute of Technology, 211 Mayer, Colon, 314 McCallum, J., 177 McKinnon, Ronald, 249 McKinsey Quarterly, 441 Meacher, Michael, 233 Meade, James, 120 Mediterranean agricultural products, 389 Mediterranean countries relations with, 187–90 Mediterranean Programmes, 452 member states balance between, 19–21 balance of payment problems, 137 blurring of distinction with competence of integration, 30– 32 contributions from, 93 discipline of, 16–19 failure to act proceedings against EU institutions, 65 inner circle, presence of, 447 issue of leaving, 439–40 mobility within, 431 national provisions to protect working environment, 265 negotiating positions of, 447–48 non-compliance with Court of Justice decisions, 24 number of, 299 political will to compromise and accommodate, 21 public opinion, 448

11 Euro Integration Index

501

recalcitrant, 72 right of veto, 50 self-discipline, 449 self-restraint, exercise of, 448 share of GDP, 94 stakeholders, 22, 69 transposition of decisions into national laws, 91 MEPs (members of the European Parliament), 60 Mercosur, 340 Merger Treaty, 3 mergers and acquisitions across borders, 161 growth, 424 numbers, 423 state, by, 425 study by KMPG, 416 see also transnational mergers and acquisitions metric measures, 14 Micco, 178 Microsoft, 134, 135 Middle East, 196 MiFID, 271 migration increasing pressure on Union, 198 military threats changing impact of, 52 Milosevic, Slobodan, 323 Ministers transport, for, 227 Ministers for Environment, 56 Ministers for Europe, 56 mineral oils, 289 minimum capital requirements factor driving incorporations, 299 minorities, xxiv control by majority, 42 existence within nation state, 468 protection of, 82 Missiroli, Antonio, 371 Mittal Steel, 430

4/8/08, 9:29 AM

502

Index

Mitterand, François, 17 at Verdun, 35 mixed competence, 92 definition, 110 mobile banking, 241 Moldova, 196, 411 mondoculture, xxiii Monetary Compensatory Amount (MCA), 11, 243 money markets, 131 Monti, Mario, 133 Montreal Protocol, 364 Morocco, 187, 188, 411 multilateral system effective, 319 multinational distinguished from supranational, 40 multinational companies, xxiii multipolar world, 472 Mundell, Robert, 165 Munich, 209 Muslim societies in Europe, xxiv Muslims, xxiv mutual currency credit line, 146 mutual trust importance in integration, 445 N nanosciences-nanotechnologiesmaterial EU funding, 214 nanotechnology, 214 Napolean, 458 Napoleonic Wars, 42 Nassau meeting of Kennedy and MacMillan, 385 Nathan, K.S., xxxi nation states exercise of sovereignty, 47 legitimacy of, xxvii, xxx

11 Euro Integration Index

502

political and emotional challenges, 47 role of, 41–44 safeguarding of domestic policies, 45 surrendering sovereignty by joining EU, 44 unstable, 321 national citizenships, 204 national currency France, 6 national identity respect for, 101–102 national law precedence of EU laws, 89 transposition into, 302–304 national legislation need to match international rules, 45 national parliament, 22 national provisions approximation, 307 reverting to principle of equivalence of, 261 national public contract markets, 131 national ratification, 106 National Science Foundation, 216 national shell, xxiii national social welfare system, 274 national standards mutual recognition of, 129 Nationalbank analyses of, 177, 178 Natolin, 219 natural hazards, 232 nature conservation, 232 Nazi regime, xxvii collaborators, xxvii Nazism, 418 NEPAD, 341 neighbourhood policy, 410–11 net contribution definition, 95

4/8/08, 9:29 AM

Index

503

Netherlands coalition government, 21 exploitation of natural gas, 223 push for environmentally friendly policy, 452 rejection of proposed Constitution, 25 networks of excellence, 215 New Delhi, 344 New York Agreement, 366 New Zealand, 349, 352 Nice Treaty, 408 see also Treaty of Nice Niger, 351 noise pollution, 232 Nokia, 239 non-discrimination principle, 86, 87 Nordic countries linking currency to EU currencies, 154 Nordic welfare models, 392 non-governmental organizations (NGOs) environmental issues, 232 non-obligatory appropriations, 283 non-optimal allocation, 280 non-tariff barriers, 261 Nordic Convention (1957), 254 North Atlantic Treaty Organization (NATO), 322 territorial defence, 324 North Sea fishing banks, 235 Norway, 68, 366 outside of EU, 37 participation in Schengen Agreement, 206 Notre Europe, xxxi nuclear power, 120 nuclear-oriented R&D, 213 nurses directive, 268 Nye, Joseph, 370

11 Euro Integration Index

503

O objectives prioritization of, 457 Observer, 254, 334 OECD, 157 Economic Outlook, 38, 249, 311 offensive diplomacy, 46 official languages, 103 oil mineral, 289 oil crisis, 6 effect on economies, 33 oil market upheavals, 221 Ombudsman, 98 OPEC, 362 Open Method of Coordination, 456 Operation White Whale, 202 opinion polls (2006), 5 optimum currency area, 165 Oracle acquisition of Peoplesoft, 134 Organization of Economic Cooperation and Development (OECD), 131 organic growth, 422 Ortoli, François Xavier, 54 over-fishing, 235 own resources, 63, 93 Oxfam, 378 P Pacific, 185 Pakistan, 348 earthquake in, 354 Palestine Authority, 188, 411 Palmieri, Stefano, 442 Paraguay, 340 parent companies, 293 Paris Charter, 193 Parsche, R., 312 Partnership and Cooperation Agreement (1997), 348

4/8/08, 9:29 AM

504

Index

passport checks, 131 passports, 204, 205 patents, 209 payments freedom for, 275–76 peace dividend concept of, 413 peacekeeping transformation to peacemaking, 322 pentachlorphenol (PCP), 266 permanent representatives Ambassadors of member states, 76 personal income taxation of, 294 Peters, Guy, 465 Petersberg tasks, 326 Petten, 213 PHARE, 398 Philips curve, 140 Plasschaert, Sylvain, 313 playground swings, 14 plus sum game, 460 pocket book, 470 Poitiers process, 36 Poland population, 405 Polaris missiles, 385 police matters, 198 Polish plumber, 269 political canvassing, 46 Political Committee, 192 political compromise, 22 Political Directors, 192 political groups, 60 political leadership importance in integration, 34 political negotiations role of Presidency, 70 political responsibility offloading of, 19 political systems domestic, see domestic political system European nation states, xxvi

11 Euro Integration Index

504

political will, 21–26 politicians reluctance to abolish duty free sales, 291 Pompidou, Georges, 386 pooling of sovereignty, xxi, xxvii, 47 Poos, Jacques, 322 population falling numbers in, 201 Portugal objective for joining EU, 383 modern economy, fast adapters of, 390 third enlargement, in, 388 Portuguese Escudos, 154 positive sum game, 1–4, 20 post-World War II, xxvi Pound Sterling, xxi, 144, 154 power nature of, 45 pre-accession strategy, 397 precision-guided weapons, 323 preferential treatment, 185 ACP countries, 186 Presidency, 69–75 characteristics of a good Presidency, 70, 71 composition of, 69 earning of trust, 462–64 establishment of tandem with Commission, 463 moderator, as, 70 plus point for smaller member states, 73 role as chief negotiator, 70 rotation by alphabetical order, 74 rotation of, 73 speaking on matters under member states’ competence, 93 in working groups, 70 President of the Commission, 54, 58 President of the European Parliament, 58

4/8/08, 9:29 AM

Index

505

pressure groups environmental issues, 232 price discrimination, 175 price support schemes, 278 prices uniform, 11 principle of legality competence of institutions, 83 principle of rotation and equality, 399 product market reforms, 132 production factors mobility of, 142 productivity growth, 173 professional qualifications mutual recognition of, 131, 268 proportionality principle, 86 proposed Constitution rejection by France and Netherlands, 200 public finances deficits, 17 sound, 150 public opinion member states, of, 448 preparation of, 458 public transfers effect of, 169 Q qualified majority voting, 80, 262 reduction in time for decision making, 301 R radio spectrum allocation of, 239 Raddatz, Claudio, 180 rail transport revitalization of, 226 Rambouillet meeting of de Gaulle and MacMillan at, 385 ratchet effect, 138

11 Euro Integration Index

505

Rayner, Laura, 465 REACH (Registration, Evaluation, and Authorization of Chemicals), 29 RealNetworks, 134 red tape, 437 Reding, Viviane speech to BITKOM, 259 Regional Committee, 15 Regional Fund, 12, 26, 126, 286 Reinheitsgebot, 306 religion, 103–105 renewable energy, 67, 222 Report on Economic and Monetary Union in the European Community, 247 representative democracy, 15 repression ineligibility for membership to countries practising, 394 Republic of Macedonia, 196 Research and Development, 208, 209, 213–18 beginning, 213, 214 evaluation, 217, 218 Framework Programmes, 214 funding of, 212 researchers European placements for, 256 reserve currency accumulation of, 182 “Response to Challenge”, 469 reverse infant industry, 233 Rheinland-Pfalsz, 36 right of access to documents guidelines, 97 right of establishment, 120, 267, 308 right of initiative exclusively for Commission, 49 right of veto member state, right of, 50 right to vote, 204 Rio CBD (Convention on Biological Diversity), 364

4/8/08, 9:29 AM

506

Index

Rio-Group, 340 road transport removal of restrictions, 226 Roman Catholic Church, 446 Roman Empire, 446 Romania, 100, 402 Romeijn, M.H., 314 Rose, Andrew, 176, 177, 178 Rubin, Alissa J., 373 rule-based system basis of international integration, 40 Rural Development Fund, 127 Russia, 346–48 exports from, 346 transformation from central planning economy, 347 boycott of gas to Ukraine, 224 view of EU as “near abroad”, 363 Russian empire downfall of, xv Russian-Ukraine dispute, 347 S S & P 500, 233 Saarland, 36 St. Malo, 327 San Jose dialogue, 340 Sanahuja, Jose Antonio, 378 Santer, Jacques, 62 SAS, 133 savings taxation of, 294 Schengen Agreement, 205, 282 Schengen information system, 203, 205 Schmidt, Helmut, 145 chancellorship of, 34 Schulz, Heiner, 314 Sciences Po University study by, 300 Scientific, Technical and Economic Committee of Fisheries (STECF), 259 Scotland, 42, 101

11 Euro Integration Index

506

sea transport, 227 Secombe, M., 314 Second Directive, 249 secondary houses, 111 Secretary General of the Council, 75 Secretary of the Council, 399, 400 secularism European mindset, 104 security EU funding, 214 security policy cooperation on, 5 seigniorage, 181 advantages of, 182 self-restraint exercise by member states, 448 separable but not separate forces, 326 separation of power, see theory of separation of power Senegal, 366 Serbs, 8, 321 services barriers to, 267 condition for economic and monetary union, 160, 161 liberalization of, 120 proposal for directive on, 308 Seveso directive, 12 SGCI, 455 shared competence definition, 110 shareholder value mergers and acquisitions, 426 shareholders protection of, 295 shareholders’ rights, 297 sheep meat case, 305 Shell, 134 Sherman Act 1890, 132 shipbuilding, 280 Sierra Leone, 351 Singapore Euro Payment Area (SEPA), 275

4/8/08, 9:29 AM

Index

507

Singapore European Sky, 228 Single Currency (Euro), 38, 50, 149 Single European Information Space, 238 Single Market, 50, 128–32 Commission as main driver of, 117 creation of, 356, 357 implementation by harmonization, 261 Skybolt, 412 Slovenia, 321 small and medium-sized enterprises (SMEs), 126, 208, 215 smokestack industries, 136, 280 “snake in the tunnel” creation of, 144 Soames, Christopher, 465 social capital, 445–47 Social Charter, 99 Social Democrats, 152 social dimension, 79 Social Fund, (1973 to 1980), 286 Social Fund, 12, 125, 125–26 social market economy, 432 social responsibility, xxiv social welfare, 126 prerogative of nation-state, 48 Sociale Marketwirtschaft, 443 Socialist group, 60 Societas Europaea (SE), 298 societal models, 471 socio-economic sciences EU funding, 214 soft policy instruments, 316 soft power exercise of, 196 Solana, Javier, 75, 372 Solemn Declaration approval of European Council, 115 solidarity principle, 10, 84 South Asian Association for Regional Cooperation (SAARC), 339 South Caucasus, 196

11 Euro Integration Index

507

sovereignty concept of, 44–48 core, 51 functionality in globalized world, 46 new kind of, 45 offensive diplomacy, 46 political canvassing, 46 pooling, xxi, xxvii protection of rights, privileges and obligations, 47 redefinition of, 46 Soviet Union ambitions re extension of empire, xxix counteracting of threat of, xxix fall of, xv threat of, xxviii, xxix war with Nazi Germany, xxviii space EU funding, 214 Spain failure to ensure quality inshore bathing water, 305 modern economy, fast adapters of, 390 objective for joining EU, 383 third enlargement, in, 388 Spanish Civil War, xxii Spanish Pesetas, 14 special assistance economically weak countries, to, 146 speculators French Franc, 170 Spinelli, Altiero report by, 242 Srebrenica, 322 Stabex, 378 Stability Pact for Europe, 413 Stabilization and Association Process (SAP), 416 Balkans, 407 stagflation, 385

4/8/08, 9:29 AM

508

Index

Stalin, Joseph, xxviii state aid, 135–36, 278–82 Statute for the European Company, 41, 298 Stiglitz, Joseph E., 179 Stocchetti, Marikki, 380 stock market, 180 importance of, 181 Stockholm POP Convention, 364 stop-go economic policy, 385 Strasbourg, 15 Strasser, Daniel, 311 Strategic Energy Dialogue, 364 strategic partnership, 341 Strategy for the Sustainable Development of European Aquaculture, 259 Strategy Paper (2000), 413 Stuttgart meeting of European Council, 115 subsidiarity principle, 32, 85–86, 435– 36 subsidies, 135–36, 279–82 Sudan, 196, 238 summer houses, 111 supranational definition, 41 supranational enterprise definition, 40 supranational model, 466, 467 surplus countries, 141 surplus production, 122 Sustainable Development Strategy (SDS), 365 symbols, 26 synthetic currency, 149 Syria, 188 Systembolagert, 13 Sweden, 383 entrance into EU, 119 Switzerland outside of European Union, 37

11 Euro Integration Index

508

Syria, 359, 411 Sysmin, 378 T Tacis, 376 tariffs dismantling of, 262 tax harmonization, 154, 287–95 aspects of, 287 conditions for economic and monetary union, 159–60 direct taxation of companies, 292–93 direct taxation of persons, 294 duty free sales, 290–92 excise duties, 289 traveller’s allowance, 290 value added tax, 288–89 tax rates Denmark, in, 163 tax strategy coherent, 294 taxation Common Consolidated Tax Base (CCTB), 428 corporate tax base, 428 persons, of, 294 technical harmonization, 307 technical standards, 261 new method for harmonizing, 263, 264 technological hazards, 232 telecom sector, 208 telecommunication, 238–41 allocation of radio spectrum, 239 bandwith glut, 240 eGov, 241 eHealth, 241 eTransport, 241 European telecom operator, 240 mobile banking, 241 multiple service providers, 240 Single European Information Space, 238

4/8/08, 9:29 AM

Index

509

terrorism borderless phenomenon, 52 impact on nation states, 51 textile industry, 280 Thatcher government (1979–90), 33 Thatcher, Margaret, 99 The Clash of Civilizations and the Remaking of World Order, xxiv “the dossier”, 457 The Future European Model, 106 The Hague summit at, 114 The Petersberg tasks, 326 The Strategy Paper (2000), 413 theory of separation of power, 48 third countries, 92 third parties protection of, 295 Third Railways Package, 227 Thirty-Year War, 41 three pillars, 50, 51 Tiananmen events, 334, 343, 351 Tiffin, Andrew, 416 time lag from proposal to implementation, 299 Time Magazine, 333 Tindemans, Leo, 115 tobacco manufactured, 289 Togo, 351 total allowed catch (TAC), 236 Toynbee, Arnold, 469 trade diversion, 121 trade flows quantification of, 177 trade policy sensitive issues of, 356 Trade Union Organizations, 425 traditional identity, xxiii training systems improvements in, 126

11 Euro Integration Index

509

trans-European network, 66 transaction costs effect of single currency, 174 Transatlantic Alliance, 330, 331 future of, 334–36 Transatlantic Declaration, 332 transatlantic workforce, 332 transitional economies fifth enlargement, 394 transitional period common policies being put in place, 114 transnational mergers and acquisitions, 421–26 attitudinal barriers, 427 barriers, 426–30 economic barriers, 427 legal barriers, 426–27 shareholders, benefit to, 422 supervisory rules and requirements, 427 taxation, 427, 428 transnational research activities, 215 Transport Ministers, 227 transport policy, 225–30 land transport, 226–27 overview, 225–26 plans for future, 228–30 sea and air transport, 227–28 transport sector percentage of GDP, 228 transportation EU funding, 214 traveller’s allowances, 290 TREATI trade action plan, 338 treaties legal principles in, 83–89 Treaty of Accession signing by Portugal and Spain, 389 transitional arrangements, 12 Treaty of Amsterdam, 3, 7, 108, 372 amendment of, 118

4/8/08, 9:29 AM

510

Index

Treaty of Maastricht (1992), xxvii, xxviii, xxx, 193–96, 271 amendment, 118 Article 126, 102 cohesion, importance of, 87 Common and Foreign and Security Policy, xxx, 7 cornerstones of, 78 Danish rejection of, 96 education, 102 effect of reducing military aggression, 320 formulation of, 117 Justice and Home Affairs, xxx, 7 origin, 7 provision for improved quality of environment, 231 ratification, 23 signing of, 108 topics under, 79 whether in violation of Germany’s Constitution, 90 Treaty of Nice, 3, 7, 53 amendment of, 1118 Articles 43 and 44, 100 qualified majority voting, 80 Treaty of Rome, 2, 79 absence on provision on environment, 230 absence of provisions on fisheries policy, 234 amendment in 1967, 3 Article 2, 137 Article 6, 137 Article 85 and 86, 244, 245 Article 103, 137 Article 108, 137 Article 235, 32 common policy for transport, 225 cost-benefit distribution prior to signing of, 114 first change to, 116

11 Euro Integration Index

510

lack of provisions on services, 266 paragraph, 84, 235 pillar one of EU, 50 principles for duration and amendments to Treaties, 105 significance of, 77 use of simple majority voting, 80 Treaty on the European Economic Community, 120 Treaty on the European Community Article 10, 84 trench warfare negotiation in EU, 453 troika, 74 composition of, 194, 381 tsunami disaster, 354 Tunisia, 187, 188, 411 Tupy, Marian L., 415, 444 Turkey, 185, 188 Cyprus issue, 406, 407 population, 405 potential for enlargement to include, 404 whether should be EU member, 104 U Ukraine, 11, 195, 346 UNFCC Framework Convention on Climatic Change, 344, 364 UNCTAD, 92 uneven distribution of wealth, xxii uniform assessment basis, 94 Union Citizenship, 99 Unipetrol, 134 unipolar world, 472 United Kingdom abolishment of duty free sales, effect of, 290 annual adoption of agricultural prices, attempt at blocking, 449 Conservative government, 2, 23

4/8/08, 9:29 AM

Index

511

disinterest in economic and monetary union, 143 dissatisfaction with EU, 3 first enlargement, in, 385–88 Labour party, 27 non-participation in economic and monetary union, 147 objective in joining EU, 382 reluctance vis-à-vis end goal of union, 384 subjugation of Scots, 42 Thatcher government, 33 trust in nation state, xxvii VAT contributions, 38 views on integration, 99 United Nations, 39, 236, 419 United Nations Charter, 193 basic rights, 87 United Nations Convention on the Law of the Sea, 365 United Nations Security Council, 39, 40 United States burden of counteracting Soviet threat, xxix burden sharing, need for, 330 Congress, xxx Dubai-based company’s purchase of port-handling company, 429 economy, 182 exit from the gold standard, 143 federal and state budgets, 155 funds for research and technology, 130 future of alliance with Europe, 332– 36 importance in European security, 323 job rotation, 431 patent legislation, 210 potential adversary, 9 security relationship with, 329

11 Euro Integration Index

511

special relationship with Britain, 385 sponsor of European integration, as, 329–31 support for Western European states cooperation, xxix threat to global security, viewed as, 333 taxpayers, xxx United States of Europe possibility of, 433 unity in command importance of, 455 UNPROFOR, Yugoslavia, 322 Uruguay, 340 V Vahl, Marius, 376 value added tax (VAT), 28, 94, 288– 89 importance of uniform assessment base, 288 Van Geend & Loos case, 89 VAT contributions, Britain, 38 VAT directive (1977), 288 VAT rates approximation, 289 values societies, of, xxiii variable geometry, 99 Vedel Report, 118 Verdun, 35 Viacelli, 178 Vienna Convention on the Law of Treaties, 84 Vienna Convention for the Protection of the Ozone Layer, 364 Vietnam War, 386 Viner, Jacob, 120 Visegrad countries, 397 Vodafone, 239 voting blocking minority, 81

4/8/08, 9:29 AM

512

Index

W Wagner, Hannes F., 314 Wales, 101 Warsaw Pact, 383 Warszawa Willy Brandt’s visit to, 35 waste management, 232 wealth uneven distribution, xxi Webber, Douglas, 464 webcast ECOFIN’s first meeting, 16 Weiler, J., 314 welfare economics, xxii Wen Jiabao, xxxi Werner, Pierre, 141 Werner Plan, 141–43 Werner Report, 142, 159 Western Balkans, 325 Western Europe after World War II, xxviii nation states, xxv Western European Union (WEU), 194, 325 Westphalian Peace (1648), 41 White Paper on European Transport Policy 2010, 226 White Paper on Growth, Competitiveness and Employment, 207 Wilson, Harold, 385 Windows Media Player, 134 Windows operating system, 134 Woon Nam Chang, 312 work culture, xxiii workforce transport sector, 228 mobility of, 125

11 Euro Integration Index

512

working environment, 264 working groups under Council, 69 World Bank, xxxi, 419 World Economic Forum, 211 world market prices, 122 World Order strive for, xxii world trade negotiations Dillon and Kennedy rounds, 379 World Trade Organization (WTO), 39, 92, 123, 183, 262, 357, 419 World War I civil European wars, 6 decade after, xxi World War II aftermath, xxv civil European wars, 6 genocide, xxii post, xxvi Wright, Vincent, 465 X xDSL, 239 Y Year of Europe, 330 Yeo Lay Hwee, 374 Yeung, B., 258 yogurt, 14 Younde, 185 Yugoslavia, 321–23 dissolution of, 8 international UN force for, 322 Z Zimbabwe, 351

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About the Author

513

About the Author Jørgen Ørstrøm Møller is born in 1944. He obtained Cand. Polit. (Master of Science, Economics) from the University of Copenhagen in 1968. He joined the Danish diplomatic service on 1 February 1968 and worked with European integration for twenty-six years (1971 to 1997); from 1989 to 1997 as StateSecretary. From 1997 to 2005 he was Ambassador to Singapore and Brunei Darussalam, and from 2002, also Australia and New Zealand, residing in Singapore. When he retired from the Danish diplomatic service in 2005, Mr Møller joined the Institute of Southeast Asian Studies (ISEAS), Singapore as Visiting Senior Research Fellow. He is Adjunct Professor, Copenhagen Business School and a member of the Adjunct Faculty, Singapore Management University (SMU), Chairman of the Advisory Board, Asia Research Center, Copenhagen Business School (CBS) and member of Singapore National Council, INSEAD, Forum International Competitiveness, CBS, Council of The World Future Society, Board of Governors ASEF (Asia Europe Foundation), Advisory Board of Asia Europe Journal, International Advisory Council, Center for Comparative Integration Studies, Aalborg University, ASEM Vision Group working from 1998 to 1999, Videnskabsministerens fremtidspanel from May 2007 to January 2008. His major publications in English are: • • • • •

A New International System. Singapore: Institute of Southeast Asian Studies, 2004. The End of Internationalism or World Governance. Westport, CT: Greenwood Publishing House, 2000. The Future European Model. Westport, CT: Greenwood Publishing Group, 1995. Technolog y and Culture in a European Context. Copenhagen: Handelshøjskolens Forlag, 1991. Member States and the Community Budget. Copenhagen: Samfundsvidenskabeligt Forlag, 1982.

He has also published a large number of journal articles and contributed columns to numerous newspapers and websites. 513

12 Euro Integration Author

513

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