The European Union as a Global Actor: Trade, Finance and Climate Policy (Springer Texts in Political Science and International Relations) 303076673X, 9783030766733

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Springer Texts in Political Science and International Relations

Susanne Lütz Tobias Leeg Daniel Otto Vincent Woyames Dreher

The European Union as a Global Actor Trade, Finance and Climate Policy

Springer Texts in Political Science and International Relations

Springer Texts in Political Science and International Relations delivers high-quality instructional content for undergraduates and graduates in all areas of Political Science and International Relations. The series is comprised of self-contained books with a broad and comprehensive coverage that are suitable for class as well as for individual self-study. All texts are authored by established experts in their fields and offer a solid methodological background, often accompanied by problems and exercises.

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Susanne Lütz • Tobias Leeg • Daniel Otto • Vincent Woyames Dreher

The European Union as a Global Actor Trade, Finance and Climate Policy

Susanne Lütz FernUniversität in Hagen Hagen, Germany

Tobias Leeg GIZ Berlin, Germany

Daniel Otto University of Duisburg-Essen Essen, Germany

Vincent Woyames Dreher Frankfurt am Main, Germany

ISSN 2730-955X ISSN 2730-9568 (electronic) Springer Texts in Political Science and International Relations ISBN 978-3-030-76672-6 ISBN 978-3-030-76673-3 (eBook) https://doi.org/10.1007/978-3-030-76673-3 # The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

The role of the European Union as an actor in international political economy has considerably increased in recent decades. The EU negotiates international economic agreements and represents Europe in international fora and organizations. As a major trading block and currency area the EU enjoys international market power. However, the extent to which the EU is able to implement political and strategic goals and guiding principles in its external relations is still an open question. Whether the EU enjoys external “actorness” is a relevant issue not least against the background of the rise of populist, Euro-critical sentiments, and challenges posed by the financial-, climate-, refugee-, or the latest Covid-19 crises. With the concept of actorness, this textbook addresses a debate that has been conducted with varying intensity over the past forty years in European integration research, International Relations and International Political Economy. Thus, the book ties in with various fields of research and sub-disciplines within political science. In addition, the actorness perspective opens up the possibility of comparing the European Union with countries or other regional organizations. Students of European integration, International Politics, or International Political Economy will become familiar with concepts and theoretical approaches suitable to the study of EU actorness. In addition, actorness will be analyzed in three policy areas such as trade, finance, and climate policy. Students will learn more about historical developments, the institutional distribution of competences, the external representation of the EU as well as policy-specific negotiation processes. First of all, I would like to thank Tobias Leeg, Daniel Otto, and Vincent Woyames Dreher. All of them are experts in their respective fields of trade, environmental policy and finance. As academic researchers, university lecturers, and practitioners, they are familiar with current policy problems related to European actorness. Last but not least, we would like to thank Ulrike de Stena, Natan Azabal Pereira, and Ole Merkel who reread, edited, formatted, and improved our manuscripts tirelessly in every respect. Hagen, Germany March 2021

Susanne Lütz

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Contents

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2

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Studying European Actorness . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Overview of the Actorness Debate . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Comparative Perspectives on Actorness . . . . . . . . . . . . . . . . . . . . 1.4 Legitimacy and Effectiveness of Actorness . . . . . . . . . . . . . . . . . 1.5 Explaining European Actorness: A View from International Relations, International Political Economy, and European Integration Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.1 (Neo-)Realist Perspectives . . . . . . . . . . . . . . . . . . . . . . . . 1.5.2 Liberal Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.3 Constructivist Perspectives . . . . . . . . . . . . . . . . . . . . . . . . 1.5.4 Leadership Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 Chapter Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Historical Development of EU Trade Policy . . . . . . . . . . . . . . . . 2.3 Actors and Processes in EU Trade Policy . . . . . . . . . . . . . . . . . . 2.3.1 Mandate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.4 EU Trade Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 The European Union as an Actor in International Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 The EU in the World Trade Organization . . . . . . . . . . . . 2.4.2 The EU’s Nonreciprocal Trade Policy . . . . . . . . . . . . . . . 2.4.3 Bilateral and Interregional Trade Relations of the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.4 Bilateral Investment Protection Agreements . . . . . . . . . . 2.4.5 Brexit and EU Trade Policy . . . . . . . . . . . . . . . . . . . . . . 2.5 European Actorness in International Trade Policy . . . . . . . . . . . . 2.5.1 Presence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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56 72 74 76 76 vii

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2.5.2 Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.3 Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Money and Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Monetary, Financial, and Fiscal Policy in the EU . . . . . . . . . . . . 3.2.1 Monetary and Exchange Rate Policy . . . . . . . . . . . . . . . 3.2.2 Financial Regulation and Supervision . . . . . . . . . . . . . . . 3.2.3 Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The EU in International Financial Organizations and Fora . . . . . . 3.3.1 Group of Twenty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 International Monetary Fund . . . . . . . . . . . . . . . . . . . . . 3.3.3 Financial Stability Board . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4 Basel Committee on Banking Supervision . . . . . . . . . . . . 3.3.5 International Organization of Securities Commissions . . . 3.3.6 International Association of Insurance Supervisors . . . . . 3.4 EU Actorness in International Financial Regulation . . . . . . . . . . 3.4.1 How Can We Explain EU Actorness? . . . . . . . . . . . . . . . 3.4.2 The Basel III Accord . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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91 91 96 98 108 114 125 126 129 132 136 137 139 141 144 148 154 158

4

Climate Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Climate Change as a Problem for National and International Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Institutional Responsibilities in Environmental and Climate Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 The EU as an Actor in International Climate Policy . . . . . . . . . . 4.4.1 A Brief Genesis of the Climate Regime . . . . . . . . . . . . . 4.4.2 European Actorness in the Climate Regime: Three Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 EU Climate Policy Between Energy and Trade Issues . . . . . . . . . 4.5.1 Energy Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.2 Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Conclusion and Further Perspectives . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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5

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Institutional Preconditions of European Actorness . . . . . . . . . . . 5.2 Evaluating Actorness in Trade, Finance, and Climate Policy . . . . 5.3 Further Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

About the Authors

Tobias Leeg works as an advisor in the field of trade and investment policy for the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) since March 2018. He studied political science, economics, and law in Würzburg, Marburg, and Madrid. Afterwards, he was a doctoral candidate and research fellow at the Chair for International Political Economy at the Otto-Suhr-Institute for Political Science at the Freie Universität Berlin from April 2013 to March 2018. He was a Guest Researcher at Georgetown University, Washington D.C. from February-March 2015. At the Otto-Suhr-Institute, he has taught BA and MA courses on European and international Trade Policy, International Organizations in the World Economy and Trade and Development in the International Political Economy. Tobias Leeg completed his PhD (Dr. rer.pol) in July 2017 at the Freie Universität Berlin with a dissertation on labor and environmental standards in EU and US bilateral free trade agreements. The conclusions of his chapter reflect his own opinion. Susanne Lütz is the Chair for International Politics at the Institute of Political Science at the FernUniversität in Hagen since October 2017. Before she was a Professor for International Political Economy at the Otto-Suhr-Institute of the Freie Universität Berlin and also held a Professorship for Political Regulation and Governance at the FernUniversität in Hagen. From 1993 to 2002, she worked as a research fellow at the Max-Planck Institute for the Study of Societies in Cologne. Susanne Lütz studied social science, history, and economics at the University of Duisburg-Essen and received her doctorate within the framework of the Volkswagen Foundation’s Doctoral Program “Social Networks” at the University of Cologne. In 2001, she habilitated in political science at the FernUniversität in Hagen. In her work, she focuses on international and regional economic organizations, Eurozone politics, financial markets, and regulatory politics in different policy areas (financial markets, corporate governance, and intellectual property rights). Daniel Otto is a Postdoctoral researcher at the Chair of Media Didactics and Knowledge Management (Learning Lab) at the Universität Duisburg-Essen since November 2018. From 2009 to 2018, he has worked as a research assistant and research fellow at the Chair for International Politics at the FernUniversität in Hagen.

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About the Authors

He has taught MA courses in environmental politics and has developed an onlinecourse on environment and climate policy. He received his PhD in 2015 from the Goethe Universität Frankfurt and has studied political science and history at the Universität Rostock and the Eberhard-Karls Universität Tübingen. Vincent Woyames Dreher is a Political Scientist and works since October 2018 at the European Central Bank in the Supervisory Policy Division. From April 2016 to September 2018, he was a research fellow at the Chair for International Political Economy of the Otto-Suhr-Institute for Political Science at the Freie Universität Berlin. As a university lecturer, he has taught seminars and lectures on the relationship between state and market, cross-border financial and trade relations, international institutions, and European economic integration. He was awarded his doctorate (Dr. phil. International Relations) from the Freie Universität Berlin in June 2018 after completing the doctoral program of the Berlin Graduate School for Transnational Studies with a dissertation on the international regulation of financial markets after the global financial crisis of 2007–09. He received his MA degree in the Fast-Track MA Program International Relations of the Freie Universität Berlin, the Humboldt Universität Berlin, and the Universität Potsdam in June 2014. In July 2012, he graduated with a Graduate Diploma in Economics from the University of Essex and received a BA in Political Science from the University of Bremen in November 2011.

List of Figures

Fig. 3.1

Fig. 4.1

Fig. 4.2

Fig. 4.3

Fig. 4.4

Fig. 4.5

GDP (in trillion US dollar). Source: Data of World Bank 2019, author’s presentation; https://data.worldbank.org/indicator/ NY.GDP.MKTP.CD?end¼2018&locations¼EU-USCN&start¼1960&view¼chart) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The world’s warmest years since the start of measurement in 1880 (deviation from the global average) Source: https://www. climatecentral.org/gallery/graphics/the-10-hottest-global-years-onrecord. Accessed: 14 June 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The ten largest CO2-emitting countries (by share of global CO2 emissions in 2019). Source: https://www.ucsusa.org/resources/ each-countrys-share-co2-emissions. Accessed: February 25, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The UN Convention on Climate Change (UNFCC). Source: http://www.accc.gv.at/unfccc.htm. Accessed: February 25, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EU dependence on imports (2005–2030). Source: http://www. bpb.de/politik/wirtschaft/energiepolitik/152502/gemeinsamenenergieaussenpolitik-der-eu (translated by author). Accessed: February 25, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EU electricity generation is very different (energy mix in percentage terms). Source: https://www.welt.de/wirtschaft/ energie/article137835904/EU-will-mit-Energie-Union-Geschichteschreiben.html (translated by author). Accessed: February 25, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Introduction

1.1

Studying European Actorness

The role of the European Union as an actor in international politics and business has grown in response to increasing European integration and the globalization of economic and political processes. The EU negotiates international economic agreements, represents Europe in international organizations, and is a large trading bloc and currency area. Current trade conflicts with China and the United States or the maintenance of the nuclear agreement with Iran require coherent and strategic EU action toward third countries. To what extent, however, the EU can use its potentially large economic power in order to impose certain guiding principles, values or political-strategic goals on the outside is an open question. It is true that the Maastricht and Lisbon Treaties increasingly transferred competences in monetary, financial, and foreign economic policy to the supranational level. Nevertheless, the EU appears to be constrained in its external relations with third countries by conflicts of interest between member states, economic and social interest groups, European institutions, and also by turf battles between different Directorates-General within the EU Commission. The concept of “European actorness” has been used and widely discussed in European integration research, international relations, and international political economy. The debate has first emerged in the 1970s, has revived in the 1990s in the wake of increasing European market integration and became topical again with the entry into force of the Treaty of Lisbon in 2008. The concept of actorness provides a heuristic device for the study of external European action. It also opens up the possibility of examining the EU from a comparative perspective—with regard to policy sectors, regional organizations, and the role of the EU in international fora, regimes, and organizations. Analyzing European foreign relations from the perspective of actorness differs from more classical views of the actors, processes, and structures of European “foreign policy” (Müller-Brandeck-Bocquet and Rüger 2015; Staack and Krause 2014). Karen Smith (2014), for example, uses a state-based concept of foreign policy # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 S. Lütz et al., The European Union as a Global Actor, Springer Texts in Political Science and International Relations, https://doi.org/10.1007/978-3-030-76673-3_1

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1 Introduction

addressing values, interests and the available instruments that shape external policy. Hazel Smith (2002) raises the question of whether the EU’s capacities for common foreign and security policy are comparable to those of nation-states. She advocates an issue-related approach that distinguishes fields and regions of European external relations. Keukeleire and Delreux (2014) also follow a broader understanding of foreign policy, which assumes deliberate influence on the external environment to pursue values, interests, and goals. The EU itself is understood as a constantly changing political system, not always capable to be a foreign policy actor in areas such as trade, development, enlargement, or external environmental policy. This is despite the fact that the EU is the world’s largest trading bloc, has the largest number of diplomatic representatives in the world, and cooperates closely with other international and regional organizations (Keukeleire and Delreux 2014, p. 1 ff.). Another strand of literature addressing the topic of external “EU Governance” empirically examines the role of European institutions, actors, and governance modes in the transfer of European norms and policies to third countries (Lavenex and Schimmelfennig 2009; Schimmelfennig and Sedelmeier 2005). Empirically, these studies focus on the institutionalized transfer of rules to EU accession candidates or within the framework of the EU neighborhood policy through association agreements or political partnerships. From a theoretical point of view, this debate focuses on the paths, mechanisms, and conditions of the export of European policies. Here, the prerequisites for the EU’s ability to act externally are not discussed since actorness is de facto assumed. The same ultimately applies to the very broad literature on transnational processes of policy diffusion and policy transfer, which has also intensively scrutinized the EU (Bach and Newman 2007; Gilardi 2012; Holzinger et al. 2007). In this context, processes of cross-border adaptation of policies are conceptualized as a result of growing international interdependence, international communication and the increasing legalization of international relations. The EU is interpreted here as an exporter of regulatory standards with the aim of reducing national adjustment costs, generating competitive advantages and creating a level playing field for European companies (Bach and Newman 2007). The theoretical focus here is on the study of diffusion mechanisms such as coercion, competition, learning, or imitation (Gilardi 2012). Against this background, this textbook fills a gap in the existing literature on the EU’s external relations by studying European actorness in three policy areas—trade, finance, and climate policy. Given the size of the European internal market and the importance of the euro in international capital and trade flows, the EU could assume a significant weight in external economic relations with third countries. From an institutional point of view, all three policy areas have been shaped by continuous extension of tasks and by shifting responsibilities to the European level while key competences have been retained in the hands of member states. Thus, all of these policy areas should be “most likely cases” for the study of European actorness as well as its tensions and dynamics. The introductory Chap. 1 presents concepts and theoretical strands related to European actorness. The following three empirical chapters (Chaps. 2–4) focus on

1.2 Overview of the Actorness Debate

3

trade, finance and climate policy. Each chapter covers the historical developments and the distribution of institutional competences between member states and supranational institutions. The authors discuss different forms and levels of external representation and analyze problems of European actorness in the respective policy area from a theoretical perspective. Chapter 5 compares European actorness in the three areas under study and discusses the value of the actorness concept for students and scholars of Political Science. Overall, the textbook pursues the following learning objectives: • Students become familiar with analytical concepts, theories, and research questions related to European actorness. • The textbook provides detailed empirical insights into three European policy areas. It covers actors, institutions, and processes of negotiation and external representation. • Students thus receive an analytical, theoretical, and empirical toolbox applicable to their own studies of European actorness.

1.2

Overview of the Actorness Debate

The question of who or what can be described as an independent actor in the international system has been the subject of controversial debates in International Relations (IB). Following the formal view of international law, until the middle of the twentieth century only the sovereign nation-states were regarded as actors. This perspective is also shared by realistic strands in international relations, whose statecentered approaches attribute other units, such as international or private organizations a rather subordinate importance. Formally, the situation changed when the International Court of Justice recognized the official status of the United Nations (UN) as an international organization in 1948, thereby breaking the international order of the Westphalian state system. It was against this background that the debate on European “actorness” arose at the beginning of the 1970s. There are basically two perspectives—approaches that emphasize the internal preconditions of actorness and those that focus on the external dimension. As early as 1970, Cosgrove and Twitchett introduced the concept of actorness into the European integration debate in order to draw attention to the growing importance of the United Nations and the European Community in international politics. According to their tentative theory of actorness, the global capacity of an international organization to act depends on its ability to make autonomous decisions, its influence in international relations, and above all on the importance of the organization for its members (Cosgrove and Twichett 1970, p. 12ff.). According to Gunnar Sjöstedt (1977) the ability to act internationally as an actor is not an indivisible, but a variable quality that the European Community can possess to varying degrees (Sjöstedt 1977, p. 14). Two basic requirements for actor capability must be met: the considered entity in the international system must be distinguishable from its environment, and it must fulfil a minimum degree of

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1 Introduction

internal cohesion. If these conditions are fulfilled, the potential actor has autonomy, which in turn is a prerequisite for the ability to act. Autonomy is a necessary, but not a sufficient condition for determining an actor. In addition, there are a number of structural, including institutional and social prerequisites. Sjöstedt thus formulates an analytical scheme for the “evaluation of how much of an international actor the EC is” (Sjöstedt 1977, p. 18). Authors who shed light on European actorness from the perspective of their environment consider the actual effects of the EU on other countries, international organizations, or the international system as a whole. From this perspective, Johan Galtung (1973) assessed the EC as an economic and political power with the potential to impose a pax bruxellana on the world. Authors such as Allen and Smith (1990) criticize Sjöstedt’s concept of actorness for not allowing the EC/EU any international influence as long as the internal conditions for actorness are not fulfilled. As a counter-model, the authors present the concept of “presence,” which assumes that Western Europe has international significance even without specific actor criteria. Presence is not the prerogative solely of ‘actors’ centered on people and institutions, but can be a property of ideas, notions, expectations and imaginations (Allen and Smith 1990, p. 22).

Allen and Smith argue that not only clearly identifiable and delimitable groups and institutions influence world politics, but also rather diffuse phenomena such as action arenas or networks. Authors such as Jupille and Caporaso (1998) and Bretherton and Vogler (1999, 2006, 2013) aim to combine both the internal and the external dimensions of actorness in different ways. Both will be discussed in more detail since they are among the most cited authors in this debate and their concepts of actorness serve as the analytical framework for our empirical book chapters. Jupille and Caporaso (1998), drawing on Allen and Smith’s (1990) recognition of the “presence” of the EU, developed an actor concept that takes account of both internal and external criteria. “Recognition” refers to the external acceptance and interaction of third parties with the EU. “Authority” indicates the EU’s legal competence in a particular area. “Autonomy” refers, similar to Sjöstedt’s concept, to institutional distinctiveness and independence. “Cohesion” hints at the Union’s ability to formulate and represent internally coherent policy preferences. This last point distinguishes an actor from “presence,” which points to influence by mere existence. “Cohesion” is divided into further dimensions such as “value cohesion,” “tactical cohesion,” “procedural cohesion,” and “output cohesion” (¼ extent of success in the formulation of common policies) (Jupille and Caporaso 1998, p.214ff.). Here, too, the various criteria are seen as a continuum, not as absolute. Bretherton and Vogler (1999, 2006, 2013) have formulated a model of actorness which is based on constructivist considerations. Accordingly, the structures of the international system form the framework of action for the actors, but are also shaped by their behavior. Foreign policy roles are constructed through this interaction between structures and action. The EU is described as a complex, multilayered

1.2 Overview of the Actorness Debate

5

entity. Actorness is regarded as a variable in terms of time and content. The Bretherton/Vogler actor model comprises three dimensions—presence, opportunity, and capability. Presence refers (in the sense of Allen and Smith 1990) to the EU’s ability to exert external influence through its mere existence and to influence the expectations and behavior of outsiders. Presence does not require deliberate action, but also encompasses the often unintended consequences of the EU’s internal priorities and policies. Thus, presence can be generated by the material existence of the European political system and its institutions, but above all also by the economic power of the EU. Bretherton and Vogler consider the size of the internal market as an asset of the EU’s trading power and the common currency of the euro as the main source of the EU’s external influence. Presence also includes external reactions, such as external perceptions of a role of the EU in a particular policy area or negotiation process. The perceptions of third parties regarding the capacity of EU actors also influence the external context and thus the opportunity structure for European action (Bretherton and Vogler 2013, p. 376ff.). Opportunity refers to the external context of ideas and events that makes action possible or difficult. This includes not only the actual changes in the international system, but also perceptions and intersubjective interpretations which determine the systemic and ideological international environment for action. The example of economic interdependencies, which have increased since the 1970s as a central feature of international politics, illustrates this opportunity. Since economic spheres of action increasingly transcend national borders, nation-states seem to lack the ability to adequately meet the challenges linked with open markets. At the same time, the ideological climate of neoliberalization also promoted the awareness that the EU was capable of managing economic interdependencies (Bretherton and Vogler 2013, p. 378ff.). The third dimension of capability refers to the internal factors of actorness. It includes those aspects of the European policy process that influence the EU’s ability to “capitalise on presence or respond to opportunity” (Bretherton and Vogler 2013, p. 381). In a narrower sense, there are two other dimensions—the ability to formulate coherent priorities and policies, and second, the capacity to exploit available policy instruments. According to the authors, a sufficient degree of coherence is decisive for the ability to formulate policy. Again, three interconnected dimensions are distinguished—vertical coherence (¼ between national and supranational levels of policy formulation), horizontal coherence (¼ between policy areas) and institutional coherence (¼ within and between EU institutions). Vertical coherence refers to the extent to which the bilateral external policies of the member states are consistent with each other and complement those of the supranational level. Vertical coherence is seen as a measure of the political willingness of member states to commit themselves to common policies. However, a position supported by states does not yet mean that the Union can take a proactive role; agreements on the lowest common denominator can also lead to relatively weak substantive positions. Accordingly, vertical coherence is greatest in those policy areas in which exclusive competence

6

1 Introduction

lies at the supranational level, such as trade policy. In areas with shared competence between the EU and member states, such as environmental policy or even parallel responsibilities, such as development cooperation, vertical coherence appears to be rather low. Horizontal coherence could be jeopardized if policy measures affect different policy areas, which can lead to conflicting objectives (e.g., between environmental and trade policy). Institutional coherence, on the other hand, refers to the coordination procedures within the Union between the Commission and the Council or also within the EU Commission. Since the Lisbon Treaty, the promotion of institutional coherence between the Commission and the Council has become a more important issue in the field of foreign, security, and development policy. The EU’s relevant policy instruments include diplomatic means such as negotiations, economic instruments that can be used as incentives or sanctions, or military measures. Although in principle the Union has access to each of these instruments, its ability to use them depends crucially on the existence of vertical coherence (Bretherton and Vogler 2013, p. 385). While diplomatic means and political dialogues are standard in European foreign relations, military operations, despite the introduction of the European Security and Defence Policy (ESDP) and the Common Security and Defence Policy (CSDP), have so far only been used to a limited extent. Political and economic paths are used much more often, not least because their use was facilitated by the Lisbon Treaty. The EU has acquired legal personality through Lisbon and can therefore make international commitments within the framework of the Common Foreign and Security Policy without having to be ratified by all national parliaments. With the abolition of the pillar structure by the Lisbon Treaty, it has also become easier to use economic means such as sanctions to achieve political goals. By controlling access to the internal market, the EU also has a powerful means of exerting pressure to achieve policy objectives (Bretherton and Vogler 2013, p. 385). Although widely received, Bretherton and Vogler’s perspective was also criticized for not sufficiently specifying the connection and interaction between the individual dimensions of actorness (Gehring et al. 2013; Drieskens 2017, p. 9 f.; Klose 2018). Against this background, Klose proposes to look at the emergence and development of the EU as an international actor from the perspective of interactionist role theory, following the sociopsychological work of George Herbert Mead (1934). Accordingly, the actorness of the EU is interpreted as defining one’s own roles in specific contexts of international affairs. The capacity itself results from the interplay of internal and external role expectations, creative action, and social and material resources. Actorness is thus a social phenomenon that must be renegotiated again and again through interactions (Klose 2018, p. 1146 f.).

1.3

Comparative Perspectives on Actorness

The more recent debate on European actorness increasingly abandons the view of the EU as an actor sui generis and adopts a more comparative perspective (e.g., Drieskens 2017; Niemann and Bretherton 2013; Peters 2016).

1.3 Comparative Perspectives on Actorness

7

One analytical perspective is to compare the EU with other countries. Manfred Elsig examines how the EU selects judges for the WTO Appellate Body and compares this procedure with that of the United States (Elsig 2013) in terms of its representativeness and effectiveness. Rhinard and Brattberg (2013), on the other hand, compare the EU and the United States in terms of their approach to disaster control and examine how they dealt with the earthquake in Haiti in 2010. Other studies focus on the comparison of European and American reactions to the “Arab Spring” in 2011 (Dandashly 2016), on state building in Afghanistan (Upadhyay and Pawelec 2016) or on dealing with conflicts in the Sahel zone (Kempin et al. 2016). Another strand of the literature compares the EU with other regional organizations and thus increasingly abandons a state-centered perspective. Söderbaum and Van Langenhove (2005) justify this view not least by the EU’s own efforts to promote regionalism in other regions of the world and to conclude interregional agreements. Wunderlich (2012a and 2012b) examines the European actorness in comparison with ASEAN (Association of Southeast Asian Nation States). Comparative regionalism and interregionalism research (cf. Hettne and Söderbaum 2005; Hulse 2014) analyze the actorness of different regions with respect to a relevant policy area, such as trade. For example, Hulse (2014) identifies different strengths of the EU, SADC (Southern African Development Community), and ECOWAS (Economic Community of West African States) in the negotiation of international trade agreements. According to these findings, region-specific factors can favor, but also constrain actorness (Hulse 2014, p. 548). Finally, another analytical perspective focuses on European actorness in international fora, regimes, and organizations. The fields of investigation range from the role of the EU in various fora of the G Group (G7, 8, 20) (Debaere 2015; Huigens and Niemann 2011; Murau and Spandler 2016), in the UN Security Council (Drieskens 2008), the International Labor Organization (ILO) (Kissack 2008), in the global gender regime (Kessler 2008), or in the EULEX mission in Kosovo in relation to other UN missions on the ground (Greicevci 2011). Groenleer and Van Schaik (2007) compare the UN negotiations on the Kyoto Protocol with the establishment of the International Criminal Court with regard to the capacity of European actors. Both cases represent examples of intergovernmental policy formulation and yet relatively high actor capacity. The authors explain this by the social interaction between member states and by the congruence of their preferences over time. They therefore argue for the theoretical consideration of informal practices and routines based on shared social norms and values in explaining actor capacity. In a much quoted article Gehring et al. (2013) discuss why the EU is recognized as an actor in some international institutions but not in others. The authors come to the important conclusion that actorness does not necessarily depend on formal membership in an international organization, but rather on its ability to control relevant governance resources (Gehring et al. 2013, p. 860 f.).

8

1.4

1 Introduction

Legitimacy and Effectiveness of Actorness

Constructivist approaches of European actorness focus on expectations, perceptions, or patterns of “soft” influence. Kratochwil et al. (2011), for example, distinguish four conditions of actorness: the legitimacy of the EU from the point of view of citizens, the attractiveness of the EU from the viewpoint of outsiders, its recognition as an independent actor in light of other international actors, and its ability to influence or frame policies or debates in the member states or in third countries. Using the Ukrainian conflict as an example, the authors examine the extent to which media coverage in the member states made reference to the EU. In their earlier work Bretherton and Vogler considered legitimacy as an internal factor of ability (2006, p. 30). Based on the notion that the EU is a sui generis actor, Čmakalová and Rolenc (2012) argue that European legitimacy should not be measured against the traditional standards applied to Western democracies. In a much quoted essay, Christopher Hill (1993) has already addressed the possible gap between expectations of member states and what the European Community could achieve in foreign policy (“capability-expectation gap”). During the Gulf wars and also the GATT Uruguay Round negotiations, the EC was confronted with new challenges, which demonstrated the limits of European actorness. Hill therefore proposes to regard the Community as a system of external relations (Hill 1993, p. 322). Such conceptualization should allow to analytically distinguish between different dimensions of the EU’s external relations. At the beginning of the 2000s, an increasing number of empirical studies addressed European actorness. Approaches that emanate from the “civil power Europe” or the “normative power of the EU” (e.g. Manners 2002), almost assume a certain degree of actor capacity. Against the background of institutional changes in the internal structure of the EU and the increasingly complex international environment, the focus of attention shifted from the capacity of actors to the question of the effectiveness of their actions (da Conceição-Heldt and Meunier 2014; Niemann and Bretherton 2013). The effectiveness of politics is partly understood as “goal attainment” (e.g., Groen and Niemann 2013) or as “problem solving.” While the former can refer to the formulation of a common position or its implementation vis-à-vis third parties in an international negotiation process, the latter addresses the medium or even long-term impact of European measures. These differences in the meaning of effectiveness alert to the need for a clear operationalization of this concept. In their introduction to a special issue of the Journal of European Public Policy, Eugenia da Conceição-Heldt and Sophie Meunier (2014) have developed an analytical framework to measure effectiveness, based on Jupille and Caporaso. The focus is on internal cohesion, which describes the ability of the EU and its member states to find a common position and to represent it externally. The degree of internal cohesion depends not least on the level of communitarisation of the respective policy field—where the EU has exclusive competence, internal cohesion is higher than where competence is shared. Cohesion appears to be lowest where the EU is merely subordinate to the member states and has no legislative competence. Unlike other authors, da Conceição-Heldt and Meunier (2014) take a sequential approach to

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internal cohesion. The argument is that the latter can only be achieved if the other three dimensions of actor capacity (autonomy, authority, recognition) are fulfilled. The external effectiveness of the EU is interpreted as the achievement of its own goals (da Conceição-Heldt and Meunier 2014, p. 968). The relationship between internal cohesion and external effectiveness is now being examined for different policy areas such as trade (da Conceição-Heldt 2014), environmental policy (Delreux 2014), or neighborhood policy (Börzel and van Hüllen 2014). This results in a mixed picture: while in some cases a positive correlation between cohesion and effectiveness can be deduced, in others there is no or even a negative impact at all. The latter is the case, for example, if the EU’s negotiating power is strengthened by referring to the difficult internal decision-making process—the lower the coherence, the greater the effectiveness in some cases (da Conceição-Heldt and Meunier 2014, p. 969ff.). The authors explain different configurations of the relationship between internal cohesion and external effectiveness with differences in the negotiating situation (with respect to the strategies, relative power, and negotiating positions of the other actors) and the particularities of the respective policy arena (complexity of respective negotiation issues, existence of competing forums for dealing with issues).

1.5

Explaining European Actorness: A View from International Relations, International Political Economy, and European Integration Studies

Several dimensions of actorness have been discussed. Concepts such as authority, autonomy, cohesion, or recognition allow to capture and empirically describe different aspects of actorness. Some of these analytical concepts include theoretical premises more or less implicitly. Bretherton and Vogler’s approach is constructivist while a focus on internal determinants of actorness often reflects institutionalist theoretical perspectives. However, describing different degrees or dimensions of actorness does not necessarily help us to understand why the EU has become an actor in the first place. Thus, actorness should be examined through theoretical lenses, which allow for causal explanations. The following sections present different theoretical perspectives mostly in the realm of realism, liberalism and constructivism, and apply them to the notion of European actorness.

1.5.1

(Neo-)Realist Perspectives

Representatives of realism, such as Joseph Grieco and Robert Gilpin, see nationstates at the center of the international system that seeks to defend and increase national security and prosperity at the expense of other states (Grieco 1990). In order to assert themselves in an anarchic environment or in international competition and to ward off possible threats to their political and economic independence, states use military, economic, or psychological means of power (Gilpin 2001, p. 19). A

10

1 Introduction

state-centered perspective on international politics sees the EU, a political system with an inherent division of power between nation-states and European institutions, at its core as a counter-model. However, this refers primarily to the integration process itself which reflects the interaction between states, European institutions, and social actors. Realistically inspired EU researchers focus on the EU’s external action and the power resources the EU uses to pursue foreign policy objectives. Zimmermann (2007) uses the example of the EU’s role in the negotiations on China’s and Russia’s accession to the WTO to argue that its interests are shaped by geo-economic and mercantilist motives, above all by the desire to increase the EU’s prosperity relative to other powers. If necessary, the EU even subordinates economic goals to political-strategic goals and, if necessary, ignores the interests of social groups (Zimmermann 2007, p. 818). The preferences of the EU are partly equated with those of the largest states (Gilpin 2001, p. 18). Accordingly, although the EU is not a unitary actor, it behaves as such if the preferences of national and supranational actors point in the same direction. Other authors such as Chad Damro and Dan Drezner see market size as an essential power resource. Damro (2012) considers the EU as market power, exercising it through the externalization of economic and social, market-related policies and regulations. As a historically grown economic bloc with a common external tariff, the European market necessarily has an external dimension. According to Drezner (2007), market size has a double significance for the externalization of internal regulations. Market size gives large powers a negotiating advantage. In addition, a large market influences the perceptions of other players with regard to the expected results. Market size, for example, influences material incentives for governments to adopt regulatory standards. The mere expectation that other countries will adjust their standards due to the threat of possible exclusion from the market leads smaller countries adapting more to the positions of the major powers (Drezner 2007, p. 32 f.).

1.5.2

Liberal Perspectives

Common to all liberally inspired theoretical perspectives is the desire to open the black box of the state and focus on the significance of social and economic influences on state action and government policy.

1.5.2.1 Liberal Intergovernmentalism This approach shares with realism the assumption that states are the central actors in international politics. In contrast to realism, however, it is assumed that political processes are decisively shaped by interstate negotiations and that government policy is an expression of dominant social and especially economic interests (Moravcsik 1997 and 1998; Moravcsik and Schimmelfennig 2009, p. 68). States thus define their preferences as a reaction to pressure from national social groups; to this extent, state preferences are neither fixed nor uniform and can vary according to policy area and topic. For the specific case of the EU, it is assumed that the preferences of national governments with regard to European integration processes

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are decisively shaped by concrete economic interests (Moravcsik and Schimmelfennig 2009, p. 70). In the sense of liberal assumptions, it is assumed that states enter into beneficial collaboration, but disagreement may arise over the relative distribution of profits. The resolution of these conflicts depends on the bargaining power of a state, which is based on its relative market power and information advantages. States that least aspire to a particular outcome are the easiest to threaten non-cooperation and thus force others to make concessions. States with better information about the preferences of others and the functioning of institutions can influence the outcome of negotiations to their own advantage (Moravcsik and Schimmelfennig 2009, p. 71). Liberal intergovernmentalism explains the delegation of competences to the European level with the aim of depriving others of the possibility of reversing certain decisions (see also the detailed description of this approach in Chap 3. Using liberal intergovernmentalism, Chaps. 3 and 4 show that lacking coherence of member state positions in the negotiation of climate targets under the Kyoto Protocol or in the setting of equity capital standards under Basel III has led to low European actorness in these processes.

1.5.2.2 Stakeholder Perspectives International economy influences social preferences and the national distribution of gains and losses. Interest group approaches assume that the preferences of economic or social interests directly determine the policies of nation-states and European institutions. Representatives of “Open Economy” approaches such as David Lake or Jeffry Frieden focus on individuals, economic sectors, or production factors (labor, capital) as analytical units (Lake 2009). It is assumed that the position of these actors in the international economy determines their economic policy preferences by anticipating possible distributional effects of economic policy decisions. Accordingly, various social groups compete for access to economic policy decision-making processes. The open economy approach draws on theorems of foreign trade theory to formulate expectations regarding the interests of similar groups of actors. Thus, the relative scarcity or abundance of production factors within a territory determines their relative impact through political decisions on market opening. According to the Heckscher-Ohlin model and also the StolperSamuelson theorem, open markets and trade liberalization favor production factors that are abundant and disadvantage scarce ones. In the world of a model that consists of two production factors, the line of conflict between capital and labor runs accordingly. On the other hand, from the perspective of the Ricardo-Viner model, the distribution effects of open markets vary considerably from sector to sector. Here it is assumed that open markets favor export-oriented industries and disadvantage import competitors. The export-oriented industries will therefore advocate low tariffs or the dismantling of non-tariff barriers to trade, which would facilitate exports. The import competing industry, on the other hand, advocates protectionism and the maintenance of trade barriers because it fears foreign competition for its products and job losses. From this perspective, labor and capital would form an alliance depending on whether their industry benefits or loses from open markets. Overall, the “production profile” of a company or a sector determines the extent to

12

1 Introduction

which it is affected by international competition (Alt and Gilligan 1994; Grossman and Helpman 2002; Lake 2009). With regard to European trade policy, Dür (2012) argues that groups representing concentrated interests, in particular, have a major influence on foreign trade policy. The rationale behind this is that the expected costs and benefits of a measure may be either concentrated or diffuse. Active lobbying is expected above all from those actors who anticipate concentrated advantages or disadvantages through a political measure. The capacity of actors such as the European Commission in international negotiations aimed at further market opening, for example, would therefore depend on the homogeneity and assertiveness of economic interests benefiting from open markets. These approaches naturally neglect noneconomic interests such as civil society groups or consumer organizations. Dür (2012, p. 180) expects that noneconomic interests will not be able to assert themselves in competition with concentrated economic interest groups. Empirically, however, trade policy and especially the negotiations of trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP) or the CETA Agreement show increasing politicization. This is accompanied by a growing importance of nontariff trade barriers such as social and labor standards, which are often deeply anchored in national political systems and economies and exert influence on daily life (DeVille and Siles-Brügge 2016) (see Chap. 2). The concrete influence of civil society on EU trade policy is controversial. While Young (2016) shows that TTIP failed less because of the conflict between export-oriented and import competing groups than because of the resistance of civil society, Strange (2016) argues that the influence of civil society is limited despite increased mobilization, due to complex negotiation issues, required expertise or intransparent negotiation processes.

1.5.2.3 Two-Level Games Putnam’s concept of the Two-Level Game examines international negotiations using domestic factors (Kahler 1993; Moravcsik 1993; Putnam 1988). The key actors here are heads of government (“chief of governments”), who represent their states and internal social groups externally. At the international level (level 1), heads of government negotiate with foreign partners and at the domestic level (level 2) they must represent these results to parliament or coalition partners and ultimately to all actors responsible for ratifying the results. Putnam combines the international and domestic negotiating level with the concept of the “win-set,” the sum of all conceivable agreements at level 1 that would obtain the necessary majority within one’s own electorate (Putnam 1988, p. 437). By definition, an agreement is only reached if the win-sets of both negotiating parties overlap. The greater the respective win-set of each negotiating partner, the greater the probability that an agreement will be reached. The smaller the win-sets, the greater the danger of their failure. A constitutive element of the two-level game is now the assumption that a smaller win-set can also be a negotiating resource for the corresponding negotiating partner, e.g., due to limited domestic political leeway or numerous veto players. Referring to his own “tying hands,” the negotiator can try to persuade the other side to compromise to suit

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his own preferences (Moravcsik 1993, p. 28). Typically, negotiators in such situations refer to their limited capacity to act due to consideration of coalition partners or the possible intervention of other veto players such as constitutional courts. In the EU context, the concept of the two- or multi-level game is often applied to trade policy and the role of the EU Commission in the negotiation of international trade agreements, in which the Commission, as negotiator, must take into account the preferences of the member states and ultimately also domestic actors. Tobias Leeg’s contribution in Chap. 2 illustrates that the EU can become an unpleasant and sometimes even assertive negotiating partner in the negotiation of trade agreements, precisely because it has to take into account the preferences of a large number of veto players.

1.5.2.4 Principal-Agent Approach The Principal-Agent (P-A) approach assumes that political principals delegate authority on a contractual basis to nonelected agents in order to achieve efficiency gains, create negotiating or market power, or increase credibility (see also the detailed description of this approach in Vincent Woyames Dreher’s Chap. 3). Due to inherent information asymmetries, agents have the opportunity to distance themselves from the preferences of their principals and use the existing autonomy to pursue their own goals. This behavior is also known as “shirking” or “slippage” or “agency loss.” The principal can now use various instruments to control the agent. However, since control is complex, it must maintain a balance between the desired agency and unwanted losses of control. Principal-agent models originate from the microeconomy and were increasingly used to explain internal and external dynamics of European economic policy (Dür and Elsig 2011; Pollack 1997). With regard to the EU, the P-A approach focuses on those who delegate power (member states in the Council, but also the European Parliament since Lisbon) and those who represent it at international level, such as the EU Commission, the rotating EU Presidency or the European External Action Service (da Conceição-Heldt 2011; Dür and Elsig 2011). P-A models provide explanations for the assignment of agents by principals and also for the relative autonomy of the agent from the principals. In the European context, the heterogeneity of member state preferences, an international context that exerts pressure, or a low degree of politicization of issues are factors that contribute to a more autonomous agent and lead member states to lose control over foreign relations (Keukeleire and Delreux 2014, p. 324 f.). With regard to our discussion of actorness, one would argue that a sufficient delegation of authority to a European agent could increase the coherence and also the external capacity of the EU. However, this is offset by the costs of a loss of sovereignty that the member states would suffer as a result of a delegation that cannot be revoked. In the field of trade, the costs of delegating competences to the European level (EU Commission) for the member states were apparently lower than the resulting benefits. In the area of financial market regulation and supervision, on the other hand, nationally heterogeneous financial markets proved to be the cause of nationally divergent state interests and were therefore an obstacle to far-reaching centralization of supervisory powers.

14

1.5.3

1 Introduction

Constructivist Perspectives

In contrast to rationalist approaches, constructivism focuses on immaterial dimensions such as values, norms, roles, or identity. Reality is therefore not given, but is repeatedly constructed by shared experiences, ideas, and patterns of action (see also Ulbert 2010). Individual and social behavior is regarded as structurally embedded. Following Giddens’ theory of structuring, Alexander Wendt assumes a codetermined relationship between actor and structure (Wendt 1987). Collectively shared contents form international structures that influence the actors’ perception of themselves and others and ultimately also their actions. From this point of view, European actorness is based neither on the definition of common interests, nor on the creation of institutional conditions or the existence of adequate instruments. Rather, it is a matter of creating a common understanding among the elites of the member states and the population regarding the European role in the world and the values they want to promote and defend externally (Keukeleire and Delreux 2014, p. 326 f.). Constructivist-inspired studies of actorness would thus reconstruct the roles and discourses that European actors assume in various fields of foreign relations (Orbie 2008). Since the EU refers to a common normative and cognitive framework in the European treaties and directives, it is no coincidence that a discussion about the character of the EU as a normative actor arose as early as the 1970s (Duchêne 1972). Accordingly, the Community appeared as a “civil actor” with considerable economic but limited military power. Against the background of the collapse of totalitarian regimes in Eastern Europe in the 1990s, Manners (2002) argued for a stronger conceptualization of the role of the EU as a normative power. Instead of focusing as before on European institutions or policies, he believes that cognitive components or symbolic dimensions of politics should be considered. Manners identifies five core standards contained in European treaties, declarations, or directives: peace, freedom, democracy, the rule of law, and a commitment to human rights. In addition, there would be another four subordinate norms such as solidarity, antidiscrimination, sustainable development, or good governance, which can also be found in European documents. The academic focus should therefore be on the processes and mechanisms through which these standards diffuse and are disseminated to the outside world. Meanwhile, the concept of the “normative actor EU” has been criticized from different directions. While some criticize the lack of standards and criteria on the basis of which the practical implementation of norms could be examined, others address its lack of relevance in political implementation (Sjursen 2006) or reject the concept as Eurocentric (Staeger 2016).

1.5.3.1 International Organizations as Bureaucracies Another facet of constructivism treats international organizations as bureaucratic actors. The EU is an international or regional organization and in this capacity is itself a member of international organizations and fora (such as the United Nations or the World Trade Organization), but also increasingly cooperates with other international organizations. Whether European partners have autonomy and authority or to

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what extent they are perceived as actors by their cooperation partners is therefore a crucial issue. An understanding of international organizations as bureaucracies focuses on the bureaucratic culture and thus the formal and informal rules and routines that international organizations develop with increasing duration of their work. Authors such as Barnett and Finnemore (1999, 2004) state that the development of one’s own norms, ideas and belief systems can lead to negative effects, “bureaucratic pathologies,” which hinder the adaptation of the international organization to changing environments. More recent research on international bureaucracies (Bauer et al. 2017) focuses specifically on the role of executive and administrative bodies of international organizations, such as international secretariats or, in the European context, the European Commission. These bodies employ professional full-time employees who follow the rules and norms of the organization. From the point of view of bureaucratic approaches, the administrative and executive bodies have relative autonomy vis-à-vis the member states, which enables them to develop their own preferences and to pursue these at least in part independently of the member states. The bureaucratic nature of an international organization can make it easier for it to “speak with one voice” to the outside world, to express uniform goals and preferences and thus contribute to increasing actor capacity. However, a bureaucratic organizational culture can also be dysfunctional for cooperation with other international organizations if their organizational cultures collide. During the European financial and debt crisis, the European Commission, the European Central Bank and the International Monetary Fund cooperated in granting emergency loans to crisis-ridden European countries. It turned out that conflicts arose in the design and implementation of credit conditions between the IMF on the one hand and European organizations on the other, which could not least be traced back to diverging bureaucratic cultures (Lütz et al. 2019).

1.5.4

Leadership Approaches

Leadership approaches address the importance of “leadership” for the success of international negotiation processes. The focus is on an actor’s ability to lead and mobilize other actors in order to facilitate collective solutions to complex problems. While some authors assume an equal, non-asymmetric relationship between the leading actor and the followers and explicitly distinguish it from hegemony (Nye 2008 and the chapter by Daniel Otto), other authors emphasize the still asymmetric character of a leadership constellation (Underdal 1994, p. 178). Depending on the author, three (Young 1991) or four types of leadership (Parker and Karlsson 2014, p. 584 ff.) are distinguished. Structural leadership is based on the use of material resources, offered advantages or the credibility of threats. Through actions and the use of power resources, the behavior of others is to be changed. Possibilities to exert pressure on the outcome of the negotiations arise in particular for the party, which has less to lose than others from the negotiations (Young 1991, p. 291). Underdal (1994, p. 186 f.) also refers to structural leadership as coercive leadership.

16

1 Introduction

Entrepreneurial leadership consists of presenting options for overcoming obstacles to negotiation in a creative and innovative way. This can include a role as an agenda-setter by pointing out the importance of certain issues or by forming negotiating packages. Entrepreneurial leadership requires diplomatic skills and negotiation experience and aims overall at problem solving (Young 1991, p. 288). Intellectual leadership uses the power of intellectual capital to influence the perspectives of other negotiators. Ultimately, intellectual leadership entails the use of ideas to influence negotiation processes (Young 1991, p. 287f.). Leadership in international negotiation processes is usually exercised by individuals, states, or international organizations. For the latter to be able to lead, they need relative autonomy vis-à-vis member states or external actors. Previous studies indicate that the secretariats of international organizations, in particular, can raise awareness of issues, contribute technical expertise, forge coalitions with states or NGOs, or obtain reports on the status of implementation processes during the agenda-setting phase (Reinalda and Verbeek 2014, p. 597). In the European context, leadership is primarily attributed to supranational actors and in particular to the European Commission (Reinalda and Verbeek 2014, p. 603 and Daniel Otto’s Chap. 4).

1.6

Chapter Overview

The following three empirical chapters present different facets of European actorness in trade, finance, and climate policy. By drawing on concepts of actorness and on selected theoretical approaches presented in this introduction, the authors analyze internal and external problems of European actorness. The following Chap. 2 discusses European actorness in trade. Tobias Leeg sketches out the different historical steps of integration beginning with the customs union and ending with the Lisbon Treaty (2009), which transferred exclusive competence to the EU in trade, services, intellectual property rights and foreign direct investment. At the same time the Treaty upgraded the European Parliament to an important player in trade policy. He then lays out in detail the main actors, institutions, and processes involved in negotiating bilateral, regional, and multilateral trade agreements. Drawing on Bretherton and Vogler’s concept of actorness (Bretherton and Vogler 2013) Leeg assesses European actorness with respect to presence, capability, and opportunity. Putnam’s two-level game and the PrincipalAgent model are applied to demonstrate that the EU is in most constellations better placed to assert its interests in trade talks than its negotiation partners because of a relatively small “win-set”. The delegation of negotiation powers to the European Commission has so far strengthened the EU’s capability to act externally while the control by the EU Council has prevented the agent EU Commission to deviate from the principal’s preferences. Vincent Woyames Dreher demonstrates varying EU actorness within the policy area of money and finance in Chap. 3. By distinguishing between monetary and

References

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exchange rate policy, financial regulation and supervision and fiscal policy, Woyames Dreher first lays out the emergence of institutional competences of the EU and their development over time. While there has been substantial institutional change and Europeanization of competences in monetary policy and financial market regulation, in fiscal policy the member states still retain a veto in most decisions. The following sections shed light on the external representation of the EU in this policy area. Woyames Dreher shows that the varying representation of the EU in several international organizations and bodies depends mostly on the distribution of competences between EU level and member states. Bretherton and Vogler’s notion of actorness is used to demonstrate that the EU exhibits substantial presence while its capability ultimately depends on the coherence of its positions. Liberal intergovernmentalism and the Principal-Agent model are used to explain the negotiations on the Basel III minimum capital requirements during 2010–2011, in which the EU has displayed low actorness. Environmental and climate policies were early on defined by the EU as core policy areas. Chapter 4 first outlines the development of the institutional responsibilities of the member states and European actors over time. Daniel Otto then scrutinizes the evolution and the state of the international climate regime including the role of the EU. Three climate negotiations are studied in detail—the Kyoto Protocol (1997), the Copenhagen Agreement (2009), and the Paris Climate Agreement (2015). Otto draws on Jupille and Caporaso’s (1998) four dimensions of recognition, coherence, authority, and autonomy to study EU actorness here. Following Niemann and Bretherton (2013) he then analyzes the effectiveness of European action. Daniel Otto finds that the effectiveness of the EU in achieving the desired goals varied substantially in the three climate negotiations mentioned above. Liberal intergovernmentalism is used to explain the failure of the EU to assert its positions in the creation of the Kyoto Protocol and in the Copenhagen negotiations. The concept of leadership is applied to shed light on the EU’s negotiation success during the Paris Agreement consultations. Finally, Daniel Otto studies the perspective of an integrated policy approach that links climate policy with energy and trade policy in order to balance economic and ecological aspects in future international agreements. In the final Chap. 5 Susanne Lütz presents a comparative view of European actorness in the policy areas of trade, finance, and environment/climate policy and discusses further implications for the study of European actorness.

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Barnett, M., & Finnemore, M. (1999). The politics, power, and pathologies of international organizations. International Organization, 53(4), 699–732. Barnett, M., & Finnemore, M. (2004). Rules of the world: International organizations in global politics. Cornell University Press. Bauer, M. W., Knill, C., & Eckhard, S. (Eds.). (2017). International bureaucracy. Challenges and lessons for public administration research. Palgrave Macmillan. Börzel, T. A., & van Hüllen, V. (2014). One voice, one message, but conflicting goals: Cohesiveness and consistency in the European Neighbourhood policy. Journal of European Public Policy, 21(7), 1033–1049. Bretherton, C., & Vogler, J. (1999). The European Union as a global actor. Routledge. Bretherton, C., & Vogler, J. (2006). The European Union as a global actor (2nd ed.). Routledge. Bretherton, C., & Vogler, J. (2013). A global actor past its peak? International Relations, 27(3), 375–390. Čmakalová, K., & Rolenc, J. M. (2012). Actorness and legitimacy of the European union. Cooperation and Conflict, 47(2), 260–270. Cosgrove, C. A., & Twichett, K. J. (1970). Part one: International organisations as actors. In C. A. Cosgrove & K. J. Twitchett (Eds.), The new international actors. The United Nations and the European economic community (pp. 9–51). Macmillan St. Martin’s Press. da Conceição-Heldt, E. (2011). Variation in EU member states’ preferences and the Commission’s discretion in the Doha round. Journal of European Public Policy, 18(3), 403–419. da Conceição-Heldt, E. (2014). When speaking with a single voice isn't enough: Bargaining power (a)symmetry and EU external effectiveness in global trade governance. Journal of European Public Policy, 21(7), 980–995. da Conceição-Heldt, E., & Meunier, S. (2014). Speaking with a single voice: Internal cohesiveness and external effectiveness of the EU in global governance. Journal of European Public Policy, 21(7), 961–979. Damro, C. (2012). Market power Europe. Journal of European Public Policy, 19(5), 682–699. Dandashly, A. (2016). The EU and the US reactions to the Arab Spring 2011: (new) response to a changing Middle East and North Africa. In I. Peters (Ed.), The European Union’s Foreign Policy In Comparative Perspective. Beyond the “actorness and power” debate (pp. 142–162). Routledge. Debaere, P. (2015). EU coordination in international institutions. Policy and process in Gx forums. Palgrave Macmillan. Delreux, T. (2014). EU actorness, cohesiveness and effectiveness in environmental affairs. Journal of European Public Policy, 21(7), 1017–1032. DeVille, F., & Siles-Brügge, G. (2016). T.T.I.P. the truth about the transatlantic trade and investment partnership. Polity Press. Drezner, D. W. (2007). All politics is global: Explaining international regulatory regimes. Princeton University Press. Drieskens, E. (2008). EU actorness at the UN security council: A principal-agent comparison of the legal situation before and after Lisbon. European Journal of Law Reform, 10(4), 599–619. Drieskens, E. (2017). Golden or gilded jubilee? A research agenda for actorness. Journal of European Public Policy, 24(10), 1534–1546. Duchêne, F. (1972). Europe’s role in world peace. In R. Mayne (Ed.), Europe tomorrow: Sixteen Europeans look ahead (pp. 32–47). Fontana. Dür, A. (2012). Why interest groups dominate the EU’s foreign economic policies. In H. Zimmermann & A. Dür (Eds.), Key controversies in European integration (pp. 178–183). Palgrave Macmillan. Dür, A., & Elsig, M. (2011). Principals, agents and the European Union’s foreign economic policies. Journal of European Public Policy, 18(3), 323–338. Elsig, M. (2013). The EU as an effective trade power? Strategic choice of judicial candidates in the context of the World Trade Organization. International Relations, 27(3), 325–340. Galtung, J. (1973). The European community: A superpower in the making. Allen & Unwin.

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2.1

Introduction

Trade is one of the most integrated policy fields of the European Union (EU) and arguably its most important competence area in external economic policy. The economic importance of trade for the EU primarily derives from the openness and enormous size of the European internal market. Alongside the American and Chinese markets, it constitutes the largest in the world. In 2018, the EU was also the second biggest trading power in goods (after China) and the largest in services (European Commission 2019). Due to the economic importance of the EU market for the world economy, the EU’s trade policy orientation—i.e., the level of tariffs, the (non-)application of export subsidies, antidumping measures, the establishment or dismantling of regulatory trade barriers—has considerable implications for third countries. Being able to determine access to the European market is therefore an essential power resource for the EU in international economic relations (Dür and Zimmermann 2007). For many experts, trade policy is even the EU’s central source of power for all its external action (Gstöhl and De Bièvre 2018; Hoang 2016; Meunier and Nicolaïdis 2006; Woolcock 2011). Chad Damro (2012) characterizes the EU as a “market power” that is able to externalize its economic policy and regulations through its foreign trade arrangements. However, its economic weight allows the EU not only to promote its economic interests, but also European norms and values in the world. Therefore, the well-known characterization of the EU as a “civilian power” or “normative power” in international relations (Duchêne 1972; Manners 2002) is often associated with the EU’s role in international trade policy (e.g., Leeg 2014; Poletti and Sicurelli 2018, Sicurelli 2020). The importance of foreign trade policy for the EU, however, not only stems from the EU’s internal market and its considerable share of world trade, but also from the EU’s ability to speak with one voice in international trade policy (da ConceiçãoHeldt and Meunier 2014; Meunier 2005). Alongside agricultural, internal market and competition policy, trade was one of the first policy areas, which was delegated from the six original member states of the European Economic Community (EEC)— # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 S. Lütz et al., The European Union as a Global Actor, Springer Texts in Political Science and International Relations, https://doi.org/10.1007/978-3-030-76673-3_2

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Belgium, (Western) Germany, France, Italy, Luxembourg, and the Netherlands—to the supranational level. With the signing of the Treaties of Rome in 1957, the member states set out to gradually dismantle tariffs among themselves and to establish a Customs Union with a common external tariff vis-à-vis the rest of the world. This in turn required a common representation of the member states in international trade fora. However, formulating a common commercial policy for the EEC was difficult. The six founding states had pursued very different trade policy approaches until then. Belgium, Luxembourg, and the Netherlands had already founded the Benelux Customs Union. These small, open economies and Germany—already a strong and growing exporter—advocated a liberal trade policy. France and Italy, on the other hand, favored a more protectionist orientation (Young and Peterson 2014, p. 49). As a result, Germany and the Benelux countries fully supported the communitarisation of trade policy. Italy and France, by contrast, were reluctant to cede too many national competences to the supranational level. The trade policy provisions of the 1957 Treaties of Rome, therefore, represented a compromise between these two camps. The main features of this compromise continue to shape the EU’s trade policy architecture today. The European Commission received far-reaching powers to coordinate the trade policy positions of the member states and to negotiate at the international level with third countries. In return, the member states obtained extensive control rights through the Council. A special committee appointed by the Council defines negotiating mandates, which the Commission has to follow closely during negotiations. This originally called Art. 113 Committee— named after the article of the EEC Treaty on the basis of which it was established (later Art. 133 and finally simply Trade Policy Committee (TPC))—is involved in the negotiation process on a consultative basis and is able to closely monitor the negotiating behavior of the Commission (Dür and Zimmermann 2007). Since any negotiated trade agreement has to receive the consent of the Council in order to take effect, the member states reserved the right to always have the final say in major trade policy decisions. Under this division of competences, the EU has concluded a large number of bilateral, interregional, and multilateral trade agreements with various countries and regions of the world since the 1960s. For a long time, the EU gave clear priority to the development of the multilateral world trade system within the framework of the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO). However, after the multilateral negotiations of the WTO Doha Development Round failed to produce results, the EU increasingly focused on concluding bilateral and regional agreements since the mid-2000s (Woolcock 2014a). In recent years, not only the number of bilateral EU trade agreements has increased significantly but also their scope and depth. They now not only deal with tariff cuts but also contain provisions on regulatory cooperation, investment, government procurement, competition policy as well as labor and environmental standards (Leblond and Viju-Miljusevic 2019). As a result, a wider range of societal actors have become involved in trade policy processes and EU trade policy has become more politicized (De Bièvre et al. 2020). The closer involvement of the

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European Parliament in trade policy since the Lisbon Treaty has exacerbated this trend (Frennhoff Larsén 2017, 2020; Leeg 2014, 2019). Besides these changes to internal political dynamics, several factors have also created a fundamentally altered international environment for EU trade policy over the last years. The protectionist policies of the Trump Administration and other governments, Brexit, the continuing rise of China’s state capitalism, the crisis of the WTO and, most recently, the COVID-19 pandemic and its economic impact have created challenges for the EU not seen since its establishment. To sum up, different interests and actors shape EU trade policy which is why it is characterized by continuity as well as change. This chapter, therefore, aims to address the following questions: How did EU trade policy develop over the last decades? What implications does the institutional design of trade policy have for the EU as an actor in international economic relations? How does the EU conduct its unilateral, bilateral, and multilateral relations with its trading partners? What conclusions can be drawn from these issues for the evaluation of the EU as a trade policy actor? To answer these questions, the chapter traces the institutional development of EU trade policy from the 1950s until today and explores the role of different actors and processes in the formulation of EU trade policy. Subsequently, the chapter examines EU trade policy within the framework of the WTO as well as the EU’s trade relations with different countries and regions. When analyzing the EU as an actor in international trade policy, the chapter is oriented toward the concept of actorness based on Bretherton and Vogler (1999, 2006, 2013). According to these authors, actorness can be examined based on three fundamental aspects: The concept of presence defines the ability of an actor to exert influence beyond its own borders. This includes both the intended and the unintended consequences of one’s own behavior on the perceptions, expectations, and behavior of third parties. The category of opportunity, on the other hand, describes external structures and contextual conditions that limit or facilitate an actor’s actions. Capability is the term used to describe the internal processes that constitute an actor and expand or restrict its scope of action. In concrete terms, this means that capability describes the ability of an actor to exploit its presence and existing opportunities. The following sections, therefore, present the concepts of presence, opportunity, and capability as an analytical framework for the study of EU actorness in international trade policy. The second section of this chapter first looks at institutional responsibilities in EU trade policy and how they changed over time. The so-called EU Common Commercial Policy (CCP) played an important role in the process of European unification (Meunier 2005). But how have institutional responsibilities changed over time and what factors have led to the current distribution of competences? This section provides an overview of the most important steps in the institutional development of EU trade policy. First, the origins and objectives of the CCP are examined. Subsequently, the section deals with the expansion of EU competences in trade policy through the successive EU treaties as well as judgements and expert opinions of the European Court of Justice (ECJ). It will become clear that the question of competences in EU trade policy has always been and remains the central challenge in the development of the CCP. Particular attention

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will be paid to the role of the Commission, the Council, and the European Parliament as central institutional actors in EU trade policy, and the changes that the Treaty of Lisbon (2009) has brought about. Besides the EU’s internal processes, the section examines as well the EU’s overall trade policy strategy over time. Part 3 of this chapter assesses the EU as an actor in international trade policy. First, the role of the EU in the WTO is examined and the changing orientation of EU trade policy at the multilateral level over the last decades will be traced. Subsequently, nonreciprocal instruments of EU trade policy will be discussed. This includes, on the one hand, defensive trade measures by the EU to protect itself against excessive imports and unfair trade practices by third countries. On the other hand, it also includes unilateral EU initiatives such as the Generalized Scheme of Preferences (GSP) and the Everything But Arms (EBA) initiative, which grants developing countries preferential access to the EU market with the aim of supporting their export opportunities and thus economic development. Finally, the section deals with the EU’s bilateral and interregional trade relations. The focus is on free trade agreements already concluded or under negotiation with ACP countries, North America, Latin America, and Asia. In addition, investment protection agreements and the influence of Brexit on EU trade policy will be examined. Section 2.4 discusses the key theoretical concepts for explaining the EU’s trade policy action and assesses European actorness in the area of trade policy based on the criteria of presence, opportunity, and capability. A variety of different theoretical perspectives exist to explain EU foreign trade policy, each of which focuses on a different set of questions. Arlo Poletti and Dirk De Bièvre (2013) provide an excellent overview of these different approaches. For reasons of consistency, this chapter limits itself to constructivist approaches, the principal-agent, and the two-level game approach. Constructivist explanations place ideas and norms at the center of the analysis. The most influential constructivist perspective on the Union’s external action is probably the “normative power” approach according to Ian Manners (2002, 2006, 2009, 2011). It conceives the EU as a normative power in international (economic) relations, which inevitably spreads its own values and norms through its external action. The concept has indeed been used many times to analyze the EU as a trade policy actor (Behrens and Janusch 2012; Hoang 2016; Leeg 2014; Manners 2009; Storey 2006). However, the concept was also met with considerable criticism, as the presentation of the EU as a unified, norm-led actor would not do justice to the complex realities of the EU’s external action. Too often, material and strategic interests seem to prevail over normative concerns (Hyde-Price 2006). And too often, the EU presents itself not as a single actor, but as a political entity marked by sometimes deep conflicts of interest (Meunier and Nicolaïdis 2006). Other constructivist authors believe that European trade policy is mainly shaped by (neo-)liberal ideas. This is mostly attributed to the central position of the Commission in trade policy formulation and the allegedly (neo-)liberal orientation of the Directorate-General for Trade (DG Trade) (De Ville and Orbie 2014; SilesBrügge 2011, 2013, 2014). For other authors, however, the Commission’s ability to shape the Common Commercial Policy is less clear.

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27

One of the central debates in the political science literature on EU trade policy, therefore, focuses on who sets the direction of EU trade policy. The main question here is whether the division of competences between the Commission and the Council allows the former to determine EU trade policy largely autonomously or whether the member states are still the decisive actors (da Conceição-Heldt 2010, 2011, 2013; Delreux and Kerrmans 2010; Elgström and Frennhoff Larsén 2010; Frennhoff Larsén 2007; Kerremans 2004; Meunier 2005; Zimmermann 2007). In recent years, the enhancement of the European Parliament’s (EP) powers in EU trade policy by the Treaty of Lisbon has additionally raised the question about its influence on the CCP (Frennhoff Larsén 2017; Jančić 2016; Leeg 2014; Meissner 2016; Van den Putte et al. 2015). These debates are largely based on the principal-agent literature, dealing with the relationship between a negotiator (agent) and his client (principal) (Dür and Elsig 2011). The approach is based on the assumption that the delegation of competences and (negotiating) authority takes place in order to capture efficiency gains. However, unintended effects may also occur as a result of the delegation. For example, the agent can pursue interests that differ from those of the principal and take advantage of his information advantage. For this reason, principals usually make use of different mechanisms in order to prevent the agent from shirking. The extent to which this succeeds in the area of EU trade policy determines who will ultimately have the last word in case of conflicts between the Commission, Council, and EP. In contrast, the two-level game approach (Putnam 1988) deals with the dynamics of international negotiations. The approach is based on the observation that political decision makers in international negotiations must always negotiate at two different levels. Stakeholders and institutional actors at the national level are crucial for the ratification of negotiation results. Therefore, negotiators must satisfy them in order to secure their consent to agreements reached at the international level. On the international level, negotiators and their external counterparts try to assert their respective interests. This constellation results in so-called “win-sets”, i.e., a range of negotiation results that would still be acceptable for the domestic arenas of both negotiating partners. Small win-sets make a successful conclusion of negotiations more unlikely. However, a small win-set also enables an actor to assert his demands more successfully. According to the so-called “Schelling conjecture,” negotiators with little autonomy have greater negotiating power (Schelling 1960). As will be shown in the following sections, the large number of internal EU veto players can make the EU a complicated and therefore assertive trade negotiation partner. Finally, Bretherton and Vogler’s (2006) concept of actorness will be discussed in detail. It will become clear that the EU is an influential player in the field of international trade policy. The EU has a high level of presence and capability due to its large internal market and the decision-making ability to deny or grant market access to other actors. The EU’s capability to actually make use of this prerequisite could be reduced by the large number of internal EU actors involved. However, as described above, this complexity can also be advantageous in international negotiations. In the conclusion, the central findings of the previous sections are summarized and discussed. The present chapter aims to provide an empirical

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overview of the development and central lines of conflict in EU trade policy and, at the same time, provide assistance in using theoretical approaches in order to study the political and economic dynamics of EU trade policy.

2.2

Historical Development of EU Trade Policy

As early as 1951, six Western European states (France, the Federal Republic of Germany, Italy, and the Benelux countries) signed the Treaty of Paris establishing the European Coal and Steel Community (ECSC), thus creating a Customs Union for coal, iron, and steel. The same countries founded the EEC with the Treaty of Rome in 1957. This extended the Customs Union to all goods. However, the creation of a Customs Union required the elimination of all tariffs between member states, the introduction of harmonized external tariffs vis-à-vis the rest of the world and, finally, a common trade policy in order to enter into trade negotiations with third countries. Hence, the establishment of a Customs Union entails a far greater level of economic (and political) integration than preferential or free trade agreements (see Box 2.1). A Customs Union offers several advantages for its members: It creates legal certainty, strengthens bargaining power in international negotiations, and prevents distortions of competition that could arise as a result of different national trade policies within a free trade area. Thus, although a Customs Union involves a partial abandonment of national sovereignty in the field of trade, the founding members of the EEC decided to create such a Union and, in the long term, a common market. Since this also implied a common trade policy toward third countries, trade was one of the first policy areas to fall under the exclusive competence of the Community (Meunier 2005). According to the Treaty of Rome, the dismantling of internal tariffs between member states and the establishment of a common external tariff should be completed within 12 years. However, the Customs Union was already completed on July 01, 1968, 2 years ahead of schedule. This points to the enormous economic benefits that the member states expected from the integration process. In addition to the CCP, the Common Agricultural Policy (CAP) was established at the same time. A large proportion of the population in the six founding countries were still working in the agricultural sector, which is why the EEC sought to safeguard their incomes. In addition, the CAP should restore the self-sufficient food supply of Western Europe. The CAP was essentially based on a market with uniform prices for agricultural goods within the Customs Union. High trade barriers vis-à-vis the rest of the world also made imports much more expensive and reduced the consumption of agricultural goods produced outside the EEC (Gstöhl and De Bièvre 2018, p. 36 f.).

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Box 2.1 Levels of Economic Integration Preferential trade agreement Free trade zone Customs Union Internal market Economic and Monetary Union Full economic integration

Preferential market access for certain goods of member states Tariffs and quotas are (almost) fully abolished between participating countries Free trade area and common commercial policy toward third countries Customs Union and free movement of capital, labor, and services Internal market and harmonization of national economic and monetary policies Economic and monetary union and single economic policies

However, the development of a genuine common trade policy was difficult as member states initially maintained several of their own import restrictions and nontariff barriers (NTBs). The GATT Tokyo multilateral round of negotiations (1973–1979) therefore focused, among other things, on new measures to restrict NTBs to trade. However, it was not until the completion of the internal market in 1993 that import conditions were harmonized in all member states. Until then, Art. 115 of the Treaty of Rome had still enabled individual member states to obtain exemptions from the common external tariff and to restrict the import of certain goods. Individual member states used this possibility to protect, inter alia, their automotive, textile, and electronics industries. Since the implementation of the Single European Act (SEA) in 1987, however, such national measures have only been possible for noneconomic reasons, for example, to protect public health or safety (Gstöhl and De Bièvre 2018, p. 37 f.). With the SEA, the Commission set 1992 as the target year for achieving the single European market. The SEA also broadened the areas in which the Council could decide by qualified majority, facilitating the establishment of the internal market. Following the well-known Cassis de Dijon judgement of the ECJ in 1979, the principle of mutual recognition as a cornerstone of the internal market was finally enshrined in a treaty. Accordingly, a product manufactured in a member state according to national rules could be freely sold throughout the entire internal market (Alter and Meunier-Aitsahalia 1994). Overall, the SEA marked the beginning of a more uniform and liberal European trade policy. Efforts to create a single European market led, for example, to the abolishment of the last national quotas for textiles, bananas, steel, and cars (Elsig 2002). The creation of the single European market also strengthened the EU’s position in the GATT, where it promoted the liberalization of new trade policy issues such as services and intellectual property rights. In addition, the creation of the internal market was followed by a whole series of negotiations on free trade agreements with third countries. The EU negotiated agreements with the countries of the European Economic Area (EEA) and the European Free Trade Association

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(EFTA), the so-called EU-Mediterranean Association Agreements with the countries of the southern Mediterranean and a Customs Union with Turkey. In addition, the collapse of the Eastern bloc was followed by so-called Europe Agreements with Central and Eastern European countries and Partnership and Cooperation Agreements with the states of the Commonwealth of Independent States (CIS) (Gstöhl and De Bièvre 2018, p. 49). For a long time, however, it was not all too clear which aspects fell within the Community’s sphere of trade competence, as the Treaty of Rome only contained an imprecise definition of trade. Therefore, the scope of the Community’s trade policy competences had often been the subject of disputes between the Commission and the member states. The Commission, for instance, urged a formal extension of its trade policy powers in the run-up to the negotiations on the Maastricht Treaty (1992) and the Amsterdam Treaty (1997). Before Maastricht, however, the Commission received little support for its plans from the member states. The Maastricht Treaty (1992) therefore hardly changed anything about the Treaty provisions on the CCP. But the need for reform of the EU’s trade policy became obvious with the conclusion of the GATT Uruguay Round in 1994. Some smaller member states, such as Belgium, the Netherlands, Finland, and Sweden, advocated an expansion of the EU’s exclusive competence in the wake of the Treaty of Amsterdam (Young and Peterson 2014). However, even when the Treaty of Amsterdam was signed in 1997, no agreement could be reached among the member states for the full transfer of competence for all WTO matters to the Commission. Larger member states blocked this expansion of competence for the EU since they doubted that the Commission would always represent their interests (Meunier and Nicolaïdis 1999). Their recent experience during the Uruguay Round had shown them that the Commission enjoyed much autonomy vis-à-vis the Council and that it was able to “go it alone”. Until the Treaty of Nice (2001), decisions and legal interpretations of the ECJ concerning the relationship between the Council and the Commission were, therefore, the central driving forces behind the gradual expansion of EU competence in trade policy. The ECJ tended toward an integration-friendly interpretation of the EU Treaties, whereby competence for a whole range of issues relevant to foreign trade was de facto transferred from the member state to the EU level. The ECJ gradually clarified and extended the scope of the CCP through a series of decisions—in particular the groundbreaking Opinion 1/1994 on the WTO Agreement. And as early as 1971, the ECJ had defined the “doctrine of jurisdiction by virtue of factual connection,” establishing that if the EU adopts common rules, member states may not enter into any international obligations that would affect these rules. As a result of rulings by the ECJ and the practical necessity for unified action in international negotiations, the Commission was de facto granted more and more powers over time, although these were usually not clearly laid down in treaties. In the 1990s, however, member states had largely accepted this distribution of competences (Young and Peterson 2014, p. 54 f.). At the turn of the millennium, the Commission argued that the EU was in danger of becoming increasingly incapable of action in international trade negotiations if the ambiguities in the areas of shared competence were not formally removed. At that

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time, more member states were ready to expand the scope of the CCP, in particular, to include trade in services and intellectual property rights. Belgium, the Netherlands, Italy, Finland, Luxembourg, and Sweden were the main proponents of the communitarisation of these new trade issues. The governments of Denmark, Germany, and Great Britain also supported the project, albeit with some restrictions. The French government, on the other hand, rejected further steps towards integration in trade policy out of concern that domestic policy areas would be too strongly penetrated by the common trade policy. The more protectionist member states Greece, Spain, and Portugal also opposed further communitarisation (Gstöhl and De Bièvre 2018). The provisions of the Treaty of Nice on trade policy were therefore again a result of a compromise between the conflicting positions of the member states. The scope of the CCP was extended to include most services and trade-related intellectual property rights. However, particularly sensitive service sectors—such as audio– visual services, education, health, and social affairs—were explicitly excluded as the EU had no competence in these areas. Foreign direct investment in fields other than services was also excluded. However, at the insistence of the British government, the member states retained the right to action in the areas of trade in services and intellectual property rights as long as they did not violate EU rules. In this respect, the agreement represented a significant departure from the rules on trade in goods where member states were prohibited from acting unilaterally. The Treaty of Nice thus contributed to further trade policy integration, albeit with a few important exceptions for the most sensitive sectors of the member states (Young and Peterson 2014, p. 55 f.). Finally, the Treaty of Lisbon (TFEU 2012) also extended and clarified the EU’s trade policy competences considerably. Art. 207:1 TFEU reads: The common commercial policy shall be based on uniform principles, particularly with regard to changes in tariff rates, the conclusion of tariff and trade agreements relating to trade in goods and services, and the commercial aspects of intellectual property, foreign direct investment, the achievement of uniformity in measures of liberalisation, export policy and measures to protect trade such as those to be taken in the event of dumping or subsidies. The common commercial policy shall be conducted in the context of the principles and objectives of the Union’s external action (TFEU 2012, C 326/140).

This ultimately transferred exclusive competence to the EU in the “new” trade issues of services, intellectual property rights, and foreign direct investment. However, it only formalized an already existing practice in the EU. Since the beginning of the Uruguay Round in the mid-1980s, the Commission had already negotiated for the member states in the areas of intellectual property rights and services. Moreover, all agreements concerning services in the sensitive areas of audiovisual, education, health, and social affairs still required the unanimous approval of the Council. This maintained the possibility of a national veto, but now in the form of a negative Council vote instead of rejections by national parliaments. However, the Lisbon Treaty also provided greater clarity on the distribution of trade powers between the EU institutions in international negotiations. Art.

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218 TFEU introduced a uniform procedure for all international negotiations. Previously there were different procedures for multilateral negotiations under Art. 133 (TEC) and for bilateral negotiations for association agreements under Art. 300 (TEC). Nevertheless, the Lisbon Treaty does not mean the complete end of shared competences in EU trade policy, as agreements often contain elements that do not fall within the exclusive competence of the EU, such as non-trade-related intellectual property rights or certain investment issues. Exclusive competence means that the Community method applies. However, it does not mean exclusive competence for the Commission, but the involvement of all important EU institutions in the decision-making process: Commission, Council, and—since the Treaty of Lisbon—also the European Parliament. The upgrading of the EP to a fully fledged player in EU trade policy is indeed one of the most significant changes brought about by the Lisbon Treaty. Nevertheless, the European Commission has maintained its strong influence on the EU’s trade strategy and has also acquired further far-reaching de facto competences (Woolcock 2011, p. 52). EU trade policy is therefore often described as a technocratic process, as officials of the Commission are primarily responsible for concrete policy formulation. Unlike politicians, civil servants are largely independent of populist and protectionist interests because they do not have to stand for re-election. For a long time, therefore, a major advantage of this technocratic way of policy-making was that EU trade policy was hardly politicized. On the other hand, the technocratic political style allowed national civil servants to be pragmatic on issues of national competence and sovereignty (Woolcock 2011). The increasing centralization of EU trade policy through successive EU treaties also made it easier for the Commission to achieve a common EU position, which was of central importance given the often conflicting interests of member states. This in turn also strengthened the EU’s external influence in international trade policy. With the economic weight of the Union as a whole and the ability to speak with one voice, the EU proved to be an effective trade actor (da Conceição-Heldt and Meunier 2014). More recently, however, the disadvantages of this policy mode have come to the fore. Critics complained that decisions are taken by a small trade policy elite and are hardly subject to parliamentary control (De Ville and Siles-Brügge 2016a, b). This is despite the fact that—since the Lisbon Treaty—the EP votes on all trade agreements concluded and is regularly informed about progress during negotiations. National parliaments must also give their assent to the entry into force of a trade agreement in the case of so-called “mixed agreements” concerning Community and member state competences. For a long time, however, national parliaments paid little attention to EU trade policy due to the low level of public interest. Because of the highly complex negotiation issues and the multilevel system of the EU, national parliaments often even lost the ability to follow trade policy processes with the necessary expertise (Woolcock 2011). Due to the renewed politicization of EU trade policy in the course of the negotiations on the Transatlantic Trade and Investment Agreement (TTIP) with the United States and on the Comprehensive Economic and Trade Agreement (CETA) with Canada, national parliamentarians seemed to have

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rediscovered their interest at least with regard to particularly controversial issues (Young 2016). These developments will be examined in more detail in Sect. 2.3.

2.3

Actors and Processes in EU Trade Policy

This section provides an overview of the main actors and institutional processes involved in negotiating bilateral, interregional, and multilateral trade agreements. At the institutional level, the Commission’s DG Trade, the Council, and the EP are primarily responsible for the formulation of the CCP. At the societal level, however, there are a large number of private interest groups that seek to influence trade policy decisions. These mainly include business associations, trade unions, and nongovernmental organizations. They play a key role in gathering and transmitting information on trade policy issues (Woll 2009). Although DG Trade is currently one of the Commission’s largest Directorates-General with around 550 staff members, its resources are not sufficient to monitor all trade policy issues at the international level (Dür 2012). The interaction between private and public actors therefore always serves to make their respective positions known and simultaneously providing advice to political decision makers. However, there are also significant differences in the relationship between political decision makers towards economic actors on the one hand and towards trade unions and nongovernmental organizations on the other. Business associations usually have very specific demands with regard to trade policy and can provide policy makers with very detailed information, for example, on hidden trade barriers for European companies in third countries. They are therefore usually in close contact with Commission officials, members of the EP Trade Committee, and member state representatives (Dür 2008, 2012). Nongovernmental organizations, on the other hand, cannot provide equally valuable economic information. They often follow trade policy processes in less detail and concentrate their activities on high-profile campaigns that address broader issues. But private interest groups also have the opportunity to introduce their demands into the political process in a more formal way. This is possible through the Economic and Social Committee (EESC), which addresses opinions to the Commission, the Council, and the EP. At the same time, a Civil Society Dialogue (CSD) exists since the 1990s, in the form of regular, structured meetings between DG Trade and nongovernmental organizations, at which the latter have the opportunity to ask questions and make their positions known to the Commission (Dür and De Bièvre 2007). NGOs and business associations also have the opportunity to lobby the permanent representatives of the member states in the COREPER Council, the national members of the Trade Policy Committee (TPC), the members of the EP, and the relevant ministries of their home state (Woll 2009). Hence, the formulation of European trade policy takes place in a complex interplay between a large number of institutional and societal actors. This is why the following section describes the process of negotiating international trade agreements, beginning with the preparation of the mandate through the international negotiation process to the ratification of negotiated treaties.

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Mandate

Art. 207 TFEU assigns the Commission the formal right of initiative in EU trade policy. Combined with the institutional capacity of the lead Directorate-General for Trade (DG Trade) and other relevant Directorates-General, this allows the Commission to have a significant influence on the strategic direction of EU trade policy. At the end of the 1990s, Commission proposals led the EU, for example, to support a new multilateral trade round within the WTO and at the same time imposing a moratorium on the opening of new negotiations on bilateral agreements. In 2006, however, DG Trade changed course with the “Global Europe” initiative, aiming to intensify the conclusion of bilateral agreements (Woolcock 2011, p. 53). Moreover, the Commission is also decisive for the concrete objectives of individual negotiation processes. The Commission is proposing negotiating objectives to the Council following DG Trade’s extensive consultations with various DGs. This will, inter alia, ensure coherence in the EU’s external action and allow the Directorates-General responsible for Industry, Environment, Social Affairs, Agriculture, and Development to clarify their priorities. DG Trade is generally considered to have a liberal stance, while other DGs often support specific industries or have other ideological tendencies (De Ville and Orbie 2011, 2014). DG Trade also seeks dialogue with business associations at the EU level when formulating negotiation objectives. The exchange with such associations is often viewed critically by the general public, which fears too much influence of special interests on EU trade policy. However, due to their limited resources, a dialogue with business organizations is often the only way for the Commission to obtain detailed information on trade barriers in third countries necessary for the formulation of concrete negotiating objectives (Woolcock 2011, p. 53). The Commission then submits a proposal for a negotiating mandate to the member states. The Commission proposal will first be examined by the Trade Policy Committee (TPC) (formerly Art. 133 Committee). The TPC is formally staffed with the highest trade diplomats of the member states. Depending on the area of responsibility of the national ministries, they may come from the Ministry of Economic Affairs (e.g., Germany), the Ministry of Foreign Affairs (e.g., Sweden), or the Ministry of Finance (e.g., France). The regular TPC meets once a month in Brussels, but once a week in the composition of the deputies. The deputies are usually a staff of the national embassies in Brussels responsible for trade matters. However, the TPC may also meet in other formats when certain technical issues, such as services, are discussed (Woolcock 2011, p. 54). The TPC, like its predecessors, enables an intensive exchange between member states and the Commission on trade policy issues. According to some authors, this has led to a process of socialization over time. Therefore, the Commission and member state representatives would often share the same views on trade policy issues. However, with the increasing number of actors in the TPC due to the successive enlargement of the EU to 27 member states, dialogue between the

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Commission and member states also seems to take place increasingly outside the TPC (Elsig 2010). Following the discussions in the TPC, the Council formally authorizes the EU’s negotiating position. Even after the entry into force of the Lisbon Treaty, the European Parliament has no formal say in the process of granting negotiating mandates (Woolcock 2011, p. 54 f.). However, since the ratification of trade agreements now requires the EP’s approval, the EP is increasingly trying to influence the EU’s negotiating position informally, for example, by defining the EP’s priorities and red lines for the negotiations in parliamentary resolutions. Since its capabilities to exert influence at this stage are very limited, the EP remains institutionally disadvantaged compared to the Council before the start of negotiations (Van den Putte et al. 2015). Trade policy decisions are taken at the Council level by the Foreign Affairs Council, i.e., in the composition of Foreign Ministers. In contrast to other EU policy areas, such as environmental or fiscal policy, there is no specialized trade council. According to Woolcock (2011), this practice works because the positions of the member states in the TPC and the Council rarely differ. Only particularly sensitive issues occasionally require clarification at ministerial level in the Council.

2.3.2

Negotiations

The European Commission is the EU’s sole international representative in trade matters. This means that negotiations on trade agreements with third countries also fall within the exclusive competence of the EU. DG Trade is thus generally the EU’s negotiator in trade negotiations. However, due to the particular position of agricultural issues in international trade policy, the Directorate-General for Agriculture (DG Agriculture) is sometimes responsible for this area. During negotiations at the international level, the TPC keeps the Commission continuously informed about the positions of the member states. If the Commission’s negotiating proposal does not receive sufficient support from the member states, it is usually revised in order to receive unanimous member state approval (Woolcock 2011, p. 55). The Commission, however, seems to have gained greater de facto competence over EU trade policy over the past years. Until the 1980s, policy formulation was largely carried out on an equal footing between the Commission and the Art. 113/133 Committee (now TPC). Today, however, the Commission formulates the EU’s trade policy strategy largely independent while member states usually only demand changes to negotiating positions on sensitive issues. A number of reasons have led to the strengthening of the Commission’s de facto competence in trade policy. First, more and more EU trade policy positions are based on already agreed internal EU policies. In many areas, such as technical regulations, public procurement or services, the established aquis communitaire already provides a common basis for the EU position in external trade policy (Woolcock 2011, p. 56). Secondly, the already advanced liberalization of international trade has reduced the attention of some member states to trade policy. Successive multilateral rounds

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of negotiations have cut the average tariff for industrial goods to 3.5%. As a result, many national governments have significantly reduced their resources for policy formulation in this area. Experts, therefore, speak of a “Brusselisation” of the trade policy process, in which more and more decisions are taken in Brussels rather than in the national capitals. The increasing importance of the EP compared to national parliaments in EU trade policy through the Treaty of Lisbon only seems to reinforce this trend (Woolcock 2010). While the EP remains formally excluded from drawing up the negotiating mandate, the Commission is now obliged to report continuously to the EP on progress in the negotiations (Art. 218 (10) TFEU). A special committee for international trade, the International Trade Committee (INTA), was set up in the EP before the Lisbon Treaty entered into force. However, in the first years after the entry into force of the Lisbon Treaty, it was quite controversial among the MEPs in the INTA Committee whether the Commission fully complied with this obligation. While liberal MEPs argued that INTA would be informed in the same way as the TPC, left-wing and green MEPs complained of selective and inadequate dissemination of information by the Commission (Richardson 2012). Sensitive documents (such as precise EU negotiating positions), for instance, were only passed on to a limited number of INTA members. Overall, the EP, therefore, remains at a disadvantage vis-à-vis the TPC in the course of negotiations. For example, the Lisbon Treaty explicitly requires the TPC to assist the Commission in the conduct of negotiations while the EP only needs to be informed. In addition, the TPC also has strong trade policy expertise and a longstanding working relationship with the Commission (Kleimann 2011). The EP, on the other hand, is politically fragmented and does not have sufficient human resources to be able to always assess the often very technical topics of trade agreements adequately. MEPs and their staff therefore usually have to rely on information and assessments from DG Trade, business associations, or NGOs. However, despite its limited formal competences and the resource constraints described above, the EP uses different methods to influence the negotiation process: resolutions and opinions are adopted regularly, hearings are held and parliamentary questions are addressed to the Commission (Van den Putte et al. 2014).

2.3.3

Ratification

As the Treaty of Lisbon gave the EP the right to vote on all negotiated trade treaties, the EP experienced its greatest increase in importance during the ratification phase. The entry into force of all trade agreements now requires the approval of a simple majority in the EP. Before the Lisbon Treaty, the EP already had to give its assent to agreements that (a) created specific institutional frameworks, (b) had implications for the EU budget, (c) led to changes in EU laws that were adopted by codecision (i.e., where the Council and the EP acted jointly as legislators). In addition, (d) all EU association agreements also required formal EP approval.

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In practice, however, the EP has long been informally involved in the ratification process for all major trade agreements. Thus, both multilateral agreements within the framework of the WTO and bilateral agreements such as the Economic Partnership Agreements (EPAs) with the African, Caribbean, and Pacific states (the so-called ACP states) were submitted to the EP for voting. Art. 207 (TFEU), however, codified this practice and thus finally established the EP as a serious actor in the EU’s trade policy decision-making process. The Commission and the member states must now take the EP’s demands seriously over the course of negotiations if they do not want to risk the EP’s rejection of an agreement. The probability with which the EP actually makes use of this veto power, however, depends to a large extent on the political composition of the EP. In the past legislative periods, the three dominant parliamentary groups of the EP largely supported the liberal trade policy course of the EU. The votes of the Group of the European People’s Party (EPP) and the Liberal Group of the Alliance of Liberals and Democrats for Europe (ALDE, renamed 2019 to Renew Europe) usually were sufficient to secure the required simple majority for trade agreements in the EP. The Group of the Progressive Alliance of Socialists and Democrats (S&D) in the EP also usually favors trade liberalization measures, even though the Group is often concerned about the adjustment costs for industries and workers in Europe or the impact on vulnerable groups in third countries. As a rule, EU trade agreements therefore received very broad majorities in parliamentary votes (Van den Putte et al. 2015). Only the majority of members of the smaller Green, extreme left and extreme right groups in the EP usually reject free trade agreements. However, as long as the balance of power in the EP does not change fundamentally, trade agreements do usually not run the risk of being rejected in the EP. This fact dispelled fears of some observers that the EP could develop into a gateway for protectionist groups and thus impair the EU’s ability to act in international trade policy. In general, the EP seems to be less concerned with the details of legal trade texts or the impact of trade agreements on specific economic sectors (apart from agriculture). The parliament seems to focus instead on high-profile political issues such as human rights and development issues or labor, environmental and consumer protection standards. Over time, the EP also appears to become more and more effective in influencing the Commission’s negotiating behavior. In the context of the TTIP negotiations with the United States, for example, the EP successfully pressured the Commission to inform the INTA Committee before and after each round of negotiations to an unprecedented extent (Van den Putte et al. 2015). Following pressure from the EP, the Commission even interrupted the TTIP negotiations in 2015 in order to develop an alternative proposal for the controversial investor-state arbitration procedure (ISDS) provided for in the treaty. EU trade agreements also need to be adopted by the Council in order to enter into force. Formally, this is done by qualified majority voting for those parts of the agreement that fall under the exclusive competence of the EU. Since the Treaty of Lisbon, this has affected most aspects of trade agreements, as the number of issues covered by shared competence has been significantly reduced. In practice, however, consensus is still sought. Most of the contentious issues relating to critical

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negotiating concessions are resolved before the final vote in the Council since member states follow the whole negotiation process closely. This can significantly prolong the international negotiation process but reduces the risk that a fully negotiated agreement will fail due to resistance from individual member states in the Council (Woolcock 2011, p. 59). The Lisbon Treaty also aimed at reducing the involvement of national parliaments in the ratification process. This should ensure a rapid entry into force of trade agreements. Trade agreements that contain policy areas with shared or member state competence must be ratified by all national parliaments in order to enter fully into force. Only those parts which fall under the exclusive competence of the EU can be provisionally applied. The extension of EU competence in trade policy should eliminate this often lengthy and, until recently, mostly formal process. However, the increased politicization of EU trade policy in the course of the CETA and TTIP negotiations put this plan under increasing pressure. The Commission, for instance, initially urged that the Comprehensive Economic and Trade Agreement (CETA) with Canada should be submitted as a EU-only agreement for ratification only to the EP and not the national parliaments (Von Der Burchard 2017). In response to growing public skepticism about the democratic legitimacy of EU trade policy, however, the Commission decided in July 2016 to have all national parliaments vote on CETA. In May 2017, a legal opinion of the European Court of Justice concerning the EU-Singapore Free Trade Agreement, requested by the Commission, confirmed that such agreements require the approval of the member state parliaments. Thus, the practice of involving national parliaments in ratification will continue in the foreseeable future (Morgan 2017). The allegedly greater democratic legitimacy of this approach is countered by the uncertainties of a ratification process that involves the national (and in some cases regional) parliaments of 27 member states. Wallonia, one of Belgium’s three regions with a population of around 3.6 million, for instance, was able to threaten a veto against CETA for weeks in 2016 and to maneuver the entire EU to the brink of paralysis (De La Baume 2016). Only through an additional declaration to the Treaty could the approval of the Walloon Regional Parliament be obtained which finally paved the way for Belgium to consent to the approval of CETA in the Council (Maurice 2016).

2.3.4

EU Trade Strategies

Despite recurrent controversies, most observers agree that over the last two decades the EU has succeeded in pursuing a largely coherent trade strategy. This is due to the increased acceptance of (neo-)liberal ideas among the member states, the completion of the European internal market, the 1995 enlargement round, and the progressive centralization of EU trade policy since the Treaty of Nice (Young and Peterson 2014). Although some priorities have changed over time, there is an astonishing continuity in the EU’s trade strategy. The link between domestic liberalization and

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the opening of foreign markets has always been a cornerstone of the subsequent strategies (see Box 2.2). Box 2.2 EU Trade Strategies Over Time Market Access Strategy (1996) The EU must “must strive to achieve improved market access in third countries in parallel to the continued progressive opening of its own market, both by ensuring the full implementation by its partners of their Uruguay Round obligations and through other market access actions.” (European Commission 1996, p. 4). Global Europe (2006) “Progressive trade opening is an important source of productivity gains, growth and job creation. It is an essential factor in reducing poverty and promoting development, with the potential in the longer term to help address many of the underlying factors which drive the global challenges we face, from security to migration to climate change. Our core argument is that rejection of protectionism at home must be accompanied by activism in creating open markets and fair conditions for trade abroad.” (European Commission 2006, p. 5). Trade, Growth and World Affairs (2010) “Trade raises EU growth by fostering our efficiency and innovation. It boosts foreign demand for our goods and services. Open trade also gives EU consumers access to a wider variety of goods at lower prices. Europe’s openness to foreign direct investment (FDI) increases our competitiveness. Equally, the ability of our firms to invest abroad enables them to grow globally and create jobs both at home and abroad. In short, whilst remaining vigilant to adjustment costs, Europe must seize the triple benefit from more open trade and investment: more growth and jobs and lower consumer prices.” (European Commission 2010, p. 2). Trade for all (2015) “Opening up the EU economy to trade and investment is a major source of productivity gains and private investment, both of which the EU sorely needs. They bring ideas and innovation, new technologies and the best research. They benefit consumers, lowering prices and broadening choice. Lower costs and greater choice of inputs directly contribute to the competitiveness of EU companies at home and abroad.” (European Commission 2015, p. 4). Open strategic autonomy (2020) The EU wants “to continue reaping the benefits of international rules-based trade and exerting leadership in the international sphere, while having the right tools in place to protect ourselves from unfair practices.” (European Commission 2020a).

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The Commission’s 1993 White Paper “Growth, Competitiveness, Employment” explicitly formulated the link between market opening and domestic liberalization for the first time. The EU’s market access strategy of 1996 then emphasized the interaction between domestic liberalization and foreign market opening and their positive effects on European competitiveness even more clearly. The strategy also focused on bilateral dispute settlement. In order to better tackle foreign trade barriers for European goods and services, the Commission established a market access database and a formal mechanism for European companies to request action against foreign trade barriers (Young and Peterson 2014, p. 61). With the 2002 Managed Globalization Doctrine, the Commission under Trade Commissioner Pascal Lamy (1999–2004) set out a more informal strategy for dealing with globalization. This doctrine consisted essentially of three elements: First, a clear commitment to the binding nature of international obligations. Secondly, the effort to broaden the international trade agenda to include issues like environmental protection, competition policy, and foreign direct investment. Third, the doctrine placed particular emphasis on achieving improved market access through multilateral negotiations. To this end, the EU even imposed a moratorium on the opening of new bilateral negotiations in 2007 (Meunier 2007). Overall, this strategy proved to be not successful, as many of the EU’s negotiating partners remained reluctant to expand the multilateral trade agenda. The stalemate in the Doha round of negotiations meant that the exclusive focus on the multilateral level could not be maintained (Abdelal and Meunier 2010). The EU’s 2006 Global Europe strategy, therefore, stressed the need for a shift toward bilateral agreements. The EU had previously concluded bilateral agreements, for example, with former colonies or countries in the immediate vicinity of the EU. However, these were mainly motivated by political goals. Global Europe, by contrast, focused on economically significant markets in Asia and Latin America (Woolcock 2007). The Council, therefore, authorized the Commission in April 2007 to open negotiations with the ASEAN group of states, India, South Korea, and the smaller economies of Central America and the Andean Pact. The so-called new-generation free trade agreements negotiated under the Global Europe strategy had a significantly expanded scope and depth compared with older agreements. Most notably, starting with the EU-Korea trade agreement of 2011, all EU trade deals contain comprehensive sustainable development chapters that commit all parties inter alia to the ILO core conventions and multilateral environmental agreements. The EU’s ambition to promote sustainability objectives through its trade agreements, however, has repeatedly complicated negotiations with trade partners (Leeg 2014, 2018, 2019; Poletti and Sicurelli 2018). In 2010, the Commission published the “Trade, Growth and World Affairs” strategy as a trade policy contribution to the EU’s 2020 Growth Strategy. The strategy essentially reaffirmed the goals of the Global Europe Agenda. The main objective of the strategy was the conclusion of further economically significant agreements. In addition, these new agreements should be characterized by even greater depth and quality as before. This meant that the new free trade agreements should tackle regulatory hurdles for goods and services in particular and “export” the

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EU’s high environmental and social regulations (Young 2015). “Trade, Growth and World Affairs” also focused more explicitly on dealing with the major trading powers: the United States, China, Russia, Japan, India, and Brazil. However, the EU’s bilateral strategy caused considerable controversy within Europe. On the one hand, this was due to the depth of the agreements, which potentially required changes to domestic legislation and thus go far beyond classic agreements on tariff reduction. On the other hand, the focus on agreements with economically strong states such as the United States, Canada, and Japan led critics to fear that the EU would be forced to lower its high standards of protection in areas such as the environment and food safety. In particular, the start of negotiations on the Transatlantic Trade and Investment Agreement (TTIP) in March 2013 sparked a fundamental debate on the content, process, and objectives of EU trade policy, attracting unprecedented attention in many European societies (Young 2016). The almost parallel negotiations with Japan and Canada, on the other hand, were discussed much less controversially and mostly only in the context of the TTIP debate (Suzuki 2017). Whether EU trade negotiations become the focus of public debate, therefore, seems to depend not only on the topics of negotiations, but also on the negotiation partner. The vehement criticism of TTIP, which was particularly widespread in large EU member states such as France and Germany, can be attributed on the one hand to the fact that the EU was for the first time negotiating bilaterally with a partner of a similar market size. This raised fears that the EU might be forced to water down its own regulations instead of exporting EU rules (De Ville and Siles-Brügge 2016b). On the other hand, as Buonanno (2017) argued, the Commission had cultivated a narrative of a more social and greener Europe for a long time, which proved to be a boomerang during TTIP negotiations. NGOs cleverly used this image of a marketradical America to reinforce Europe’s loss of confidence in the United States, which had already advanced as a result of events such as the Iraq war, the NSA affair, and the financial crisis of 2008. As a result, the agreement was perceived in Europe as a fundamental threat to numerous policy areas and even to democracy itself. The Commission reacted to these societal developments in 2015 with the new trade strategy “Trade for All.” The new strategy upheld the liberal orientation of EU trade policy. However, “Trade for All” emphasized the importance of transparency in EU trade processes and so-called non-trade issues in commercial relations with the rest of the world. According to the strategy, EU trade policy should make an active contribution to achieving the Sustainable Development Goals (SDGs), contribute to fight climate change, and promote human rights in third countries (Rudloff 2017, p. 9). This strategy guided EU trade policy in the years after 2015. In June 2020, however, the Commission launched a public consultation process for a review of EU trade policy. Member states, the European Parliament as well as civil society and business groups were able to provide feedback for the review process. The Trade Policy Review (TPR) was initiated as a reaction to the fundamentally changed international trade environment. Geopolitical and geo-economic tensions had sharply increased due to the rise of China’s state-led economy within the multilateral system and President Donald Trump’s protectionist response. The

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WTO’s dispute settlement system was paralyzed as well due to the obstructive approach of the Trump Administration and economic nationalism was on the rise globally. To make matters worse, the COVID-19 pandemic hit Europe with full force in early 2020 and caused immense economic damage to EU economies (Schmucker and Mildner 2020). Therefore, the Commission proposed in 2020 a paradigm called “open strategic autonomy” as the cornerstone of a new EU trade strategy. According to the Commission, this means that the EU wants “to continue reaping the benefits of international rules-based trade and exerting leadership in the international sphere, while having the right tools in place to protect ourselves from unfair practices.” In concrete terms, the EU should aim at stabilizing the EU’s strategic engagement with key trading partners but also try to diversify its trade relationships. In reaction to the COVID-19 pandemic, the Commission also places particular emphasis on supply chain resilience, especially with regard to critical health products. Most notably, the Commission stresses that the EU has to “ensure that our openness is not abused by unfair, hostile or uncompetitive trade practices” (European Commission 2020a). This means that the Commission aims to make more frequent use of the EU’s existing defensive trade mechanisms and create new ones if necessary. In addition, the Commission is considering introducing a so-called Carbon Border Adjustment Mechanism (CBAM) as a flanking measure in support of the EU Green Deal. The CBAM should levy a duty or tax on greenhouse gas-intensive imports from countries with no or insufficient climate protection measures. It aims to avoid so-called carbon leakage and protect EU producers that have to operate under very strict environmental regulations (Schmucker and Mildner 2020, p. 20 f.). However, the CBAM raises serious questions with regard to its WTO compatibility, practicability, and its impact on developing countries. At the time of writing it is not clear yet which direction EU trade policy will take over the coming years. Given that most debates about the concept of “open strategic environment” focus on the defensive side of trade policy, we might witness meaningful changes in the trade policy approach of the EU (Schmucker and Mildner 2020). After having examined the strategic direction of EU trade policy over the last years, we now turn to the development and performance of the EU as an actor both in the multilateral and bilateral context over the recent past in more detail.

2.4

The European Union as an Actor in International Trade Policy

The following section deals with the EU as a trade policy actor in multilateral, interregional, and bilateral settings. It sets out the basic features of the world trading system and traces how the development of the multilateral trade regime and EU trade policy have influenced each other. The section then looks at the EU’s bilateral and interregional trade relations with various regions of the world as well as the controversial investment protection agreements and the expected consequences of Brexit.

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The EU in the World Trade Organization

Since the establishment of the multilateral trade regime by the General Agreement on Tariffs and Trade (GATT) in 1947, the EU has been a key player in the recurring rounds of negotiations such as the Kennedy Round (1964–1967), the Tokyo Round (1973–1979), and the Uruguay Round (1986–1993). However, the EU’s role within the multilateral trading system has changed fundamentally over the last decades: from a defensive, neo-mercantilist actor in the GATT system to a continuously more offensive and proactive advocate of further trade liberalization in the WTO (Box 2.3). The EU’s behavior in the world trading system can therefore be analytically divided into three successive phases. The first phase began with the signing of the Treaties of Rome in 1957, which provided for the creation of a Customs Union and the establishment of a common external tariff with the rest of the world. The trade provisions of the Treaty of Rome were themselves shaped by GATT rules. Both were multilateral regimes dominated by the strategic foreign policy goals of the United States during the emerging EastWest conflict. The GATT regime promoted trade liberalization based on the principles of nondiscrimination, transparency, and reciprocity. However, the rules provided for a number of important exceptions to these principles. GATT Art. XXIV allowed the establishment of free trade areas and Customs Unions, which actually contradicted the principle of nondiscrimination between GATT member states. However, the United States deliberately opted for this exception in order to make the European unification process legally possible. Also, the continuation of customs duties, import quotas, antidumping duties, and subsidies was tolerated in some areas and in 1955 agricultural trade was completely excluded from GATT rules (Box 2.4). Box 2.3 The Emergence of the Multilateral Trade Regime: From GATT to WTO In addition to the International Monetary Fund (IMF) and the World Bank, an international trade organization was to be founded in 1947 at the initiative of the United States and the United Kingdom. More than 50 states participated in the negotiations on the International Trade Organization (ITO). However, the non-ratification of the ITO Charter by the US Congress in 1948 meant that the project could not be realized. The GATT, however was already signed and its rules, therefore, provided the framework for international trade policy for almost 50 years and, as a negotiating forum, enabled tariffs to be gradually dismantled. While tariff barriers, especially for industrial goods, were increasingly falling, new problems arose in the form of nontariff barriers to trade. At the same time, the progressive globalization increased the volume of trade in services and foreign direct investment. Therefore, in the Uruguay Round (1986–1993), the GATT member states agreed to create the WTO. Since 1995 it has served as a forum for negotiations on tariffs, investments, and (continued)

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Box 2.3 (continued) trade-related intellectual property rights. However, since 1995 no comprehensive agreement was reached within the WTO framework. But the organization has by no means lost its relevance for international trade policy, not least because of its strengthened dispute settlement mechanism that allows for a reliable way to solve international trade disputes. GATT provisions made the creation of the EEC possible in the first place, as they allowed a series of state interventions in the market which were to become constitutive for the EEC (such as the Common Agricultural Policy). The geopolitical framework of the Cold War thus allowed the EEC in the early years of the GATT to decisively determine the trade policy rules of the Western world with its economic policy priorities. The United States initially tolerated this European neo-mercantilism largely for geostrategic reasons. However, American agriculture increasingly felt the effects of the EEC Common Agricultural Policy on world market prices. In addition, the prospect of a Customs Union in Europe threatened to exacerbate the already existing balance of payments problems of the United States. Therefore, the American government came under increasing domestic political pressure to take countermeasures. In the GATT Kennedy Round (1964–1967), initiated by the United States, the EEC primarily acted as a defensive actor in an attempt to fend off American demands for liberalization. A considerable, linear reduction of tariffs by an average of 35% for about 60,000 industrial products, an antidumping agreement, and food aid for developing countries were agreed. However, the EEC was able to prevent the efforts of the United States to include agricultural trade in the GATT agreements (Meunier 2005, p. 80ff.). In the years following the Kennedy Round, however, trade conflicts increased steadily. Economic crises in Europe and America as well as increasing international competition from companies from Japan and other emerging Southeast Asian countries led to a new type of protectionism that relied less on tariffs. Instead, states increasingly began to protect their national markets through the use of nontariff trade barriers such as technical standards, local content regulations, import quotas, subsidies, or environmental and consumer protection regulations. Once again, it was the United States that pushed for a GATT round of negotiations to reduce such practices and facilitate American companies’ access to other markets. In the resulting Tokyo Round (1973–1979), the European Community (EC) once again found itself in a defensive position due to clear differences of interest between the member states. Although the Customs Union was already established in the late 1960s, there was still no complete EU internal market. Governments of EU member states actively promoted their own national companies. France continued to pursue comprehensive indicative planning, Great Britain had an interventionist industrial policy; Italy and Belgium also promoted national companies by selectively intervening in the market. Germany did not pursue an explicit national industrial policy, but various measures were in place to support national producers. Although market interventions were

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common in all member states, there was no uniform industrial policy at the European level. The nationally promoted companies were ultimately in competition with each other. The defensive position of the EU in the Tokyo Round was therefore marked by the need to defend the scope for national industrial policy strategies of the EU member states and the practices of the Common Agricultural Policy against international pressure. After protracted negotiations, the GATT once again agreed on a significant reduction in tariff rates for industrial products of 33% to 38%. However, with its defensive stance, the EC again succeeded in preventing the opening of the European agricultural market and avoided the introduction of strict multilateral rules on national subsidies and public procurement. With regard to nontariff barriers to trade, only a few binding codes of conduct were agreed. In this era, the EC even could and did impose selective import restrictions on products from Japan and other Southeast Asian countries. Box 2.4 The Basic Principles of the WTO • Most-favored-nation treatment (Article 1 GATT): The principle of mostfavored-nation treatment obliges WTO members to immediately and unconditionally grant to any other WTO member and its nationals any advantage they may concede in trade in goods to a trading partner. • National treatment (Article 3 GATT): The principle of national treatment requires WTO members not to treat foreign goods and their suppliers less favorably than domestic goods and their suppliers. • Transparency (Article 10 GATT): External trade rules and restrictions should be transparent. WTO rules require the publication of these rules and often require WTO members to notify changes to the WTO Secretariat (notifications). • Liberalization/dismantling of trade barriers: The WTO is a forum for negotiations aimed at removing all kinds of trade barriers. A distinction is made between tariff barriers (tariffs) and nontariff trade restrictions. The latter include quantitative restrictions on trade, import and export licenses, subsidies, discriminatory safety, environmental and health regulations, and excessive administrative regulations. • Reciprocity: The WTO establishes a system of multilateral concessions, also known as concessions. As a result of the multilateral rounds of negotiations, each WTO member is bound by certain framework conditions, such as a certain percentage duty for the import of a product. The developing countries have a special position, from which the industrialized countries should not demand equivalent concessions. The trade agenda of the 1980s was dominated by US demands for the EU to launch a new comprehensive round of negotiations focusing on services, intellectual property protection, and investment rules. The EU initially reacted cautiously, as a

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number of member states were in an economic recession at the beginning of the 1980s. In the mid-1980s, however, the US government’s initiative received increasing support from EU member states. This change of opinion in the EU was based on a number of internal EU developments. On the one hand, the enormous costs of the Common Agricultural Policy became increasingly apparent which is why some member states considered reforms necessary (Young and Peterson 2014, p. 81). On the other hand, the European industry concluded that it would not remain internationally competitive if it continued to operate in the national markets of Europe. It, therefore, called for an end to national market fragmentation. At the political level, too, liberal paradigms in the area of industrial and trade policy were increasingly gaining ground. In Europe, a consensus on economic policy developed in favor of market liberalization within an agreed regulatory framework, which culminated in the initiation of the EU internal market program in the mid-1980s (Woolcock 2011, p. 48 f.). In March 1985, the EU member states finally agreed to a new multilateral trade round. However, there were still considerable differences of opinion between the member states with regard to its objectives and the planned scope. In June 1986, the Council could not even agree on a common approach for the Commission’s mandate. This was caused by concerns on the part of individual member states regarding trade liberalization in specific sectors: France (agriculture), Portugal (textiles), Italy (textiles, services), and Greece (transport). Only Germany and the United Kingdom fully supported the negotiations. The EU’s precise negotiating objectives and responsibilities for various aspects of the negotiating agenda, therefore, remained unclear for a long time. It was not until the end of the Uruguay Round in 1993 that the Council succeeded in obtaining the qualified majority needed to issue a negotiating mandate. Conversely, this meant that for much of the negotiation process, the EU could only respond to the initiatives of other negotiating parties without making its own proposals. The member states often found it difficult to agree on a common position and when this was the case, it often reflected the lowest common denominator determined by the most protectionist member states (Meunier 2005). Hence, one of the EU’s main objectives was to protect the Common Agricultural Policy. Simultaneously, the EU sought improved market access in a number of sectors, notably services. The Uruguay Round ended with the creation of a new, comprehensive international trade organization, the WTO. The WTO continued to liberalize tariffs, but also contained a number of regulatory agreements. In addition, the strengthening of the dispute settlement mechanism gave WTO rules an unprecedented level of enforceability. Developing countries, in particular, therefore complained that WTO rules would not allow any room for maneuver (or “policy space”) for the application of effective development strategies (Gallagher 2008; Wade 2003). Nevertheless, almost all emerging economies and developing countries supported the establishment of the WTO, particularly because they were worried that they would otherwise be disadvantaged in the international trading system. In the aftermath of the establishment of the WTO, the EU took a real leading role in initiating a new multilateral round of negotiations for the first time. The Uruguay

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Round Agreement on Agriculture obliged the WTO member states to push ahead with the liberalization of agricultural trade in new negotiations and to reduce agricultural subsidies. In the new round of WTO negotiations, the EU attempted to balance its own concessions in the agricultural sector with gains in other areas of interest. The Commission, therefore, urged improved market access for nonagricultural goods and the inclusion of the so-called Singapore issues such as competition policy, investment, public procurement, trade facilitation as well as labor and environmental standards. The first attempt to set up a new round of negotiations at the 1999 WTO Ministerial Conference in Seattle, however, failed spectacularly. On the one hand, the conference was shaken by considerable anti-globalization street protests. More important for the failure of the meeting, however, were the fundamental differences between industrialized and developing countries over the objectives of the new round of negotiations (Gstöhl and De Bièvre 2018). The WTO member states had to make a new attempt to launch a round of negotiations at the Doha WTO Ministerial Conference in 2001. To this end, more attention should be paid to the concerns of developing countries. Many developing countries had the impression that industrialized countries had profited more from the Uruguay Round than they had. The new round should therefore compensate for this imbalance. In order to encourage developing countries to agree to start negotiations, the EU supported their key concerns, such as making access to affordable, essential medicines easier under the TRIPS Agreement concerning intellectual property rights. The EU’s broad agenda for the forthcoming negotiations, by contrast, should remain intact. However, the insurmountable differences of interest between industrial and developing countries were to be revealed again at the Ministerial Conference in Cancún only 3 years later (Kerremans 2004; Wilkinson et al. 2014). The G20, a new WTO internal alliance of developing and emerging countries—including Brazil, China, India, and South Africa—rejected a hard-won compromise proposal by the United States and EU on agriculture, challenging the classic Western leadership role in multilateral trade fora. Subsequently, various new coalitions were formed within the WTO: the so-called “New Quad” (EU, the United States, India, Brazil), the G5 (with Australia), the G6 (with Japan), or the G7 (with China). This indicated a structural change in power: The hegemonic position of the old “Quad” (EU, the United States, Canada, Japan) came to an end, but no new power formation was found that was strong enough to bring the Doha Round to a conclusion (Muzaka and Bishop 2015). In the following section, the main stumbling blocks of the Doha Development Round in terms of content will be illustrated using the most controversial negotiating points—agriculture and the Singapore issues—as examples.

2.4.1.1 Agriculture Due to the escalating costs of the Common Agricultural Policy and the forthcoming enlargement of the EU to include a large number of Eastern European states, the reform of the CAP was on the agenda at the turn of the millennium. In 2000, the EU first implemented the Agenda 2000 reforms, which provided for a reduction in agricultural subsidies. The Commission aimed to extend the scope for agricultural

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concessions, particularly to developing countries, through further CAP reforms in the forthcoming WTO round of negotiations. Following the launch of the Doha negotiations in 2001, the EU came under considerable pressure to make further concessions on agriculture. Particularly emerging markets such as Brazil and other developing countries with export interests in agricultural products were behind these demands. But also the United States urged the EU to abolish its agricultural export subsidies (Young 2011). Subsequent CAP reforms in June 2003 and the US Farm Bill of 2002 enabled the EU, together with the United States, to bring forward joint proposals on agriculture in the run-up to the WTO Ministerial Conference in Cancún in 2003. The main aim of the reform proposal was to harmonize the different approaches of the EU and the United States in reducing tariff reductions for agricultural products and to limit pricedistorting subsidies and export subsidies. However, the proposal did not prescribe specific reductions and deadlines. The G20 was therefore extremely critical of the transatlantic proposals. They called on the industrialized countries to liberalize agricultural trade more widely. Otherwise, they would not be prepared to make further concessions in other areas. However, the G90, another coalition of developing countries, mainly from Africa, feared that far-reaching liberalization of agricultural trade could reduce the value of its own mostly preferential trade relations with industrialized countries and subject its small farmers to extreme competitive pressure. These irreconcilable positions meant that no agreement could be reached in Cancún and that the Doha Round had to cope with its first serious setback (Kerremans 2004). However, the Commission’s attempts to reach a compromise at the multilateral level also led to internal resistance among the member states. In particular, states with strong defensive interests in agriculture, such as France, argued that the Commission’s concessions in the WTO exceeded the prescriptions of the negotiating mandate. France, Greece, Ireland, Poland, Portugal, and Spain urged the Commission to withdraw its negotiating proposals before the 2005 WTO Ministerial Conference in Hong Kong. However, with the support of liberal member states such as Denmark, Germany, Finland, Holland, and Sweden, the British Presidency managed to fend off the pressure on the Commission. The attempts of some member states to restrict the Commission’s room for maneuver have therefore clearly failed in this case. This suggests that the Commission enjoys substantial autonomy in trade policy, especially when there is disagreement among member states (da Conceição-Heldt 2010). In 2008, the Commission tried to breathe new life into the Doha Round by, inter alia, proposing a significant reduction in agricultural tariffs. However, again eight EU member states with strong defensive interests in agriculture—France, Greece, Ireland, Italy, Lithuania, Portugal, Hungary, and Cyprus—were reluctant to support this proposal. In the Council, however, the member states were able to agree not to reject the Commission’s proposals, as this would probably have led to the breakdown of the Doha Round. However, negotiations came to a standstill again when the United States and India were unable to agree on rules for agricultural safeguards (Young and Peterson 2014, p. 90 f.). This made a comprehensive agreement in the

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Doha Round increasingly unlikely. In December 2015, however, WTO members could at least agree on an agreement to restrict trade-distorting agricultural export subsidies.

2.4.1.2 The Singapore Issues The Singapore issues received their name from the WTO Ministerial Conference in Singapore in 1996, where they were first discussed within the WTO framework. They include competition policy, investment protection, public procurement, and trade facilitation. Unlike traditional trade issues, the Singapore issues are not about reducing trade barriers, but about establishing multilateral standards for national economic policies (Holmes 2006). Many developing countries therefore vehemently rejected the Singapore issues. As a consequence, the EU’s attempt to negotiate these issues was extremely difficult even before the start of the round. In addition to agriculture, the Singapore issues brought the Doha Round repeatedly to the brink of collapse. Most controversial among them were environmental and labor standards. Hence, they were among the first issues to be removed from the negotiating agenda. Finally, in order to save the negotiations, in 2004 the EU also abandoned its goal to discuss competition policy, investment protection, and public procurement (Falke 2005). Only the much less controversial issue of trade facilitation remained on the agenda. Trade facilitation mainly includes measures that ease the crossing of borders of goods and services, such as the reduction of customs bureaucracy (Box 2.5). Box 2.5 The Singapore Issues • Competition policy • Investment • Public procurement • Trade facilitation • (Environment) • (Labor standards) In order to overcome the deadlock in the Doha negotiations, the EU worked to achieve results initially in less controversial areas. In December 2013, the first multilateral legal instrument since the founding of the WTO in 1995 was agreed. The agreement on trade facilitation aims at reducing unnecessary bureaucratic hurdles in customs procedures, which was considered essential for boosting trade between developing countries (Wilkinson et al. 2014). There was therefore very little left of the EU’s ambitious agenda from the beginning of the negotiations.

2.4.1.3 Dispute Settlement in the WTO However, the WTO is not just a forum for negotiations. One of the most important functions of the WTO today is the settlement of disputes between its member states. The WTO dispute settlement provisions allow members to take legal action against trade practices of other WTO states that allegedly violate WTO rules. The Uruguay

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Round fundamentally strengthened the dispute settlement procedure by removing the possibility of the losing party to reject the rulings of trade tribunals. This instilled multilateral trade rules with much greater enforceability (see Box 2.6). The first step in a WTO complaint procedure is an extensive consultation phase. At this stage, conflicting parties still try to resolve the dispute through negotiations. If this is not successful, the complaining state may require that the case be heard by an expert panel. Both parties to the dispute can still appeal against the decision of the expert panel before the Appellate Body of the WTO. Panel or Appellate Body rulings must be formally accepted by the Dispute Settlement Body of the WTO. This body consists of all governments of the WTO member states. Judgements can only be blocked by a unanimous vote of the Dispute Settlement Body. Since this means that all member states, including the complaining state, would have to agree, this is rather a theoretical possibility. If a state is found guilty of violating WTO rules, it will have a period within which to comply with the judgement following its delivery. If it fails to do so, the aggrieved party may impose trade sanctions authorized by the WTO or seek compensation (Young and Peterson 2014, p. 110). The EU is one of the most active users of the procedure, although the Commission stresses that a WTO dispute is a used only as a last resort. The decision as to whether the Commission initiates the WTO dispute settlement procedure in a specific case depends on a number of factors. On the one hand, the economic benefits arising from the removal of an unjustified trade barrier must be sufficient. On the other hand, the chances of success of a dispute must also be promising. This depends on the specific case and on the clarity of WTO rules related to the issue at stake. A WTO dispute settlement procedure can therefore also have a non-direct economic benefit by imposing a favorable interpretation of existing WTO rules in the form of a ruling. However, as the EU’s resources are limited, it does not always seek a dispute settlement procedure. Political considerations also seem to influence the Commission’s decision to bring a case before a WTO dispute settlement panel. During the Doha Development Round negotiations, for example, the EU deliberately refrained from taking legal action against developing countries in order not to diminish their willingness to compromise in the ongoing negotiations (Young and Peterson 2014, p. 110). Box 2.6 The WTO Dispute Settlement Procedure The Uruguay Round (1986–1994) fundamentally reformed the dispute settlement procedure of the multilateral trading system and made it much more enforceable. The main objective of the Dispute Settlement Understanding (DSU) is to create certainty and predictability in international trade policy. In the GATT dispute settlement procedure, arbitral awards required the consent of all GATT member states (including the respondent). Judgements within the new WTO procedure, on the other hand, have immediate effect unless all WTO members unanimously oppose them. This has made the procedure much more efficient and has led to a shift from diplomatic to (continued)

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Box 2.6 (continued) quasi-judicial dispute resolution. DSU dispute settlement also applies to all WTO agreements, unlike the previous GATT dispute settlement system. The dispute settlement procedure takes place in the Dispute Settlement Body (DSB), which is administered by the General Council of the WTO (in which all WTO members are represented). The process of a dispute settlement procedure begins with bilateral consultations between the parties to the dispute in order, ideally, to reach an amicable solution. If the consultations fail, independent dispute settlement bodies, so-called panels, are set up at the request of the complaining party to draw up a final report after 6 months. This report is not a judgement, but contains recommendations which are adopted by the DSB and thus become binding. If a party lodges an appeal, a second instance is opened before the Appellate Body. The Appellate Body reviews the panel’s decision on legal issues and is to submit its report within 60 days. This report must again be adopted by the DSB. If the losing party fails to comply with the Appellate Body’s recommendations and compensation negotiations fail, the winning party may be authorized by the Dispute Settlement Body to impose trade sanctions. Individual EU member states occasionally oppose the initiation of a WTO dispute settlement procedure because they fear the foreign policy consequences of this rather confrontational course toward other states. Young and Peterson (2014) also argue that the Commission is reluctant to invoke WTO jurisdiction if a ruling could restrict the EU’s and member states’ own room for maneuver. If, for example, an EU member state has enacted a regulation that resembles a supposedly non-WTOcompliant regulation of a third country, the EU is unlikely to lodge a complaint with the WTO. The Commission therefore strategically selects the cases in which a WTO complaint would bring more benefits than disadvantages. A large number of potential conflicts between the EU and third countries are resolved without formal WTO complaints, with third countries agreeing to change their policy on the subject matter of the dispute. After all, around 15% of the EU’s formal WTO complaints are also settled before the WTO dispute settlement procedure even begins. However, if a formal ruling is reached, the WTO has proved to be a very successful plaintiff. By 2012, almost 90% of all WTO rulings were at least partially in favor of the EU. After the ruling, the losing party has a certain period of time to bring its policies into line with WTO rules. If it fails to do so, the WTO may authorize states to apply trade sanctions against the losing party in order to give WTO rulings an effective enforcement mechanism. Due to the enormous size and importance of the EU market for many third countries, the threat of trade sanctions is often sufficient to achieve compliance (Gstöhl and De Bièvre 2018, p. 146ff.). Currently, however, the dispute settlement mechanism is in its most severe crisis since the creation of the WTO in 1995. Since 2017, the United States has been blocking new appointments of Appellate Body judges after the terms of sitting

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members expired. The reason for this is that the United States accuses the WTO dispute system of judicial overreach, meaning that it interprets the WTO rules in a way that creates new obligations for WTO members without their consent. As a consequence, the number of members has been dwindling ever since. After December 11, 2019, the Appellate Body was left with only one remaining member. Since the minimum requirement for the functioning of the system is three judges, the committee that deals with WTO members’ appeals is currently dysfunctional. This entails the danger of disrupting global trade flows as it enables WTO members to introduce forbidden protectionist measures without risking binding WTO rulings against their actions. Since the EU is one of the firmest supporters and profiteer of a rule-based global trading system it addresses this crisis in mainly two ways. The EU and like-minded countries created an alternative, ad hoc appeals mechanism inside the WTO as an interim solution. In parallel, the EU and its partners aim for a more far-reaching WTO reform that aims to work on a broader range of shortcomings that the WTO system has shown over the last 25 years (von Daniels et al. 2019).

2.4.2

The EU’s Nonreciprocal Trade Policy

In addition to reciprocal trade policy instruments such as multilateral and bilateral trade agreements, there are a number of nonreciprocal forms of trade policy. On the one hand, this includes trade policy measures to protect the domestic economy in Europe, so-called trade remedies. On the other hand, the term also covers a completely different form of nonreciprocal trade policy: the EU’s Generalized Scheme of Preferences (GSP). This system offers developing countries unilateral preferential access to the EU market with the aim of promoting their exports and economic development. These two very different forms of nonreciprocal trade policies are the subject of the following section.

2.4.2.1 Trade Remedies The EU has a number of defensive trade instruments at its disposal in order to protect European producers against imports. These so-called trade remedies allow the imposition of additional tariffs or quotas on imports to address three types of situations. If a sudden flood of imports threatens to seriously damage an industry, the EU may impose safeguard duties on imports of the product concerned in order to provide temporary relieve for the industry. Such safeguard measures can be applied within a multilateral or bilateral framework. In the so-called “Bra Wars,” e.g., the EU used WTO safeguard measures against skyrocketing textile imports from China. But the EU also anchors safeguard measures in bilateral trade agreements. In the agreement with South Korea, for instance, tariff increases are allowed in certain areas in the event of an excessive increase of imports. Another form of trade remedies are countervailing duties. Countervailing duties can be imposed by the EU on imports whose sellers abroad are receiving government subsidies that distort international competition. Finally, antidumping measures aim to shield European industries from foreign producers who sell their goods in the EU market at unfairly

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low prices. Since antidumping measures are the most common form of trade remedies they will be explained in more detail here. The EU’s antidumping policy is characterized by an enormously high degree of delegation to the Commission and its strong procedural character. After European manufacturers file a complaint about foreign dumping, the Commission is responsible for investigating such cases. The Commission requires a high density of evidence before a formal investigation procedure is initiated. Between a third and a half of all complaints are rejected even before the examination phase. In addition, about 40% of all investigations are terminated without the imposition of punitive duties. Manufacturers also regularly withdraw their complaints due to changing market conditions. Sometimes this happens after a preliminary report from the Commission found no causal link between dumping and injury to an industry. However, even if dumping is found by the Commission, this does not necessarily imply the imposition of countermeasures. The EU’s Union Interest test gives the Commission considerable flexibility in deciding when to take antidumping action. If the Commission is convinced that this is more damaging to the Union’s overall interest than an individual case of dumping, it can forgo punitive duties. The use of the antidumping instrument therefore often depends on the acting Trade Commissioner, his ideological orientation and thus the interpretation of the overall interest of the Union (Young and Peterson 2014, p. 116 f.). Then EU trade commissioner Phil Hogan oversaw already in 2018 a reform of antidumping policy, introducing methodical changes that facilitated applying antidumping measures against Chinese imports. The current EU trade commissioner Vladis Dombrovskis has announced that the Commission will be much more assertive in its use of trade defense measures and further supplement the existing toolbox of trade defense instruments. Therefore, the EU has proposed in December 2019 amendments to the EU Enforcement Regulation (EU) No. 654/2014 that aim to improve the EU’s ability to enforce international trade rules. Furthermore, the EU has created the new position of Chief Trade Enforcement Officer (CTEO) within DG Trade. The Enforcement Officer is responsible for monitoring and enforcing compliance with EU trade arrangements by partner countries. This includes classic trade rules as well as sustainability commitments under sustainable development chapters and under GSP (Schmucker and Mildner 2020).

2.4.2.2 The Generalized Scheme of Preferences Through the Generalized Scheme of Preferences (GSP), the EU has granted unilateral preferential access to the EU market to developing countries—that are not part of the ACP group of states—since 1971, in order to promote their economic development. Through an exception to the MFN principle of the GATT, industrialized countries were able to set up such a preferential system vis-à-vis developing countries without violating WTO rules. This exception was codified in 1979 by the so-called “Enabling Clause.” The EU’s GSP regime is based on successive regulations, each valid for about 10 years. The following phases can be distinguished in the development of the EU’s GSP regime over time.

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The first phase lasted from 1971 to 1980 and was extended until 1990. Within the 10-year cycle, the GSP was implemented through various regulations and decisions. “Non-sensitive” goods were generally granted duty-free market access in certain specified quantities. “Sensitive” goods, on the other hand, only received a tariff reduction. GSP therefore distinguished between different goods depending on how much they competed with goods produced within the EC. The list of “sensitive” goods was strongly influenced by the interests of the EC member states, with France and Italy in particular pushing through the exclusion of many agricultural products. In this phase, the GSP was adjusted annually, leading to a constant change in product coverage, quotas, ceilings, qualifying countries, and tariff rates for agricultural products. In general, GSP countries had less far-reaching access than ACP countries (Gstöhl and De Bièvre 2018, p. 168). The second phase of the EU GSP began with a new system which entered into force in 1995 and lasted for a decade. The system contained a number of innovations. Most importantly, a total of five different GSP schemes for beneficiary countries emerged: The general GSP and four separate GSP arrangements with special incentive structures. One aimed at improving labor standards, another at environmental protection, a third at combating drug production and trafficking and one was designed to help least developed countries. However, India invoked the WTO dispute settlement procedure against the EU’s GSP regime after the EU had added Pakistan to the list of beneficiary countries of the special preferences under the antidrug regime. In fact, the WTO ruled in favor of India and found that the EU’s different treatment of GSP beneficiaries on the basis of political criteria were incompatible with the MFN principle and could not be justified by the “enabling clause.” In 2004, the WTO Appellate Body confirmed this ruling and stated that GSP preferences must be available to all countries at similar stages of economic development (Gstöhl and De Bièvre 2018, p. 168ff.). The third phase started with a new GSP scheme in 2006 and continued until 2013. In response to WTO rulings, the EU replaced its existing GSP regime again in 2014 with an integrated approach with specific incentives for sustainable development and good governance (GSP+). This GSP of the fourth phase consisted of three components. Under the standard GSP, around 66% of products benefit from preferential access to the EU market. Some products are completely exempt from customs duties. For goods classified as sensitive, tariffs are only reduced (mainly agricultural products and textiles). Other products, which are often important exports from developing countries, are completely excluded from the GSP (e.g., bananas, beef, and sugar) (Gstöhl and De Bièvre 2018). In addition to the standard GSP, there are two special initiatives within the GSP scheme: GSP+ and Everything But Arms (EBA). To qualify for GSP+, beneficiary countries must have ratified 27 international conventions (conventions on human rights and labor standards, environmental standards and good governance). GSP+ offers duty-free access also for sensitive products which are often of special importance to developing countries (Orbie and Tortell 2009). With the EBA initiative of 2001, the EU reoriented its trade relations with the poorest developing countries. Through EBA, the 48 poorest countries of the world

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received unrestricted duty and quota free access to the EU market for all exports except arms. The EU thus abandoned its practice of discriminating between developing countries within and outside the ACP group and focused its efforts on support for the least developed countries. However, the EBA initiative was initially not uncontroversial within the EU. Member states such as Belgium, Spain, Greece, Italy, France, and Portugal feared that imports from ACP countries would have a negative impact on domestic producers of sugar, rice, and bananas in particular. Member states that did not have to worry about agricultural imports, on the other hand, supported the project primarily for normative and political reasons. As is so often the case in EU trade policy, the disagreement between the member states resulted in a compromise that made the EBA initiative possible but also took into account the concerns of the critical member states. Certain safeguards mechanisms and extended transition periods helped to overcome resistance from critical member states in the Council (Faber and Orbie 2009) (Box 2.7). Box 2.7 The EU’s Generalized Scheme of Preferences The Generalized Scheme of Preferences (GSP) is an EU trade policy instrument, which allows developing countries to benefit from tariff reductions up to full duty-free treatment on imports of numerous finished and semifinished industrial and processed agricultural products. The aim of the scheme is to support developing countries in tapping new potential on the markets of the industrialized countries and increasing their exports. The current GSP regime of the EU comprises three different formats: • Under the standard GSP, countries that have not been classified by the World Bank as high- or middle-income countries for three consecutive years and have no other arrangements for equivalent or even better preferential EU market access (e.g., in the form of a trade agreement) receive far-reaching tariff reductions. • Under the Special Initiative GSP+, developing countries can receive additional preferences if they commit to the ratification and implementation of 27 international conventions on human rights and labor standards, environmental standards and good governance. • Under the Everything But Arms Initiative (EBA), products from least developed countries (LDCs) can be imported into the EU market dutyfree. The only exceptions are weapons and ammunition. The value of preferential imports into the EU under all three preferential schemes amounted to 62.2 billion euro in 2016. Compared to the 51 billion euros in 2014, this is a considerable increase. However, this still represents only about 3.6% of total EU imports from the world. Therefore, the importance of the instrument for the EU itself is extremely limited. The benefits of the system are also concentrated in a relatively

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small number of countries. In 2016, 87% of GSP imports came from only six countries, all of which are located in South and Southeast Asia. In each of the three GSP categories, more than 50% of preferential imports came from a single country. For some beneficiary countries, preferential exports to the EU therefore account for a significant part of their total exports (e.g., Bangladesh, Pakistan, and Sri Lanka). The textile and clothing sectors in the three countries mentioned above has benefited most from the EU’s GSP regime. This is of particular importance as this sector has enormous potential to create jobs, especially for women, and to contribute to poverty reduction (Zamfir 2018). The EU has also a considerable lever to promote normative goals such as human rights, labor, and environmental standards in partner countries through its unilateral preference systems. In all three preference systems, preferential treatment may be withdrawn if relevant human rights and labor conventions (as well as environmental and good governance conventions in GSP+) are not complied with. The Commission is responsible for detecting possible infringements and the withdrawing of preferences. So far, however, this measure has only been used four times: in 1997, Myanmar was deprived of its GSP access due to forced labor practices in the country. In 2007, Belarus lost EU market access under GSP due to violations of the ILO Convention on the Right to Organize and Collective Bargaining. In 2010, Sri Lanka was downgraded from GSP+ to GSP due to noncompliance with various international conventions. Finally, the EU partially suspended Cambodia’s EBA trade benefits in 2020, affecting roughly 20% of the country’s exports to the EU, on the ground of a deterioration of democracy, respect for human rights and the rule of law (Brunsden et al. 2020). The Commission seems to withdraw preferences only in cases where violations do not occur in isolation but in the context of far-reaching violations of human rights and democracy. The EU has therefore repeatedly been accused of reacting too selectively, hesitantly, and slowly to infringements (Vogt 2015). However, it should be borne in mind that a withdrawal of preference can have a significant impact on the export sectors of the countries concerned and thus on the income of employees in these industries. Therefore, the Commission, when deciding on the withdrawal of preferences, must always weigh the need to maintain the credibility of pre-set standards against the objective of poverty reduction. At the time of writing, the EU is in the process of developing a new GSP regulation that will take effect in 2024. The characteristics of the new regulation are not yet forseeable.

2.4.3

Bilateral and Interregional Trade Relations of the European Union

The EU’s bilateral and interregional trade relations encompass an extensive network of various forms of free trade agreements. In 2019, the EU applied 44 trade agreements with 76 partners. Trade with these partners amounted to €1.345 billion, representing 33% of EU external trade (34% of total exports and 33% of total

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imports) (European Commission 2020b). Furthermore, the EU is currently negotiating trade agreements with about two dozen other countries. Nevertheless, the WTO’s multilateral rules remain crucial for much of the EU’s external trade. However, after recurring rounds of negotiations within the GATT and the WTO have massively reduced tariff barriers over the past decades, nontariff trade barriers now represent the greatest obstacles to international trade. In recent years, the EU free trade agreements therefore increasingly address new issues such as regulations, services, public procurement, competition policy, investment protection as well as labor and environmental standards.

2.4.3.1 Trade Relations with the ACP Countries The EU has maintained institutionalized economic relations with the former colonies of its member states, which were later to be referred to as the group of African, Caribbean and Pacific (ACP) states. Already in the Treaty of Rome of 1957, economic cooperation between the then EEC and former European colonies was enshrined. On the basis of association agreements negotiated between 1960 and 1970 (Yaoundé I, Yaoundé II), the Western European market was unilaterally opened for 18 to 22 contracting states, and financial and technical assistance provided. The aim was to promote the economic and social development in particular of former French colonies in Africa and to secure their close links with Europe. At the beginning of the 1970s, however, the results were sobering: African exports to Europe had not increased, nor had trade patterns fundamentally changed. With the entry of the United Kingdom into the EEC in 1972, the geographical focus of EU cooperation expanded to former British colonies. This led to a fundamental reorientation of European development cooperation policy. In 1975, the 9 EEC countries and 46 ACP countries concluded the first so-called Lomé Convention. Once again, the EEC unilaterally granted the ACP countries largely duty-free access to the European market. In addition, industrial cooperation should increase the ACP countries’ share of world industrial production. Despite only moderate success, Lomé was renewed three times in a 5-year rhythm with an increasing number of participants. Lomé II (1981) and Lomé III (1986) therefore largely consolidated the existing arrangements. Lomé IV (1990), which covered the period from 1990 to 2000, introduced structural adjustment loans and human rights conditionalities into EC-ACP relations (Gibb 2000). Since 2000, the Cotonou Agreement has provided the framework for trade relations between the EU and the ACP countries. The agreement represented a fundamental turning point in EU-ACP economic relations. On the one hand, trade relations were separated from development aid under the European Development Fund (EDF). On the other hand, the Cotonou Agreement initiated the transition from unilateral, preferential ACP access to the EU market to reciprocal market opening (Hurt 2003). Critics, therefore, argue that Cotonou represented a shift toward an aggressive neoliberal and deregulative agenda in EU-ACP relations, as the agreement also stressed the importance of market forces and the private sector for economic development (Hurt 2003).

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The trigger for this change was a 1998 WTO ruling which found that the Lomé banana regime infringed the most-favored nation clause of the GATT Treaty by favoring ACP countries. This meant that ACP preferential access to the EU market overall also violated WTO rules since it discriminated against non-ACP developing countries. In order to maintain the EU’s special relations with ACP countries and continue to offer them more advantageous access to the EU market than other developing countries, the EU sought WTO-compatible reciprocal free trade agreements with ACP countries (Elgström and Pilegaard 2008). In addition, EU policy-makers recognized that the nonreciprocal trade preferences for the ACP countries that had existed up to that point had not yielded the hoped-for results. The share of ACP countries in world exports even fell from 3.2% in 1970 to 1.3% in 2003. Despite preferential access, ACP’s share of exports to the EU market also fell from 4.1% to 1.0% over the same period (Storey 2006, p. 335). In 2002, the EU started negotiations on Economic Partnership Agreements (EPAs) with 7 regional groups of ACP countries (West Africa, Central Africa, Eastern and Southern Africa, East African Community (EAC), Southern African Development Community (SADC), Caribbean, Pacific). By the end of a transitional period in 2007, comprehensive free trade agreements should have been concluded. The EPA negotiating agenda was broadly in line with the EU’s objectives in other trade negotiations: in addition to trade in goods, the EPAs should also address nontariff issues such as services, technical barriers to trade, competition policy, intellectual property rights, public procurement as well as labor and environmental standards. The Commission’s approach was therefore criticized by some negotiating partners as well as nongovernmental organizations and academics as not development oriented (Elgström 2009; Elgström and Frennhoff Larsén 2010; Heron 2011; Hurt 2012; Sheahan et al. 2010; Storey 2006). In 2006, a number of EU member states—including Denmark, the Netherlands, Sweden, and the United Kingdom— shared these concerns and urged the Commission to revise its negotiating strategy (Elgström and Pilegaard 2008). Subsequently, the Commission showed itself more flexible and willing to accept greater asymmetries in market opening requirements to the benefit of ACP countries. In addition, long transition periods should precede the dismantling of ACP tariff barriers, and a wide range of sensitive products of ACP countries were permanently excluded from liberalization. In case of an excessive increase in imports into ACP countries, generous safeguard measures were agreed, allowing for a temporary reintroduction of protective tariffs. The EU also sought to promote the regional economic integration of the regional ACP blocs by designing the rules of origin in the EPAs in such a way as to encourage the use of inputs from the region in the production of exported goods. Rules of origin define the proportions of a product that must be produced in a country in order to benefit from preferential access. The EU also supports the implementation of EPAs in ACP countries through development cooperation. Despite these concessions and the considerable power asymmetries in the negotiations, not a single EPA could be concluded within the planned timeframe (Elgström 2009).

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It was not until 2008 that the first EPA was signed with the fifteen countries of the Caribbean group of states (Heron 2011). However, negotiations with the remaining groups of states proved more difficult and dragged on for even longer. One reason for this was the sometimes large economic diversity between the states in the regional groups and the different arrangements that regulated their access to the EU Market. While some ACP countries relied on EPAs to secure their access to the EU market, about 40 ACP countries already had extensive access through the EU’s Everything But Arms (EBA) initiative without having to dismantle trade barriers themselves. Due to these differing incentive structures within the regional EPA groups, the EU had to conclude in some cases so-called interim agreements with countries that otherwise would have lost preferential market access to the EU (Krapohl and Van Huut 2020). The EPA with the South African Development Community (SADC) is the most advanced of the African EPAs. In June 2016, all Parties signed the Agreement. After Mozambique ratified the treaty in April 2017 as the last SADC state, the SADC EPA became the first African EPA that was fully implemented. The EPA with Eastern Africa (EAC), by contrast, continues to pose problems. The negotiations were concluded as early as 2014 (Brandi et al. 2017). However, the signature was unexpectedly postponed by the EAC states. The decisive factor for this was Tanzania’s declaration that it would not yet be able to sign the agreement. The EPA with West Africa (ECOWAS) was also closed in 2014. But here, too, some states (Nigeria, Mauritania, Gambia) refuse to sign the agreement. However, the agreement cannot enter into force until it has been signed and ratified by all parties. Therefore, both Ghana and Côte d’Ivoire concluded interim EPAs with the EU, which have been applied since 2016. Four Eastern and Southern African States (ESA) have also concluded an interim EPA with the EU. This has been applied provisionally since 2012. In 2019, Comoros joined the ESA-EPA and the ESA-Group started negotiations with the EU in order to deepen the existing agreement and include issues such as services, intellectual property rights, technical barriers to trade, investment, and sustainable development (Fox 2019). Negotiations with the countries of Central Africa (CEMAC) have so far only led to an interim EPA with Cameroon. The regional negotiations, on the other hand, were broken off due to the unstable political situation in the region. Negotiations with the Pacific states were similarly sluggish. Only with Papua New Guinea and Fiji could an interim EPA be concluded in 2007 which was provisionally applied since 2009 and 2014, respectively (Brandi et al. 2017). Samoa joined the agreement in 2018. The same year, the Solomon Islands submitted a formal accession request and Tonga notified its intention to accede to the Pacific-EPA. The accession procedure is currently underway.

2.4.3.2 Transatlantic Trade Relations The EU and the United States have one of the most integrated economic relations in the world. Their bilateral trade volume for goods in 2018 was around 674 billion euros and for services 460 billion euros in 2017. Their bilateral trade and investment flows are therefore the largest in the world. Overall, bilateral trade between the EU

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and the United States accounts for about one-third of world trade, and both blocks represent about half of the world’s GDP. Due to the enormous importance of transatlantic economic relations, the relationship between the EU and the United States has been characterized by decades of stable cooperation. At the same time, however, both are in direct economic competition with each other which is why recurring conflicts also characterize their relationship. Since the 1990s, both the United States and the EU have increasingly used bilateral and regional free trade agreements to promote international trade liberalization and to secure better access to growing markets, particularly in Asia and Latin America. Due to the continued blockage of the multilateral Doha Development Round within the WTO, a real competition developed between the EU and the United States for the conclusion of new free trade agreements at the beginning of the 2000s. In this “structural competition” between the two trading blocks, both heavily influenced each other in the selection of their prospective trade agreement partners (Sbragia 2010). After the United States concluded the North American Free Trade Agreement (NAFTA) with Mexico and Canada in 1994, the EU swiftly reacted by signing an agreement with Mexico in 1997. From the 2000s onwards, a real race between the EU and the United States to conclude new free trade agreements developed. Both concluded agreements with Chile, Singapore, Central America, Peru, Colombia, and South Korea, among others. However, the EU and the United States are not only competitors in international trade policy but also partners. The numerous initiatives taken by the two trading powers since the 1990s aimed in particular at reducing nontariff barriers to trade (NTBs) are proof of this. In 1995, they started an institutionalized cooperation on NTBs with the New Transatlantic Agenda. In 1998, the forum was expanded further to the Transatlantic Economic Partnership. In 2007, the EU and the United States established the Transatlantic Economic Council as a further step on the road to stronger transatlantic cooperation. This initiative aimed to reduce existing differences in regulatory issues and counteract the emergence of new barriers to trade (Egan 2005; Peterson and Steffenson 2009; Pollack and Shaffer 2001; Pollack 2005; Steffenson 2005). The efforts to strengthen regulatory cooperation culminated in the start of TTIP negotiations in July 2013. For some experts, TTIP was a prime example of the deep and comprehensive free trade agreements that the EU is striving for in all current negotiations. Only the substantial volume of transatlantic trade and the related importance of an agreement would distinguish the TTIP negotiations from other free trade talks (De Bièvre and Poletti 2016). Other authors argue, however, that both the content of TTIP and the political processes in the context of TTIP negotiations have been fundamentally different from other trade agreements (De Ville and Siles-Brügge 2016a, b; Young 2016). Young (2016), for example, notes that in the context of the TTIP negotiations the traditional lines of conflict between export-oriented and import-competing interests were barely discernible. On the one hand, he attributes this to the enormously high level of mutual investment flows across the Atlantic. The high level of transatlantic FDI stems from the fact that many corporations are already present in both markets

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and intra-enterprise trade and value chains are of particular importance in transatlantic relations. Therefore, the focus of the TTIP negotiations was less on improving market access than on realizing efficiency gains. TTIP negotiations were therefore, much less than in other trade negotiations characterized by conflicting business interests between firms located in different jurisdictions. Instead, many companies already worked together in transatlantic industry associations and thus had influence on both sides at the negotiating table (Young 2016). On the other hand, both Young (2016) and De Ville and Siles-Brügge (2016b) noted that the focus on nontariff trade barriers, especially in addressing regulatory differences, triggered an unprecedented intensity of civil society protest against a free trade agreement. From the beginning of the negotiations, many civil society groups expressed concerns that the intended reduction of regulatory differences between the EU and the United States could lead to a lowering of consumer and environmental protection standards, particularly on the European side. As a result, the TTIP negotiations received unprecedented attention from the European public and led to numerous large-scale demonstrations by various TTIP critical groups (Young 2016). De Bièvre and Poletti (2016), on the other hand, considered traditional trade issues such as tariffs in some key areas still an important subject in the TTIP negotiations. The treatment of regulatory issues was merely the logical consequence of the general development of trade policy in recent decades. Accordingly, the mobilization of civil society groups in the context of transatlantic trade talks was also not a new phenomenon, but has been an integral part of trade policy processes at least since the anti-WTO protests in Seattle in 1999. Only the great economic significance of the planned trade agreement would have intensified public interest in this agreement. In any case, the negotiations turned out to be longer, more controversial and more complex than initially hoped for. The increasing public skepticism towards TTIP, however, resulted not only from the content of the agreement but also from the allegation that trade policy processes at EU level were opaque, lacked democratic legitimacy and were dominated by business interests (De Ville and Siles-Brügge 2016a). Due to increasing public criticism and the inauguration of the trade-skeptical US President Donald J. Trump, the TTIP negotiations have been put on ice. However, it cannot be excluded that negotiations will be resumed at a later stage and under different political circumstances. The greatest challenge of transatlantic trade relations over the last decades was the Trump Administration’s open aversion to existing multilateral trade rules. Trump’s 2017 Trade Policy Agenda condemns them merely as constraints of American sovereignty, rather than recognizing them as guarantees of open markets worldwide. The US administration also repeatedly indicated that it was no longer willing to comply with unpleasant WTO arbitration rulings. The US blockage of the appointment of new Appellate Body judges incapacitated the appeal mechanism and thereby fundamentally weakened the WTO dispute settlement mechanism. Thus, the United States as the main architect of the international trade order seemed to turn its back on the system. This is diametrically opposed to the EU’s firm support of the WTO

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regime. The United States’ trade strategy therefore repeatedly led to discontent in the transatlantic relationship during the presidency of Donald Trump (SchneiderPetsinger 2019). With the inauguration of President Joe Biden in January 2021, however, the hopes are high that the United States will become a constructive member of the multilateral trade regime again and trade relations with the EU will improve. In contrast to TTIP, negotiations on the other transatlantic free trade agreement named the Comprehensive Economic and Trade Agreement (CETA) with Canada were successfully concluded in September 2014. CETA was treated by the Commission as a “mixed agreement” as parts of the agreement fall under the competence of the EU member states. The agreement must therefore be ratified by the member states in accordance with their national constitutional provisions before it can enter into force. However, since September 2017, the Agreement is provisionally applied for those parts falling under the exclusive competence of the EU. CETA is seen by many experts as a role model for the EU’s new deep and comprehensive trade agreements. Indeed, CETA was the most far-reaching agreement concluded by the EU up to that moment. It contained many elements which were also at the center of the negotiations during the TTIP talks (Hübner et al. 2017). Allee, Elsig and Lugg (2017) were able to show that the text of the CETA agreement indeed differs greatly from earlier EU free trade agreements which indicates a new quality of the agreement. In addition to the complete abolition of customs duties over a period of 7 years, CETA provides chapters on public procurement, foreign direct investment, regulatory cooperation, intellectual property rights, the protection of geographical indications, and sustainable development. In particular, the far-reaching opening of Canada to public procurement is seen by the EU as a great success. However, CETA’s economic significance still falls far short of a potential EU-US agreement, as Canada is only the EU’s twelfth largest trading partner (Hübner et al. 2017). It is particularly noteworthy, however, that CETA commits Canada to the goal of establishing a new multilateral investment court with a binding appellate court. This is a real innovation compared to existing investment protection agreements and was pushed through by the Commission in the negotiations as a reaction to heavy criticism in Europe to current approaches (Tuominen 2017). In October 2016, however, the signing of CETA by the EU was delayed due to opposition from a regional parliament in Belgium, the Walloon legislature. This was possible since all five regional parliaments in Belgium had to give their assent before the Belgian central government could consent at the European level. The rejection of CETA was apparently the result of a spillover effect from public skepticism towards the parallel TTIP negotiations. Since spring 2014 at the latest, the TTIP negotiations and thus also the CETA talks had produced an unprecedented intensity of public criticism of EU trade policy. A broad alliance of civil society groups portrayed TTIP and CETA as a threat to the ability of the EU and its member states to legislate in the public interest. In particular, the planned regulatory cooperation and the controversial investor-state dispute settlement procedure would threaten European health and environmental regulations.

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In order to secure the approval of the Walloon parliament, the EU and Canada therefore agreed on a joint declaration, which addressed controversial parts of CETA. The Walloon government was also able to obtain further concessions from the Belgian federal government. From the viewpoint of optimists, this incident confirms that European trade policy is closely connected to (sub-)national democratic institutions. Critics, on the other hand, feared the involvement of too many legislatures would threaten the EU’s ability to act at the international level. After all, the parliament of a relatively small region could threaten to veto an important trade agreement for the whole EU. The Commission was therefore concerned that this would undermine the credibility of the EU as a negotiating partner in trade policy and would prevent negotiating partners from making significant concessions given the high risk of failure of agreed treaties during the EU ratification process (Hübner et al. 2017).

2.4.3.3 Trade Relations with Latin America Mexico was one of the first countries with which the EU concluded a bilateral trade agreement in the late 1990s. There were a number of reasons for this. On the one hand, the end of political authoritarianism and the modernization of the economy through the implementation of market economy reforms at the beginning of the 1990s made Mexico an attractive growth market for European companies. On the other hand, an agreement should eradicate the disadvantages for European exporters in accessing the Mexican market caused by the entry into force of the NAFTA accord between Mexico, the United States and Canada in 1994. According to Dür (2007), it was in particular the lobbying by European exporters that prompted the EU to negotiate the agreement with Mexico, after trade between the EU and Mexico fell by as much as 25% between 1993 and 1995 due to trade diversions caused by NAFTA and the Mexican currency crisis. However, the agreement was also intended to strengthen the strategic position of the EU in the Western Hemisphere as a whole, in view of the Free Trade Area of the Americas (FTAA), a United States-led but ultimately failed initiative to create a free trade zone from Alaska to Tierra del Fuego. The Economic Partnership, Political Coordination and Cooperation Agreement (Global Agreement) with Mexico was signed in Brussels in December 1997 and entered into force in October 2000. In addition to agreements on political cooperation in a variety of policy areas, the Global Agreement contained a classic free trade agreement. The trade agreement covered many economic sectors, including far-reaching liberalization of trade in industrial goods, substantial liberalization of agricultural trade and provisions on services and public procurement. The Global Agreement doubled the volume of trade between the EU and Mexico to 53 billion euros between 2000 and 2015. In 2017, goods worth 38 billion euros were exported from the EU to Mexico. Imports into Europe amounted to 24 billion euros. The European Union is thus Mexico’s third most important trading partner after the United States and China (Mühlauer 2018). However, a deficient infrastructure, the complexity of European regulations and persistent agricultural protectionism in Europe slowed down stronger growth in Mexican exports to Europe and

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ensured a continuous bilateral trade surplus in favor of the EU (Dominguez 2015, p. 74). Since 2016, the EU and Mexico have been negotiating a modernization of the Global Agreement, including the trade component, to further intensify reciprocal trade flows. In April 2018, the Commission announced general consensus between the EU and Mexico on a new agreement that would extend the existing agreement to include several sectors and deepen liberalization in others: financial services, e-commerce and, above all, agriculture. As a result, virtually all goods will be traded duty-free between Europe and Mexico. For Mexico, the tariff reductions for agricultural goods such as beef, sugar, and bananas are particularly important in the new agreement. For European companies, especially in the pharmaceutical and mechanical engineering industries, by contrast, the planned simplified customs clearance procedures will be crucial. Both parties will also commit to comply with the provisions of the Paris Convention on Climate Change. It is also the first trade agreement to include anti-corruption measures in the private and public sectors (Mühlauer 2018). Given that the United States, Mexico, and Canada replaced NAFTA with the more comprehensive USMCA agreement in 2020, the new EU-Mexico agreement has gained further importance for EU companies since it will level the playing field for them with their US competitors in Mexico. In 1999, the EU also began negotiations on an Association Agreement with Chile. Political stability and strong economic growth made the country an attractive partner for a free trade agreement with the EU. But once again, securing equal market access for European companies was one of the driving forces behind the conclusion of the agreement, as the United States negotiated its own trade agreement with Chile. Negotiations with the EU were successfully concluded in November 2002. The EU-Chile Association Agreement entered fully into force in March 2005, with the trade component of the Agreement already provisionally applied since February 2003. The agreement provided for far-reaching liberalization of trade in goods and services, mutual opening of public procurement markets, and more stringent protection of intellectual property rights. As a result, bilateral trade grew from 7.9 billion euros in 2003 to 15.9 billion euros in 2016. With the exception of 2013, Chile was always able to record a positive trade balance. Mining products such as ores and nonferrous metals account for more than half of Chile’s exports to the EU, while agricultural products account for another quarter. The EU exports mainly machinery and transport equipment, industrial and chemical products. The EU is also the largest source of foreign direct investment (FDI) in Chile, ahead of the United States, while Chile is the fourth largest recipient of EU FDI in Latin America (Dominguez 2015, p. 76ff.). However, after more than 15 years, the trade provisions of the 2002 Agreement are partly outdated. As a result, bilateral trade volumes dropped over the last few years in favor of third countries such as China. Since 2017, Chile and the EU are in negotiations to modernize the existing free trade agreement (European Commission 2017). The aim is to negotiate two separate agreements covering trade on the one hand and investment on the other. The investment agreement is intended to replace the existing bilateral investment

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agreements between individual EU member states and Chile. The new Investment Court proposed by the EU is to serve as the future decision-making body. The agreement with Chile will also be the first EU free trade agreement to include a separate chapter on trade and gender. The chapter aims to contribute to minimizing the potential negative impact of trade liberalization on women and to strengthen their position in economic and social life in general. In addition, the EU is planning a separate agreement with Chile in which organically produced goods from Chile will be recognized as equivalent to European organic products (Grieger and Harte 2017). The EU has also sought several interregional agreements with various Latin American integration projects. The only successfully concluded EU interregional association agreement in Latin America to date, however, is the EU-Central America Agreement with the Central American Integration System (Spanish: Sistema de la Integración Centroamericana, SICA). Negotiations between the EU and the six SICA member states, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama, began in 2007. Once again a previous agreement of the United States, this time with Central America, known as CAFTA-DR, was a major motivation for the EU to sign its own trade agreement with the region. However, issues such as migration, security, sustainable development, counter-terrorism, and the intensification of regional integration were also on the agenda of the political part of the Association Agreement with the EU. Unlike in the cases of Mexico and Chile, however, the negotiations were disrupted by domestic instability in Central America. In 2009, the seventh round of negotiations had to be temporarily suspended due to a coup d’état in Honduras. Negotiations only resumed in February 2010 after the political crisis in Honduras was resolved by holding new elections in November 2009. In May 2010, negotiations were successfully concluded at the EU-Latin America Summit in Madrid and the agreement was signed in June 2012 (Dominguez 2015, p. 86 f.). The market access achieved by the EU in Central America is similar to that achieved by the United States in the United States-Central America FTA (CAFTA-DR). The trade part of the Agreement entered into force provisionally on three different dates in 2013. For the EU, Honduras, Nicaragua, and Panama, this was in August 2013, but Costa Rica and El Salvador had to wait until October as Italy slowed down in the Council and gave its consent only after renegotiations on protected geographical indications. For Guatemala, the contract came into force in December 2013 (Dominguez 2015). Other EU negotiation processes on interregional association agreements in Latin America have not been successful. Although negotiations with the Andean Community (CAN) began in 2007, Bolivia and Ecuador withdrew from the talks in 2008 and 2009, respectively, due to differing objectives regarding the agreement. The leftwing presidents Evo Morales (Bolivia) and Rafael Correa (Ecuador) preferred to promote regional integration within the framework of the Bolivarian Alliance for the Peoples of our America (Alianza Bolivariana para los Pueblos de Nuestra América, ALBA), together with Cuba and Venezuela. Consequently, the EU abandoned its interregional approach and sought a pure free trade agreement with the other CAN member states Peru and Colombia. Here,

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too, the influence of competition with the United States on the EU’s economic priorities was evident, as the United States was also about to conclude trade agreements with Peru and Colombia. The EU negotiations with Peru and Colombia were successfully concluded in June 2012 and the agreement entered into force provisionally in March and August 2013 (Pop 2013). The Treaty provides for full liberalization of trade in goods over a 10-year period and improved market access for agricultural products (85% liberalization over 17 years). Services and public procurement are also being liberalized. The agreement also contains provisions on intellectual property rights, human rights, and labor and environmental standards. The agreement, however, was controversial in Europe due to human rights concerns, especially in Colombia. Critics of the treaty called for a halt to negotiations due to ongoing internal conflicts and violations of human and trade union rights in Colombia. Proponents, however, saw the agreement as an opportunity to support the peace process in Colombia and strengthen the country’s economic stability. DG Trade referred to economic analyses predicting economic gains for all contracting parties and highlighted clauses in the agreement to ensure compliance with human rights, labor, and environmental standards. The EP finally approved the agreement in December 2012 by an overwhelming majority of 486 votes to 147 with 41 abstentions (Leeg 2018). Ecuador, which withdrew from talks with the EU in 2009, resumed negotiations in January 2014. The main reason for this was that Ecuador wanted to safeguard its preferential access to the EU market. After a reform of the EU’s Generalized Scheme of Preferences in 2012, Ecuador would have lost its GSP status and Ecuadorian exports would face regular MFN duties. However, after only four rounds of negotiations, both sides were able to announce an agreement in July 2014 and thus avoided higher tariffs (Gardner 2014). Following ratification on both sides, Ecuador acceded to the EU-Peru/Colombia trade agreement in November 2016 (Bridges 2016). Bolivia continues to benefit from GSP preferences and has the possibility to accede to the agreement in the future. The largest interregional project of the EU in Latin America, however, is the EU-Mercosur Association Agreement. Mercosur includes Argentina, Brazil, Paraguay, Uruguay, and Venezuela. However, Venezuela’s membership has been suspended since 2016 due to the country’s democratic deficits. With a combined GDP of US$2.4 billion in 2016, Mercosur is Latin America’s largest trading bloc and, from the EU’s perspective, one of the continent’s most important regional integration initiatives. However, there are considerable asymmetries between the Mercosur member states due to the large differences in their size and economic structure. While Brazil and Argentina have considerable domestic markets and depend less on international trade, Paraguay and Uruguay are as small economies much more involved in regional and global trade (Grieger and Harte 2017). Brazil is of particular importance to the EU as the bilateral trade volume accounts for more than one-third of trade with the region as a whole. Negotiations for an EU-Mercosur agreement were officially opened in Rio de Janeiro in June 1999. A total of six rounds of negotiations took place between 2000 and 2001. Topics such as tariff and nontariff trade barriers as well as services and

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public procurement were discussed. However, negotiations stalled between 2002 and 2004 due to differences, particularly related to the political part of the agreement. Particularly controversial were cooperation in the fight against terrorism, security and migration, and clauses relating to democracy and the Nuclear Non-Proliferation Treaty. The negotiations were therefore put on hold between 2004 and 2010. Following the EU-Latin America Summit in 2010, however, talks were resumed at the insistence of the Spanish Council Presidency. Nevertheless, disagreements remained both between the EU and Mercosur and within the respective blocks, in particular with regard to tariff reductions. Within Mercosur, there were mainly differences between Brazil and Argentina. After the election of the business-friendly Presidents Mauricio Macri in Argentina (2015) and Michel Temer in Brazil (2016), the negotiations picked up speed again. In May 2016, market access offers were exchanged for the first time since the negotiations began in 1999. 2017 saw significant progress in a large number of areas, although differences persisted in different areas, such as subsidies and state-owned corporations (Grieger and Harte 2017, p. 19). On the EU side, France, Ireland, and Hungary in particular raised concerns about EU concessions for agricultural products such as beef, rice, sugar, and chicken (Dominguez 2015, p. 128ff.). Other EU countries, on the other hand, hope to gain their own advantages in liberalizing agricultural trade, especially in the areas of wheat, wine, and other alcoholic beverages. This again illustrates the problems that can arise with an interregional approach by the EU. The large number of negotiating parties involved complicate and protract negotiation processes. In June 2017, several EU member states called on the Commission to increase transparency in the negotiations and to reach a “balanced” EU-Mercosur agreement (Grieger and Harte 2017). In addition, the Agriculture Ministers called for close involvement in the negotiation process and threatened, if necessary, to adjust the Commission’s negotiating mandate (Paraguassu 2017). This represents a clear attempt by the Council as principal to restrict the Commission as agent in its freedom of action in order to avoid too great a deviation from the Council’s preferences at the international negotiating table. The Commission’s subsequent agricultural negotiating offers of October 2017 was criticized by the Mercosur states as insufficient while some EU states considered the proposal too generous (Reuters 2017). Other issues like the rules of origin for cars and car parts and the protection of geographical indications remained unresolved as well. Without further progress, negotiations were shelved again in early 2018 due to the Brazilian general elections in October 2018 (Zalan 2018). After the election of right-wing candidate Jair Bolsonaro as Brazilian president, however, negotiations gained momentum. While Bolsonaro showed himself more flexible in the trade talks in order to secure a deal with the EU, his environmental and climate policies caused concern in Europe. Bolsonaro had brought into play the possibility of Brazil withdrawing from the Paris Climate Accord and, upon taking office, started to implement measures that were widely criticized as endangering the rain forests and other nature reserves in Brazil (Stuenkel 2019).

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Nevertheless, in June 2019 the EU and Mercosur could announce a political agreement on the trade deal on the margins of the G20 Summit in Osaka, Japan. After 20 years and more than 40 negotiation rounds, the agreement was hailed as a strong signal for free trade amid rising protectionism worldwide. The pact would indeed bring down considerable trade barriers, cover more than 720 million consumers and represent the world’s largest interregional trade agreement (Blenkinsop and Kihara 2019). Moreover, the agreement contains a broad sustainable development chapter that commits all signatory states inter alia to the Paris Climate Accord and the ILO core labor standards. In fact, the Brazilian government had backpedaled in the course of the last negotiation rounds and refrained from its intentions to leave the Paris Agreement (Nelsen and Von der Burchard 2019). Nevertheless, the political agreement at Osaka was met with mixed reactions in the EU. This was not so much caused by the expected economic impact of the trade deal but mainly due to concerns relating to deforestation in Brazil. The issue gained further political salience during the summer of 2019 when countless fires raged in the Brazilian Amazon. In response to public pressure, French President Emmanuel Macron announced that France will not ratify the EU-Mercosur deal under current circumstances. In September 2019, the Austrian parliament’s EU subcommittee voted to reject the draft free trade agreement, thus obliging the Austrian government to veto the pact at the EU level. The Irish parliament equally voted against the deal in a nonbinding vote due to concerns about the rainforest and the domestic farm sector. German Chancellor Angela Merkel, by contrast, argued that refusing to ratify the trade deal will not prevent “a single hectare” from being illegally logged in Brazil’s rainforest (Stuenkel 2019). Given the diverging views of different EU member states, the fate of the EU-Mercosur trade agreements remains uncertain at the time of writing.

2.4.3.4 Trade Relations with Asia As part of the 2006 Global Europe trade strategy, the EU also started negotiations to conclude free trade agreements with promising markets in Asia. In 2007, the EU opened negotiations with India, South Korea, and the Association of Southeast Asian Nations (ASEAN), a regional organization comprising Singapore, Brunei, Malaysia, Thailand, Indonesia, the Philippines, Vietnam, Laos, Cambodia, and Myanmar. In order to strengthen ASEAN as a regional integration project, the EU began negotiations on a comprehensive interregional agreement. However, the EU suspended negotiations in 2009. Due to the differences in their economic development, ASEAN member states were often unable to present a uniform negotiating position. The political crisis in Myanmar in 2009, triggered by a coup d’état, finally led the EU to give up on its goal of an interregional agreement (Woolcock 2014a). Instead, the EU began to negotiate a bilateral free trade agreement with Singapore in 2010 which was concluded as early as 2014. As described above, however, the ratification process of the Singapore Agreement sparked a debate within the EU as to whether the approval of the national parliaments was also required for the entry into force of the treaty. A European Court of Justice opinion in 2017 finally confirmed the involvement of the national parliaments. This decision will most likely guarantee the

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involvement of the member state parliaments in all future ratification processes (Geraets 2018). The foreseeable economic disadvantages for the other ASEAN member states led some of them to also strive for a free trade agreement with the EU. Indeed, the EU opened negotiations with Malaysia in 2010, but these were suspended in 2012 after seven rounds of negotiations at the country’s request. Malaysia refused to meet the EU’s demands in the area of public procurement. Since 2017, however, Malaysia’s aim has been to continue the talks. Thailand also started bilateral negotiations with the EU in 2013. However, after a military coup in May 2014, they were suspended. In Council conclusions adopted in 2017, the EU foreign ministers have expressed their support for resuming the negotiations in case of a political normalization in the country (Deringer and Lee-Makiyama 2018, p. 8 f.). Negotiations focus in particular on investment rules, rules of origin, public procurement, and sustainability aspects. Indonesian palm oil production has become a politically extremely sensitive issue. Palm oil is of central importance for Indonesia, as it is the country’s most important agricultural export product. Indonesia is even the world’s largest producer and exporter of palm oil, with the EU being the largest importer after India. However, palm oil production is controversial because it is often accompanied by deforestation, illegal logging, increased CO2 emissions, and social problems. The EU, therefore, decided in March 2019 that palm oil will no longer be eligible to count toward EU renewable transport targets for national governments—a 32% share of renewable energy by 2030. This will drastically reduce the attractiveness of palm oil as it will almost certainly result in a phaseout of the fuel’s use in Europe. The Commission is eyeing further steps to curb unsustainable palm oil production by considering, inter alia, adding to the FTA specific provisions to improve the sustainability of Indonesian palm oil production, linking compliance with sustainability standards to the reduction of EU tariffs. Indonesia has so far largely rejected these plans (Deringer and Lee-Makiyama 2018, p. 5 f.). Besides the palm oil issue, EU plans to include provisions on an investment court system—as an alternative to the traditional ISDS approach—also led to considerable irritations during the negotiations (Sicurelli 2020). In 2012, the EU also opened trade talks with Vietnam. The agreement was signed in 2019. However, the lack of trade union rights in Vietnam is a particular cause for concern in Europe. Members of the European Parliament, but also the French President Macron, explicitly called on the Commission to exert pressure on Vietnam to implement corresponding conventions of the International Labor Organization (ILO) before ratifying the agreement in order to improve the situation in the country (Hanke 2018). The Commission as well as the Vietnamese government obviously feared a veto by the European Parliament due to human rights and labor standards concerns (Deringer and Lee-Makiyama 2018). Therefore, Vietnam took several important steps during and after negotiations regarding labor rights that softened resistance to the agreement in the EP. Most importantly, the Vietnamese National Assembly ratified ILO Convention 98 on the Right to Organise and Collective Bargaining in June 2019 (Blenkinsop 2020) and ILO Convention 105 on Abolition of Forced Labour in June 2020 (Humphrey and Pham 2020). These steps facilitated

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the ratification of the agreement by the European Parliament in February 2020 (Hanke Vela and Mears 2020). In July 2007, the EU started negotiations for a free trade agreement with South Korea. A total of seven rounds of negotiations took place in the first year of the talks. The most important negotiating points were tariffs, services, and nontariff barriers to trade. After some difficulties in 2008, negotiations improved again from March 2009. The talks were successfully concluded in October 2009. Compared to other EU negotiation processes, this was an extremely rapid conclusion. Given that this was the EU’s first agreement under the Global Europe strategy, this seems rather surprising. However, the ratification process should take longer than expected. In particular, the Italian Government expressed concerns about the impact of the agreement on European producers of small and medium-sized cars. Against this background, the Italian government even threatened not to ratify the agreement if the relevant paragraphs were not adapted in order to grant European producers greater protection (Hruska 2010). The European Parliament was also put under pressure by the car industry to advocate better conditions. After the Treaty of Lisbon granted the European Parliament the right of ratification, this was the first opportunity for the EU Parliament to exert greater influence on a trade agreement. Following some amendments to the Treaty, the Council approved the agreement in September 2010. The European Parliament also gave its assent in February 2011 (Elsig and Dupont 2012). The agreement had been provisionally applied since July 2011 and formally entered into force in December 2015. The enormous importance of free trade agreements for the EU’s bilateral trade is demonstrated, among other things, by the fact that EU exports to South Korea have grown by 55% since 2011. The EU-South Korea trade agreement also proved to be a revealing test case for the functioning of the dialogue-based sustainable development chapters included in all current EU trade agreements. In December 2018, the Commission for the first time ever sought consultation with a partner state for failure to respect labor standards enshrined in a trade agreement. After not achieving sufficient progress, the Commission decided in July 2019 to call for an expert panel as the last possible enforcement step under the chapter (Jong-Hwi 2019). After several delays, the expert panel issued its final report in January 2021. The Panel found that Korea had failed to bring its national labor legislation sufficiently in line with the fundamental ILO labor principles. However, the panel also came to the conclusion that the sustainable development chapter did not oblige Korea to ratify ILO core conventions for which ratification is still pending (Peers 2021). It remains to be seen what impact this mixed result of the dispute settlement process will have on Korean labor legislation. In any event, the outcome of the first dispute case under a sustainable development shows that the weak legal wording of the sustainable development chapters and the absence of any sanction mechanism make sustainability obligations in EU trade agreements difficult to enforce. At the end of 2017, the EU could conclude another major free trade agreement with Japan after more than 4 years and 18 negotiation rounds. Japan is the EU’s second largest trading partner in Asia, and the agreement will reach some 600 million people and 30% of world GDP. Following the withdrawal of the United States from

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the Trans-Pacific Partnership Agreement (TPP), the agreement gained even greater economic significance for Japan and was seen by the EU as a signal against the increasingly protectionist tendencies of the United States (Binder 2017). The JapanEU Economic Partnership Agreement (JEEPA) is another example of a profound new generation agreement. In addition to tariff reductions and the dismantling of nontariff barriers to trade, agreement was reached on the liberalization of trade in services, the opening of markets to public procurement, and modern trade rules in the areas of competition, intellectual property rights, subsidies, corporate governance, rules of origin, and sustainability standards. However, JEEPA does not contain a chapter on investment protection as the negotiating parties were unable to agree on the investor-state dispute settlement procedure. Therefore, the topic is to be regulated in a separate bilateral investor protection agreement (Hilpert 2018). One of the EU’s largest free trade projects on the Asian continent is a planned agreement with India. The EU is India’s largest trading partner in the world, accounting for 13.5% of India’s total trade. India, on the other hand, only ranks ninth among the EU’s largest trading partners with a share of 2.2%. Although India is still a developing country, the huge Indian market and the enormous growth potential make it an attractive negotiating partner. The EU’s main long-term strategic objective was to secure improved access to the Indian market at an early stage. Negotiations started in 2007 and should be concluded within a few years. The EU called on India to reduce tariffs by 90% over a period of 7 years. The EU was particularly interested in a tariff reduction for automobiles and car parts, an opening of the Indian wine and spirits sector, liberalization of Indian auditing and legal advice, and improved market access to the insurance, banking, and retail sectors (Leeg 2014). Nongovernmental organizations criticized the EU right from the start of negotiations, saying it would take too little account of the dramatic economic asymmetries between the two negotiating partners. In particular, the livelihoods of small farmers in the dairy and poultry sectors would be threatened by the massive dismantling of customs duties. But the EU’s call for the Indian market to be opened up to European supermarket chains was also viewed critically by development NGOs. They feared catastrophic effects of such a measure on the numerous street traders in India. In India, this led to massive protests by street traders in 2011, which made it difficult for the Indian government to make concessions in this area. Another controversial issue was the EU’s demand for increased patent protection. Critics argued that this would make the production of generic drugs in India more difficult, among other things. As India is a major producer of generic medicines, this would not only threaten the access of poor Indian populations to cheap medicines but would also affect many developing countries that import such medicines from India. The European Parliament therefore repeatedly addressed resolutions to the Commission calling on it to design the planned agreement in such a way as not to jeopardize sustainable development (Frennhoff Larsén 2017). The EU’s demand to include human rights, social, and environmental standards in the free trade agreement was another point of contention in the negotiations. The Indian government feared that such clauses would interfere too strongly with

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national sovereignty and could constitute a kind of hidden protectionism. Due to its level of economic development, India argued it could not yet implement excessively stringent labor and environmental regulations. India therefore even threatened to break off the talks if the EU did not drop these demands. The European Parliament, on the other hand, insisted on the inclusion of these clauses (Leeg 2014). India’s offensive interests consist primarily in the liberalization of trade in services and the flexibilization of existing visa regulations. India urges the EU to classify it as a safe third country with an adequate level of data protection. This would allow India to circumvent the complex EU standard contractual clauses on data protection measures in sensitive trade activities (e.g., outsourcing). As the implementation of these measures is costly, they reduce the competitiveness of Indian companies. India is also calling on the EU to simplify visa issuance to highly qualified Indian workers and to improve mutual recognition of training qualifications. India also believes that nontariff barriers to trade in the agricultural sector in the form of strict sanitary and phytosanitary regulations of the EU should be eliminated (Khorana and Garcia 2013). Due to numerous disagreements, the EU’s negotiations with India were suspended for a long time in 2013. Since 2017, however, both partners have been trying to revive the trade talks (Delcker 2017).

2.4.4

Bilateral Investment Protection Agreements

The Treaty of Lisbon (2009) shifted responsibility for concluding investment protection agreements to the European level. Previously, this competence was exclusive with the member states and was used extensively: More than half of the almost 3000 bilateral investment protection agreements worldwide involve a member state of the EU. Of these, 200 alone were concluded between current EU member states. Most of these treaties date back to the 1980s and were agreed with current EU member states that were not yet members of the EEC. Today, however, the Commission is increasingly pushing for the abolition of these internal EU agreements as they are not in line with current EU investment law (Rudloff 2017, p. 11) (Box 2.8). Box 2.8 Bilateral Investment Protection Agreements Through investment protection agreements, states guarantee investors from the respective partner country protection of their investments under international law. The basic objective is to stimulate foreign investment even in countries where the legal and factual conditions for protecting investment are difficult. Investment protection agreements, therefore, establish a uniform understanding of investment protection and its practical implementation in the participating states. They also generally provide for so-called investor-state arbitration proceedings to settle investment disputes. These allow investors to take action legal against violations, independently of national courts and (continued)

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Box 2.8 (continued) diplomatic interventions by their home state. The agreements also regulate when investors can initiate arbitration proceedings and how arbitral tribunals are set up and operate. There are currently about 3000 bilateral and multilateral investment protection agreements worldwide, many of them with the participation of EU member states. However, the Lisbon Treaty transferred responsibility for foreign direct investment to the EU in 2009. This gives the EU Commission the opportunity to negotiate investment protection agreements for the EU as a whole. Over time, these will replace the bilateral agreements of the individual member states. However, the existing bilateral investment protection treaties of the EU member states will continue to apply as long as no new treaties have been concluded between the EU and third countries. EU member states have in the past also concluded investment protection agreements with EU accession countries. Therefore, EU-internal bilateral investments agreements exist to this day. Due to the massive criticism of the previous investment protection agreements, especially in the context of the TTIP and CETA negotiations, the Commission proposed a new approach to dispute settlement in 2016. The new EU approach aims to modernize dispute resolution and introduce a publicly legitimized investment court. The judges shall be appointed by the parties to the agreement and no longer by the parties to the specific dispute. The court hearings should also be open to the public and all pleadings and judgments should be published. An appeal body is also foreseen to ensure the consistency and legality of decisions. These changes are a result of the Commission’s public consultation procedure on investment protection and investor-state arbitration initiated in response to the criticism of TTIP’s investment provisions. The establishment of such a reformed investment court was therefore proposed for the first time in the negotiations for TTIP. However, the EU’s free trade agreements with Canada and Vietnam are the first ones in which the parties commit themselves to seek the establishment of such a permanent multilateral investment tribunal. The CETA agreement with Canada was even subsequently amended at the end of the negotiations to include this obligation (Rudloff 2017). As the European Parliament, in particular, insisted on these amendments, the Canadian Government had to agree to them if it did not want to jeopardize the ratification of the free trade agreement as a whole. The EU Commission is currently investigating possible options for the establishment of the multilateral investment court. Within the framework of the opinion of the European Court of Justice (ECJ) of May 2017 on the legal nature of the EU-Singapore Agreement, there were also some changes in the jurisdiction in investment policy. According to the report, portfolio investments and the investor-state dispute settlement mechanism do not fall within the exclusive competence of the EU. This means that in future all EU trade

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agreements containing corresponding provisions will have to be treated as “mixed agreements” and will therefore have to undergo the national ratification process in all EU member states before they can come into full force (Geraets 2018). In order to avoid these lengthy processes and to maintain the EU’s credibility as a reliable negotiating partner, the EU is now no longer negotiating trade and investment agreements together as it has done in the past. Instead, DG Trade now often negotiates two separate agreements (one FTA and one Investment agreement). This should enable a faster ratification process for trade treaties requiring only the assent of the Council and the European Parliament (De Bièvre et al. 2018). In December 2020, the EU could successfully conclude negotiations for maybe one of its most important investment protection agreements. The Comprehensive Agreement on Investment (CAI) with China will establish a uniform legal framework for EU-China investments by replacing the 25 outdated bilateral investment treaties (BITs) China and EU Member States concluded prior to the 2009 Lisbon Treaty. The CAI goes beyond traditional investment protection agreements since it also covers market access, level playing field issues, such as transparency of subsidies, and rules on state-owned enterprises and forced technology transfer. It is also the first investment agreement of the EU that contains a sustainable development chapter. The chapter requires China inter alia to take additional measures for climate protection and against the practice of forced labor (Grieger 2020). However, the deal has come under criticism from US President Biden who sees the agreement as a blow to his efforts to build a coalition to counterbalance China. Human rights advocates and MEPs in Europe, on the other hand, criticized the agreement for its weak language on human rights and slave labor in view of the estimated one million Uighurs in internment camps in the Chinese region of Xinjiang. Therefore, the agreement’s entry into force is still far from secure since the agreement still needs the consent of the European Parliament (Harper 2020).

2.4.5

Brexit and EU Trade Policy

In June 2016, a narrow majority of British citizens voted in a referendum in favor of the United Kingdom’s withdrawal from the EU. On 29 March 2017, the British government activated Art. 50 TEU, which gave the United Kingdom and the EU a period of 2 years to negotiate the framework for the first-time withdrawal of an EU member state from the EU (Bulmer and Quaglia 2018). However, the precise form of future relations between the United Kingdom and the EU was extremely controversial in the United Kingdom since Brexit inevitably led to a conflict of objectives. On the one hand, Brexiteers called for “taking back control” from Brussels inter alia with regard to trade policy—which would mean leaving the EU Customs Union. On the other hand, the economic damage caused by Brexit should be kept to a minimum, which would, however, require a close connection to the EU market and its rules (Gamble 2018). The UK’s position was therefore to seek a “deep and special relationship” and an ambitious free trade agreement with the EU.

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After years of political deadlock, the UK parliament finally voted on January 09, 2020, in favor of a Brexit bill which paved the way for United Kingdom’s departure from the EU on January 31, 2020. This date also marked the beginning of a transition period until December 31, 2020, in which the United Kingdom and the EU had to sort out their future trade relationship or put up with a hard Brexit with trade taking place on general WTO terms (Jozepa et al. 2020). After long and difficult negotiations, the EU and the United Kingdom finally reached a last-minute deal on December 24, 2020. The so-called Trade and Cooperation Agreement (TCA) secured the continuation of tariff- and quota-free trade in goods between the EU and United Kingdom. However, the TCA also tightens so-called rules of origin that require goods to be made locally to a certain percentage in order to profit from preferential tariff rates. UK industries that rely on inputs from third countries could therefore still lose tariff-free market access or being forced to look for more costly local suppliers for their inputs. Services trade will be even more negatively affected. Most crucially, financial services are hardly covered by the agreement, giving the EU the unilateral right to decide if it considers the United Kingdom’s regulatory framework equivalent to the EU’s. EU regulations may impede United Kingdom-EU service trade or compel service providers based in the United Kingdom to relocate to the EU. The TCA also secures a “level playing field” between EU and UK businesses in the areas of labor and environmental regulations as well as state subsidies. These provisions aim to prevent the United Kingdom from achieving a competitive advantage by lowering regulatory standards. They even include a rebalancing mechanism allowing contracting parties to reduce market access if standards are undermined by the other side. This binds the United Kingdom de facto to EU-equivalent regulatory standards and seriously calls into doubt the claim Brexit would mean “taking back control” from Brussels (Funk Kirkegaard 2021). But Brexit requires the United Kingdom not only to refigure its trade arrangements vis-à-vis the EU, but also with the rest of the world. To this end, separate tariff rates, antidumping processes, tariff preference systems for developing countries, and independent WTO membership had to be established. In addition, the United Kingdom needs to replace numerous existing bilateral EU trade agreements with its own treaties or trade on less favorable WTO terms with much of the world. As of December 2020, the United Kingdom had concluded 32 so-called trade continuity agreements covering about 60 countries, which roll over existing EU agreements and should guarantee continuation of frictionless trade. In October 2020, the United Kingdom also concluded a trade agreement with Japan which differs from a preceding EU agreement. Furthermore, the United Kingdom is in negotiations for trade deals inter alia with Australia, New Zealand, the United States, and to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (Edgington 2021). It remains to be seen if the United Kingdom will prove to be a similar effective trade negotiator as the EU. In any case, its smaller market will put the United Kingdom systematically in a weaker negotiating position vis-à-vis major trading powers (Trommer 2017). As a result of the loss of the UK economy, the EU, for its part, will become a smaller market with reduced bargaining power vis-à-vis third countries as well. The

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balance between more liberal and more protectionist member states could also shift in favor of the latter. Overall, the EU is losing an offensive proponent of trade liberalization. However, the extent to which this will influence the general direction of EU trade policy remains to be seen. The unanimity rule in the Council for most trade-related issues means that the EU’s common position on trade issues tends toward the more defensive member states in any case. Authors like Zimmermann (2019) even argue that neither its general pro-trade orientation nor its effectiveness as a trade actor will change substantially. Others are more pessimistic and fear the EU could become less free trade and transatlantic oriented after Brexit. The use of antidumping measures—especially against goods from China—could also increase following the withdrawal of the United Kingdom (Gstöhl and De Bièvre 2018).

2.5

European Actorness in International Trade Policy

In the following section, the previous empirical observations will now be theoretically classified and the actorness of the EU in international trade policy as a whole assessed. This chapter makes use of the following categories of the concept of actorness, as established by Bretherton and Vogler (2013): Presence, opportunity, and capability.

2.5.1

Presence

By presence, Bretherton and Vogler (2013) understand the ability of an actor to exert influence beyond his own boundaries. This includes the active behavior of an actor as well as his perceptions and the possibility to influence the action and expectations of others. In international trade policy, the EU undoubtedly has an extraordinary presence when it comes to achieving its own economic objectives. This is first and foremost due to the enormous size of the European single market. On the one hand, this means that other countries have considerable incentives to obtain improved EU market access. The EU is therefore an extremely attractive partner for FTAs with countries around the world. This is reflected in the enormous number of bilateral and interregional trade agreements that the EU is negotiating and has concluded over the last decades (Woolcock 2014a). The EU is usually confronted with smaller economies, which are in a weaker negotiating position. Access to these markets is usually less important for the EU than EU market access for partner countries. According to Putnam’s (1988) two-level approach, this means that the EU is, therefore, better placed to assert its interests in trade talks than its counterpart. In most constellations, the “win-set” of the EU is much smaller than that of the negotiating partners. This means that an agreement can only be implemented domestically if it largely corresponds to the interests of the EU. For negotiating partners, however, it is often more important to reach an agreement at all in order to gain better EU market access even though serious concessions are necessary. As a

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rule, it is better for third countries to have some kind of agreement with the EU than none at all. The EU exerts influence on its trading partners not only bilaterally but also unilaterally. This is done, for example, through political conditionalities linked to the EU’s GSP. Unlike in the bilateral and multilateral negotiating context, this unilateral trade instrument allows the EU to set the conditions for EU market access on its own. The potential beneficiary countries will be confronted with a fait accompli and will have to meet the requirements or waive access to the market (except under EBA for LDCs). Therefore, in the unilateral GSP, the EU seems willing to go much further than is the case in the multilateral and bilateral context when it comes to normative objectives. In the case of GSP+, compliance with basic agreements on labor and environmental standards is directly linked to preferential market access. Violations can therefore be effectively punished by withdrawal of preferential access (Portela and Orbie 2014). EU bilateral trade agreements also refer to labor and environmental standards in so-called sustainability chapters. However, compliance with them is not linked to market access (Vandenberghe 2008). At the multilateral level, the EU even abandoned the objective of enshrining mandatory labor and environmental standards due to the fierce resistance of many developing countries (González Garibay and Adriaensen 2013). Thus, the way the EU approaches normative issues in trade policy depends on the respective external resistance and domestic political processes (Leeg 2019; Velutti 2020). In a sense, this contradicts the idea of a uniform actor essentially guided by normative objectives, as represented by the “Normative Power Europe” literature (Manners 2009). Normative goals in trade policy often run into conflict with economic and strategic objectives. Their relative importance is therefore always anew determined by internal decision-making processes and constrained by the external environment. However, the EU does not only actively exert influence through its external trade policies. The economic importance of the EU’s internal market also means that EU regulations often unintentionally affect non-EU companies and governments. If non-European exporters wish to introduce goods into the EU internal market, they will inevitably have to meet the EU standards (Damro 2012). In many countries for which the EU is an important export market, this means that production is geared to EU standards and even national regulatory requirements are often adapted accordingly (Vogel 1997). For many developing countries, however, the usually very high EU standards, for example, in the area of food safety, also represent considerable barriers to trade, as the necessary infrastructure for production, inspection, and certification is often scarce. Thus, the usefulness of the generous EU market access for developing countries through the GSP and EPAs falls far short of its potential.

2.5.2

Capability

Bretherton and Vogler (2013) use the term capability to describe the internal processes of an actor that limit or expand its ability to act. In the area of trade policy,

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the Commission was given far-reaching powers at an early stage of European integration. At the latest with the Kennedy round of negotiations within the GATT, the Commission became the sole negotiator of the then EEC. Over time, the Commission’s areas of responsibility have gradually been extended both formally and informally. The Commission, therefore, has a prominent position today in shaping the CCP. For an association of heterogeneous member states, the EU has therefore succeeded in maintaining an astonishing continuity and coherence in its trade policy orientation over the past decades. However, the Council or the member states have retained far-reaching rights of control over the mandate and the need to approve negotiated agreements. A broad strand of research on EU trade policy, therefore, uses the principal-agent approach to examine how strong the Commission’s autonomy from the Council is in practice (Dür and Elsig 2011). The empirical cases described above illustrate that the Commission is indeed in a position to give direction on many issues of EU trade policy. However, when significant national interests are affected by the Commission’s proposals, member states are not afraid to make their opposition heard within the Council. Accordingly, in line with the assumptions of the principal-agent approach, the EU makes use of the efficiency gains of the delegation to the Commission while the Council’s control usually prevents the agent from deviating too much from the principal’s preferences. With the Treaty of Lisbon, the EP has become an additional institutional actor of significance for the shaping of EU trade policy. Although the EP cannot set binding negotiating objectives ex-ante, the right to vote on negotiated agreements gave the EP an effective lever to define its own priorities in EU trade policy. So far, the EP has used this less to influence economic details of trade agreements. Rather, the EP seems to be particularly interested in the normative aspects of EU trade policy (Frennhoff Larsén 2017; Leeg 2014, 2018, 2019; Mckenzie and Meissner 2017; Van den Putte et al. 2015). However, according to Putnam’s two-level approach, the strengthening of the EP in EU trade policy could also have reduced the EU’s win-set in negotiations. With the EP as an additional veto player, the likelihood that an agreement negotiated by the Commission will fail at the domestic level tends to increase. On the other hand, pressure from the EP at the domestic level could also help the Commission to better push through controversial normative issues at the international negotiating table (Leeg 2014; Mckenzie and Meissner 2017). Most recently, the involvement of national parliaments in the ratification process of “mixed agreements” has put a spoke in the wheel of EU trade policy. This became particularly clear in the course of the ratification of the CETA agreement with Canada (Hübner et al. 2017). The ECJ opinion on the EU-Singapore agreement strengthened the role of national parliaments for the time being but raised serious questions with regard to the efficiency and credibility of the EU as an actor in international trade policy. However, the Commission seems to have found a new effective approach by negotiating trade and investment agreements separately.

2.5 European Actorness in International Trade Policy

2.5.3

79

Opportunity

According to Bretherton and Vogler (2013), “opportunity” comprises the external context of ideas, perceptions, events, and subjective interpretations of external changes that influence one’s own actions. In the EU’s bilateral trade policy, the characteristics of the respective negotiating partners are of crucial importance. In negotiations with smaller economies, the EU usually finds it easy to achieve its own objectives and conclude agreements relatively quickly. Recently, however, the EU has focused more on concluding economically relevant agreements with larger markets around the world (Woolcock 2014b). The most important example of this is certainly the negotiations on TTIP with the United States. In this negotiation process, the EU for the first time met a partner on an equal footing (Eliasson 2014). However, despite a strong mutual interest in the conclusion of the agreement, this appears to have been also a significant obstacle. As predicted by Putnam’s two-level concept, the presence of small win-sets on both sides of the negotiating table reduced the probability of successfully concluding negotiations (Putnam 1988). However, the EU also made similar experiences in negotiations with emerging economies such as India. Here, too, the EU is finding it difficult to bring the trade talks to a successful conclusion. These talks are made particularly difficult by the EU’s own claim to pursue normative goals such as human and labor rights and environmental protection through trade agreements (Leeg 2014). This shows a clear conflict of objectives between pursuing economic interests as effectively as possible and the intention to transport values and norms through trade policy. The probability that the EU will be able to export its normative requirements and its integration model via its trade relations, however, depends strongly on the respective negotiating partners (Doctor 2007; Sicurelli 2020). It was still relatively easy to reach a trade agreement with the small Central American economies (Gomez Arana 2014). Negotiations with the economically much more significant Mercosur bloc, on the other hand, took more than 20 years (Darlington 2019). In addition to its economic importance, however, the composition of the member states on the other side of the negotiating table can also make trade negotiations more difficult, as in the cases of the EU-ASEAN and EU-Andean Community negotiations. Here, the EU moved relatively quickly away from its interregional approach and pragmatically sought agreements with the interested states of Singapore, Peru, Colombia, and Ecuador (Woolcock 2014a). However, the EU’s difficulties in bringing negotiations to a successful conclusion are most apparent at the multilateral level. The Doha Round, which was initiated by the EU as the driving force, could not be concluded despite numerous attempts (Muzaka and Bishop 2015). Even the EU’s willingness to remove the controversial Singapore issues it called for from the negotiating agenda could not bring about a breakthrough (Langhelle et al. 2014). This points to a fundamental shift of power within the multilateral trading system toward increasingly self-confident emerging economies such as China, Brazil, and India. As a result, the ability of the old industrial powers EU, United States, Canada, and Japan to determine the rules of

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the global trade regime largely on their own no longer seems to exist (Efstathopoulos 2012; Hopewell 2015). However, the EU’s ability to operate freely in the world trading system is influenced not only by existing and changing power relations, but also by the legal requirements of the WTO. These limit the EU’s possible options for action in EU trade policy. However, since this also applies to all other WTO members and is a prerequisite for an open world trade regime, the EU is one of the most determined supporters of the WTO (Eckhardt and Elsig 2015). However, the considerable enforceability of WTO law can also affect the EU itself and force it to adapt its trade policy instruments. The most prominent example of this is the reorganization of EU-ACP relations through the conclusion of reciprocal economic partnership agreements. This was a response to repeated rulings by the WTO Dispute Settlement Body which considered the EU-ACP trade relations to be not WTO compliant (Hurt 2003).

2.6

Conclusion

This chapter has exemplified that EU trade policy is a multifaceted and complex research topic from a political, economic, and legal perspective. In conclusion, the most important findings will be briefly summarized and an outlook given on future developments and possible research questions. First, however, we will recapitulate EU trade policy at uni-, bi-, and multilateral level to show that the EU is an important actor at all levels. At the multilateral level, the EU is one of the strongest supporters of the WTO and its principles. The EU largely complies with WTO rules, often makes use of dispute settlement procedures and participates actively in multilateral and plurilateral negotiations. However, the EU has also made considerable use of WTO exceptions, which allow bilateral and regional trade agreements to be concluded. Since the Doha Round could not be brought to a successful conclusion, deep, and comprehensive free trade agreements at the bilateral and interregional levels have become a central instrument of EU trade policy. But unilateral trade instruments such as antidumping measures and nonreciprocal trade preferences for developing countries are also part of the EU’s trade policy repertoire. Fundamental upheavals at the international level, such as power shifts in the world trading system, the expansion of global value chains, and the 2008 global economic crisis, have also left their mark on EU trade policy. This is most evident at the bilateral level, where the EU attaches greater importance to competitiveness, economic growth, and reciprocity when concluding free trade agreements. For this reason, the EU is aiming above all for agreements with large and emerging economies. Relations with the ACP group of states have also changed fundamentally with the conclusion of reciprocal Economic Partnership Agreements. Moreover, the EU has also made significant changes to its unilateral Generalized Scheme of Preferences. On the one hand, the number of beneficiary countries was significantly reduced in 2014. On the other hand, the EU has gradually introduced greater

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conditionality in order to encourage partner countries to better respect basic human rights, labor, and environmental standards. Recently, however, the EU has been confronted with a number of entirely new trade policy challenges. The reduction of nontariff barriers to trade in previously domestic policy areas is now raising several new legitimacy issues. Many nongovernmental organizations have therefore focused their campaigns on EU trade policy, which had previously rarely been in the public limelight. The strengthening of the EP through the Treaty of Lisbon also offers critical voices an additional channel of influence. These developments have led to a greater politicization of EU trade policy in recent years and have replaced the previously rather technocratic character of this policy area (De Bièvre et al. 2020). A worthwhile question for future research is therefore to what extent these developments influence the EU’s ability to act as an actor in international trade policy and whether nongovernmental organizations can actually influence the results of trade policy processes in the EU. Another challenge is the lacking consensus among EU member states in favor of a liberal trade policy. Many member states have recently been reluctant to publicly support controversial agreements such as TTIP, CETA, and the Mercosur Agreements. This lack of support and the extremely successful, trade-critical campaigns of numerous nongovernmental organizations have made the ratification of EU trade agreements more difficult, even in national and sub-national parliaments. The United Kingdom’s withdrawal from the EU represents an additional setback not only for European integration itself, but also for basic assumptions about the importance of trade for intra-EU stability. But Brexit will also have an impact on the EU’s external trade relations, as the loss of the United Kingdom will make the EU a smaller and possibly less liberal trading power. Future research should therefore address the impact of the developments described on the EU’s trade policy orientation. However, the changed international environment may entail the greatest challenges for EU trade policy in the coming years. After the election of Joe Biden as US President, the times of severe conflicts in transatlantic trade relations may be over. But in more than enough states around the world protectionist tendencies are still on the rise. The crisis of the WTO will therefore most likely continue and the plan of the EU to reform the multilateral trading system much harder to achieve. Trade conflicts such as the ongoing US-China trade war may also force the EU to make difficult strategic decisions in the future. Ultimately, the COVID-19 pandemic is already strongly impacting discussions on the future direction of EU trade policy at the time of writing. Studies of European trade policy therefore will have to deal with a whole new range of fundamental questions regarding EU and global trade policy.

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Money and Finance

3.1

Introduction

Monetary, financial, and fiscal policy in the European Union (EU) underwent fundamental transformations over the past half-century. In the monetary realm, national currencies of selected member states, closely linked since the 1970s, were replaced through the introduction of a single currency, the euro, at the beginning of the new millennium. The conduct of monetary policy was accordingly delegated to the European level. The European Central Bank (ECB), together with the National Central Banks (NCBs), now oversees a currency area of 19 member states within the Eurosystem. The pillars of financial market regulation and supervision in the EU passed also through several stages of change and are currently represented by a densely institutionalized landscape of authorities, committees, and, above all, the Single Supervisory Mechanism (SSM), which became operational in November 2014. Even in fiscal and budgetary policy, European rules have been successively tightened with EU member states being subject to a number of rules, prescriptions, and controls which they have to respect under Union law. However, all these areas also have their limitations—for instance, fiscal policy and measures for macroeconomic stabilization ultimately remain in the responsibility of member states, despite several waves of European institutionalization. What implications do these developments have for the EU as an economic actor? How can the role of the EU and its institutions be evaluated in the context of internal integration processes as well as in view of its actorness at the international level? The present chapter deals with these aspects in the areas of EU monetary, financial, and fiscal policy. This is particularly pertinent in the context of the fundamental changes materializing just during the past decade. Since the outbreak of the global financial crisis of 2007–2009, monetary, financial, and fiscal policy have experienced several adjustments in the EU in response to a seemingly never-ending series of successive crises. The banking and financial market crises were followed by the sovereign debt crisis in some EU member states, which eventually threatened the collapse of the euro area (De Grauwe 2016; Hodson and Puetter 2016; Jones et al. 2016). The # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 S. Lütz et al., The European Union as a Global Actor, Springer Texts in Political Science and International Relations, https://doi.org/10.1007/978-3-030-76673-3_3

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financial and economic meltdown was only averted by several far-reaching steps of integration, as the following pages will describe in detail. Yet these developments in internal institutional and policy processes within the euro area and the wider EU should not be separated from external dynamics. The chapter, therefore, aims to examine and discuss the internal as well as the international aspects of the EU and its growing role in monetary, financial, and fiscal policy. To analyze the role of the EU, I draw on the concept of actorness as laid out by Bretherton and Vogler (1999, 2006, 2013). In a more recent contribution, the authors define actorness on the basis of three constituent dimensions (Bretherton and Vogler 2013): Presence describes the ability of an actor to exert influence beyond its own boundaries. It includes both intentional activities as well as an actor’s unintentional effects on the perceptions, expectations, and behaviors of third parties. Opportunity captures the external environment and structural aspects that enable or limit the actor’s activities. Capability, finally, emerges from the internal processes that constitute an actor and expand or limit the scope of action. Capability thus determines the ability of an actor to exploit its presence in order to take advantage of given opportunities. The three concepts of presence, opportunity, and capability thus provide the framework of analysis in this chapter. In order to grasp the current role and actorness of the EU, however, its emergence and internal constitution must first be reconstructed. Therefore, the next part of this chapter deals with the institutional competences of the EU and their development over time. The discussion on monetary, financial, and fiscal policy will be reviewed in three sections: The first section on monetary policy covers the institutional developments from the 1970s onwards, when the Bretton Woods system of pegged currencies came to an end and the international monetary order was subjected to considerable tensions. While the members of the then European Economic Community (EEC) remained initially cautious with regard to the establishment of a joint European exchange rate regime, the momentum toward a common monetary policy developed over time. With the decision to introduce the euro, participating member states rescinded national controls for the ECB as part of the Eurosystem to conduct monetary policy in the euro area. The global financial crisis and the subsequent euro area crisis posed unexpected challenges, particularly for the ECB, and other EU institutions. Step by step, the ECB grew into its role as the central bank of the world’s second largest currency area, first acting as the lender of last resort in bank funding markets and then in markets for government bonds. The section concludes with a brief discussion of recent lawsuits against the ECB’s supposedly law-breaking activism via the launch of unconventional monetary policy measures. The subsequent section examines financial market regulation and supervision in the EU. The first relevant institutional changes occurred in the late 1990s. Since then, there have been three waves of institutional change, which have successively changed the form of European financial market regulation and supervision and led to increasing centralization. The first wave covers the creation of three European financial market committees at the beginning of the 2000s, which acted as advisory bodies in the regulation of the European banking, insurance, and securities sectors.

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In addition to the committees, the Lamfalussy procedure was introduced as a more efficient institutional framework for European regulatory processes. The second wave can directly be attributed to the response to the global financial crisis of 2007–2009. It triggered the transformation of the three above-mentioned committees into European authorities as well as the creation of the European Systemic Risk Board (ESRB), which together form the European System of Financial Supervision (EFSF). The third wave then followed in the midst of the euro area crisis, when the establishment of a European banking union, as constituted by the SSM and the Single Resolution Mechanism (SRM), was deemed as the only possible way of preventing the eventual collapse of the currency area. In view of these waves of institutional change, the section will conclude that significant differences remain regarding the distribution of competences across European financial market regulation and supervision: these cover the relationships between EU institutions and EU member states, between Euro members and non-Euro members, and between the three financial market sectors of banking, insurance, and securities markets. The last section of the second part deals with fiscal policy in the EU, namely budgetary policy and instruments for macroeconomic stabilization. Picking up with the agreement over the Copenhagen convergence criteria of the 1990s, the analysis follows the increasing consolidation of budgetary rules in form of the Stability and Growth Pact of 1997, the intensification in the aftermath of the global financial crisis, and the introduction of the European Semester and various other rule enforcement procedures. This activism of creating new institutional mechanisms at the European level contrasts starkly with the reality that intermittently the largest euro area members broke the rules most flagrantly. Even today, member states retain a veto in most aspects of budgetary policy. Therefore, following the discussion on the (lack of) instruments for macroeconomic stabilization, the section revisits several interpretations of the causes and recommended policies for addressing the weak institutional framework of the euro area. Although a range of remaining problems have been identified, analyzed, and well documented, a comprehensive and final reform for establishing a sound common economic and monetary union (EMU) is still missing. The section concludes by stating that budgetary and fiscal policy in the EU experienced the least delegation of competences to the European level among the three policy areas discussed here. The third part of this chapter turns from questions over the EU’s internal constitution to the representation of the EU at the international level. With the recent changes introduced by the Treaty of Lisbon in 2009, the role of the EU as an external actor was strengthened in its two base treaties, the Treaty on European Union (TEU 2009) and the Treaty on the Functioning of the European Union (TFEU 2009). However, European representation in international bodies and organizations is also dependent on the distribution of competences between EU level and EU member states, which varies across policy fields as reviewed in the preceding sections. Formally, EU institutions and member states share the competences at the international level in international economic and financial policy; but in practice member governments usually have the final say as EU bodies are often at best represented as observers. Yet the rules and procedures of the respective international body are also

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of relevance. If, for example, the international organization formally only recognizes sovereign nation-states as members, the representation of EU institutions is not straightforward to clarify. The different set-ups across international institutions hence offer intriguing insights into the practices of international politics, the many formal and informal rules, and the varied outcomes when engaging the new institutional construct of the EU. In order to examine empirical evidence concerning the international membership of EU institutions and member states, six international bodies, and organizations, are presented and discussed in the section: the Group of 20 (G20), which met from November 2008 onwards at Head of State and Government level to first coordinate the response to the 2007–2009 global crisis and then to push ahead with reforming the international financial system; the International Monetary Fund (IMF), in existence since 1945 as international organization overseeing the stability of the international monetary and financial system; the Financial Stability Board (FSB), which was established by the G20 Heads of State and Government in April 2009 to oversee financial regulatory reforms at the international level; the Basel Committee on Banking Supervision (BCBS), which enabled the international regulation and supervision of banks for over 40 years; the International Organization of Securities Commissions (IOSCO), which brings together securities regulators from over 100 countries and sets international standards for securities and capital market regulation; and finally the International Association of Insurance Supervisors (IAIS), which, as an equivalent to BCBS and IOSCO, is the international body for the regulation and oversight of insurance markets. In the fourth part, the empirical analysis is complemented by a theoretical discussion. The concept of actorness according to Bretherton and Vogler is presented in detail, with its three constitutive dimensions of presence, opportunity, and capability (Bretherton and Vogler 2013). The subsequent analysis of EU actorness in the area of monetary, financial as well as fiscal policy will show that the EU exhibits substantial presence. First, the EU presides over one of the largest internal markets in the world alongside the United States and China. Second, the euro is the second most important international currency after the US dollar in terms of its use in international trade and capital flows (BIS 2019; IMF 2017). For the policy areas examined here, it can thus be stated that the EU has a strong presence in the world economy. The attractiveness of the common European market provides a strong incentive for state and non-state actors to gain access. This in turn provides EU institutions and member states with the potential of substantial influence in setting international market rules. Moreover, the EU’s market power also offers scope for external opportunity. Although China is an increasingly equal partner on the international stage, Chinese representatives have thus far proven more reluctant than their American and European counterparts when it comes to leadership and setting new economic rules in international bodies. As, in parallel, the United States appears to be increasingly abandoning its position at the helm of the international economic system, there is abundant opportunity for a powerful third actor. Thus, as presence and opportunity display high scores, the question arises as to the capability of the EU to make use of

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these opportunities. And here we will see that the capability of the EU—which ultimately depends on the coherence of the positions of the EU member states among themselves and between EU institutions and the member states—varies substantially across policy fields and time. If the EU speaks with one voice, it can be expected to be one of the most influential, if not the most influential, actor in the international financial system, leveraging the full force of the single market and the common regulatory framework. However, if the objectives of the actors within the polycentric EU diverge, it can be expected that the EU will struggle to maximize its capability and consequently display lower actorness at the international level, despite its considerable market power. What can explain the variance in EU actorness in the fields of monetary, financial, and fiscal policy? The introductory chapter of this textbook presented a number of theoretical approaches and perspectives of Political Science and International Relations. Among these, this chapter selects liberal intergovernmentalism and the principal-agent approach to understand and explain European actorness. The section then continues to present the two theories, their central premises and to review their contribution against the background of the EU’s actorness. Liberal intergovernmentalism, for instance, argues that states as central actors in international politics pursue their domestically determined preferences in interstate negotiations (Moravcsik 1991, 1998; Moravcsik and Schimmelfennig 2009). State preferences result from conflicts between interest groups within society, the results of which are aggregated by political institutions. The successful realization of state preferences at the international level depends on the negotiating power of a state, which is thought to be based on relative market power and information advantages. The analysis is thus built on a three-stage model in which, first, states define their preferences, second, states negotiate with each other, and third, preferred policies are implemented or new international institutions established. The principal-agent approach places the analytical focus on the relationship between principals and agents, i.e., two types of actors which agreed on a contract of competence delegation (Hawkins et al. 2006; Dür and Elsig 2011). The approach assumes that principals delegate authority and competences to an agent in order to reap benefits from the agent’s specialization, possible economies of scale, or a higher credibility of policy decisions. In the context of EU actorness, the chapter applies the principal-agent approach to the relationship between EU member states as principals and EU institutions as their agents. However, once competences are delegated, a number of issues can effectively undermine the agent’s implementation of contractually determined objectives. Agents may pursue goals that differ from the interests of principals, facilitated by information advantages due to their specialization. In order to prevent these dynamics, principals take various measures to prevent the agent from deviating ex ante. Moreover, even before engaging in competence delegation, prospective principals balance the benefits of the agent’s specialization with the costs of deviant behavior and monitoring. The principal-agent approach would thus expect a delegation only in cases where the benefits, as perceived by principals, outweigh the costs.

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The third section in the fourth part of the chapter then analyzes the negotiations on the Basel III minimum capital requirements in 2010 and their results in light of the EU’s actorness (BCBS 2010b). First, the study will find that, despite its strong presence and opportunity in the policy area of international banking regulation, the EU displayed low actorness during the negotiations. This is attributed to the EU’s reduced capability, which is due to the lack of coherence between the positions of EU institutions and member states. Having established the low actorness of the EU, the section applies the theory of liberal intergovernmentalism and the principal-agent approach to explain this case. Liberal intergovernmentalism correctly points to divergent preferences among the largest EU member states. However, it reveals weaknesses in the reconstruction of the preference formation in individual states. The principal-agent approach, on the other hand, sharpens the focus on the more general question of delegation in EU banking regulation and allows to explain the limited delegation of competences from EU states to EU institutions in a comprehensive way. Finally, both theories contribute to explaining EU actorness in the realm of financial regulatory policy and to understanding the processes that led to the ultimately disappointing policy outcome of the BCBS negotiations. As the largest member states of the EU pursued conflicting preferences, while EU institutions were largely sidelined, all parties failed to achieve their desired results. In the conclusion, the various parts and sections of the chapter are briefly reflected upon in order to sketch out possible applications and further research questions. Moreover, a brief consideration of the ongoing COVID-19 crisis and the EU’s response will be provided. In addition to an overview of the relevant integration steps in the area of EU monetary, financial, and fiscal policy, this chapter provides a detailed discussion of six relevant international bodies and organizations. The concept of actorness and the two theoretical approaches of liberal Intergovernmentalism and the principal-agent approach offer the tools to address relevant research questions in these realms. The chapter is thus intended to support students and postgraduates working in the realm of International Relations, International Political Economy, and European Integration studies.

3.2

Monetary, Financial, and Fiscal Policy in the EU

The beginning of European integration and the gradual institutionalization of intergovernmental cooperation in Europe can be traced back to the early years after the end of the Second World War. In the immediate postwar period, security concerns were the primary drivers of cooperative measures among European states. The Treaty of Dunkirk between France and the United Kingdom in 1947 and the accession of the Benelux countries to this security cooperation with the Treaty of Brussels in 1948 represent just two examples. It was the founding of the European Coal and Steel Community (ECSC) by the Treaty of Paris in 1951 among Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands, which combined for the first time the political, economic, and ideational forces that would accompany every further step of European integration. The ECSC, established under the

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leadership of the French Foreign Minister Robert Schumann and French diplomat Jean Monnet, integrated the signatories’ coal and steel industries to be overseen by newly established joint institutions and laid the foundations for forthcoming transformations. Ongoing intergovernmental cooperation would be fostered by both the aspiration of long-term peace in Europe and the promise of cross-border market exchanges (Fontaine 2000; Phinnemore 2016). The Treaty of Rome of 1957 significantly broadened the scope of European integration efforts, establishing the European Economic Community (EEC) by the six founding states of the ECSC. Alongside the ECSC and the European Atomic Energy Community (EAEC, later renamed EURATOM), also founded in 1957, the EEC formed one of the three bases of early European cooperation. In the following two decades, cross-border cooperation between the member states of the EEC focused on trade and agricultural policy. The driving objectives of the Treaty of Rome had been the creation of a common market, the gradual reduction of customs duties and barriers to trade, and the harmonization of national regulations. Monetary and financial policy played a subordinate role until the 1970s, as the Bretton Woods system established in 1944 set the rules of the international monetary and financial system (see Box 3.1). When the Bretton Woods system found an abrupt end in the early 1970s, a number of processes were triggered, which would prove essential to the evolution of monetary, financial, and fiscal policies in the EU. The following section will therefore identify the most relevant developments over these decades while focusing on the implications for monetary policy, financial market regulation and supervision, and budgetary policy and macroeconomic stabilization. Box 3.1 The Bretton Woods System At the Bretton Woods Conference in July 1944, representatives of 44 countries agreed to a reorganization of the international economic and financial system after the end of the Second World War. For the area of international monetary policy, a system of fixed exchange rate bands was designed assigning the US dollar the role of an anchor currency. All currencies were pegged to the US dollar which in turn was linked to gold in a fixed ratio. The exchange rates of individual countries could deviate by
1% from predetermined conversion rates. If these limits were transgressed, the national central banks were required to intervene in foreign exchange markets in order to restore the specified exchange rate. The International Monetary Fund (IMF) was established as an international organization to monitor this system of pegged exchange rates in particular and the stability of the international monetary system in general (Helleiner 2017).

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Monetary and Exchange Rate Policy

The first important steps toward a common monetary policy in Europe were taken in the 1970s in response to international developments: The sudden announcement of US President Richard Nixon on 15 August 1971 to restrict the convertibility of the US dollar into gold triggered a volatile period in international monetary and financial markets. With cooperative efforts failing, in 1973 followed the dissolution of the fixed exchange rate peg between the currencies of Western economies, which heralded the end of the Bretton Woods system (Helleiner 2017). In parallel, oil price shocks upended global commodity markets and spurred the increasing fragmentation of the international monetary system. In the context of the Yom Kippur War of 1973, oil-producing countries in the Middle East suddenly limited production quantities which led to the quadrupling of oil prices in world markets, which accelerated the turbulences in the already troubled world economy (Adam and Mayer 2016, p. 27 f.). The member states of the EEC were severely affected by the upheavals in world markets, and the abandonment of the Bretton Woods system coincided with stark fluctuations in the exchange rates of intra-European currencies. Among other things, Bretton Woods had put a stop to targeted devaluations of domestic currencies. Without such a model of exchange rate pegging, individual economies could hope to gain short-term competitive advantages by devaluing their currency against trading partners. Through devaluation, economies can aim to reduce the world market price of their exports and thus increase the relative demand for the products of domestic producers. However, as this usually triggers countermeasures by trading partners, a race of competitive devaluations may quickly ensue. In the Interwar period, such fateful devaluation spirals had destabilized the international and European monetary and financial system with disastrous long-term consequences (Baldwin and Wyplosz 2015, p. 327 f.). Hence with the end of the Bretton Woods system, the order and stability of the European monetary area were once again called into question. Yet these troubling developments notwithstanding, the EEC had grown further in the meantime, with Denmark, the United Kingdom, and Ireland joining the Community in 1973. By then, the first drafts for a common monetary union among the members of the EEC had already been published. In 1970, a commission of experts chaired by Luxembourg Prime Minister Pierre Werner drew up a blueprint for the integration of monetary policy. The so-called Werner Plan provided for the establishment of a common currency in several steps by the year 1980. However, these ambitious goals were missed by a wide margin, and the members of the EEC only agreed on a European exchange rate network, the so-called currency snake, in 1972. The currency snake aimed for participating member states to coordinate and largely stabilize the parities of their currencies. The currencies could deviate positively and negatively from a fixed exchange rate within a corridor of
2.25% without triggering monetary policy measures. In the event that these ranges were exceeded or undercut, the central banks of the countries concerned were required to intervene in foreign exchange markets in order to restore the prescribed parity of exchange rates (Adam

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and Mayer 2016, p. 33 f.). In the following years this system functioned only to a limited extent; price fluctuations on international oil, product and currency markets repeatedly put the exchange rates of EEC members under considerable pressure, and individual members had to temporarily withdraw from the common currency coordination. Continued tensions in the intergovernmental coordination of monetary policy also surfaced, especially as capital controls were only implemented hesitantly and increasingly lost their influence. At the end of the turbulent 1970s stood the agreement on the European Monetary System (EMS) in 1979, which among others introduced the European Currency Unit (ECU). The ECU served as reference point for exchange rate calculations and its value was established as weighted average of the currencies of all participating states. Building on the ECU, the newly established Exchange Rate Mechanism (ERM) formalized and further expanded the exchange rate coordination of the currency snake and participating countries agreed to keep the values of their currencies within a narrow corridor of
2.25% and a wider corridor of
6% in case of need around the ECU. Thereafter, fluctuations among the exchange rates of the member states somewhat stabilized. The economists Wyplosz and Baldwin highlight three unique features of the EMS: (1) the EMS was the first purely European exchange rate regime that did not involve any reference to the dollar or gold; (2) it was symmetrical as there was no official reserve currency; and (3) there was an equal responsibility for exchange rate stability between its members (Baldwin and Wyplosz 2015, p. 337 f.). However, the EMS was unable to lastingly curb exchange rate fluctuations in Europe. Between 1979 and 1987, the common exchange rates were readjusted 12 times, a measure initially reserved for extraordinary crisis situations. Moreover, the uniformity of the EMS laid down in the statutes could not be maintained. During the 1980s, the EMS gained an increasingly asymmetrical form as it came to be led by the Deutsche Mark as managed by the Bundesbank. The German Bundesbank, which followed a strict monetary policy geared to price stability and low inflation rates by virtue of comparatively higher interest rates, set the de facto standard for monetary policy in the EMS. As research has shown, other European economies had to repeatedly realign the value of their currencies relative to the Deutsche Mark to counter detrimental market developments (Spielau and Höpner 2015). Despite the persistent tensions in the exchange rate area, the attractiveness of joining the EEC did not wane. Greece joined in a second round of enlargement in 1981, followed by Spain and Portugal in a third round in 1986 (see Box 3.2). The Single European Act (SEA) was also adopted in 1986. Driven by a market-friendly coalition led by UK Prime Minister Margaret Thatcher and European industry interests, the SEA aimed to create a common internal market guaranteeing the four freedoms of free movement of goods, persons, services, and capital across borders (Adam and Mayer 2016, p. 35).

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Box 3.2 Membership of the European Coal and Steel Community (ECSC) and European Economic Community (EEC), Since 1993 European Union (EU) 1951 1973 1981 1986 1995 2004 2007 2013 2020

Belgium, France, (West) Germany, Italy, Luxembourg, Netherlands Denmark, Ireland, United Kingdom Greece Portugal, Spain Austria, Finland, Sweden Cyprus, Czech Republic, Estonia, Hungary, Malta, Latvia, Lithuania, Poland, Slovakia, Slovenia Bulgaria, Romania Croatia Withdrawal of the United Kingdom

At the beginning of the 1990s, the EMS faced growing tensions in light of volatility in international markets and growing doubts over the stability of European exchange rate coordination. Member states reacted by widening the bands of the fixed exchange rates to up to
15% in both directions. While intended to ensure the robustness of the EMS, these measures also undermined the overarching objective of stable exchange rates in the EEC. But soon would these be concerns of the past, as in February 1992 member states signed the Maastricht Treaty, officially in force by 1993, with its long-lasting consequences for European integration shaping political and economic developments to this day: The Treaty established the encompassing European Union (EU) and replaced the European Economic Community (EEC) with the European Community (EC). It also added to the first pillar of economic cooperation the second pillar of Common Foreign and Security Policy (CFSP), and the third pillar of Justice and Home Affairs (JHA). Yet most essential for monetary policy, the Maastricht Treaty also established the European Economic and Monetary Union (EMU) (Padoa-Schioppa 1994). The idea of EMU was based on a report spearheaded by then President of the European Commission, Jacques Delors (Delors Report 1989). Delors was one of the driving forces behind further European unification in the 1980s, first as French finance and economy minister and then as President of the European Commission from 1985 to 1993 (Verdun 1999). In 1989, the Delors Report was adopted by the European Council of Heads of State and Government and translated into official European statute with the Maastricht Treaty of 1992. The Treaty provided for the introduction of a single currency and the establishment of a common central bank (James 2014). It also laid down comprehensive requirements, which aspirants had to fulfil in order to join the new currency. These so-called convergence criteria included, inter alia, a prior membership of the EMS of at least 2 years, an annual inflation rate of close to 2% and a broadly balanced government budget. In the literature, this is attributed in particular to German influence, since political and

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economic interests in Germany were united in defending the strong position of the Deutsche Mark (Baldwin and Wyplosz 2015, p. 341 f.). Section 3.2.3 below will look in more detail at fiscal and budgetary policy aspects in the EU. The Maastricht Treaty established the European Monetary Institute (EMI), which prepared the establishment of the European Central Bank (ECB) in 1998. The ECB was placed at the center of the European System of Central Banks (ESCB), which brings together the central banks of all EU member states. Since not all EU members would adopt the euro, the so-called Eurosystem was created separately. The Eurosystem comprises the ECB and the National Central Banks (NCBs) of the euro area member states. The euro was introduced on January 01, 1999, by eleven states as a virtual currency for cash-less payments and accounting purposes, and replaced national currencies at the values of the ECU as of December 31, 1998. The ERM was replaced by the Exchange Rate Mechanism II (ERM II), which maintains the prescribed exchange rate corridor for states willing to participate. Initially, Greece and Denmark participated, but since Greece and other aspirants adopted the euro, Denmark remains in ERM II and was only in July 2020 joined by Bulgaria and Croatia. Future euro members are expected to enter and successfully maintain ERM II membership for at least 2 years before joining EMU. As of January 2002, then, euro banknotes and coins replaced national currencies in payments. Since the introduction of the euro, eight more countries have joined EMU, raising the number of the current membership to 19 economies (see Box 3.3). Box 3.3 Membership of the European Economic and Monetary Union (EMU) 1999 2001 2007 2008 2009 2011 2014 2015

Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain Greece Slovenia Cyprus, Malta Slovakia Estonia Latvia Lithuania

The ECB thus became the central actor in monetary policy in the euro area. The competences of the ECB are laid down in Article 127 of the Treaty on the Functioning of the European Union (TFEU 2009). Formally, the ECB’s independence shields it from any political or institutional influence on the fulfilment of its mandate. The Eurosystem assumes all tasks of monetary policy in the euro area, including conducting foreign exchange operations, managing foreign reserves and maintaining payment systems, but most importantly steering short-term interest rates (see Box 3.4). The Governing Council is the main decision-making body of the ECB and is

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composed of the Executive Board of the ECB and the central bank governors of all euro area member states. The Executive Board of the ECB has six members, the President, the Vice-President, and four additional permanent members. Monetary policy decisions are all taken by the Governing Council of the ECB, according to predetermined voting rules. During the first one-and-a-half decades, the six members of the Executive Board and the individual governors of each Eurosystem central bank had one vote. Since Lithuania joined in 2015, the system has been reformed due to the increasing size, and the total number of votes in the Governing Council has been limited to 21. The system now in place retains the voting rights of the six members of the Executive Board. However, the remaining 15 voting rights are distributed among central bank governors on a rotating basis. The five countries with the largest economies and the most advanced financial sectors—Germany, France, Italy, Spain, and the Netherlands—together command four votes while the remaining countries share 11 votes. In both groups voting rights rotate on a monthly basis (Baldwin and Wyplosz 2015; Adam and Mayer 2016). Box 3.4 Monetary Policy Instruments The ECB controls several monetary policy instruments: – Open market operations are the central bank’s main instrument for steering interest rates, managing liquidity in markets as well as for signaling the monetary policy stance. – The standing facilities administered by the National Central Banks (NCBs) provide and absorb overnight liquidity: eligible counterparties can receive liquidity via the marginal lending facility or make deposits in the deposit facility. – The requirement for banks to hold minimum reserves on their accounts at NCBs helps to stabilize money market interest rates for banks to smoothen out daily liquidity fluctuations. – Unconventional monetary policy instruments, i.e., asset purchase programs, have been increasingly used in response to the global financial crisis of 2007–2009 and ensuing euro area crisis. (Hartmann and Smets 2018; ECB 2020e) The primary objective of the ECB is to maintain price stability. The TFEU reads (2009, Article 127 (1)): The primary objective of the European System of Central Banks (hereinafter referred to as ‘the ESCB’) shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources [. . .].

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Thus, the mandate primarily requires the price level to be kept at a predetermined level. However, as long as price stability is secured, the ECB and the NCBs may also support general economic policies in the euro area. In the Treaties, no explicit inflation target is mentioned. Therefore, the ECB pursues a self-imposed target of below but close to 2% annual inflation as measured by the Harmonised Index of Consumer Prices (HICP) (Adam and Mayer 2016, p. 222 f.). After a protracted start, the euro’s first decade from 1999 to 2008 was widely seen as an economic success, as it featured a broad economic upswing across its member states. Stable and robust growth figures in Gross Domestic Product (GDP) accompanied a low inflation rate of below 2.5%, which seemed to demonstrate the growth-enhancing effects of the single currency as well as the price-stabilizing performance of the ECB’s monetary policy. Over the period of 1999–2008, the economies of countries such as Greece and Spain grew by over 30% of GDP, Ireland by over 50%, and Germany, France, and Italy also increased their economic output by 12–15% (IMF 2017). Toward the end of that decade, however, dark clouds appeared on the horizon when in the summer of 2007 default rates of subprime mortgages in US housing markets skyrocketed. What was initially dismissed in Europe as a local crisis of the American mortgage market had massive consequences for European financial markets and local economic growth a few months later. Ultimately, the reverberations of the subprime crisis would come to challenge the survival of the single currency itself (Baldwin and Wyplosz 2015, p. 480 f.; Hodson and Puetter 2016). In retrospect, the onset of the global financial crisis of 2007–2009 can be traced back to the peaking of the US housing market in the summer of 2006, as increasingly rapid falling prices had a direct impact on closely connected subprime mortgages and derivatives markets. When the major French bank PNB Paribas announced on August 09, 2007, that it would suspend redemptions to investors in three of its hedge funds dealing in mortgage-backed securities, uncertainty spread from American markets to the global financial system. Central banks of the major industrial nations, above all the US Federal Reserve System and the ECB, responded to the impending crisis by providing additional liquidity for banks and other financial market players. The following steps of the global financial crisis of 2007–2009 have been documented in detail elsewhere and will not be recounted here (e.g., see Lowenstein 2010; Blinder 2013; Eichengreen 2015). Yet some light should be shed on the ECB’s actions and the ensuing euro area crisis, as these would prove critical for the further trajectory of the European project (see also Hartmann and Smets 2018). Initially, the ECB reacted in a similar manner to the US Federal Reserve by offering ample liquidity to markets in the summer of 2007. Banks were able to draw on unlimited central bank funds against adequate collateral to cover outstanding positions. Over the course of the crisis, both central banks massively expanded the form and scope of these refinancing transactions. Moreover, the Federal Reserve installed direct swap lines with the ECB and several advanced markets’ central banks, through which they exchanged currencies free of charge for a predetermined period of time (between the Federal Reserve and the ECB US dollar against euro) (Prasad 2014). This enabled the ECB to supply domestic banks with the

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much-needed American currency. However, soon after, monetary policy measures between the ECB and the Federal Reserve began to diverge starkly. While the Federal Reserve successively lowered its policy rate from 5.25% in September 2007 to 0–0.25% in December 2008, the ECB proved much more cautious. In July 2008, the ECB even chose to raise the main interest rate from 4% to 4.25% (ECB 2010). With the bankruptcy of the investment bank Lehman Brothers on September 15, 2008, the international financial system imploded. Lehman Brothers had been doing business in markets around the world, and no one was aware of the true extent of the bank’s international obligations. Distrust spread on who would be next to fall. As a direct consequence, the interbank market collapsed, where banks lend money at very low-interest rates and time horizons to each other. Then on October 08, 2008, the central banks of several countries took coordinated action and significantly lowered their interest rates. Until May 2009, for example, the ECB would lower its main interest rate to 1%. Moreover, in October 2008, the Governing Council of the ECB decided to launch for the first time a series of so-called nonstandard measures to improve its transmission mechanism and credit support to the real economy. Among other things, central bank liquidity that banks could call on was further increased and the criteria for accepted collateral were lowered. Then in May 2009, the ECB decided to start purchasing euro-dominated covered bonds from July onwards, with the program ending in June 2010 when it reached a nominal amount of €60 billion (ECB 2010, p. 64 f.). With these measures, the ECB grew into its role as lender of last resort in European money and other bank funding markets. To recall, since its establishment in 1999, the ECB had focused on maintaining price stability, in accordance with its mandate under the Treaties. But in the midst of the most severe global financial crisis since the Great Depression, it slowly transformed into the role of a crisis manager (De Grauwe 2016, p. 173 f.). The crisis in Europe entered the next stage when the newly elected Greek government in October 2009 revealed a significantly higher budget deficit for 2009 than initially announced (Copelovitch et al. 2016). As markets were still reeling in the aftermath of the financial crash and widespread uncertainty had not receded, risk premia on Greek government bonds began to rise abruptly; in parallel, US rating agencies successively downgraded the creditworthiness of Greek government bonds (Hodson and Puetter 2016). In consequence, the Greek government could no longer refinance maturing government bonds in global markets and soon after called for external help by requesting an international support package in April 2010. This was the first time that a member state of the EU’s new monetary union applied for direct budget support. Initially, EU leaders were split over how to respond to this situation (Blustein 2016). Eventually, an aid package was granted in May 2010 by the so-called Troika, a newly established inter-institutional grouping consisting of the European Commission, the ECB, and the IMF. In exchange for financial aid, the Greek government had to agree to drastic cuts to its annual budget and reforms to the domestic economic framework (Lütz and Hilgers 2019). Faced with deteriorating markets and falling prices, the ECB launched the Securities Markets Programme (SMP), through which it purchased for the first

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time sovereign bonds on secondary markets in order to ensure price stability and market liquidity. However, the Greek crisis continued. In fact, it would last for years. Extensive studies are available to examine the stages of the Greek crisis in detail (such as Blustein 2016; Papakōnstantinu 2017). But for the stability and continued existence of the euro area, the Greek crisis was ultimately a noncritical event. In relation to the total GDP of the euro area, Greece’s share amounted to a mere 2% in 2010—a local Greek crisis was thus unlikely to call into question the creditworthiness and cohesion of the entire euro area. However, the lack of a stabilizing institutional framework of EMU failed to contain the crisis to Greece, and the spreading contagion effects soon engulfed other members of Europe’s single currency (Baldwin and Wyplosz 2015). Uncertainty over government solvency, therefore, reached Ireland and Portugal, which followed Greece and requested international aid packages in 2010 and 2011, respectively; the official responses also fostered the evolution of the emerging European safety net (see Box 3.5). Yet also the crises in Ireland and Portugal appeared at first to be manageable through aid packages and within the institutional status quo. However, when Spain, the fourth-largest economy in the euro area, was dragged into the spreading crisis in the spring of 2012, the existence of EMU was put into question. Still in 2010, Spain had enjoyed a relatively low national debt to GDP of 80% as compared to other crisis countries (Baldwin and Wyplosz 2015). Since then the fiscal situation in Spain had, however, deteriorated, mainly due to failures of several banks that called on, and were granted, support by the Spanish government. This triggered a fateful cycle, in which Spanish banks and the Spanish government mutually dragged each other further down (De Grauwe 2013, see also Royo 2013, p. 158). The underlying problem of such state-bank nexus will be picked up again in the subsequent section on financial regulation and supervision in the euro area. Box 3.5 The European Safety Net: ESFS, EFSM, ESM The European Financial Stabilization Mechanism (EFSM) was established in May 2010 as an EU Community instrument through a Council Regulation as entity under Luxembourg law (EuC 2010). With the agreement of all EU member states, the EFSM could lend up to €60 billion. The European Financial Stability Facility (EFSF) was founded in parallel to the EFSM. It is a private limited liability company under Luxembourg law. It could borrow up to €440 billion on capital markets and provide these funds to program countries (BMF 2018). The European Stability Mechanism (ESM) was created as an international financial institution under an international treaty, following decisions of the European Council in December 2010 and March 2011. As a crisis management mechanism, the ESM replaced the EFSM and the EFSF from October 2012 onwards. The financial volume of the ESM amounts to €705 billion of share capital, divided into €80 billion of paid-in capital and €625 billion of callable capital (ESM 2018).

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The escalation of the crisis was also enabled by the constraints placed on the ECB to engage in the full spectrum of tasks as central bank of the euro area. As described above, from autumn 2008 onwards the ECB had employed nonstandard monetary policy instruments in order to stop the escalating liquidity crisis in the European interbank market. It thus acted as the lender of last resort for banks and took on an essential function of a central bank. However, the ECB’s mandate seemed to prohibit comparable actions in government bond markets. Although it was already buying a share of government bonds under the SMP, these actions were strictly limited. Indeed, Article 123(1) of the TFEU states that Overdraft facilities or any other type of credit facility [for member states] with the European Central Bank or with the central banks of the member states [...] shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

The paragraph represents a ban on monetary financing, intended to prevent the direct financing of state expenditures by the ECB. Although measures such as the purchase of government bonds on secondary markets were not prohibited per se, they were subject to formal and above all informal rules and norms regulating monetary policy in the euro area. The ECB leadership and its staff thus faced the perennial challenge to square what was considered economically necessary with what was legally possible as well as what was deemed politically appropriate. One interpretation, therefore, sees the ECB during the crisis years as a strategic player, as it assessed possible measures and programs and also evaluated when member state disputes would likely prevent agreement and a smooth implementation (Henning 2016). Consequently, the ECB acted cautiously in response to the flaring euro area crisis—that is until the Spanish crisis forced the hands of euro area Heads of Government to allow for more far-reaching measures. The contagion of government bond markets of supposedly economically weaker euro area countries continued. Redenomination risk began to be priced into sovereign interest rates, i.e., the risk that a euro area member was forced to leave the euro and its assets be redenominated in legacy currency (Hartmann and Smets 2018, p. 30). Against the background of an escalating bank and sovereign debt crisis in Spain and ominously creeping interest rates on Italian government bonds, the leaders of EU member states met on 28 and 29 June 2012 in Brussels. And at this summit, the governments agreed to establish a European instrument for the direct recapitalization of ailing banks in the euro area. This was linked with the hard-wrought condition to centralize the supervision of the largest European banks and create a European banking union. Direct bank recapitalization should be executed by the recently established European Stability Mechanism (ESM). The supervision of euro area banks was delegated to the ECB, enacting a provision in Article 127, paragraph 6 of the TFEU, which had laid dormant since the original signing of the Treaties (Véron 2015; Copelovitch et al. 2016; Glöckler et al. 2016). Despite this historic step of centralizing banking supervision in the euro area and granting the ESM to directly back banks (at least on paper), market actors’ distrust

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did not dissipate. To restore confidence in the euro area as a whole, therefore, ECB President Mario Draghi declared at a conference in London on 26 July 2012: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro” (Draghi 2012). On August 02, 2012, the ECB consequently announced the instalment of the Outright Monetary Transactions (OMTs) program, a Eurosystem measure for the purchase of government bonds issued by euro area countries. The ECB’s avowed willingness to buy up government bonds—unlimited, if necessary, to maintain the constant demand for bonds issued by euro area members—fended off the crisis and led to a stabilization of markets (Jones et al. 2016). In order not to amount to an unrestricted rescue policy for crisis countries, the OMT program is subject to a set of limiting requirements. The purchasing of government bonds of individual states is linked to conditionalities; the ECB may only buy government bonds with a maturity of 3 years or less. In addition, member states requesting support through the OMT program must simultaneously accept structural adjustment measures under the supervision of the ESM. The involvement of the ESM shall provide incentives for program countries to end ECB support as soon as possible (De Grauwe 2013, p. 174 f.). These conditionalities were intended to increase the relative costs of joining OMT for member states, which would only resort to such measures in most severe circumstances. In fact, the OMT program has never been used—it was the ECB President’s credible commitment to use such instruments whenever necessary, which proved sufficient to calm the markets. This expansion of monetary policy activities and thus the further development of the ECB’s monetary policy had far-reaching consequences. The announcement of the OMT monetary policy operations was followed by the actual implementation of quantitative easing programs from summer 2014 onwards with expanded purchases of public and private sector securities to address deflation risks and for bringing inflation levels closer to the ECB’s avowed aim (Hartmann and Smets 2018). Unlike OMT, the extent of quantitative easing was limited by predetermined volumes, followed fixed country quotas relative to market size, and could not affect more than one-third of a member state’s outstanding government bonds (De Grauwe 2016). Overall, these unconventional monetary operations of the ECB had significant consequences for markets, the euro area economies as well as for the central bank’s balance sheet. Since the beginning of the crisis, the ECB tripled its balance sheet, with assets growing from around €1500 billion in 2007 to €3000 billion in 2012 to €4500 billion in 2017 (ECB 2018a). The ECB’s actions during the crisis and after provoked fierce controversies. Supporters emphasize the essential achievement of the ECB in preventing the collapse of the euro area. Opponents cite among others alleged negative long-term consequences of the policy of low-interest rates for financial markets and the real economy (as discussed in Baldwin and Wyplosz 2015; De Grauwe 2016). In particular, the question as to whether the ECB broke the ban on monetary state financing by announcing the OMT program caused open conflicts. The adversaries already found themselves before the highest courts in the EU, first the German Federal Constitutional Court and then the European Court of Justice (ECJ). The Federal Constitutional Court considered the question of whether the OMT program

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was covered by the mandate of the ECB in the TFEU and the Statute of the ESCB and in line with German Basic Law. In January 2014, it initially suspended the proceedings, turned to the ECJ for further clarification and submitted a series of questions for a preliminary ruling on the interpretation of Union law under Articles 119, 123, and 127 of the TFEU and Articles 17 to 24 of the Statute of the ESCB (Federal Constitutional Court 2014). In June 2015, the ECJ ruled that the OMT program was compatible with Union law (ECJ 2015). The Federal Constitutional Court, in turn, supported the ruling of the ECJ in June 2016 and approved the ECB’s OMT program subject to a set of conditions, such as specified volume limits (Federal Constitutional Court 2016). For the time being, the ECB’s actions had been found compatible with Union law; however, by mid-2020 the German Federal Constitutional Court would pronounce another judgment on ECB programs, the repercussions of which are still playing out. The controversies have thus been assured to continue. Over the past 50 years, monetary policy in Europe evolved from being fragmented among diverse nations to a currency union of now 19 member states. Central stages of this evolution represent the establishment of the currency snake in the 1970s, the introduction of the euro and the creation of the ECB in 1999, and the ECB’s maturing to assume the role of lender of last resort in 2012. While the ECB enjoys exclusive competence in monetary policy matters, it is also embedded in the Eurosystem and the ESCB: the Governing Council of the ECB consists of the Executive Board and the central bank governors of all euro area members; the General Council additionally includes all EU non-euro area central bank governors. Ultimately, the evolution of monetary policy in the EU reflects the typical dynamics of European integration: new entities beyond sovereign states are created in which member states retain rights of representation. Thus, new sui generis institutions are shaped by new rules convening old actors. As noted above, the consolidation of the ECB as a fully functioning central bank also had implications for European financial market regulation and supervision. The following section discusses the integration process in this area, which was initially more restrained than in monetary policy.

3.2.2

Financial Regulation and Supervision

The creation of the common internal market through the Single European Act (SEA) of 1986 and the Maastricht Treaty of 1993 established the prerequisites for seamless cross-border exchanges. The four freedoms, on which the single market is based, comprise the free movement of goods, services, persons, and capital. In nominal terms, this should also have created a European financial market. However, while monetary integration progressed gradually and the euro was introduced in 1999, the regulation and supervision of banks and financial markets remained under national prerogative. The principles of home country control and mutual recognition of regulation were predominant, resulting in mere minimum harmonization of regulatory frameworks.

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In view of these protracted developments, the European Commission published the Financial Services Action Plan (FSAP) in the year 1999 to spur the development and reap the benefits of cross-border financial flows. This blueprint, adopted by the European Council in March 2000, laid the foundations for the creation of a common financial market and the establishment of European sectoral financial market regulatory committees. Alexandre Lamfalussy, a distinguished economist with experience at the head of the Bank for International Settlements (BIS) and the European Monetary Institute (EMI), chaired a specially appointed committee of European experts on the reforms of financial regulation and supervision. The committee’s work resulted in a number of proposals for regulatory and institutional innovations, which fed into the European reform efforts (Lamfalussy et al. 2001). Among other things, the so-called Lamfalussy process was set up in order to speed up the convergence of financial market rules across Europe. The Lamfalussy process introduced several levels in form of a nested four-step process: at Level 1, framework legislations for financial services were to be adopted under the EU’s ordinary legislative procedure (co-decision procedure). At Level 2, the European Commission took over the development of regulation, closely coordinating with the European Parliament and three Level 3 committees under the European comitology procedure (Alford 2005; EC 2007). The three Level 3 committees brought together representatives of national regulatory authorities in the areas of banking supervision, insurance supervision, and securities supervision (see Box 3.6). Box 3.6 The Level 3 Committees • Committee of European Securities Regulators (CESP), established in 2001 • Committee of the European Insurance and Occupational Pensions Supervisors (CEIOPS), established in 2003 • Committee of European Banking Supervisors (CEBS), established in 2004 However, their role in the development of regulations was purely consultative, and agreement was reached only on the basis of unanimous decisions (Lannoo 2008). Level 4 finally concerned the monitoring and implementation of the jointly developed rules in the member states by the European Commission. Although the Lamfalussy process thus established an EU-wide regulatory procedure, the prerogative to supervise banks and other financial market actors remained at national level. And while rules were developed at the EU level, implementation and interpretation were left to the national authorities which were guided by national laws. For explaining this fairly low level of integration in the area of financial market regulation and supervision, studies point at the divergent preferences of the individual states over form and extent of financial market regulation and supervision (EC 2007; Lannoo 2008). The global financial crisis of 2007–2009 and its devastating impact on European markets kick-started the integration of financial market regulation in the EU. As with the establishment of the Lamfalussy process earlier, a committee of experts was set up, this time under the chairmanship of Jacques de Larosière, a former president of the French central bank and executive director of the IMF (Larosière et al. 2009). On

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the basis of the resulting de Larosière report, the three Level 3 committees for banking supervision, insurance supervision, and securities supervision were to be transformed into European authorities; hence the European System of Financial Supervision (ESFS) was founded which today comprises the three European Supervisory Authorities (ESAs), a systemic risk board, a joint committee of all authorities as well as the national supervisory authorities (see Box 3.7). Box 3.7 The European System of Financial Supervision (ESFS) Since 2011 • European Banking Authority (EBA) • European Insurance and Occupational Pensions Authority (EIOPA) • European Securities and Markets Authority (ESMA) • European Systemic Risk Board (ESRB) • Joint Committee of the European Supervisory Authorities (ESAs) • National supervisory authorities The new authorities and committees gained a number of competences, among them further instruments to collect data in European financial markets. Moreover, the regulatory standards developed internationally after the global crisis were transposed in EU Directives to be implemented in all member states but importantly also in directly applicable EU Regulations. The Basel III agreement on minimum regulatory standards for banks as developed by the Basel Committee on Banking Supervision (BCBS), for instance, was transposed in the EU in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD)— both set the foundation of the Single Rulebook for providing a single set of harmonised prudential rules across the EU (Howarth and Quaglia 2013). The ESAs, in this case the EBA, were mandated to further specify EU legislative texts by developing Binding Technical Standards (BTS), which after adoption by the European Commission become legally binding and applicable in the EU, as well as guidelines, recommendations and opinions. Yet despite these regulatory changes, the basic premise of the system was not called into question; although the European level gained competences, supervision, and the implementation of many rules remained at the national level (Burns et al. 2017). In spring 2012, however, the escalation of the euro area crisis triggered a fundamental reform of European banking supervision (Howarth and Quaglia 2016; Jones et al. 2016). As discussed previously, the crisis spread rapidly, and supposedly economically weaker EU countries, in particular, had to cope with suddenly rising risk premia to refinance their outstanding debt. The shocks to the Spanish banking system, combined with rising interest rates on government bonds, finally forced European decision makers to act (de Rynck 2015; Glöckler et al. 2016). A systemic crisis in Spain, the fourth largest economy in the euro area, challenged the long-term stability of the entire monetary union. In addition, by then EU stakeholders and national governments had largely accepted the premise that the crisis intensified not only because of profligate spending of Southern governments or the excessive willingness of banks to take risks, but also because the state-bank nexus triggered negative feedback loops between states and domestic banks (see Box 3.8).

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Box 3.8 The State-Bank Nexus in the Euro Area During the global financial and the euro area crisis, many European banks struggled and so were only saved due to direct domestic government support. As a result, the debt-to-GDP ratio of those countries rose and markets demanded higher risk premia on their government bonds. This in turn weakened the banks and increased the sovereign risk on their balance sheets, as they held large amounts of home country sovereign bonds. The weakened banks in turn increased the burden on governments as the likelihood of bankruptcy increased. Thus, banks and states mutually reinforced the downward spiral of rising debt, falling credit ratings, and higher interest premia, which threatened to culminate in systemic collapse (De Grauwe 2013; Véron 2015). To break this nexus, euro area leaders met on 28 and 29 June 2012, with policymakers from Southern euro area members and EU institutions pushing for a direct recapitalization of banks through the European Stability Mechanism (ESM). This was to serve as fiscal backing for the euro area to signal once and for all that banks could count on the support of the entire community. Northern European members acknowledged the urgency of the situation yet requested in turn that competences over the supervision of banks were transferred to the European level. The decision makers reached a compromise linking the strengthening of the ESM with the centralization of banking supervision for the largest banks in the euro area (Howarth and Quaglia 2016; Glöckler et al. 2016; Schäfer 2016). This agreement between the Heads of State and Government laid the foundation for the European banking union with its first two pillars of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The new banking union would come to represent a significant step of integration in European financial market supervision, even though the changes were confined to the banking sector (Nielsen and Smeets 2017). At the same time, the introduction of banking union arguably also deepened the divisions in a multispeed Europe, as non-euro area countries resisted the far-reaching centralization of competences (Schimmelfennig 2016). The SSM and SRM, fully operational since November 2014 and January 2016, respectively, each assume responsibility for banking supervision and bank resolution, and form two of the three envisioned pillars of the European banking union. The SSM Regulation was adopted in October 2013 and is based on Article 127(6) of the TFEU (TFEU 2009). The SSM comprises the ECB and the National Competent Authorities (NCAs) of participating countries and is being steered by the Supervisory Board. The Supervisory Board consists of the Chair, Vice-Chair, four ECB representatives, and representatives of the NCAs of each member state. While the Governing Council of the ECB has the final say on all important decisions, it can only adopt or reject, but not amend, decisions of the Supervisory Board under the non-objection procedure. This is intended to preserve the principle of separation between monetary policy and banking supervision. The SSM supervises approximately 120 banking groups in participating member states that have been identified as significant institutions due to their size and complexity. For the remaining less

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significant institutions, the SSM oversees direct supervision by NCAs. Among others, the SSM holds sole authority to grant and withdraw banking licenses in participating countries (ECB 2020f). The SRM Regulation was finalized in July 2014 and is based on internal market provisions under Article 114 TFEU (TFEU 2009). The Single Resolution Board (SRB), which administers the SRM, began its work in January 2015. The SRM centralizes decision-making powers on the procedures for dealing with banks after their likely insolvency has been determined. If the SSM determines a significant institution as failing or likely to fail (FOLTF), it calls upon the SRM to initiate the winding-up of the bank. The resolution mechanism includes a special insolvency procedure designed to facilitate the orderly resolution of financial institutions while at the same time reducing the risk of systemic contagion. The SRB acts thereby in close consultation with the National Resolution Authorities (NRAs) of participating countries. Finally, the Single Resolution Fund (SRF) was established in May 2014 through a separate intergovernmental agreement between euro area governments (SRB 2017). Over a period of 8 years (2016–2023), the SRF will be gradually filled by contributions from euro area banks and shall reach the target of €55 billion or at least 1% of the covered deposits of all credit institutions within the banking union by December 31, 2023 (De Grauwe 2016, p. 177 f.). During the bank liquidation process, the SRF shall provide liquidity to cover the open positions of banks in resolution. The development of banking regulation and the Single Rulebook remained within the scope of the European legislative process, the Regulations and Directives which apply to all banks in the European Union. Recent legislation includes the Capital Requirements Regulation (CRR II) and Capital Requirements Directive (CRD V) adopted in May 2019, the Deposit Guarantee Scheme Directive (DGSG) adopted in April 2014, and the Bank Recovery and Resolution Directive (BRRD II) adopted in May 2014. However, European deposit insurance, in particular, is still in its infancy, as the absence of important intergovernmental decisions is currently holding back the further development process. Financial market regulation and supervision in the EU have gone through three waves of institutional innovation and European integration. The first wave represents the introduction of the Lamfalussy process and the establishment of the three Level 3 committees at the beginning of the 2000s. The development of the ESFS in the wake of the global financial crisis embodies the second wave which, among other things, transformed the three Level 3 committees into authorities and fully transferred the legislative process to the EU level. But only the third wave, the establishment of the banking union in response to the escalating euro crisis, led to a complete delegation of competences in the supervision of the largest banks from national to European institutions. The SSM, which comprises the ECB and NCAs, now has the competence to take any measures deemed necessary with regard to individual banks, even against interests of member states or other parties. According to political experts and economists, the centralization of supervision of major European banks can be regarded as relatively successful. However, the experts also refer to a number of unsolved problems, which ultimately reveal the lacking completion of the

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European banking union: the small size and long-term financial structure of the fund for the resolution of pan-European banks (SRF), the uncertainty about the ESM in its function as the backstop of the banking union, the utter lack of a common crossborder European Deposit Insurance Scheme (EDIS) or the limitation of joint supervision to only the largest European banks (Véron 2015; Eichengreen and Wyplosz 2016; Schoenmaker and Véron 2016). At the same time, although institutional innovation in financial policy has slowed since the establishment of the SSM and SRM, both vertical and horizontal integration processes keep churning. Vertically, the European reform process under the objective of deepening EMU and completing the banking union continues. In December 2018, the European Council mandated the Eurogroup to further proceed in reforming the institutional architecture of EMU. The Eurogroup is an informal forum of finance ministers from the euro area which met for the first time in June 1998. Since 2004, the Eurogroup appoints a President and the Lisbon Treaty of 2009 provided the grouping with an explicit legal basis. Under the aegis of the Eurogroup, a high-level working group was thus established for addressing the Council’s request. Notable work areas were the reform of the ESM, the strengthening of the bank resolution procedure, the planned introduction of EDIS, and the establishment of the Budgetary Instrument for Convergence and Competitiveness (BICC) for the euro area (Eurogroup 2019). While observers tend to lament the mere gradual changes and reform fatigue of euro leaders, policymakers seem also reluctant to fully halt these processes in view of the remaining glaring vulnerabilities in the euro’s institutional framework. The response to the COVID-19 pandemic in 2020, moreover, another transformational crisis rocking Europe’s economies to their core, would bring many of these issues to the fore and heighten once more the reform momentum. A further horizontal expansion was slowly taking shape as well. The SSM Regulation and an ECB Decision provide for a so-called close cooperation procedure, under which EU member states whose currency is not the euro may participate in the banking union. By requesting the establishment of close cooperation between the ECB and their national supervisory authority, and thus accepting bank supervision by the ECB, these states may join the SSM as well as the SRM. The procedure involves two central steps (ECB 2018b): first, the aspiring EU member state needs to prepare and adopt national legislation to allow the ECB to exercise its supervisory tasks within the framework of close cooperation, as the ECB will execute bank supervision indirectly via the national supervisory authority and domestic supervisory instruments. In the preparatory examination, the ECB will thoroughly review existing legislation and tools and demand adjustments where needed. Second, the applicant’s banks must undergo a comprehensive assessment as conducted by the ECB to establish their current state and soundness. Based on the results of the comprehensive assessment, the ECB requests corrections and adjustments of the entities as well as the relevant authorities where necessary. During the preparatory phase, the ECB also requests further information from the supervisory authority, facilitates staff interaction, and provides technical support to facilitate a smooth

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transition to the SSM supervisory approach. The decision to grant close cooperation is ultimately taken by the ECB’s Governing Council. The EU members Bulgaria and Croatia filed their applications for close cooperation in July 2018 and May 2019, respectively. After the completion of the accession procedure, in July 2020 the Governing Council decided to establish close cooperation with the Bulgarian National Bank and the Croatian National Bank (ECB 2020a, b): The ECB hence announced that from October 01, 2020, forward it will be responsible for directly supervising significant institutions in Bulgaria and Croatia and be in charge of the common procedures for all supervised entities, including the oversight of less significant institutions. Both Bulgarian and Croatian National Bank will be represented on the ECB’s Supervisory Board with the same rights and obligations as all other members, including voting rights. In parallel, the Bulgarian lev and the Croatian kuna were included in the ERM II by decision of the finance ministers of the euro area members, the ECB, the finance ministers and central bank governors of Denmark and of Bulgaria and Croatia respectively (Eurogroup 2020). As established previously, both Bulgaria and Croatia must now partake in ERM II without severe tensions and without devaluing their currency against the euro on their own initiative for at least 2 years, paving the way for future euro area participation. In conclusion, European financial regulation and supervision saw a series of changes over the past decades, notably visible in the fact that EU institutions acquired exclusive competences for supervising the largest banks in the euro area. This places banking supervision among the areas in which EU institutions enjoy the greatest possible decision-making autonomy and intrusion into national financial markets. For the supervision of major banks from non-euro area countries (excluding Bulgaria and Croatia), the over 6000 smaller banks in euro area and non-euro area economies, insurance companies, and securities markets, however, the competences remain shared between nation-states and EU institutions. This fragmentation places the policy area of financial regulation and supervision in-between monetary policy and fiscal policy, the latter of which experienced the least delegation to the EU level to date.

3.2.3

Fiscal Policy

Compared with monetary policy and the common regulation and supervision of financial markets, fiscal policy—including budgetary policy and macroeconomic stabilization measures—has so far experienced the least delegation to the EU level. The last decades have seen several attempts to strengthen fiscal coordination and control over national budgets, most notably for euro area members where the most far-reaching alignments of fiscal policies can be observed. Yet already the EU’s admission criteria for aspiring applicants include some fiscal policy guidelines which are intended to advance the convergence of fiscal and budgetary policy among all EU members.

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In June 1993, the so-called Copenhagen criteria were adopted by the European Council in the context of possible EU enlargements to the East. These include political, economic and acquis criteria (see Box 3.9). The economic criterion, for example, initially laid down only the conditions of a capitalist market economy and internal EU competitiveness. In practice, however, this was interpreted along several dimensions, such that membership candidates have to satisfy a number of fiscal policy parameters. In addition, the third, the acquis, criterion prescribes the acceptance of all legal obligations of membership including the future willingness of joining EMU and thereby adopting the euro. Each EU member is thus a possible member of the euro area as soon as it meets the much stricter criteria for joining the single currency, as discussed further below. Of course, an EU country must ultimately aspire to join the euro and be willing to meet all the admission criteria. In the still young euro area, there were and are several examples of countries that formally met the accession criteria but chose not to join the euro, such as the United Kingdom, Sweden, or Denmark. In the context of the recent euro crisis, the possibility was also raised as to whether member states could exit the euro area. However, the resulting economic and institutional consequences for the individual country in question and the EU as a whole could hardly be estimated, potential negative scenarios entail catastrophic consequences for all parties involved. This was one of the reasons why the Heads of State and Government retreated from seriously considering such a step at the height of the Greek crisis in summer 2015 (see Blustein 2016; Papakōnstantinu 2017). Box 3.9 The Copenhagen Criteria 1. The political criterion: Guarantee of democratic order and the rule of law, respect for human rights, respect for and protection of minorities. 2. The economic criterion: A functioning market economy and the ability to cope with competitive pressures within the EU. 3. The acquis criterion: The fulfilment of obligations arising from membership, the implementation of the common rules and standards laid down in the acquis communautaire and the pursuit of the objectives of political, economic, and monetary union (the acquis communautaire refers to the totality of EU law in force) (EuC 1993, p. 13). The stricter fiscal and budgetary requirements for joining the euro area were laid down in the Maastricht Treaty in form of convergence criteria including five conditions (see Box 3.10). The objective behind the convergence criteria was the eventual economic and political rapprochement of members, by prescribing limits and parameters for the budgetary policy of individual governments. However, these detailed requirements were not fully met even by the 11 founding members at the euro’s introduction. Italy, the third largest economy in the euro area, and Belgium had a debt ratio of over 120% relative to GDP before the launch of the euro. To not exclude a founding member of the European Economic Community and the home country of the EU capital Brussels, the Treaty was adjusted accordingly. Article

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104 of the Maastricht Treaty thus noted that exceptions to the criteria were possible if the economy had either departed only temporarily from the reference values or the deviation had continuously declined previously (TFEU 2009: Article 126, 140 [ex TEC 2002: Article 104]), with the reference values being specified in the Protocol on the excessive deficit procedure (EDP) annexed to the Treaty. Observers concluded that despite the supposedly objective convergence criteria, the decision over a country joining the euro was and is mostly a political matter (Bergsten and Kirkegaard 2012; Baldwin and Wyplosz 2015, p. 391 f.). Box 3.10 The Convergence Criteria for Accession to the European Economic and Monetary Union (EMU) (TFEU 2009, Art. 126, 140, Protocol on the Excessive Deficit Procedure) 1. The inflation rate may not exceed 1.5% above the average of the three member states with the lowest inflation rates. 2. Long-term central bank interest rates may not exceed 2% above the average interest rates of the three member states with the lowest inflation rates. 3. The aspirant must have participated in the European Exchange Rate Mechanism (ERM II) as part of the European Monetary System (EMS) for at least 2 years without central bank intervention. 4. The annual budget deficit may not exceed 3% of GDP. 5. Public debt may not exceed 60% of GDP. The Maastricht Treaty initially laid down the convergence criteria only for a candidate to qualify for accession. The way in which the economies of new euro area member states, as well as non-euro area EU members for that matter, developed after accession was not subject to any further monitoring. To close this gap, governments adopted a set of Regulations in 1997, which together became known as the Stability and Growth Pact (based on Articles 121 and 126 of the TFEU). This Pact consolidated the convergence criteria and urged member states to strive for satisfying the specified parameters throughout. This was intended to ensure that individual members did not incur heavy debt burdens or run large budget deficits, which could in the long term affect the entire union. If a member state exceeded the prescribed limits on a sustained basis, the EU-level EDP was to be triggered to bring the public finances back into appropriate ranges. The procedure was to be initiated by the European Commission and could include several measures including sanctions to persuade the rule-breaking state to take countermeasures. However, the final decision whether to actually trigger the procedure remained with the Economic and Financial Affairs Council (ECOFIN), or in case of euro area members the Eurogroup, both bodies assembling countries’ ministers. And here the member states enjoyed and continue to enjoy the right of veto, as fiscal policy remains a prerogative of national governments despite the changes introduced by the Stability and Growth Pact (Baldwin and Wyplosz 2015, p. 432 f.). The downsides of lacking enforceability of fiscal policy rules became obvious soon after their introduction. After Belgium and Italy had failed to meet the total debt

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criterion in 1999, it was for the two largest euro area countries to undermine the budgetary rules of the Stability and Growth Pact. In 2003–2004, both Germany and France ran budget deficits exceeding 3% of annual GDP; in order to not formally breach the Stability and Growth Pact, and after considerable pressure by the respective governments, the budgetary criterion was relaxed similar to the total debt criterion earlier (EuC 2005; Bergsten and Kirkegaard 2012). With the onset of the global financial crisis of 2007–2009 and the following euro area crisis, the reference values of the Stability and Growth Pact were again significantly transgressed. Almost all EU member states failed to meet the reference targets. At the end of November 2008, therefore, the European Commission published the European Economic Recovery Plan to coordinate the response to the crisis among the EU countries and to stimulate the economy. On the one hand, the plan justified the temporary transgression of the key parameters of the Stability and Growth Pact. On the other hand, the Commission also proposed an expansion of the Pact, as it had not taken sufficient effect before the crisis (EC 2008). These approaches to reforming the Pact led to the introduction of the European Semester in 2011 (see Box 3.11). The European Semester was embedded in the Europe 2020 Plan, which comprised the EU’s 10-year growth strategy for the period 2010–2020. The overarching aim of this measure was to initiate the necessary structural reforms, consolidate budgetary policy and avoid excessive macroeconomic imbalances. Box 3.11 The European Semester The European Semester comprises a six-month cycle and begins in January of each year with the publication of the Annual Growth Survey by the European Commission. The report contains an analysis of the economic situation of the entire EU as well as of individual EU member states. Among others, the future development of the economy is estimated for the coming years across a number of indicators. In March, the European Council meets, agrees on the findings of the report and decides on measures to comply with the criteria of the Stability and Growth Pact. In case deficiencies have been identified, member states have to submit planned measures to improve their budget estimations. In particular, they shall calculate the medium-term budgetary objectives (MTOs), which they plan to achieve over the next 3 years. On the basis of the revised budget plans, the Commission draws up country-specific recommendations by June, which then have to be approved by the Council of Ministers and the European Council. The final recommendations are then published in July, with the aim that EU states adjust their budgetary policies in line with the recommendations. The Commission’s Annual Growth Survey for the following year records and assesses the degree of implementation in the individual EU countries (EuC 2018).

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The European Semester defines a budgetary framework and introduces preventive and corrective measures. In complex decision-making processes, member states are urged to adapt their budgetary policies to EU prescriptions on the basis of annual recommendations. In the event of noncompliance with the recommendations, the European Council can declare a country to be in excessive deficit, which in case of euro area states under the corrective arm may even lead to blocking funds to the amount of 0.2% of an economy’s GDP (EuC 2018). Yet despite this increasingly complex procedure, fiscal sovereignty remains ultimately with member states—as it is national governments deciding on the implementation of the prescribed measures (Baldwin and Wyplosz 2015; Adam and Mayer 2016). Although the EU institutions issue their recommendations, they may mostly only encourage member states to comply within a limited framework. Fiscal policy thus remains a prerogative of national governments and parliaments. Moreover, it is the European Council and not the Commission that decides on the essential steps, which ultimately makes the European Semester an intergovernmental process. The experience to date reveals only limited success of the procedure. In spring 2011, during the height of the euro crisis, 24 of the 28 EU member states ran excessive deficits, according to the Commission’s analysis. In 2014, 17 EU members were still in excessive deficit. Despite these persistent breaches of the Stability and Growth Pact, drastic corrective measures or sanctions have yet to be imposed (Baldwin and Wyplosz 2015, p. 437). The dismal record notwithstanding, the requirements of the 1997 Stability and Growth Pact have intermittently been strengthened. In 2012, the Treaty on Stability, Coordination, and Growth in the Economic and Monetary Union has been agreed by the majority of EU governments and came into force in January 2013 (EurLex 2012). The Treaty was ratified by 25 EU countries, with the exception of the United Kingdom, the Czech Republic, and Croatia (the latter joining the EU in 2013). The Treaty, also known as the Fiscal Pact, stipulates that member states must adopt a binding budget law that complies with the EU criteria. And these criteria were further tightened by the so-called six- and two-pack reform packages (see Box 3.12). In addition, each state must also set up an advisory body of independent experts. Finally, the introduction of a debt brake with clear limits for budget deficits and total debt levels was also prescribed, as it had already been introduced in Germany in 2009 for the federal level and state governments. Baldwin and Wyplosz argue that the Fiscal Pact had a consequential impact, as the Treaty’s provision must be incorporated into national legislation. At the same time, many aspects of the Treaty were based on principles that led to selective implementation at the domestic level (Baldwin and Wyplosz 2015, p. 437). Box 3.12 Six- and Two-Pack The six-pack came into force on December 13, 2011, and added tightened rules for economic and budgetary surveillance to the Stability and Growth (continued)

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Box 3.12 (continued) Pact. The six-pack included five Regulations and one Directive proposed by the European Commission and adopted by all EU member states (EC 2011). The two-pack came into force on May 30, 2013, and added two more Directives to the six-pack regulations. In particular, the two-pack gave the European Commission additional powers to monitor national budgets (EC 2013). The six-pack reform package also introduced the macroeconomic imbalance procedure (MIP). Like the procedure for excessive budget deficits, the procedure for limiting macroeconomic imbalances consists of a preventive and corrective arm (EC 2012). The aim of the program is to identify and recommend countermeasures against adverse macroeconomic developments, such as excessive current account surpluses and deficits, high unemployment, or excessive price developments in real estate or financial markets. The procedure is initiated with the annual Commission’s Alerts Mechanism Report, which analyses the macroeconomic situation of EU countries. On the basis of these reports, individual countries are then selected for detailed examination, still under the preventive arm. In case an excessive imbalance is identified, the triggering of an excessive imbalance procedure under the corrective arm of the MIP may be considered. Since the procedure was introduced, member states with simple and excessive imbalances have been regularly identified over the years. However, no sanctioning measures have been adopted in these cases either (Baldwin and Wyplosz 2015, p. 442). In addition to attempts at EU-wide coordination of budgetary policy, from the Growth and Stability Pact to the latest two-pack, questions about mechanisms of macroeconomic stabilization at the European level also became increasingly prominent. With the introduction of the euro, the problem arose that after the delegation of monetary policy to the ECB, the euro area countries were left with only national fiscal policy for economic management. Fiscal policy, in turn, was increasingly regulated by the EU’s budgetary requirements, which further reinforced the challenge of responding to economic shocks. The fact that a centralization of monetary policy through the introduction of the euro would have to go hand in hand with an at least partial centralization of fiscal policy had already been the mantra during the introduction of the euro (see Box 3.13). But EU member states and institutions had responded hesitantly if at all to these concerns. Box 3.13 Concerns Over Institutional Shortcomings at the Euro’s Creation Romano Prodi, former Italian Prime Minister (1996–1998, 2006–2008) and President of the European Commission (1999–2004), explained the institutional shortcomings of the single currency as follows (Kertzer 2015, p. 514): (continued)

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Box 3.13 (continued)

In retrospect, it’s been said that the euro was established without common fiscal policy. Sure, but the awareness that common fiscal policy would follow was very clear. Not only to me, as an economist, but to all the European leaders. I remember the words of Kohl, who started from a particular political premise but recognized the need to make new decisions in economic policy. When I said to the German Chancellor that we had to take steps forward and establish the pillars of economic and fiscal policies around the currency so that it would be protected, his response was, ‘Look, the Germans didn’t want the euro and I want it because my brother died in the war, and I want it because I want a European Germany – he repeated Mann’s phrase – and not a German Europe. And I want it so that the European process becomes irreversible’. Then he added: ‘You, as an Italian, know very well that Rome wasn’t built in a day and so all the necessary economic decisions will follow’.

Jacques Delors, considered as one of the architects of the euro, supported Prodi’s assessment. In an interview, he noted to have insisted in the 1990s that the proposed plan to introduce the euro as a currency was flawed. The introduction of a common currency should have been accompanied by at least minimal coordination of economic policies and possible harmonization of fiscal and welfare policies. But, as he concedes, “I said all these things, but I was not heard. I was beaten” (Interview: Delors 2011). The resulting problems became apparent at the height of the euro crisis. In response to the global financial crisis of 2007–2009, all euro area and EU countries launched massive fiscal policy programs to support the domestic banking and financial systems and to stimulate the wider economy. While the success of this coordinated crisis response bore initial fruits in 2010–2011—the euro area recorded GDP growth of 1–2%—the negative growth of the crisis years and the simultaneous budget deficits also led to a rapid increase in public debt. This prompted international investors to increasingly doubt the solvency of individual euro member states (De Grauwe 2013). When in October 2009 the newly elected Greek government corrected the current budget deficit considerably downwards, as already discussed in Sect. 3.2.1, international private lenders increasingly demanded higher interest rates for debt renewals. This took place against the background that Greece’s public debt relative to GDP had risen from 105% to 127% between 2007 and 2009. In spring 2010, the Greek government was no longer able to refinance itself on international capital markets. The ensuing conflict-laden interaction between the Greek government, the EU institutions, and other member states finally ended with the decision to involve the IMF in the fight against the crisis (Blustein 2016). After some quarrels, the European Council launched a rescue program in May 2010, which was monitored by the so-called Troika, consisting of the IMF, the European Commission, and the ECB. Initially, bilaterally guaranteed loans were provided paired with IMF funds. Shortly thereafter, the European Financial Stability Facility (EFSF) was established which provided additional financial resources to combat the debt crisis. The Troika offered Greece a loan of €110 billion under the

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condition of implementing a comprehensive structural adjustment program to strengthen competitiveness, coupled with tax increases and major cuts in public spending (Papakōnstantinu 2017). The Troika’s first credit program for Greece was followed by a second of €130 billion in March 2012, coupled with a comprehensive participation of private creditors (Zettelmeyer et al. 2013). In November 2010, Ireland received financial assistance of €85 billion, Portugal €78 billion in May 2011, Spain €100 billion in July 2012, and Cyprus €10 billion in April 2013 (Baldwin and Wyplosz 2015, p. 487). And indeed, the gradual escalation and spread of the euro area crisis had implications for all areas of European monetary, financial, and fiscal policy as discussed in this chapter. First, the ECB massively expanded the use of its unconventional monetary policy programs, as has been discussed in Sect. 3.2.1. Second, the Heads of State and Government decided to establish the European banking union to centralize the supervision and resolution of the largest banks in the euro area, see Sect. 3.2.2. And third, the question of the extent to which individual members of a monetary union can react to asymmetric shocks was raised again and more forcefully than before. How can the discrepancy between a centralized monetary policy and a decentralized fiscal and wage policy be overcome if individual countries experience local financial and economic crises? The official response to this question had been given by granting bilateral financial assistance managed and implemented by the European Council, the Eurogroup, and the Troika. Only under strict conditions of structural reforms to domestic political and economic institutions were loans granted to member states in crisis to support the domestic economy and, above all, to settle outstanding debts with international creditors (see also Blustein 2016; Jones et al. 2016). As evident from these crisis management measures, the Troika and political elites in the EU located the causes of the euro crisis in the flawed budgetary policies and economic structures of the affected countries (Laffan 2014; Jones et al. 2016). The assessment of profligate pre-crisis behavior and excessive national debts was prominent in the public debate during the crisis years, especially in Northern euro area countries (Schäuble 2011). This was also reflected in the labelling of the euro area crisis as a “sovereign debt crisis,” implying that indeed high debt levels of individual countries were the driving force behind crisis events. Excessive debt was undoubtedly an aspect of the crisis, which forced crisis countries to request credits from international lenders. The question remains, however, whether market doubts in the solvency of member states can be attributed solely to the level of public debt in relation to GDP or whether it was more a symptom of other underlying causes. As a complementary explanation to excessive government debt, a group of politicians and economists highlighted lacking economic competitiveness of select member states (Feld et al. 2016). According to this reasoning, the question of competitiveness gains further relevance in context of the euro area’s centralized monetary policy. In an open global economy, national economies generally have two options for increasing their competitiveness vis-à-vis other national economies. First, an economy can lower the relative value of its currency and thus reduce the

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relative prices of its products in order to gain larger market shares on the world market. If, however, the economy joins a monetary union and thus relinquishes sovereignty over its own currency and exchange rate, this instrument of external devaluation will no longer apply. This leaves the economy with only the second option, internal devaluation, i.e., the reduction of prices and wages in the domestic economy. This is usually a difficult process that takes years and involves a significant reduction in domestic economic activity. Unit labor costs are a key measure of this internal competitiveness (Voggenauer 2013). Unit labor costs measure how much companies on average have to pay for labor—wages and corresponding taxes—in order to produce a given number of products. Higher unit labor costs usually translate into higher prices in product markets, as firms pass these costs on to further processing industry and consumers. And indeed, in the euro area, the average unit labor costs of individual countries varied widely. Especially over the years 1999–2009, the supposedly successful first decade of the euro, the euro countries grew further apart. During this period, unit labor costs in Ireland, Spain, and Greece rose by almost 30% faster than they did in Germany, for instance (Baldwin and Wyplosz 2015, p. 491). As a result, German products became relatively cheaper over time than products of states with high unit labor costs growth, leading to a relatively strong increase in German exports compared to other European countries. Thus, Germany achieved trade surpluses, both inside and outside the euro area, while those with comparatively higher unit labor costs generated trade deficits (De Grauwe 2016). The interpretation of the euro crisis as a crisis of excessive government debt and lack of competitiveness dominated in the reaction of the European institutions and member states. Financial assistance was meant to service the debt and structural adjustment programs were imposed to increase competitiveness. Yet as already indicated in the assessments by Romano Prodi and Jacques Delors (Box 3.13), there were also other interpretations of the causes of the crisis, among others considering the unfinished institutional structure of the euro area. For one, the ECB was initially only able to act to a limited extent as a lender of last resort. It was not until the ECB announced that it “[...] [was] ready to do whatever it takes to preserve the euro” (Draghi 2012) that the collapse of the euro area was averted in the summer of 2012 (see Sect. 3.2.1). However, the ECB’s activities, such as the purchase of government bonds, face constraints. Within the framework of quantitative easing, purchases are limited relative to purchases of government bonds of all member states—and those may not exceed 33.3% of all outstanding bonds per country. In addition, the use of the OMT program is linked to an ESM structural adjustment program, which the state concerned must accept unconditionally. All the while, the ECB was and is under constant criticism from governments and parts of the European public accusing it of violating the ban on monetary state financing in the European treaties. This contrasts with the undisputed roles of central banks as lenders of last resort in other jurisdictions. The crisis experienced in the United States, the United Kingdom, and above all Japan illustrate that market shocks or very high national debt levels relative to GDP do not necessarily lead to a solvency crisis of government debt. In Japan, for example,

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the government debt to GDP ratio has stood at more than 200% of GDP since the global financial crisis – but as the Bank of Japan is uncompromising in buying up government bonds, and considering that much of the debt is owned domestically, the situation has not triggered any market concerns. Baldwin and Wyplosz argue that had the ECB acted as the lender of last resort for ailing banks in the euro area—early on and with unconditional support—the crisis would not have escalated to the degree observed, if at all. Member state governments would not have been forced to conduct excessive bail-outs of bank debt, and there likely would not have been a sovereign debt crisis in Europe (Baldwin and Wyplosz 2015, p. 490). Another group of politicians and experts focuses additionally on the need for a centralized fiscal capacity in the euro area and the availability of instruments for macroeconomic stabilization. The ESM has already taken on the stabilization role in part by lending European funds to countries in need. However, decisions on lending continue to be taken unanimously among representatives of the euro area countries. In a next crisis, the positive effects of the ESM could thus be undermined if markets speculate that individual member states will veto credit programs for crisis-ridden countries. But the discussion about the necessary reforms in the euro area continues as briefly alluded to in Sect. 3.2.2 of this chapter. This section will conclude with a more detailed consideration of different expert proposals to remedy the vulnerabilities in EMU’s status quo. The centralization of all relevant economic policy fields alongside monetary policy is identified by most analyses as the best solution for the euro area (Enderlein et al. 2012; Feld et al. 2012; Baldwin et al. 2015; De Grauwe 2016). The ultimate aim would consequently be to create a new European institutional structure that fulfils the central functions of a modern state. In view of the political standstill and the strongly diverging preferences at the local, national, and supranational levels over the future of the EU, however, the creation of a political union in the near future seems quite unlikely. Starting from the shared assumption that this best solution is unattainable, expert’s reform proposals for resolving the persistently critical situation differ markedly. A number of recent economic reports and analyses agree on the need for a common fiscal policy among the members of the euro area, which would require a further transfer of sovereignty over fiscal and budgetary aspects to the European level (Enderlein et al. 2012; De Grauwe 2013; Baldwin et al. 2015; Baldwin and Giavazzi 2016; Bofinger 2016). From this point of view, the central institutional shortcoming of the euro area remains the creation of a system of centralized monetary policy with a single currency on the one hand and decentralized national fiscal and economic policy on the other. As long as there is no further centralization of fiscal policy, e.g., in the form of fiscal transfers in response to crisis shocks or economic divergences, the euro area will remain crisis-prone; at the same time, asymmetric divergences in the member states may intensify. As one report concludes: We argue that EMU countries should become subjected to much stricter budgetary surveillance and at the same time be willing to give up elements of their sovereignty when they are

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cut off from the market (“sovereignty ends when solvency ends”) (Enderlein et al. 2012, p. 37).

Across these contributions, the three most recurring recommendations for enhancing the fiscal capacity are (see also Baldwin and Giavazzi 2016; Eichengreen and Wyplosz 2016; Tabellini 2016): (1) a strengthening of the ESM in order to serve as a real fiscal pillar. The current maximum lending capacity of €500 billion, or 5% of euro area GDP, is seen as insufficient to stabilize the over €10,000 billion market. In addition, it is criticized that the decision-making of the ESM is still subject to the unanimity rule and requires the approval of some national parliaments; (2) a fiscal budget and autonomous spending powers should be created at the European level to combat asymmetric economic shocks in the euro area. Through such a mechanism, the euro area could complement the ECB’s monetary policy with fiscal measures to boost aggregate demand in severe cross-border recessions; (3) the euro area should issue its own debt instruments to raise funds for fiscal policy when needed and to provide safe, euro area-wide investment opportunities. By contrast, there are other reform proposals that see the causes of the crisis solely in the high national debt and lack of competitiveness of crisis countries. For example, four of the five members of the German Council of Economic Experts (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung) offered a different perspective on the problems of the euro area at the height of the crisis (then member Peter Bofinger often held divergent opinions). The economists regarded the policy failures of individual governments as primarily responsible for the divergences in the euro area and called for a strengthened rule framework (see also Feld et al. 2012): The institutional framework of the single currency area can only ensure stability if it follows the principle that liability and control must go hand in hand. Those who decide must bear the consequences of their decisions (Feld et al. 2016, p. 46).

From this point of view, the possibility of an exit from the euro area is seen as a necessary last resort for member states whose budgetary policies are deemed detrimental to the long-term welfare of the monetary union. All five members of the German Council of Economic Experts had already proposed a national approach to overcoming the euro crisis in 2012; they argued that political inaction on the national level could only be averted by the disciplining effect of international financial markets. As long as states could incur new debt at low-interest rates, they would not feel compelled to carry out the necessary structural reforms to strengthen the domestic economy in the longer term (Feld et al. 2012). At present, both interpretations of the euro area crisis and thus the respective proposed solutions still vie for dominance—yet as a look across the euro’s history reveals, similar discussions have accompanied European monetary and fiscal policy for decades (James 2014). In early 2018, French and German economists made another attempt to reconcile the camps and strike a balance between increased risk sharing at the European level and stricter budgetary discipline of member states, but

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these proposals had made it only partially into political decision-making bodies, if at all (CEPR 2018). However, the COVID-19 pandemic erupting in early 2020 and its unprecedented consequences for healthcare, the economy, and politics would significantly transform all pre-crisis arithmetic, as crises so often had done in Europe. The emerging joint European fiscal response carried the promise to fundamentally overcome what had been considered possible in European economic policy. As still unfolding, the conclusion to this contribution will briefly revisit these most recent developments. In summary, the area of fiscal policy in the EU, including budgetary policy and instruments for macroeconomic stabilization, still reveals only a limited delegation of competences to the EU level. Although various agreements such as the Stability and Growth Pact or the European Semester have provided new frameworks for budgetary policy decisions, the ultimate decision-making power remains with member states. So far, no acceptable compromise has been found in these areas on necessary risk sharing across borders while ensuring discipline and curtails of national fiscal policy (Schelkle 2017). As the discussion on possible reforms showed, a final and satisfactory agreement is still out of sight. In conclusion, the policy areas of monetary, financial, and fiscal policy in the EU, as well as their various subfields, show broad variation in the delegation of competences to the EU level and its institutions. In a similar way, there are many differences across policy areas in the external representation of EU institutions and member states at the international level. These and related aspects will be dealt with in the following parts of the chapter.

3.3

The EU in International Financial Organizations and Fora

The external representation of the EU is established in the two foundational Treaties, the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU). The international function of the EU was promoted in particular by the Treaty of Lisbon in force since December 2009, which designated the EU as the legal successor to the European Community. The direct assignment of an international role to EU institutions is laid down in Article 211 of the TFEU. It states: Within their respective spheres of competence, the Union and the Member states shall cooperate with third countries and with the competent international organisations (TFEU 2009, Article 211).

The requirement of cooperation between the EU member states and the EU institutions is repeatedly highlighted, as in Articles 32 and 35 of the TEU (TEU 2009). Article 5(2) of the TEU specifies moreover that the EU shall act only in those areas in which it has been given the necessary powers by the member states (TEU 2009).

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The respective roles of EU institutions and member states are thus determined primarily by the division of competences as specified per policy area and the statute of the international organization (Wessel 2011). Competence sharing relates first to the question of whether the EU institutions have exclusive or shared competence rights in an area. The competences exclusive to the EU are listed in Article 3 of the TFEU while the shared competences are listed in Article 4 TFEU. In monetary, financial, and fiscal policy as discussed here, for external relations the EU institutions and states generally have shared competence. This means that although the ECB enjoys exclusive monetary competence in the EU, for instance, it is usually only represented as an observer in relevant international bodies and organizations. Second, it must be clarified whether EU institutions can become members of an international organization or body. In case EU membership is permitted, the question arises as to which of the EU institutions will take the lead. According to Article 17 of the TEU, it is the European Commission in all policy areas outside foreign and security policy and as otherwise specified in the Treaties. In practice a variety of arrangements can be found here, especially as the EU can be represented by the ECB, the European Commission, or other policy-relevant EU bodies. The implication of this is that case-specific studies are needed to analyze the role of the EU in international organizations. As the following discussion will show, EU institutions are represented in international bodies and organizations as full members, associate members, or observers. EU institutional actors may have the choice of attending meetings, exercising the right to speak and vote, or even to lead committees and working groups. At the same time, however, a number of EU member states are represented in those very same bodies, partly pursuing objectives that may differ from those of the EU institutions and other states. Therefore, in the areas of monetary, financial, and fiscal policy, understanding international EU representation requires to examine the role of the EU institutions, the objectives of EU governments, and the sum of these interests. The following part discusses the representation and role of the EU in international financial market organizations and fora, in particular the Group of 20 (G20), the International Monetary Fund (IMF), the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS).

3.3.1

Group of Twenty

The Group of 20 (G20) was founded in 1999 by representatives of the leading industrial nations and emerging markets in response to the Asian financial crisis of 1997–1999, which had a devastating impact on the East Asian economies of South Korea, Indonesia, Thailand, and Singapore. The crisis also had global repercussions, however, not only for large emerging markets such as Brazil and Russia but also for the industrial nations (Sheng 2009). Decision makers in Canada and the United States, therefore, called for the establishment of a membership forum that went beyond the previously “club” format of the industrialized countries, such as the

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Group of Seven (G7). The G20 thus started to meet annually at the level of finance ministers and central bank governors to promote dialogue on financial and economic policy issues and to ensure growth and financial stability in the global economy. However, after the longer-term effects of the Asian financial crisis subsided, international cooperation on economic and financial market policy receded into the background and the G20 functioned as a mere forum for intergovernmental exchanges. The outbreak of the global financial crisis in 2007–2009 confronted the international community, in particular the largest economies, with cooperation problems of unknown magnitude. The US administration under President George W. Bush faced far-reaching domestic market failures, which increasingly affected the entire global economy. In the context of this crisis pressure, American decision makers realized that the global dimensions of the crisis required a global response. Driven by immense time pressure due to the collapse of financial markets, an adequate forum was sought at the international level to formulate a joint response to the crisis. And here the G20 stood out because, first, it offered a flexible framework for cooperation at government level. Second, its members included the major emerging economies of China, Brazil, India, and Russia, the participation of which was considered necessary to contain the crisis. It was, however, evident that the authority of finance ministers and central bank governors was not sufficient to coordinate on appropriate crisis management measures. Thus, the Bush administration convened the first G20 Heads of State and Government meeting in Washington, D.C. in November 2008. The summit resulted in an unprecedented joint declaration by the world’s largest economies to back international finance and trade with public funds (G20 2008; Rieffel 2008). The G20’s second summit took place in London in April 2009. At the meeting, governments strengthened their commitment to supporting domestic markets and the global economy, but also increasingly considered a comprehensive reform of the international financial system (G20 2009a). Finally, at the third summit in Pittsburgh in September 2009, the leaders decided that the G20 should henceforth be the first global forum for international coordination of financial and economic policy (G20 2009b). The G20 differs from other international organizations, such as the IMF in particular, in that it only has informal status under international law. Thus, the agreements reached are not binding among member states, the rules and principles are not laid down in an underlying treaty, and there is no G20 secretariat to take over the administrative tasks of the group (Vabulas and Snidal 2013). Instead, states take over the G20 presidency on a regular basis and are responsible for the administration for 1 year at a time (see Box 3.14). In addition to the summits at the level of the Heads of State and Government, the finance ministers and central bank governors continue to meet and prepare the meetings at the highest political level. Their meetings are in turn prepared by the deputy finance ministers and deputy central bank governors, completing this complex multilevel international cooperation mechanism. Although the low level of institutionalization suggests a supposed weakness of the G20, leading decision makers have praised the format as helpful in finding

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rapid, efficient, and flexible solutions to global problems (Viola 2014). But what role does the EU play in this international forum? Box 3.14 Membership of the G20 • Full members: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States, and the European Union. • The G20 regularly invites representatives of international organizations, such as the FSB, the IMF, the International Labor Organization (ILO), the OECD, the UN, and the World Bank. The EU is the only regional organization that is an official member of the G20. The President of the European Commission and the President of the European Council represent the EU at the G20 level of Heads of State and Government. At the level of finance ministers and central bank governors, the EU is represented by the Commissioner responsible for economic and financial matters, the finance minister of the Council Presidency at the Economic and Financial Affairs Council (ECOFIN), and the President of the European Central Bank (ECB) (Amtenbrink et al. 2015). While the G20 was established for addressing financial and economic issues, it covers all policy areas of interest to its membership. Given this broad range, the following distribution of tasks has emerged in the G20 over the past years following TEU Article 17: The President of the European Council represented the EU in the areas of foreign and security policy while policy areas such as economic and financial policy were taken over by the President of the Commission. In the latter case, the Commission’s work is carried out by the Directorate-General responsible for the policy field. In areas of shared competence between the EU and member states, it is decided on a case-by-case basis whether the President of the European Council or the European Commission takes the lead. The external role of the ECB, by contrast, is clearly limited. In the G20, the President of the ECB represents the EU at the finance minister and central bank governor level but shares this task with the Commissioner responsible for economic and financial matters and the head of ECOFIN. Article 138 of the TFEU stipulates that the Council following a proposal by the Commission shall decide on matters of interest for economic and monetary union externally, after merely consulting the ECB. These provisions effectively limit the ECB’s role mainly to the international exchange of information on fiscal and monetary policy issues (Amtenbrink et al. 2015, p. 40). Overall, it can be stated that EU membership in the G20 is subject to issuespecific variation. The highest echelon of the G20 is a forum of Heads of State and Government who speak for themselves and Europe’s representatives do not always agree on a common line in advance. Germany, France, and Italy are independent members of the G20, while Spain and the Netherlands regularly receive special

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invitations to summits. Depending on the policy area, divergences in the positions of the European Commission, the European Council, and the EU’s largest member states may interfere when attempting to speak with a single European voice (Wessel 2011).

3.3.2

International Monetary Fund

The International Monetary Fund (IMF) is one of the oldest international organizations in the area of economic cooperation. In July 1944, representatives of 44 states gathered in Bretton Woods in New Hampshire, United States, to plan the international economic order after the end of the Second World War. The causes for the distortions of the interwar period were seen, among other things, in the lack of an institutional framework for the international economy. Therefore, the architects of the postwar order aimed for a mutually agreed institutional framework, in which the newly created IMF would feature prominently (Helleiner 2017). The original task of the IMF was to monitor the exchange rate peg of the Bretton Woods system. As described in Box 3.1, states agreed on predetermined exchange rate bands pegged to the US dollar as the anchor currency. In the event that individual states exceeded or fell short of their fixed exchange rate bands, joint corrective measures agreed with IMF experts were initiated. In addition, the IMF provided financial support to countries in need, subject to conditionalities. However, with the end of the Bretton Woods system in the early 1970s, an international system of flexible exchange rates emerged and the IMF was deprived of its main task. Yet the organization proved adaptable and shifted its focus toward international financial stability and crisis management in current account crises, particularly in developing and emerging markets (Blustein 2013; Koops and Tolksdorf 2015). The IMF is an intergovernmental international organization, the existence of which is based on the so-called Articles of Agreement as an internationally binding treaty between the member states. The Articles of Agreement of the IMF entered into force in December 1945, after having been ratified by 29 states. They define the objectives of the IMF, the obligations of the member states, the administrative structure, and the bureaucratic apparatus (Koops and Tolksdorf 2015). The IMF thus stands in stark contrast to the G20 discussed above, which neither pursues clearly defined objectives nor imposes obligations or has its own administrative structure. Today, the tasks of the IMF can be roughly divided into three functions: monitoring and information provision on the economic situation and financial stability in member countries; financial support in the form of loans to overcome countries’ current account imbalances which are usually linked to a series of required structural adjustment measures; and technical support to strengthen the economic, regulatory, and legal frameworks in countries, and to promote economic growth in general (Barnett and Finnemore 2004; Koops and Tolksdorf 2015). According to Article 2 of the Articles of Agreement, IMF membership is reserved exclusively to sovereign states. Following the accession of the Principality of Andorra in 2020, the current membership numbers 190. The voting rights in the

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IMF are determined according to a fixed quota based on GDP, the degree of openness of the domestic economy, and the level of currency reserves (Koops and Tolksdorf 2015, p. 14). The share of voting rights held by the United States amounts to slightly more than 17%, making it the only sovereign state to hold a veto on all substantial decisions requiring the approval of more than 85% of voting rights. The EU members have about 26% of voting rights after the withdrawal of the United Kingdom, which reveals the enormous weight of the EU in the IMF—as long as the EU member states manage to formulate a common position. The EU itself is not an official member of the IMF, as it does not fulfill the membership requirement under Article 2 of the Articles of Agreement. The change of this circumstance, for example, by introducing a common EU seat, would require an agreement with more than 85% of all voting rights of more than 60% of the member states. And since the European countries would undoubtedly lose weight—the sum of their cumulative voting rights can no longer be justified according to the IMF quota— this is a conflict-ridden issue (Smaghi 2004). The most recent IMF quota reform in 2010 led, among other things, to the redistribution of around 6% of voting rights in favor of emerging countries whose relative market size had increased significantly in the previous two decades. However, the quota reform was delayed by 5 years as it was not ratified by the US Congress until December 2015 (IMF 2015). Since the United States would also lose a share of its votes while emerging markets such as China, Brazil, India, and, above all, Russia, would gain, IMF quota reforms are a cause for protracted political disputes not only in Europe but also in the United States. The organizational structure of the IMF includes the Board of Governors, the Executive Board, the Managing Director, and the administration and staff of some 2700 people. Since its foundation in 1945, the IMF has been based in Washington, D.C. in the United States. The Board of Governors comprises one representative per state, the minister of finance or the governor of the central bank, and one deputy. The Board usually meets twice a year for the two annual meetings of the World Bank and the IMF, the Spring Meeting and the Autumn Annual Meeting, in Washington, D.C. The Executive Board consists of 24 Executive Directors who represent all IMF membership and oversee the day-to-day business of the IMF between Board meetings. The Executive Directors are appointed partly exclusively by the largest states and partly by smaller, grouped states. The Executive Board also appoints the Managing Director. The Managing Director chairs the Executive Board and is at the same time head of the administrative apparatus of the IMF, also deciding on lending programs and the disbursement of tranches (IMF 2018b). The activities of the IMF are thus managed by the Executive Director and the IMF staff, while the Executive Board acts as the supervising and controlling entity. The International Monetary and Financial Committee (IMFC) is another body of the IMF. The Committee was established in 1999 and appoints 24 representatives from the Board of Governors on the same basis as the Executive Board. The Committee’s responsibilities include analysis and advice on financial stability issues, the international monetary system, and possible amendments to the Articles of Agreement (IMF 2018a).

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Officially, the EU is not a member of the IMF. Only the ECB was granted permanent observer status when it was given sole competence for monetary policy in the euro area in January 1999. When the IMF Executive Board addresses ECB relevant matters, the ECB is usually invited to the meetings. In addition, the President of the ECB and the Commissioner responsible for economic and financial matters are observers in the IMFC. Both can make statements on the economic situation and financial stability in the EU and the euro area (Koops and Tolksdorf 2015, p. 21). In addition to representation by EU institutions, however, it is particularly the coordination between the EU member states that enables the EU to play an independent role in the IMF. Two groupings are of importance which have the aim of coordinating a common EU position before meetings take place at the IMF. First, the Economic and Financial Affairs Council (ECOFIN), consisting of the economic and finance ministers of the EU member states, is formally responsible for the IMF. The meetings of ECOFIN are prepared by the Economic and Financial Committee (EFC), which is composed of representatives of national administrations and central banks, the ECB, and the European Commission. The Sub-committee on the IMF (SCIMF) of the EFC meets monthly and is responsible for the preparation and follow-up of IMF meetings, advises ECOFIN on all issues, and prepares the speeches of the EU Presidency for the Spring and Annual Meetings of the IMF and the World Bank. Second, representatives of EU member states, the ECB and the EU Commission meet on at least a weekly basis in Washington, D.C. in a group entitled EURIMF. EURIMF was convened for the first time in 1997 with the explicit aim of coordinating the positions of EU member states and EU institutions in advance of IMF meetings. Since 2007, the group is chaired by an elected EURIMF President (Koops and Tolksdorf 2015, p. 47). In order to understand the EU’s current role in the IMF, the developments in the context of the 2007–2009 global financial crisis and the subsequent euro area crisis must be taken into account as well. Here, too, the IMF experienced a further adjustment of its activities. When the risk premia on government bonds of the euro area countries drifted apart in the winter of 2009/2010, governments discussed the appropriate response to the crisis. Initial proposals to include the IMF were abruptly rejected by European elites. Although it was acknowledged that the IMF had built up the expertise and experience over decades to intervene in the current account and debt crises, deployment within the euro area was initially out of the question. French President Nicolas Sarkozy is reported as replying to Greek Finance Minister George Papakonstantinou at the beginning of 2010: “Forget the IMF [...] The IMF is not for Europe. It’s for Africa – it’s for Burkina Faso!” (quoted in Blustein 2016, p. 97). Despite these initial resistances, the IMF, together with the Commission and the ECB, soon formed the so-called Troika to design and manage the lending programs in the affected countries (see Sect. 3.2.3). Thus, the activities of the IMF also took on an internal dimension for the EU. It was no longer just the EU member states or the observing ECB and Commission in the case of the IMFC that reviewed the activities of the IMF in non-European countries. Instead, the IMF, together with EU institutions and states, now agreed on lending programs for euro area members, thereby creating complex political interrelationships (Lütz and

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Hilgers 2019; Lütz et al. 2019). Moreover, the Eurogroup also advanced to become a central coordinating body of the European response to the crisis. In addition to the euro area finance ministers, the ECB President, the Economic and Monetary Affairs Commissioner, and the Chairman of the Eurogroup Working Group (EWG) usually attended the meetings. Throughout the crisis years, the Eurogroup represented a key venue for the negotiations of financial assistance and the accompanying structural adjustment measures, some of which caused fierce pushback in borrower countries, as the case of Greece repeatedly illustrated (Blustein 2016; Papakōnstantinu 2017). In sum, a multilayered picture of the EU in the IMF has emerged. Officially, the EU states are members of the IMF while among EU institutions only the ECB enjoys official observer status at the Executive Board, and attempts to consolidate the EU representation have failed over the years. This has nourished the formation of a complex system of different groupings in the attempt to coordinate joint EU positions for leveraging the Single Market’s weight.

3.3.3

Financial Stability Board

The Financial Stability Board (FSB) was established at the second summit of the G20 Heads of State and Government in April 2009 in London. In the aftermath of the 2007–2009 global financial crisis, the FSB was tasked to coordinate and help formulate the financial regulatory response to the collapse of the global financial system. Much like the G20, the FSB also built on a predecessor body created in 1999. The Financial Stability Forum (FSF) had been set up to promote global financial stability in response to the Asian financial crisis of 1997–1999. To this end, from 1999 onwards the FSF regularly convened leading financial market regulators, central bankers, and representatives of the finance ministries of the largest industrial nations in the Group of Seven (G7), as well as financial marketplaces such as Switzerland and Singapore. Representatives of four international economic and financial organizations and six international standard setters and bodies were represented as well. Immediately after its establishment, the FSF created several working groups to address issues such as the rapid growth of tax havens or the stability of cross-border financial firms and, at best, to develop internationally valid solutions (FSF 1999, 2000). However, the work of these groups ended without tangible outcomes. In the 2000s, there was little interest in internationally coordinated measures of financial market regulation, especially representatives of the United States who saw no need for regulatory interventions (Blustein 2013). The onset of the global financial crisis of 2007–2009 thus revealed the FSF’s toothlessness. The FSF had been founded to identify precursors of financial crises at an early stage and to take preventive measures if possible. With the meltdown of the global financial system in September 2008, the forum’s failure became all too evident.

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Box 3.15 Membership of the FSB States: • Argentina, Australia, Brazil, Canada, China, France, Germany, India, Hong Kong SAR, Indonesia, Italy, Japan, Mexico, Netherlands, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Switzerland, Turkey, United Kingdom, United States, and the European Union. Spain is invited as permanent guest. International organizations: • • • •

International Monetary Fund (IMF) World Bank Organization for Economic Co-operation and Development (OECD) Bank for International Settlements (BIS) International standard setters and committees:

• • • • • •

Basel Committee on Banking Supervision (BCBS) International Organization of Securities Commissions (IOSCO) International Association of Insurance Supervisors (IAIS) International Accounting Standards Board (IASB) Committee on the Global Financial System (CGFS) Committee on Payments and Market Infrastructures (CPMI)

In response to the financial crisis, the G20 leaders gave the FSF a stronger and broader mandate, more institutional resources, and also expanded its membership to all G20 members (see Box 3.15). The membership of international financial centers, international organizations, and standard setters was maintained (FSB 2012). The body, renamed FSB, was now charged to stabilize the global financial system and coordinate the work of nation-states, international organizations, international standard setters, and bodies to prevent the return of future financial mayhem. Like the G20, the FSB is an informal international body that imposes no legally binding obligations on its members. This makes it a soft law body in the language of international law, in contrast to the hard law of international organizations such as the IMF (Brummer 2010, 2015). However, the oversight powers of the FSB had also been strengthened as compared to the FSF. The coordination of regular peer reviews by other states, the oversight of progress in IMF programs (in particular FSAPs, Financial Stability Assessment Programs), and voluntary compliance with standards by member states count among the toolkit to ensure the timely implementation of international regulatory standards. Initial data on the implementation of standards after the crisis showed that member states were broadly following international recommendations (FSB 2011, 2015, 2016).

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The FSB has the form of a coordination body and acts as an interlocutor between the various players in its membership. The central decision-making body of the FSB is the FSB Plenary which brings together representatives of all members. State members can send one to three officials, depending on a predetermined key based on the relative GDP of the jurisdiction, financial market development, and an indicator of financial stability (FSB 2012). As in the FSF, representatives in the FSB come from sectoral financial market regulators (such as banks or securities markets), central banks, and finance ministries. The Plenary meets three to four times a year and decides the strategic objectives of the FSB and adopts individual regulatory initiatives. Plenary decisions are taken by consensus, as in all other FSB groupings. Day-to-day business between Plenary meetings is handled by the Steering Committee, the membership of which consists of around 20–30 Plenary representatives. The FSB is chaired by the FSB Chair, who is appointed by the Plenary for 3 years, renewable once. The FSB Secretariat hosts an average staff of 30 employees and is housed in the tower of the Bank for International Settlements (BIS) in Basel, Switzerland, illustrating the limited institutional facilities of the body (FSB 2018c). The work of the FSB is managed by four Standing Committees (FSB 2012): the Standing Committee on Assessment of Vulnerabilities (SCAV), the Standing Committee on Supervisory and Regulatory Cooperation (SRC), the Standing Committee on Standards Implementation (SCSI), and the Standing Committee on Budget and Resources (SCBR). The development of regulations and other technical tasks of the FSB is carried out in working groups, which can be set up on an ad hoc basis by the various units of the FSB. In the years following the financial crisis, an average of 30 different working groups was active. The FSB moreover maintains six Regional Consultative Groups (RCGs) as an outreach and feedback mechanism, each meeting usually twice per year, for engaging with roughly 70 jurisdictions beyond its membership. The RCG for Europe assembles representatives of 18 EU member states, Iceland, Israel, Norway, Switzerland, the United Kingdom, and Ukraine, while the attendance of EU institutions is reported only in the meeting-specific press releases (FSB 2020). Due to limited institutional resources of the FSB, the representatives of the member states play an important role. In the Plenary, the Steering Committee, the Standing Committees, and the working groups, the work is largely driven by representatives and staff from national jurisdictions. In particular, the principle of consensual decision-making theoretically gives each member a right of veto which underpins the intergovernmental nature of the FSB. However, in practice it is only a few countries, the Western industrial nations as well as Japan, China, and international financial centers such as Singapore and Hong Kong that are actively involved in the negotiations. Moreover, the regulatory processes of the FSB are closely interlinked with the G20 groups. For example, a process of regulatory development can be commissioned by the G20 Heads of State and Government, which is then carried out by the FSB. At the end of the process, the FSB delivers the new regulatory standard to the G20 which officially approves it at the next summit. Similarly, a regulatory initiative may also initiate from expert groupings at the

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FSB, be brought up through the hierarchies to find endorsement by the highest echelon of multilateral financial policymaking, the G20 Heads of State and Government. However, while the intergovernmental nature of these international institutional arrangements seems predominant, the function and influence of the FSB’s own units, the Chair, the Secretary-General, and the Secretariat, must not be underestimated. As recent research has shown, these entities may prove critical for progress in regulatory development processes. This is made possible by room for maneuver in agenda setting and policy innovation, by limiting the regulatory options deemed feasible and by intermediating in conflicts among member states (Woyames Dreher 2020). In addition to the five EU member states with the largest markets and financial systems—Germany, France, Italy, the Netherlands, and Spain—the ECB and the European Commission are official members of the FSB. The European Commission speaks also for the smaller EU members not represented at the FSB. The list of FSB Plenary members includes the Vice-President of the ECB, the Vice-Chair of the ECB’s Supervisory Board, and the Director General of the Commission’s Directorate-General for Financial Stability, Financial Services, and Capital Markets Union (DG FISMA). In addition, both the Vice-President of the ECB and the Director-General of DG FISMA are represented in the more exclusive Steering Committee of the FSB. The EU institutions are also represented in the Standing Committees of the FSB (FSB 2018a, b). This clear presence of EU institutions at the FSB is of particular importance as the Commission, the ECB and the member states do not formally coordinate their positions in advance for meetings of the FSB bodies. Thus, EU institutions and EU countries may well pursue divergent positions and make them public in the FSB. At the same time, confrontations are avoided; the EU institutions are expected to give in when facing push-back (ECONOPOLIS Strategy NV 2015, p. 15). At the EU level, the groups already mentioned in the context of the IMF play nonetheless an important role. Since the EU member states are also involved here, the potential for conflict on the international stage of the FSB is ultimately reduced. For example, the Economic and Financial Committee (EFC) is in charge of preparing the FSB meetings. The Eurogroup Working Group (EWG) is explicitly responsible only for issues relating to the euro area. In addition, the Financial Services Committee (FSC), which was established by ECOFIN in 2003, contributes to the process of establishing common positions. Here too, representatives of both the EU Commission and the member states are represented (ECONOPOLIS Strategy NV 2015, p. 16 f.). In comparison to the G20 and the IMF discussed above, EU institutions play thus a more independent role vis-à-vis EU member states in the FSB. It is true that the committees at European level, such as the EFC and the FSC, are relevant for the coordination of common positions. As the discussion showed, however, diverging European positions may well emerge in the FSB—between the large European countries as well as between national authorities and EU institutions. Detailed case-specific studies could shed light on the extent of these conflicts and their possible consequences for European actorness.

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Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision (BCBS) is the international standardsetter for banking regulation and was founded at the end of the Bretton Woods era. The unwinding of the dollar’s peg to the gold value in the summer of 1971 and the subsequent abandonment of the fixed exchange rate system was accompanied by a turbulent phase in the world economy (see Sect. 3.3.2). The oil price shock of 1973 intensified market fluctuations and coincided with the bankruptcy of the German Herstatt Bank. Due to its international business, the bankruptcy of the German bank had also repercussions for financial institutions on Wall Street in New York City. Here it was the much larger First National Bank that got dragged down and had to file for insolvency. This crisis of banks interwoven across the Atlantic demonstrated the need for cross-border cooperation between bank supervisors. When a large, internationally active bank began to waver, who was ultimately responsible for ensuring that its business and possibly insolvency were handled properly? The ensuing discussion on the responsibility of home and host country supervisors led to intensified cooperation between bank supervisors and central banks (Kapstein 1994; Goodhart 2011). In December 1974, this cooperation was institutionalized in the form of the BCBS (until 1980 it was called the Committee of Banking Regulations and Supervisory Practices), which appointed representatives of the Group of Ten (G10) States (Belgium, Canada, France, West Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States). Since then, the BCBS has acted as the internationally recognized body for banking regulation and supervision, and its secretariat is located in the BIS building in Basel, alongside the FSB’s offices. In particular, the successive standards for regulating minimum capital ratios—the Basel I Accord of 1988, the Basel II Accord of 2004, and the most recent Basel III Accord of 2010 (completed in 2017)—established the international bank regulation regime. In response to the global financial crisis of 2007–2009, the BCBS membership was significantly expanded. Although other financial market-oriented economies had joined over the years, such as Switzerland and Singapore, the major emerging markets were left out until the crisis. With the crisis shock, the membership was extended to a total of 45 regulators, supervisors, and central banks from 28 jurisdictions in order to do justice to the changed balance of power in the global economy and international financial markets. Like the FSB, the BCBS is an informal international body, and its activities and standards do not impose legally binding obligations on member states. However, the agreed standards are generally complied with, which is why international negotiations are often conflictual (Kapstein 1991; Oatley and Nabors 1998; Lall 2012). The organizational structure of the BCBS is similar to that of the FSB, but with some differences. The Basel Committee is the central decision-making body. Five groups manage the different work areas: the Accounting Experts Group, the Supervision and Implementation Group, the Policy Development Group, the Macroprudential Supervision Group, and the Basel Consultative Group. The Basel Committee Chair is appointed by the members for a three-year cycle. The Chair is

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assisted by the secretariat of the BCBS, which counts staff of about 15–20 persons, some of whom are seconded by member states. The BCBS is overseen by the more senior Group of Central Bank Governors and Heads of Supervision (GHOS); it was in the aftermath of the crisis that GHOS assumed increasing decision-making powers. Regardless of regulatory developments or decision-making within the BCBS, topic-specific groups and subordinate working groups, final decisions were often taken by GHOS (BCBS 2018a). Eight of the 27 current EU member states are independent members of the BCBS: Belgium, France, Germany, Italy, Luxembourg, the Netherlands, Spain, and Sweden. The EU institutions are also represented in several ways in the BCBS (BCBS 2018b): The ECB and ECB Banking Supervision are each full members of the Basel Committee. As in the FSB, the ECB is thus a member of the Basel Committee in its role as the central bank and as the bank supervisor for the approximately 120 largest banks in the euro area. The European Banking Authority (EBA) and the European Commission have both observer status (Quaglia 2015, p. 12f). In the BCBS, the Commission representatives hence act as observers in the various bodies and working groups and coordinate their activities through DG FISMA. The positions of EBA representatives follow the views of the EBA’s Board of Supervisors, which assembles the EU member states’ bank supervisory authorities. The ECB’s view is informed by internal analyses and consultation among senior representatives. As in the case of the FSB, no common positions among EU institutions and EU member states are formally agreed in advance, but there is an ongoing informal exchange of views through bodies such as the EFC. Thus, as in negotiations at the FSB, the role and joint positioning of the EU institutions and member states depends on the issue in question. When the preferences of member states and EU institutions converge, the EU is likely to act as a coherent actor. If the preferences diverge, it may happen that EU institutions and EU members among themselves pursue contradictory goals (Quaglia 2015).

3.3.5

International Organization of Securities Commissions

The International Organization of Securities Commissions (IOSCO) is the international standard-setter for capital and securities markets. IOSCO was founded in 1983 in Quito, Ecuador, as a nonprofit organization under Canadian law. The body emerged from the Interamerican Conference of Securities Commissions, a regional association of 11 securities commissions established in 1974. The reorientation of IOSCO as an international body beyond the American continent was triggered by the increasing integration and internationalization of securities markets. In 1987, a permanent secretariat was established, initially located in Montréal, Canada. In 2001, the Secretariat moved to Madrid, Spain (Davies and Green 2008; Conac 2015). Since its foundation, IOSCO’s membership has grown steadily. Today, IOSCO counts 226 members from more than 115 jurisdictions, which together oversee 95% of the world’s securities markets. Of these, 129 are ordinary members,

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the nationally accredited securities regulators; 30 are associate members representing other national securities regulators and representatives of international organizations; 67 are affiliate members, such as stock exchanges, financial market infrastructures, or other parties involved in securities markets (IOSCO 2020b). Like the FSB and BCBS, IOSCO is an international soft law body (Brummer 2015). IOSCO’s overarching functions are the development of regulatory standards, multilateral cooperation in the monitoring and enforcement of rules, and the promotion of the expansion of securities markets (IOSCO 2016). All decisions in the various IOSCO committees and working groups are taken on a consensual basis, while adopted standards do not entail any legal obligations for subsequent implementation in domestic markets. However, what distinguishes IOSCO from FSB and BCBS is its inclusive membership. This means that securities markets regulators and supervisors from any region of the world as well as other entities associated with securities markets can become members. The organizational structure of IOSCO consists of several levels and units. The Presidents Committee convenes all members and meets once a year for the IOSCO Annual Conference. It acts as the General Assembly and formally determines the members of the IOSCO Board. The Board is the governing body of IOSCO with 34 members and a Chair. The Board’s tasks include steering IOSCO, reviewing regulatory issues, and coordinating regulatory developments. The Chair’s role is limited to coordinating the regular meetings of the Board, organizing the timetable, and interacting with the Secretariat. The Secretariat is headed by the SecretaryGeneral of IOSCO and employs about 30 persons, more than half of which are seconded by member states (Center for Law, Markets and Regulation 2012). The development of regulations in IOSCO on topics such as accounting, regulation of secondary markets, or the standard development for rating agencies takes place in eight different committees (IOSCO 2016). Another IOSCO committee focuses exclusively on the development of securities and derivatives markets in emerging markets. In the course of the global financial crisis of 2007–2009, several additional committees were formed. The Assessment Committee was established in 2012 to monitor the implementation of the standards in the member countries. The Emerging Risks Committee, formerly known as the Standing Committee on Risk and Research, was established in 2011 to identify and address systemic risks in securities markets in close cooperation with IOSCO’s research department. Finally, a number of ad hoc working groups have been established to address specific issues, such as the Financial Market Benchmark Task Force, the OTC Derivatives Regulation Task Force, the Audit Quality Task Force and the Market Conduct Task Force (IOSCO 2016). The EU is represented in IOSCO by its member states, the European Securities and Markets Authority (ESMA), and the Commission. Due to the inclusive membership, all EU member states are represented as full members in IOSCO. The EU institutions enjoy the status of associate members as representatives of a regional organization. The Commission, ESMA, and EU states are represented in various IOSCO committees and working groups. In 2013, ESMA moreover gained observer status on the more restrictive IOSCO Board. For this purpose, the statutes of IOSCO

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had to be amended, since until then only national authorities had joined the Board (Conac 2015, p. 24). The membership in the IOSCO Board is further discussed here to illustrate internal lines of conflict. In April 2018, for example, 8 of the 34 members of the Executive Board came from EU countries (plus the United Kingdom) with ESMA listed as observer (IOSCO 2020a). ESMA did not acquire observer status until 2013, after it applied for it following a decision by its Supervisory Board. ESMA’s Board of Supervisors consists of representatives of the securities supervisors of the EU states and, as a rule, all of ESMA’s activities are coordinated with them. However, in the context of ESMA’s decision to apply for observer status on the IOSCO Board, there was a controversy with regulators from European countries. In particular, the German authority BaFin drew attention to possible conflicts of jurisdiction between ESMA and the national securities regulators. This complaint had no further consequences (Conac 2015, p. 26f). However, after ESMA had been successfully promoted to observer on the IOSCO Board, the EU Commission’s DirectorateGeneral Internal Market and Services (DG MARKT) pursued the same goal. However, this application for observer status was rejected by IOSCO, presumably because of the large number of European representatives on the IOSCO Board and the fact that the EU Commission was seen more as an executive body rather than a securities regulator (Conac 2015, p. 27). That DG MARKT nevertheless attempted to gain access to the Board sheds light on the potential tensions between individual EU member states and EU institutions in matters of the EU’s external representation. IOSCO thus gives EU member states precedence over EU institutions in terms of international representation. Although ESMA is an associate member of the President’s Committee and observer on the Executive Board and the EU Commission is an associate member in many of IOSCO’s activities, both do not enjoy the status of full voting members. In fact, national regulators had informally agreed that in areas where ESMA has sole regulatory competence within the EU, it should also represent the interests of the EU at IOSCO level. However, this agreement was non-binding and the EU’s single voice continues to ultimately depend on the convergence of preferences among national authorities.

3.3.6

International Association of Insurance Supervisors

The International Association of Insurance Supervisors (IAIS) was formed in 1994 emerging from a series of informal meetings among international insurance regulators and supervisors. They had started meeting regularly since the mid-1980s at the instigation of the US National Association of Insurance Commissioners (NAIC) to exchange information and develop common regulatory approaches. Founded as a nonprofit organization under Swiss law, the IAIS quickly developed into an internationally recognized forum of insurance supervisory authorities. Like the Secretariats of the FSB and the BCBS, the offices of the IAIS Secretariat can be found in the tower of the BIS in Basel, Switzerland. The IAIS

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comprises over 200 insurance regulators and representatives of other national authorities from over 140 countries (Lowet and Hamels 2015; IAIS 2020). Similar to the other international financial standard setters, the IAIS is an international soft law body (Brummer 2015). This means that all agreements reached are not binding for its members under international law. However, the IAIS differs from other bodies such as FSB or IOSCO with regard to voting rules, as it is not bound by the principle of consensus. At the General Meeting of the IAIS decisions are taken by a simple or two-thirds majority, depending on the topic (Lowet and Hamels 2015, p. 15). The Executive Committee leads the activities of the IAIS. The Annual General Meeting appoints the members of the Executive Committee on a two-year basis, respecting a balanced representation of geography, market size, and level of development. The Executive Committee also deviates from consensual decisionmaking and prescribes a double majority system as the voting rule. In fact, however, decisions are almost exclusively taken by consensus (Lowet and Hamels 2015, p. 17). The Executive Committee pursues the objectives of the IAIS in accordance with the directives as set by the General Assembly (IAIS 2015). Over the years, the Executive Committee has established a number of committees to fulfil the tasks of the IAIS: a Technical Committee, an Implementation Committee, a Budget Committee, an Audit and Risk Committee, and a Financial Stability Committee. The Executive Committee has wide powers and recently the Technical Committee was merged with the Financial Stability Committee (Lowet and Hamels 2015, p. 19). A number of subcommittees have been attached to the committees, which carry out the technical aspects working on insurance monitoring and regulation as ad hoc working groups. The IAIS Secretariat performs coordinating functions and, as mentioned, is based in Basel, Switzerland. In fact, some of the staff are seconded by the BIS, but their remuneration is paid by the IAIS (Lowet and Hamels 2015, p. 21). By 2020, all EU member states except Greece were represented in the IAIS. Belgium and the Netherlands moreover had a dual membership, as in addition to the insurance supervisor the national central bank is represented in the IAIS. The United States also stands out, as its representatives besides the Federal Reserve Board and the Federal Insurance Office of the US treasury are 56 insurance supervisory authorities of the individual US states (NAIC 2020), which are, however, listed separately (IAIS 2020). The EU institutions are represented in the IAIS first by the European Insurance and Occupational Pensions Authority (EIOPA) as the official insurance sector regulator of the EU. Second, the European Commission has been a member since the IAIS was founded. DG FISMA, for example, justifies its membership in the IAIS by presenting itself as a European regulator. However, not all IAIS members share this view, which explains the Commission’s changing status. First, it was listed as an international organization in the IAIS Rules of Procedure before it achieved special status in 2014 (Lowet and Hamels 2015, footnote 96). The distribution of seats becomes apparent by looking at the composition of the IAIS Executive Committee. In 2015, for example, the Executive Committee had 27 members, 24 of which had the right to vote. The EU provided seven representatives, five of which were allocated the right to vote. Of the five EU representatives entitled to vote, four came from the member states (Germany,

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France, Poland, and then EU member United Kingdom) while the EIOPA Chair was the fifth. In addition, the German representative chaired the Executive Committee. The two representatives without voting rights came from Italy and Austria (Lowet and Hamels 2015, p. 27 f.). This division of seats between EU states and European institutions points to a remarkable cooperation. On the one hand, Italy and Austria waived their right to vote in the context of the five EU votes in order to enable co-determination for EIOPA. On the other hand, the EU Commission had neither voting rights nor observer status and was not represented in the Executive Committee at all. This suggests possible conflicts in the allocation of seats within the group of EU representatives, a circumstance that should be clarified through in-depth case analyses. In conclusion, the IAIS also displays specific peculiarities in the external representation of the EU. Again, the interaction between EU member states and EU institutions is crucial, as both sides share competences in European insurance regulation and supervision. At the international level, this division of competences necessarily leads to conflicts and ambiguous responsibilities. Thus, further studies on individual policy decisions in the regulation of international insurance markets can provide illuminating insights into the role and form of the EU as an external economic actor.

3.4

EU Actorness in International Financial Regulation

The analysis of the EU’s role and actorness in the international economy covers several decades. As has been discussed in the introductory chapter, various trends contributed to the development and sharpening of the concept of actorness (see Sjöstedt 1977; Jupille and Caporaso 1998). Charlotte Bretherton and John Vogler in particular have influenced this debate through their concept of European actorness (Bretherton and Vogler 1999, 2006), which has been revised and extended recently (Bretherton and Vogler 2013; Niemann and Bretherton 2013). Bretherton and Vogler propose the three dimensions of presence, opportunity, and capability to measure the actorness of the EU. The following section analyzes the EU’s actorness in monetary, financial, and fiscal policy with reference to these three dimensions. Presence describes the ability of an actor to exert influence within and beyond its own sphere of power. Presence refers not only to the intended activities of an actor, but also to the ability to shape perceptions, expectations, and behavior of others (Bretherton and Vogler 2013, p. 376 f.). The EU has a significant presence in the international economy. This is mainly due to the size and level of advancement of the common market. In recent years, the EU has competed with the United States and increasingly also with China for the status of largest market in the world, while the most advanced markets are still to be found in North America and Europe only (see Fig. 3.1, World Bank 2019). The single market displays several features underlining the EU’s presence in the international economy. Following the state-centered approaches of International Political Economy, it is assumed that the size of the market increases the incentive

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Fig. 3.1 GDP (in trillion US dollar). Source: Data of World Bank 2019, author’s presentation; https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end¼2018&locations¼EU-US-CN& start¼1960&view¼chart)

for state and non-state actors to gain access to the European market, particularly through signing agreements on trade and financial cooperation (Simmons 2001; Drezner 2007). These measures expand the sales markets for domestic products, the possibilities for importing high-quality goods as well as the establishment of global value chains. In turn, the international influence of European market regulators as decision makers over the granting of access to the home market are increasing commensurately. In addition, the introduction and consolidation of the euro is another important factor for strengthening the EU’s international presence in international currency markets. As the EU and the euro area have been exposed to severe crises in recent years, as discussed before, the current status quo is far from stable. Nevertheless, the euro area is the second largest currency area in the world and the euro the second most important currency in international money and financial markets (BIS 2019). Bretherton and Vogler also argue that the presence of an actor depends on the perception of third parties with regard to stringent internal decision-making for external representation (Bretherton and Vogler 2013, p. 378). In the case of monetary, financial, and fiscal policy, the EU enjoys the potential of a large international presence thanks to the enormous relative size of the domestic market. Whether this presence can lead to an effective external assertion of European interests depends, however, on the internal decision-making processes and on finding common positions. Opportunity refers to the external environment and the structures that enable or limit the actor’s activities (Bretherton and Vogler 2013, p. 378). Here, Bretherton and Vogler refer to the changing distribution of power in world politics over the past decades which spurred the rise of the EU as an actor. With the end of the Bretton Woods system in the early 1970s, the constitution of the international system changed substantially. While security policy was still shaped by the bipolar rivalry between the United States and the Soviet Union, the international economic system became exposed to enormous turbulence, triggered by the oil price shocks, and the increasing internationalization of trade and finance. In parallel to the dissolution of the Soviet Union in 1988–1991, the growing EU faced increasing external

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opportunities to pursue its interests globally. In particular, it expanded its influence in the Eastern European and Central Asian neighborhoods. Bretherton and Vogler quote the then Trade Commissioner Peter Mandelson: [...] the European Union gives us the potential to shape globalisation positively in ways even the largest of our nation states cannot achieve on their own (quoted in Bretherton and Vogler 2013, p. 379).

However, the authors also sketch out the increasing international constraints the EU had to face since the 2000s. In Eastern Europe and Central Asia, for example, Russia’s renewed strength sets clear limits to the activities of the EU and its member states. Likewise, international financial and trade policy is increasingly shaped by the rise of China and of other emerging economies such as Brazil, India, and Russia, which are putting obstacles in the way of the EU’s aspirations (Bretherton and Vogler 2013). In the areas of monetary, financial, and fiscal policy, however, the enormous size of the common EU market and the central position of the euro in international currency markets still reigns dominantly. In the current uncertain world economy, in which the United States seems to be increasingly abandoning its former leadership position while China is not willing to overtake this role, there is much room and therefore opportunity for a powerful third actor. However, the formation of an international actor is not only dependent on external circumstances, but also relies on internal factors. These are captured by Bretherton and Vogler’s third concept, capability. Capability refers to internal political processes that enable or limit the actor’s activities. It thus implies the ability of the actor to benefit from its presence and to seize opportunities. This includes the stringent definition of priorities and policy objectives as well as the existence and ability to apply policy instruments (Bretherton and Vogler 2013, p. 381). In the EU context, the main obstacle to a strong capability lies in the varying degrees of internal coherence. Bretherton and Vogler distinguish between vertical coherence, horizontal coherence, and institutional coherence (2013, p. 381 f.). Vertical coherence comprises the degree of convergence between the policy goals of individual EU states and those of EU institutions. Horizontal coherence refers to conflicting objectives between policy areas, which may hinder and cancel each other out. Institutional coherence refers to the EU’s internal coordination processes. In monetary, financial, and fiscal policy, different degrees of coherence can be observed. In particular, vertical coherence (i.e., convergence or divergence of member states’ preferences) and institutional coherence (i.e., internal EU coordination) are essential for determining actorness. For example, EU countries, in particular Germany, France, and then member the United Kingdom, pursued contrary goals with respect to hedge fund regulation after the global financial crisis of 2007–2009 (Fioretos 2010). Given the lack of delegated competences in this field, the European Commission did not play a decisive role either. The low level of vertical and institutional coherence thus led to weak EU actorness, although presence was given by the size of the market and opportunity by the post-crisis reform phase. By contrast, before the global financial crisis in the area

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of insurance regulation, for example, the EU had revealed a strong unitary position supported by all institutions and member states (Quaglia 2013). The resulting high actorness enabled the EU to set international standards in insurance regulation according to its preferences. To simplify the subsequent analysis, coherence will be understood as the sole analytical category collapsing the subcategories of vertical and institutional coherence. Coherence is thus used as a yardstick for measuring the convergence or divergence of preferences among EU member states, as well as between member states and EU institutions. The actorness of the EU is thus determined by its presence, opportunity, and capability. In the field of monetary, financial, and fiscal policy, the EU has a pronounced presence and opportunity due to its very large domestic market and its single currency. Despite the increasing economic clout of East Asian markets and the continued dominance of the United States, the EU has been one of the largest political actors and markets in the world since the last round of enlargement. We can therefore assume a high degree of presence and opportunity over the last two decades. European actorness should hence be determined by variation in the EU’s capability and, in particular, by the coherence of its internal interests. And as has been shown above, the coherence of EU positions in monetary, financial, and fiscal policy may vary considerably.

3.4.1

How Can We Explain EU Actorness?

The introductory chapter discussed a number of approaches to explain the different patterns of EU actorness across policy areas. At this point, two of these theories, liberal intergovernmentalism and principal-agent theory, will be presented and applied to the cases of EU monetary, financial, and fiscal policy.

3.4.1.1 Liberal Intergovernmentalism Liberal intergovernmentalism has a rich theoretical background and, together with functionalism, is classified as one of the basic theories of European integration. In particular, it was Stanley Hoffmann’s contribution that advanced the research and elaboration of classical intergovernmentalism (Hoffmann 1966, 1982). Starting in the 1990s, Andrew Moravcsik added a liberal perspective to the basic framework of intergovernmentalism (Moravcsik 1991, 1997, 1998). Today, the liberal intergovernmentalism approach is considered by its proponents as a fundamental theory of European and thus regional integration (Moravcsik and Schimmelfennig 2009). The approach rests on the following core assumptions: First, liberal intergovernmentalism interprets states as central actors. International policy is determined by states that pursue their interests in intergovernmental negotiations. Second, states are rational, i.e., they calculate the costs and benefits of different courses of action and choose the option that maximizes their overall benefits. If states cooperate at the international level, then this can be explained by the strategic decisions of the individual states acting rationally. This applies both to the anarchic international

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system and to politics within the EU. Although the EU offers an institutional framework, according to liberal intergovernmentalism, the outcomes of intergovernmental policy can be explained solely by the interests and influence of the member states. States are the masters of the Treaties and continue to enjoy dominant decisionmaking power and political legitimacy in European political processes (Moravcsik and Schimmelfennig 2009). The approach uses hence a three-stage model: first, states define their preferences, second, they negotiate with other states, and third, they adopt the preferred policies or establish new institutions. This means that any application of liberal intergovernmentalism must refer to at least the first two stages: the formation of preferences within states and the ensuing interstate negotiations. The first step is to clarify how the goals pursued by states, their case-specific preferences, are shaped. Liberal intergovernmentalism assumes that social interest groups compete over influencing the foreign policy activities of states. The interests that successfully emerge from these conflicts are then aggregated via political institutions and shape the preferences of state representatives (Moravcsik 1991; Moravcsik and Schimmelfennig 2009). However, this also implies that state preferences are variable. Preferences will therefore change depending on the distribution of interests within individual states, but also with regard to current domestic and foreign policy challenges as well as in view of the respective policy field and period. Thus, an analysis should first identify the different interest groups relevant to a policy area and then discuss their respective possibilities of influence and institutional approaches within the political system. Liberal intergovernmentalism expects that dominant interest groups, such as business associations, can significantly influence the position of state representatives. Accordingly, Moravcsik explains the advancing European integration with the influence of economic interest groups that determine both state preferences and macroeconomic goals of member state governments. Although his theory also attributes some significance to other explanations, such as theories based on geopolitical or ideological factors, he insists on the general predominance of preferences shaped by domestic interest groups (Moravcsik 1991, 1998). In the second step, liberal intergovernmentalism then looks at negotiations between states. In accordance with theories of rational institutionalism, states pursue mutually beneficial cooperation, i.e., they may be willing to adjust their own policy goals to the extent necessary in order to gain a greater common benefit (Keohane 1984; Koremenos et al. 2001). However, the question of the subsequent distribution of common gains complicates the negotiations since each state wants to increase its own relative share. The resolution of these conflicts depends on the bargaining power of the individual state. Simply put, the more powerful a state, the more likely it is that the final outcome will converge with that state’s preferences. Negotiating power can result from several factors. In a simple version, the market size of the respective state would be a crucial power resource. The larger the market of an EU member state, the greater the incentives for other states to adapt their own policies to those of the powerful state. In a somewhat more complex version, the analysis examines the relative costs and benefits of individual states in the event of a cooperative outcome as compared to a failure of the negotiations. If a state were to

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achieve quite small differences in the benefits of both outcomes, it could credibly threaten the failure of the negotiations and thus persuade its counterparts to make concessions. If, on the other hand, a state were to win significantly through cooperation, the failure of the negotiations would entail heavy losses, which would increase the willingness to make concessions. A third way emphasizes the relevance of the asymmetric distribution of information. States with better knowledge of the preferences of others and also of the functioning of (European) institutions can exploit these information asymmetries in order to influence the negotiation results in their favor (Moravcsik and Schimmelfennig 2009, p. 70 f.). Liberal intergovernmentalism finally explains the increasing institutionalization of the EU and delegation of competences to the European level with the case-specific objectives of governments. With a far-reaching agreement at the European level, for example, they prevent other states as well as their own future governments from reversing the decisions taken. But only in a few cases do EU member states decide to delegate extensively, such as when introducing qualified majority voting or setting up the ECB. As a rule, EU-wide decisions remain generally in the area of moderate delegation, for example, when common standards and procedures are defined in order to reduce information asymmetries and make processes more efficient. Liberal intergovernmentalism thus successfully explains, for example, the minor level of fiscal competences delegated to EU institutions, the few possibilities for sanctioning member states or the limited number of EU bureaucracies (Moravcsik and Schimmelfennig 2009).

3.4.1.2 Principal-Agent Theory Principal-agent theory shares some of the basic assumptions of liberal intergovernmentalism, such as the rationality of the actors involved, but also differs in many aspects. The analytical focus lies on the relationship between principals and agents, i.e., the actors who are part of the contract of a competence delegation. The principal-agent approach originated from microeconomics. There, it is applied to investigate the extent to which capital owners can ensure that the company managers they hire actually act in their interests. The first political science applications can be found in analyses of the US political system, before the theory was introduced to the EU literature by Mark Pollack (Pollack 1997, 2003, 2005). Today, there is a multitude of different studies and an increasing specialization in certain policy areas (see Kassim and Menon 2003; Kerremans 2004; Delreux and Kerremans 2010; Mügge 2011). Andreas Dür and Manfred Elsig edited a special issue of the Journal of European Public Policy on the principal-agent approach applied to the EU’s external economic policy, the theoretical assumptions of which provide the basis for the following discussion (Dür and Elsig 2011). The analysis will thus focus on the relationship between EU member states, the principals, and EU institutions, the agents. The first question to be clarified is why principals delegate authority and competences to an agent in the first place. In the literature, different explanations for this decision are put forward. One approach argues that agents generate specific knowledge and as experts can thus solve principals’ problems more effectively and

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efficiently. Through specialization and repetitive activity, economies of scale can be achieved that further reduce the costs for principals. Other models look at the effects of delegation on the higher credibility of principals, the long-term commitment to policy decisions or the facilitation of collective decision-making. Finally, in the case of the EU, the authors also cite the advantage of being able to speak with one voice externally as a strategic motivation for the delegation (Dür and Elsig 2011, p. 328 f.). However, once authority is delegated, especially over a predetermined long-term period, a number of problems can undermine the relationship between principals and agents. Two basic assumptions underlie most models. First, the principal or principals ex ante assume that the agent will exploit the acquired competencies and could pursue its own goals, even against the interests of the principals. Second, information is distributed asymmetrically, since the agent necessarily enjoys better information acquisition over principals due to its specialization. In case of doubt, the principals cannot judge what the agent is doing and whether it is already acting against their interests. On the basis of these assumptions, the principal-agent approach assumes that principals take various measures to forestall such agency loss or shirking. For instance, principals follow strict selection procedures even before the delegation in order to select the appropriate agent. Contracts are also formulated as strictly as possible to prevent agency loss. At the same time, contracts must be drafted as flexibly as necessary in order to not diminish the benefits of the delegation. Principals might also impose reporting obligations and threaten ex post the nonacceptance of the results and other sanctioning mechanisms (Dür and Elsig 2011, p. 329). Ultimately, however, all these measures are associated with costs which the principal or principals must compare with the benefits of the delegation. Because if the costs of the delegation exceed the benefits, no rational actor would choose to delegate. In addition, further complications may arise if collective principals, as in the case of EU member states, pursue diverging interests (Elsig 2010). For example, the crises of recent years have repeatedly shown that some European governments shared the positions of the European Commission and the ECB while others clearly rejected the same objectives. An analysis of monetary, financial, and fiscal policy and its external representation in the EU should clarify the following aspects: First, it should be discussed what expected benefits the principals would gain by delegating authority to the agent. The delegation of sufficient authority to an EU actor would likely considerably increase the coherence and thus the capability of the EU. Based on its increased capability, the EU could then leverage its presence based on market power and use the opportunities offered by the international system to assert its policy positions. However, this theoretical benefit is offset by the costs that member states could suffer from a non-revocable delegation. For euro area members, for example, who recently found themselves in the crossfire of the financial crisis, the ultimate (perceived) costs of fully delegating monetary policy to the ECB may have exceeded the benefits. Through a precise cost-benefit analysis of the delegation of essential competences in economic and monetary policy, the principal-agent approach can thus provide illuminating insights. In addition, exit clauses in Treaties or other measures to restrict the activities of EU institutions can also be considered from

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the perspective of the attempted control of agents. Thus, while liberal intergovernmentalism examines the preference formation of states as a result of conflicts between societal interest groups, principal-agent theory locates the explanation for varying actorness in the strategic considerations of governments. The following section deals with a prominent case of financial market regulation—the negotiations over the Basel III Accord of 2010—to illustrate the use of the two theoretical approaches for the study of the actorness of the EU.

3.4.2

The Basel III Accord

The setting of minimum capital standards for international banks is a core element of international financial market regulation. Administered by the Basel Committee on Banking Supervision (BCBS), the 1988 Basel Accord was the first significant international standard in the field of cross-border banking regulation (Kapstein 1994; Oatley and Nabors 1998). The agreement stipulated that internationally active banks must meet a minimum standard of 8% capital relative to the risk-weighted assets in order to ensure the stability of the international banking system (BCBS 1988). In the 1990s and 2000s, the international banking regulators intensified their collaboration with the aim of revising this Basel I agreement which was perceived as too rigid. It was argued that an increasingly globalized and technically advanced financial system required new, more risk-sensitive, and better adaptable rules. The result of these negotiations was the Basel II Accord, which, in addition to a number of innovations, led to an effective reduction in capital requirements (BCBS 2004). In retrospect, the Basel II standard was seen as having contributed to the huge imbalances and build-up of risk in the banking system, which enabled the global financial crisis of 2007–2009 (Tarullo 2008; Goldbach 2015). As the financial system was on the verge of collapse in the fall of 2008, the political spotlight soon focused on the fragility of international banks. Since mid-August 2007, governments of Western industrialized countries had to support or even nationalize a number of their largest financial institutions to prevent devastating domino effects across the financial system. However, after the bankruptcy of the US investment bank Lehman Brothers on September 15, 2008, a meltdown of the financial system was imminent (Lowenstein 2010; Blinder 2013). And just a few days before the final bankruptcy, Lehman managers had desperately tried to increase their own capital levels—but at that point, no market player, nor public actor, was willing to back the stumbling bank (Wilchins 2008). The shock waves triggered by the Lehman bankruptcy hit Wall Street, the global financial markets, and ultimately the entire world economic system, and particularly the major multinational banks of the most developed economies. The systemic collapse could only be prevented by the decisive and cooperative actions of the world’s largest economies. To manage the crisis, as described in earlier sections, the G20 met for the first time at the Head of State and Government level in November 2008. And with the 2008 summit, but even more so with their second summit in April 2009, the G20 leaders initiated far-reaching reforms of the international

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financial architecture (G20 2008, 2009a). The regulation and strengthening of the resilience of international banks stood at the top of the reform agenda. To this end, the G20 commissioned the BCBS to fundamentally revise the minimum capital regime as it had been in force since the Basel II Accord. During the spring and summer of 2010, the members of the Group of Central Bank Governors and Heads of Supervision (GHOS), which oversees the BCBS’s work, met in Basel to negotiate and subsequently adopt the new international minimum capital standards. International experts, academics, and the BCBS’s own technical committee proposed high minimum capital requirements of more than 15% of the risk-weighted balance sheet of internationally active banks (Admati et al. 2010; Wall Street Journal 2010; BCBS 2010a). Only a capital base above this level would reduce the likelihood of a banking crisis far enough, they argued. The largest market powers in the negotiations were the United States, the EU institutions, and EU member states, as well as Japan and China. However, China largely stayed out of the negotiations as domestic banks were seen as sufficiently capitalized (Masters 2010). Japan feared the cost of high capital requirements for domestic banks but rather aligned its position with other BCBS members in the negotiations. Thus, the question remained as to how the United States and the EU and their members would position themselves in the negotiations. Both had by far the largest economies, the most developed banking and capital markets and both had suffered significantly from the crisis. According to Bretherton’s and Vogler’s three dimensions of actorness, both had the presence and opportunity to significantly influence international negotiations on minimum capital standards. The United States showed a high degree of coherence and thus consolidated capability with regard to its preferences. Although the different American regulatory agencies had somewhat divergent ideas about the necessary quantity and quality of capital requirements, the bank regulators and the Federal Reserve agreed on a common position in advance and were thus able to express their point of view with the full power of the United States presence (Bair 2013; Ryan and Ziegler 2015). In the EU, however, the situation was different. The present analysis is concerned with how the EU and its member states positioned themselves in negotiations. Since the latest round of enlargement in 2009 and before the referendum over the United Kingdom’s withdrawal in 2016, nine European countries had been independent members of the BCBS: Belgium, Germany, France, Italy, Luxembourg, the Netherlands, Spain, Sweden, and the United Kingdom. The EU institutions were represented in the BCBS in 2010 by the ECB and the European Commission. The Single Supervisory Mechanism (SSM) would not be established until 2014, when ECB Banking Supervision would be given another seat in the BCBS as supervisor of the around 120 largest banks in the euro area. In addition, the European Banking Authority (EBA) would also only begin its work in 2011 and was therefore not represented in the BCBS either. Moreover, the role of the ECB was, according to the Treaties, mainly limited to the exchange of information with authorities of other jurisdictions, while the European Commission participated in the bodies as a mere observer. Given the reduced representation of the EU institutions, EU actorness thus depended on common or shared objectives of EU member states.

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The preferences of the European countries on the new international minimum capital standards diverged considerably, however (see Dreher 2018, p. 82ff.). In fact, two opposing camps formed during the negotiations. One group was led by the United Kingdom, the Netherlands, and Sweden, which advocated a high quantity and high quality of capital requirements. This position overlapped with the preferences of the United States, which led a powerful alliance in favor of significantly higher capital requirements. The second group around Germany, France, and Japan was strongly opposed and demanded lower prescribed capital levels. This lack of coherence in the positions of the largest and financially most advanced EU countries, paired with the observing EU institutions at the BCBS, undergirded the EU’s low capability in the negotiations. The EU’s actorness, in turn, despite the EU’s considerable power derived from the single market, was thus rather low throughout policy development of the new Basel Accord. The ultimate outcome was disappointing for both camps. The minimum capital requirement of 7% highquality capital of risk-weighted assets, of which 2.5% would only be added through the capital conservation buffer, fell short of levels demanded by the change alliance. Since the final agreement only allowed financial instruments of high quality, such as equity and bank profits, to fulfil the requirement, it did not meet the preferences of the status quo coalition either (BCBS 2010b). The EU thus neither acted with a common voice nor did the EU member states achieve their preferred policy goals. So how can the EU’s low actorness in the Basel III negotiations be explained? Liberal intergovernmentalism focuses on the preferences of the states with the greatest bargaining power. These preferences are in turn determined by the competition between interest groups for influence on political processes and the aggregation of social interests by domestic political institutions. The following analysis will be limited to the three EU member states Germany, France, and the United Kingdom, as they represented the largest markets within the EU. The United Kingdom opted for relatively high regulatory standards while Germany and France held the opposite position. Thanks to their market size, the three states enjoyed the greatest bargaining power and suffered potentially least from a possible failure of the negotiations. Liberal intergovernmentalism thus expects the position of the government representatives of Germany and France to be determined by the preferences of the dominant interest groups within them. And indeed, in both countries the highly influential banking associations advocated a significant lowering of the proposed international standards. In Germany, it was in particular the representatives of the savings banks and Landesbanken, who pointed out the potential economic damage to Germany as a business location. These credit institutions have significantly lower capital buffers than large multinational banks and face reduced access to capital markets to recapitalize themselves. Therefore, stricter international capital standards were seen to cause competitive disadvantages particularly for German banks (Wall Street Journal 2010; Financial Times 2010a, b; BDB 2010). However, these costs for German banks were also due to a specific requirement of the EU market. The BCBS explicitly formulates capital adequacy standards only for ‘internationally active banks’, but without providing a specific definition, hence most jurisdictions apply the requirements only to banks beyond a certain balance sheet size. In the EU,

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however, international capital standards are made mandatory for all banks; in other words, what has been agreed at the international level with usually medium-sized and large banks in mind will apply to all banks in the EU (Howarth and Quaglia 2013). The French position can also be explained by domestic banking interests. Here, too, domestic banks had much lower capital buffers than UK and US banks, and the major French multinational banks would face considerable costs from increased capital standards (Financial Times 2010c; Jabko and Massoc 2012). In contrast, civil society groups and left-wing political parties in both Germany and France vehemently advocated for stricter regulation of financial markets (Deutsche Welle 2010); more differentiated proposals also called for significantly higher bank capital standards (Hellwig 2010; Admati and Hellwig 2013). However, these groups proved ultimately unable to assert themselves against the dominant positions of the banking and business associations in the domestic political system. Thus, the first expectation of liberal intergovernmentalism regarding preference formation in Germany and France can be confirmed. The dominant interest groups, in this case the domestic banking associations, were able to successfully influence the position of their state representatives in international negotiations. In the case of the United Kingdom, liberal intergovernmentalism would also expect the dominant interest groups to determine the preferences of state representatives in the BCBS for stricter capital standards. However, this assumption cannot be confirmed. Although some of the British financial market representatives favored further stabilization of the financial system in light of the previous crisis, they did not advocate to raise capital standards significantly (James 2015). Rather, it was the upheavals of the crisis that prompted regulators, the public, civil society groups, and political representatives to call for strict regulation of banks and the financial system. At this point, it could be argued that civil society interest groups were able to assert themselves against economic and financial market associations on these issues—and the empirical findings would thus be congruent with the theoretical expectations of liberal intergovernmentalism. However, this would conceal the temporary nature of the superiority of the pro-regulatory camp. Moravcsik’s theory is based on the preferences of dominant interest groups and does not account for situational factors, triggered by the crisis. However, research on the regulatory reforms following the crisis has comprehensively shown that, as a result of destructive financial market crises at home, national regulators may well advocate stricter standards at the international level to ensure stability of home markets while maintaining a global level playing field (see Singer 2007; Mosley and Singer 2009). To summarize, the simple version of liberal intergovernementalism could successfully explain the preferences of Germany and France while the application to the United Kingdom revealed inconsistencies. In the second step, liberal intergovernmentalism assumes that the relative bargaining power of states determines the outcome of political processes and, in this case, the degree of EU actorness. To simplify, it is assumed here that the size of the domestic market offers a crude but adequate approximation to the potential bargaining power of states. According to IMF data, GDP in US dollars in 2012

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was in Germany U$3545.94 billion, in France U$2682.90 billion, and in the United Kingdom U$2655.46 billion (IMF 2012). While Germany ranked top and France came second closely followed by the United Kingdom, all three represented the largest national markets within the EU and thus should enjoy the power to significantly influence the EU’s foreign policy. Liberal intergovernmentalism would therefore expect divergent preferences of the three states to persist and to shape international negotiations, thus leading to low EU actorness. Although there is a high degree of presence and opportunity—both the common EU market and the euro are indisputable sources of international market power—a lack of internal coherence among the EU member states prevents a high capability of the EU and thus significant actorness. And as has been shown above, this is precisely what occurred in the BCBS negotiations over the new international minimum capital standards. From the viewpoint of principal-agent theory, the reasons for delegation or non-delegation of regulatory competences to European institutions are of relevance. When the negotiations on minimum capital requirements in the BCBS started in 2010, the competences in European banking regulation were distributed in a rather intergovernmental way. The EBA as more supranational regulator would only start its work at the beginning of 2011. Similarly, the ECB’s SSM was not yet established which also limited the ECB’s direct input on bank supervisory matters at the BCBS. The European Commission only enjoyed observer status in the BCBS. Compared with trade where EU member states had already transferred sole and unrestricted competence to the Commission (Young 2007; Elsig 2010; Dür and Elsig 2011), the area of financial market regulation was characterized by a low level of competence delegation to the European level. How can we explain this? The principal-agent approach weighs the costs and benefits of a delegation of competences by the principal. First of all, the benefits of a common EU voice should be considered. As discussed above, the EU enjoys a considerable presence and opportunity in the area of monetary and financial policy, which theoretically gives it the potential to act as a leading power on the world stage. However, a coherent position embodied by a competent agent or via common preferences for that matter, is needed in order to use this presence and exploit the opportunities. The EU could thus hypothetically use its full market power in negotiations and successfully stand up to the United States which has so far dominated these policy areas. This would enable the EU to shape international standards in line with its preferences and design international market rules, which in turn would also enable EU domestic market players to expand business across the globe more smoothly. In addition to international market expansion, the attractiveness of the EU for external market players would continue to increase and the resulting capital flows and foreign direct investments would further boost EU-wide economic performance. From a financial stability perspective, the EU and its member states would also benefit from a further delegation of financial market regulation and supervision. In an increasingly integrated European market, for example, as crises and recessions are no longer limited to individual national markets, cross-border stability is best ensured from a central oversight position. Finally, joint financial market supervision would also

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promote the further integration of markets. If the same rules were applied across markets, which is far from being the case in the EU, market players could expand their activities even more easily. This would lead to more efficient, cheaper, and faster business and trade, in the logic of the markets. In view of this immense benefit of an EU-wide competence for banking and financial market regulation and supervision, the question arises as to what costs stood in the way of this delegation so far or at least until 2012. For if the expectations of principal-agent theory are to apply in this case, the costs of delegating these competences must exceed the benefits for individual EU member states. The benefits of a common EU actorness must first be set against the loss of sovereignty of individual states. This is because every delegation of competences, by definition, involves a task of giving up national prerogatives. In the policy area of trade, this delegation of competences was obviously bearable for the EU states, in view of the enormous benefits of a uniform EU voice. In the policy area of financial market regulation and supervision, however, the situation is different. In the application of liberal intergovernmentalism above, the heterogeneous financial market landscape across EU member states has already been revealed. Even Germany and France, which found themselves in the same camp in the Basel III negotiations, have clearly divergent market institutions and regulatory frameworks (Jabko and Massoc 2012; Howarth and Quaglia 2013). With the heterogeneity of markets and the resulting heterogeneity of societal interests, the costs of joint centralized regulation and supervision thus increase. Furthermore, in capitalist market economies, control over money and financial resources lies at the heart of economic activity. Thus, financial market regulation has been and continues to be subject to a similarly special national protection as fiscal policy—the abandonment of which is not impossible but entails considerable costs from the viewpoint of the governments of individual states. And finally, an ideational aspect may be considered, which made the costs of a lack of European supervision for cross-border banking and financial markets appear negligible. Until the outbreak of the global financial crisis, the belief in the efficiency of markets dominated, in particular financial markets, supposedly eliminating asymmetric dynamics and undesirable developments in prices and valuations by their own efforts. In this context, active state intervention, such as excessive regulation and supervision, seemed to undermine the functioning of the markets (Fama 1970; Borio 2009; Baker 2013). Although the latter in particular was exposed as flawed by the global financial crisis and its aftermath, the corresponding institutional status quo in the EU persisted until 2010, the time of the BCBS negotiations. In summary, principal-agent theory thus helps to explain the status quo of competence sharing in the EU at the time of the Basel III negotiations. Despite the obvious benefits of a common EU voice and thus the potential of a high level of EU actorness according to the concepts of Bretherton and Vogler, the costs of competence delegation outweighed the benefits on the part of EU states. The weak EU actorness thus contributes to explaining the unsatisfactory result of the Basel III Accord for all sides. However, the case of banking supervision also foreshadowed a further increase in the delegation of competences to the EU. In view of the principal-agent approach,

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the effects of the global financial crisis and the closely related euro area crisis starkly revealed the considerable costs of the lack of Europe-wide supervision and commonly enforced regulatory standards—this increased the benefits for principals to strengthen the institutionally very weak sectoral regulators. In the area of banking standards and regulation, the Committee of European Banking Supervisors (CEBS) was further developed into the EBA, which began its work on January 01, 2011. Furthermore, in 2012 EU member states agreed to set up the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) (Véron 2015; Glöckler et al. 2016). At the same time, the costs of these delegations remained omnipresent and national authorities tried to minimize the consequences even after agreeing to establish a banking union. For example, a uniform European Deposit Insurance Scheme (EDIS), sufficient liquidity for the Single Resolution Fund (SRF) or the necessary fiscal backstop are still missing to complete the banking union (Schoenmaker 2015; CEPR 2018). To conclude, principal-agent theory offers a convincing model to analyze variation in the degree of exclusive or shared competences between EU member states and European institutions. A possible point of criticism is that the discussion of costs and benefits, especially what counts as costs and benefits and how these are weighted in each case, leaves room for interpretation. For example, the above analysis has used political, economic, and ideational factors to capture the costs and benefits for the principals. A narrower interpretation could, for example, be limited to only one class of these factors and thus strengthen the explanatory power of the approach.

3.5

Conclusion

Since the creation of the European Coal and Steel Community (ECSC) in 1951, the integration of Europe has made transformational advances. In policy areas such as competition or trade policy, member states gradually transferred comprehensive powers to EU institutions to set policy and to represent the EU with one voice in external relations. In addition to these areas in which the EU institutions enjoy exclusive competence, however, there are also a number of areas, such as monetary, financial, and fiscal policy, in which the European institutions and states still share competences today. Here, as the chapter has shown, the question arises to what extent competences have been delegated and with what consequences. It became also apparent that integration in monetary, financial, and fiscal policy has dragged on for decades. Economic and financial crises in particular were often the necessary stimulants to motivate decision makers and states involved to initiate further integration measures and closer cooperation. There are probably few policy areas in which Jean Monnet’s famous dictum has such an apt application as to monetary, financial, and fiscal policy: “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises” (Monnet 2015 [1978], p. 417). As the study of economic and monetary integration has shown, the sum of the solutions often seems to exceed what was considered possible, but to fall short of what was deemed necessary. Thus, even the ECB which

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enjoys unrestricted competence in monetary policy in the euro area is still subject to constant push-back. Furthermore, the policy area of financial regulation and supervision shows a surprising variance in the distribution of competences. Supervision of the largest euro area banks has now been centralized under the banking union while smaller banks, as well as the insurance and securities markets, are still primarily supervised by national authorities. This discrepancy between what would be expected as a functional solution and what can be realistically implemented in the political process of the EU is even more evident in budgetary policy and macroeconomic stabilization, two policy areas that can hardly be separated. Even today in the EU, sovereignty over the budget remains with national governments while the EU level is devoid of any functional fiscal policy instruments. Of course, the distribution of competences in these policy areas affects sensitive aspects of domestic politics; however, the crises of recent years have revealed that a certain centralization of fiscal policy is unavoidable within the framework of a common economic and monetary union (Box 3.16). Box 3.16 The Response to the COVID-19 Crisis: A “Hamiltonian Moment”? The outbreak of the coronavirus (COVID-19) pandemic in early 2020 threw Europe and the world in a yet unprecedented catastrophe. The rapidly spreading viral infection caused public health crises across the world. Fundamental uncertainty quickly engulfed the global economy and caused an abrupt interruption of economic and financial flows the depth of which seemed to make the global financial crisis of 2007–2009 pale in comparison. Europe was early on and massively implicated, with the virus spreading first in Southern members, but soon overwhelming the entire continent. At the time of writing, the public health crisis was still in full steam, while positive news on vaccine development and first and foremost the full-blown public response to the faltering world economy had reassured markets of governments’ and central banks’ determination. The COVID-19 crisis thus put the EU’s and euro area’s still evolving institutional framework under strain; it is hence valuable to have a first glimpse at their performance, while of course much still lies ahead. How then did the EU fare across monetary, financial, and fiscal policy in response to the COVID-19 shock? • Faced with collapsing markets and rampant uncertainty, the ECB unleashed on March 18, 2020, the pandemic emergency purchase programme (PEPP), a temporary asset purchase program of private and public sector securities to counter the serious risks to the euro area economy. Initially set at €750 billion, the envelope for the PEPP was increased by €600 billion on 4 June and by €500 billion on 10 December, for a new total of €1850 billion. Importantly, while the quantity of purchases was to be conducted according (continued)

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Box 3.16 (continued) to the Eurosystem capital key, the ECB announced to apply the program flexibly over time, across asset classes, and among jurisdictions, meaning it would not be bound by short-term constraints to ensure strictly proportional purchases (ECB 2020d). With the PEPP accompanied by further accommodative measures across the ECB’s different instruments, European markets were shored up, short- to medium-term pressures eased and the collapse was averted. • ECB Banking Supervision equally formulated an immediate response from March 2020 onwards, signaling a range of measures to ensure that its directly supervised banks could continue to fulfil their role in funding the real economy amid the expanding shock. The ECB, in close coordination with the National Competent Authorities (NCAs), the European Banking Authority (EBA), and the European Systemic Risk Board (ESRB), allowed banks to operate temporarily below the levels of their capital and liquidity buffers, granted operational relief by postponing a set of scheduled supervisory actions, and issued strong recommendations to forego dividend distributions and share buy-backs to preserve as much capital as possible within the banking system (ECB 2020c). While the mid- to long-term effects still have to surface, also given that public guarantees across the EU may conceal the extent of deteriorated asset qualities, the EU’s coordinated regulatory and supervisory response and the more resilient banking system may be credited to have thus far prevented any signs of a banking crisis as observed a decade earlier. • While the strengthened institutional structure of the euro area’s monetary and financial policy performed as it was supposed to, the most momentous change may have occurred in the realm of fiscal policy. Amid the realization that the COVID-19 crisis represented an unprecedented but exogenous and fairly symmetric shock to the EU as a whole, the European Council agreed on 21 July on a €750 billion recovery package, termed Next Generation EU, to help the EU tackle the crisis and alongside agreed on a €1074.3 billion long-term EU budget for 2021–2027. Already in May the Eurogroup had finalized three immediate safety nets, worth €540 billion, to provide loans on favorable terms to member states in need. Not only the scale of the combined support efforts outpaced any previous measures, but also the fact that over €300 billion of the recovery instrument were to be distributed as grants while the Commission was tasked to issue joint debt to finance these measures. This led some observers to announce the EU’s “Hamiltonian moment,” also taking into account the ECB’s actions, as in 1790 then US Treasury Secretary Alexander Hamilton successfully negotiated that the nascent federal government of the United States of America would assume the debts of its 13 founding states incurred during (continued)

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Box 3.16 (continued) the War of Independence, thereby laying the groundwork for the US federal fiscal authority (Nussbaum and Jennen 2020; Kirkegaard 2020). Looking up close, it is clear that the EU is still far away from permanently unionizing member state debt—yet still, however temporary and limited, the COVID19 recovery package does represent a significant step forward in the integration of the EU’s fiscal policy. It may thus be more accurate to speak not of a Hamiltonian moment, but rather the initiation of a Hamiltonian process with yet undetermined outcome. And what mid- to long-term consequences the COVID-19 response will have for the EU’s actorness, as determined by its presence, opportunity and capability, needs to be seen— and to be researched. While the state of the euro area is still evolving, the external role and representation of the EU at the international level exhibits varying patterns. A differentiated picture of the EU’s variable membership was provided by an analysis of six international bodies: the Group of 20 (G20), the International Monetary Fund (IMF), the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS). EU institutions and EU member states are represented in all bodies, partly as full members, partly as observers, and some groups include only the largest EU states. Therefore, the study concluded that the consideration of membership or nonmembership alone reveals little with regard to the role of the consolidated EU. Thus, the final part of this chapter presented concepts and theoretical approaches to explain EU actorness at the international level. The chosen concept of actorness according to Bretherton and Vogler (2013) is based on the three dimensions of presence, opportunity, and capability. For the EU in the area of monetary and financial policy, high values could be observed for presence and opportunity. As guardian of one of the world’s largest markets and manager of the second most important currency, the EU has the presence in the global economy as well as the opportunity to influence international policy according to its interests. The focus of the analysis thus turned to the EU’s capability and its ability to benefit from its presence and to grasp the given opportunity. The capability of an actor, however, depends to a large extent on the internal coherence of decision-making processes. And here, as has been discussed above, the EU shows a considerable variance in monetary and financial policy. This translates into a variance in the EU’s actorness that can be explained by drawing on the two theories of liberal intergovernmentalism and the principal-agent approach. For illustrative purposes, the fourth part of this chapter then applied these conceptual and theoretical tools to the international negotiations of the Basel III Accord. The analysis first examined the actorness of the EU in this policy area. As already indicated above, there were high values detectable for both presence and

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opportunity. However, the lack of a coherent European position again weakened the EU’s capability. In the subsequent analysis, liberal intergovernmentalism and principal-agent theory were applied to explain the overall low actorness of the EU. Both approaches allowed a set of illuminating further insights, but also revealed some limitations. Finally, these findings were discussed and placed in the broader context of the debate on EU actorness, while their implications for the development of European banking regulation were evaluated as well. Future studies of EU actorness should continue to investigate the representation and role of EU institutions and member states in international organizations and fora. Single case studies exploring the development of regulatory standards in international committees from the viewpoint of EU actorness would be valuable. Comparative perspectives could scrutinize the reasons for the observed variance of EU actorness across cases of financial policymaking. Theories such as liberal intergovernmentalism and the principal-agent approach represent only two of several approaches to try to explain the observed findings. European integration will continue to evolve, and thus EU actorness will continuously be subject to change. Studying the direction of this change and its implications for the future of European integration opens manifold research opportunities for political scientists and international political economists alike.

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4

Climate Policy

4.1

Introduction

This textbook chapter analyzes the EU as an actor in the field of climate policy, with a special focus on its external relations. Since its foundation, the EU has been perceived as an ambitious actor in climate policy, and its leadership role has been and continues to be recognized by other actors. This recognition applies in particular to the EU’s external relations and here to the climate negotiations. Accordingly, the EU has been a pioneer in climate policy (Lindenthal 2009; Bäckstrand and Elgström 2013; Oberthür 2011a). Early in the beginning, environmental policy and climate policy were defined by the EU as core fields of action. However, the claim for a leadership role is not accomplished by self-assignment, but by external attribution. To qualify for a leadership role, ambitious international announcements of goals by an actor should be complemented by their sustainable implementation. The actor willing to lead should build and be included in coalitions (Nye 2008). The objectives of this contribution are to: • Introduce climate change as a problem for national and international politics (Sect. 4.2). • Outline the institutional responsibilities of the EU and its member states in environmental and climate policy (Sect. 4.3). • Provide an overview of the evolution and state of the international climate negotiations (Sect. 4.4.1). • Examine European actorness in the climate regime as a central international negotiation arena. For this purpose, various theoretical approaches to study actorness are empirically applied to climate regime negotiations (Sect. 4.4.2). • Present European activities that overlap with energy and trade policy and to evaluate possible synergies with climate policy (Sect. 4.5). • Summarize the main findings and discuss further implications (Sect. 4.6).

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 S. Lütz et al., The European Union as a Global Actor, Springer Texts in Political Science and International Relations, https://doi.org/10.1007/978-3-030-76673-3_4

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For the analysis of European actorness and its effectiveness, this contribution refers to Jupille and Caporaso (1998), Niemann and Bretherton (2013) as well as Groen and Niemann (2013). According to Jupille and Caporaso (1998) the four criteria of actorness include recognition, coherence, authority, and autonomy. Recognition describes the de jure and de facto recognition of an actor by other actors. Coherence is defined as the ability of an actor to reach an agreement internally. Authority encompasses the basic principles of action available to an actor in a policy area. Autonomy refers to the degree of independence of the EU from its member states. However, Jupille and Caporaso point out that actorness is not equivalent to the assertiveness of an actor. The chapter, therefore, follows the argument expressed by Niemann and Bretherton (2013) that the study of European actorness must be extended in many policy areas to include the criterion of effectiveness. According to Groen and Niemann (2013, p. 310 f.), effectiveness describes the external dimension of the EU and is defined as the ability of an actor to achieve the desired goals in negotiations. Based on this concept of actorness, Sect. 4.4 examines three different cases of negotiations in the climate regime, which represent important decisions and thus impulses for its further development: The Kyoto Conference of 1997, the Copenhagen Accord of 2009, and the Paris Agreement of 2015. With regard to the role of the EU, the cases exhibit different degrees of effectiveness (see Box 4.1). Box 4.1 Key Contractual Milestones of the Climate Regime 1997: Kyoto Protocol 2009: Copenhagen Agreement 2015: Paris Agreement The liberal intergovernmentalism approach is used to explain the role of the EU in the creation of the Kyoto Protocol in 1997. From the viewpoint of this theory, the most influential member states of the EU determine the EU’s preferences in intergovernmental negotiations (Moravcsik 2009). State preferences are formed based on the preferences of dominating interest groups, the result of which is aggregated by the political institutions. The negotiating power of a state determines the assertiveness of its preferences. In liberal intergovernmentalism, the analysis is based on a three-stage model in which states define their preferences, then negotiate with each other, and the negotiated policies are ultimately implemented. The failure of the EU to push its objectives at the Copenhagen negotiations in 2009 will be analyzed based on the four indicators of actorness following Jupille and Caporaso (1998) and from the viewpoint of effectiveness in the understanding of Groen and Niemann (2013). Unlike the Kyoto Protocol, the Paris Agreement 2015 is considered a success, particularly for the EU. The theoretical explanation of the EU’s actorness and effectiveness is based on so-called leadership approaches. Following Nye and Young, leadership is understood as the ability of an actor to achieve his own goals

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while at the same time enabling collective negotiation solutions through the exercise of different types of resources (Nye 2008; Young 1991). The concept of leadership differs from a neorealist understanding of hegemony (Keohane 2005) since the assertion of interests does not presuppose an asymmetrical power structure, but is based on an equal power relationship between the leading actor and its followers. Section 4.5 deals with energy and trade policy, two further European policy areas that overlap with climate policy. It assesses European actorness in these policy areas and the potential for an integrated policy approach. Section 4.6 concludes with an examination and assessment of European actorness and effectiveness in the area of climate policy and discusses future challenges.

4.2

Climate Change as a Problem for National and International Politics

“The climate” can be seen as an interdisciplinary and so-called “wicked problem.” It is a difficult to grasp, sometimes contradictory, complex problem that can no longer be considered an isolated policy area (Lazarus 2009). With the start of international climate negotiations at the 1992 Rio de Janeiro Earth Summit, climate change was addressed as a central issue, but linked with various competing environmental issues. Accordingly, the area of climate policy was long regarded as “low politics,” i.e., as not affecting the vital interests of states compared with security and military capabilities, which are referred to as “high politics” (Trombetta 2008; Delreux 2014). Among other things, political decision makers have increasingly accepted that uncontrolled climate change is a risk factor (Otto 2015). This is partly due to increasingly reliable and precise scientific findings on the concrete ecological and economic effects and consequences of climate change. The Stern Report published in 2006 by the then World Bank chief economist, Nicholas Stern, pointed out the economic consequences of global warming (Stern 2007). The report postulates that if the international community fails to act, the annual costs will correspond to a 5% loss of the global gross domestic product. A further study indicates that we have been facing the first six of the world’s ten warmest years since 1880 (determined by their deviation from the global average) in the last two decades (NCDC and NOAA 2018; see Fig. 4.1). The reports of the international scientific advisory body IPCC (Intergovernmental Panel on Climate Change) also indicate the urgency of the climate problem. Since its first progress report in 1990, the IPCC has regularly reported on the state of the scientific consensus on climate change. It communicates this to policy-makers and the general public worldwide. Although the IPCC does not conduct any scientific research itself but compiles the current state of affairs based on scientific publications, it is heard in politics and the media. The culmination of this recognition was the awarding of the Nobel Prize together with former US Vice President Al Gore. Climate change is increasingly being addressed as a security issue (Trombetta 2008; Dalby 2013) rather than as a purely environmental problem. The

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Fig. 4.1 The world’s warmest years since the start of measurement in 1880 (deviation from the global average) Source: https://www.climatecentral.org/gallery/graphics/the-10-hottest-globalyears-on-record. Accessed: 14 June 2021

“securitization” of climate change primarily refers to its expected implications. Climate refugees leaving increasingly uninhabitable regions of the world or climate wars over decimated access to water and food are just two of the many aspects that the international community is addressing in various fora such as the UN. In the more recent debate, climate change is also discussed against the background of future energy security (Siddi 2016; Fischer 2017). In Europe and above all in Germany, due to the planned turnaround in energy policy, a secure and sustainable European energy supply is being discussed, which also addresses climate policy challenges (Lang and Hohaus 2017). On the international level, a persistence of different climate policy discourses can be observed in various fora, committees, and conferences. Climate change is now prominently represented on the G7 and G8 agendas. In addition, climate policy aspects are addressed directly (Framework Convention on Climate Change, Kyoto Protocol) or indirectly (WTO, G20). The UNFCCC (United Nations Framework Convention on Climate Change) is the central authority for intergovernmental political decisions at the international level (Sands 1992). This international legal document, developed under the auspices of the UN (United Nations), defines the basic principles of the climate negotiations. The Kyoto Protocol, signed in 1997, for the first time formulates concrete reduction commitments for the member states that are binding under international law. With the Paris Agreement signed in 2015, the parties decided to limit global warming to well below 2 degrees Celsius compared to the pre-industrial level. The annual COP (Conference of the Parties) is the supreme body and thus the central decision-making framework for climate policy decisions.

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These and similar intergovernmental negotiation arenas are referred to as regimes in political science and international relations, respectively (Müller 1993; Sprinz 2003; Zangl 2003). Regimes can be described as an institutional framework for an agreement to regulate certain issues, such as ozone, fisheries, but also arms reduction or free trade, in which both state and non-state actors can be involved. Regimes are of a problem-specific nature which distinguishes them from international organizations such as the UN. Contrary to organizations that have their own independent bodies, regimes are not considered as actors. The climate regime has proven to be viable in light of its ground-breaking and internationally binding agreements on mitigation and adaptation to climate change. The development of the climate regime underwent several phases (Otto 2017). The first phase, from 1988 to 1994, encompassed the politicization of climate change and the beginning of an international negotiation process culminating in the emergence of the regime. In the second phase, from 1994 to 1997, an intergovernmental negotiation process has been initiated in the COP, which ended with the signing of the legally binding Kyoto Protocol for the reduction of greenhouse gas emissions. In the third phase, from 1997 to 2005, an attempt was made to find answers to the still open questions of the Kyoto Protocol, thereby enabling its ratification by the nationstates and thus its entry into force. In the fourth phase, from 2005 to 2011, a followup process started with the aim of negotiating a post-Kyoto agreement after 2012. The adoption of the Durban Platform for Enhanced Action, which for the first time included all members of the Framework Convention on Climate Change, marked the beginning of a fifth phase of the negotiation process, culminating in the decision of the Paris Agreement at COP 21 in December 2015. Since then states try to negotiate commitments that can be regarded as adequate for climate protection. The COP 25 in Madrid ended on the 15th of December 2019, 2 days late. It was agreed that by COP 26 in Glasgow, all signatory states are to present revised climate protection commitments for the next decade and a long-term strategy up to 2050. Europe intends to lead by example and has announced a plan in 2020 to raise the EU’s climate target significantly. However, during the last 25 years of international climate negotiations, the international context and the dominant actor constellations have changed significantly (Otto 2016). First, the BASIC group of states, an acronym for the states Brazil, China, India, and South Africa, have considerably increased their negotiating power through impressive economic development and a resulting significant share of global greenhouse gas emissions (Lederer 2014). The latest data (see Fig. 4.2) underline the importance of these countries for global CO2 emissions (IMF 2018; Germanwatch 2018). Second, over time the position of the United States in the climate regime oscillated between support and withdrawal. In June 2017, US President Trump announced that the United States would withdraw from the Paris Accord in November 2020 (although it is still disputed whether the United States has ever really agreed to this treaty under international law). This was supposed to be the second exit of the United States from a global climate treaty, after the withdrawal of US President Bush from the Kyoto Protocol in 2001. Afterwards, the negotiations on

Fig. 4.2 The ten largest CO2-emitting countries (by share of global CO2 emissions in 2019). Source: https://www.ucsusa.org/resources/each-countrys-shareco2-emissions. Accessed: February 25, 2021

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the ratification process of the Kyoto Protocol had suffered a severe setback. In February 2021, the new Biden Administration has confirmed its support of the climate regime and joined the Paris Accord again. It remains to be seen whether the United States will take up a new leadership role in the upcoming negotiations. In the past, the EU has been able to some extent to fill the vacuum following the withdrawal of the United States to prove its claim to leadership in international climate policy (Lindenthal 2009). Due to this outstanding position, the climate regime is also the central reference for the EU’s external relations in the area of climate policy and for the implementation of its policies (Oberthür 2011b; Bäckstrand and Elgström 2013). Accordingly, this chapter focuses mainly on the EU’s performance in the climate regime and addresses the question of European actorness over time.

4.3

Institutional Responsibilities in Environmental and Climate Policy

European environmental policy and climate policy, in particular, are undoubtedly among the political priorities in the EU’s external relations (Fröhlich 2014; Waldmann 2007). EU climate policy has become a core element of environmental policy in the Treaty on the Functioning of the European Union (known as the TFEU or TFEU Treaty), one of the founding treaties of the EU alongside the Treaty on European Union. A core objective in Art. 191 of the TFEU is “promoting measures at the international level to deal with regional or worldwide environmental problems, and in particular, combating climate change” (EUR-Lex 2012). In general, since the establishment of the EC/EU, there has been an incremental increase in decision-making powers in environmental policy and thus in the number of decisions taken at the Community level (Fischer 2009; Umbach 2015). The supranationalization of environmental policy is partly due to the fact that a large number of environmental problems are of a transboundary nature and can therefore hardly be solved within the framework of regional or national action. In this context, climate change is a prime example of this type of environmental problem. Economists often characterize climate change as a public goods problem, as the climate is potentially available to all free of charge, and nobody can be excluded from its use (Hardin 1968; Ostrom 1990). Vice versa, collective agreements of all parties are needed to ensure the protection of climate as a collective good. Climate policy measures are described by both the EU and political science as policy measures that can be subsumed under the overarching objective of mitigation or adaptation (Lohner 2011). Climate policy within the EU is a cross-cutting task in the classical sense since climate policy issues are inherent in numerous policy fields. While energy, transport, and agriculture are policy areas with a strong climaterelevant component, aspects of foreign and security policy, but also external economic relations are increasingly affected as well (Umbach 2016). At the onset of European integration, the environment as a policy area was of only marginal importance (Knill 2008). For example, it was not mentioned in the EC

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Treaty of 1957. It was not until the 1970s that the completion of the Common Market spurred the harmonization of different national environmental regulations. The 1973 Paris Summit, attended by the Heads of State and Government, adopted the first Environmental Action Program (EAP) with guidelines for the development of Community environmental policy. As a result, more than 200 environmental protection guidelines were created. In 1981, the Directorate-General XI “Environment, Nuclear Safety and Civil Protection” was set up. A new phase of legal-institutional consolidation and further development of Community environmental policy began in 1987 (Knill 2008). The entry into force of the Single European Act (EEA) in 1987 gave the EU explicit competence in environmental policy (EUR-Lex 2010). The EEA provides an essential basis for environmental policy in the EU by setting objectives, principles, and decisionmaking procedures. On the other hand, climate policy is not mentioned in the EEA expressis verbis. However, the external environmental policy competence of the EU is explicitly mentioned. In 1992, the Maastricht Treaty made the objectives of sustainable development binding (EUR-Lex 1992). The Council of the EU can also decide on the vast majority of environmental policy decisions by qualified majority. In 1997, environmental protection was given a further boost in the Amsterdam Treaty (EUR-Lex 1997). The cross-cutting environmental clause stipulates that environmental protection requirements must be taken into account when defining and implementing other Community policies (Döring 1998). The co-decision procedure will be introduced for environmental policy decisions. The European Parliament and the Council are thus equally involved in the vast majority of environmental policy issues. With the sixth environmental program for the period from 2002 to 2012, the environmental policy priorities were shifting to the area of climate protection (Knill 2008), among others. In March 2007, the European Council of Heads of State and Government adopted an “integrated energy and climate policy,” also as a source of impetus and under the impression of the sluggish UN climate negotiations to date. The inclusion of energy policy is a novelty insofar as it represents a traditionally strongly nationally dominated policy field in the European integration process, with a low willingness from national governments to transfer sovereignty and competences. With the decisions on integrated energy and climate policy, the EU now has an appropriate control level and governance structure for this policy area (Fischer 2014). Another core element is the 20–20-20 strategy. This strategy comprises the three key objectives: • 20% reduction in greenhouse gas emissions compared with the base year 1990. • 20% increase in energy efficiency. • 20% of the energy in the EU comes from renewable sources. The Lisbon Treaty, which came into force in 2009, assigns environmental policy to the EU and the member states as a joint task (EUR-Lex 2009). The exact provisions are codified in Articles 191 to 193 of the TFEU (EUR-Lex 2012). As

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already mentioned, Article 191 TFEU explicitly includes climate and energy policy in primary legislation (Fischer 2009). Energy policy objectives are also an integral part of the Lisbon Treaty and are thus given both legitimacy and a political underpinning for action. The Treaty of Lisbon formally entrusts the Commission with the external representation of the EU in environmental matters, while maintaining as far as possible cooperation with the current and forthcoming Council presidencies in the climate negotiations (Groen and Niemann 2013). The Treaty of Lisbon gives the European Parliament an influential role, as it can veto international agreements in the field of environment. In addition, the European Parliament must be kept informed of the state of negotiations at all stages. Accordingly, the European Parliament approved the ratification of the Paris Agreement on October 06, 2016. In the Commission under President Manuel Barroso, starting in 2010, the topic of climate protection was receiving increased attention, also under the impression of the failed conference in Copenhagen in 2009. A Climate Change Commissioner was appointed to deal specifically with EU climate policy, in particular the European Emissions Trading Scheme. The Dutch Frans Timmermans has been in office since 2019. As Vice-President of the Commission since 2020, Timmermans is leading the Commission’s work on the European Green Deal and on its first European Climate Law. The Council, the Commission, and the European Parliament play a key role in the decision-making process on climate policy. Decisions on measures shall be taken by Parliament and the Council based on a proposal from the Commission in accordance with the ordinary legislative procedure laid down in Article 294 (EUR-Lex 2012). The Council decides unanimously following TFEU Art. 194, para. 2, if measures concern areas of the energy mix or the energy supply structure in the member states. In such cases, the European Parliament only needs to be consulted. In March 2011, the “Roadmap for moving to a competitive low carbon economy in 2050” was published by the Commission (EUR-Lex 2011) as an important impetus for climate change. The overall objective for the EU is to reduce its greenhouse gas emissions by 80 to 95% by 2050 compared to the base year 1990. Interim targets are a 40% reduction by 2030 and a 60% reduction by 2040. Key sectors identified to achieve these objectives are energy, transport, air and road transport, private and office buildings, and agriculture. In October 2014, the Commission adopted further targets for climate and energy policy up to 2030. Objectives are: • At least a 40% reduction in greenhouse gas emissions compared with the base year 1990. • An increase of at least 27% in the share of renewable energies. • An increase in energy efficiency of at least 27%. However, the latter objective is not to be achieved through the implementation of binding national targets, as it has been the case to date but is only mandatory at the EU level. Nevertheless, a coherence between national planning and the formulation

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of a European strategy is strived for (Fischer 2014). During the course of 2020, the Commission’s proposals were extended to include the target of reducing greenhouse gas emissions by at least 50% by 2030. Notwithstanding these numerous packages of measures and targets, it should be noted that, according to the latest calculations, the EU’s climate targets for both 2020 and 2030 are unlikely to be achieved under the current conditions. To conclude, it can be stated that since the EU/EC was founded, large parts of environmental and climate policy measures and decision-making structures have been shifted to the European level. In addition, a large part of the national environmental legislation of the member states has originally been initiated by the EU.

4.4

The EU as an Actor in International Climate Policy

After reflecting on the emergence and further development of European environmental and climate policy, this chapter will address its external dimension and the EU’s actorness. Nevertheless, it must be borne in mind that the EU’s external relations can, in principle, only be understood in conjunction with internal measures and developments. This reciprocity decisively increases or decreases European actorness in external relations. The EU’s foreign policy on climate change encompasses its actions within the international system or in international organizations and other multilateral negotiation arenas, in which collective solutions such as agreements, protocols, or treaties are negotiated, agreed upon, and subsequently ratified. The different legal forms of agreement represent different degrees of binding force. Unlike, for example, in trade policy (with the exception of services and intellectual property), the EU does not have exclusive competence in international climate policy matters under the EU Treaties (Peters and Wagner 2005). According to Art. 4 TFEU, climate policy falls under shared competences, i.e., not under the exclusive competence of the Commission. The member states may, therefore, exercise their rights independently or delegate these powers to the Commission or the Presidency of the Council and have them represent them. In matters of international climate and environmental policy, the co-decision procedure applies, so that the European Parliament has a full right of co-decision, is involved in the procedures and must give its assent. Nevertheless, the EU is a party to most multilateral environmental agreements at the international level. It thus has the same formal rights in the negotiation process as the participating nation-states. The latter aspect is primarily explained by the fact that most international environmental negotiations take place in the bodies entitled for this purpose, in which the EU is almost always a contracting party (Delreux 2014). This also applies to the status of the EU as a member of the Framework Convention on Climate Change. The latter forms the contractual and institutional framework, and the COP serves as the supreme decision-making body for multilateral

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agreements in the field of international climate protection (Delreux 2014; Groen and Niemann 2013). As a full member of the Framework Convention on Climate Change, the EU has rights comparable to those of nation-states. The EU is, like the 28 member states, listed as Annex I (classified as industrialized countries and 14 economies in transition) and Annex II (24 members of the Organization for Economic Cooperation and Development (OECD) member. The Framework Convention on Climate Change is a so-called “mixed agreement” that is signed and ratified by both the EU and the 28 member states. The EU signed the Framework Convention on Climate Change on June 13, 1992, and ratified it on December 21, 1993. It is listed in the Framework Convention on Climate Change as a Regional Economic Integration Organization (REIO). Since both the EU and the member states have full membership status, both parties exercise a shared right in the bodies of the Framework Convention on Climate Change, such as the supreme decision-making body of the COP. When decisions concern both the EU and the member states, both have to decide on a jointly agreed basis. No rival casting of votes is possible. If negotiations exclusively concern the competences of the EU, the EU represents all member states and the number of their votes. This shared responsibility is visible at the annual COP, at which the parties negotiate on the design and further development of the Framework Convention on Climate Change. All 28 member states of the EU are involved in the negotiations as independent actors with their own negotiating delegations. For the EU, the Council Presidency plays a central role in the meetings of the COP, as it coordinates the EU’s internal decision-making process, guides the coordination with the member states and represents the coordinated negotiating position in the various negotiating fora. Until 2004, this meant that each Council Presidency appointed a team of 20 members to act as a negotiating delegation until it was handed over to the next Council Presidency (Afionis 2016). This made it difficult to establish a coherent, strategic and long-term negotiating position and posed significant challenges, particularly for the smaller member states. In 2004, therefore, an informal procedural system was introduced at the request of the Irish Council Presidency, which provides for differentiation into issue leaders and lead negotiators (Niemann and Bretherton 2013). The high-level negotiators selected by the member states and the Commission relieve the Presidency of the Council by participating in the various negotiating groups during the conference. Supported by the leaders specialized in the various topics, the negotiators develop a common negotiating position for the EU. These changes have contributed significantly to a continuous, differentiated, and well-founded negotiating position, thus enabling the Council Presidency to establish a long-term strategy (Afionis 2016). In the critical bilateral negotiations and the numerous meetings with the other parties during the COPs, the so-called Troika acts for the EU. The Troika traditionally consists of the current and forthcoming Council Presidencies and the Commission. This tripartisan constellation shows the tension inherent in the EU between unitary (Commission) and national (Presidency) demands. The six-month rotation of

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the Council Presidency means that only the Commission participates continuously in the negotiations.

4.4.1

A Brief Genesis of the Climate Regime

Before we discuss European actorness in the climate regime in more detail, a cursory overview of the developments and the current state of the international climate negotiations will be presented. The 1992 Framework Convention on Climate Change has created an institutional framework for further negotiations that still exists today (see Fig. 4.3). Article 2 of the 1992 Convention sets out the objective of stabilizing greenhouse gas emissions into the atmosphere at a level that prevents dangerous anthropogenic interference with the climate and mitigates its consequences (UNFCCC 1992). The concrete implications arising from the aforementioned Article 2 form a core point of contention in intergovernmental climate negotiations. A major driving force behind international efforts to protect the climate is science. Being for a long time funded by the United States, researchers early suggested an anthropogenic influence on the climate (Conrad 2009). In 1988 the IPCC was institutionalized as an intergovernmental scientific advisory body which to this day informs political decision-makers at regular intervals on a consensual basis about the causes and consequences of global warming. In 2017, the compilation of what is now the sixth progress report on the state of scientific, technical, and socioeconomic research on climate change began which is to be completed by 2022. The IPCC’s consensual knowledge played a particularly important role in the development of the Framework Convention on Climate Change (Otto 2015). Due to the high uncertainty about the existence and possible consequences of climate

Fig. 4.3 The UN Convention on Climate Change (UNFCC). Source: http://www.accc.gv.at/ unfccc.htm. Accessed: February 25, 2021

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change at the time, the political decision makers in the progressive European member states, in particular, tend to refer to the results of the IPCC in order to generate political pressure on slowing states such as the United States in the climate negotiations. In addition to Article 2, the Framework Convention on Climate Change codifies other key principles and differentiation that have structured the subsequent negotiation process and also shaped major lines of conflict between the various states (Sands 1992). A categorization of different groups of countries can be found in the Annexes to the Framework Convention on Climate Change. There are groupings of states for which different obligations and rights arise: • Annex I: OECD countries and 14 countries in economic transition from Eastern Europe. • Annex-II: Only the 24 OECD countries. • Non-Annex I: All other countries, mainly developing countries. Fundamental rights and obligations arising from the principle of “common but differentiated responsibilities and respective capabilities” (CBDR), as set out in Article 3. With the CBDR, global climate protection is seen as a joint effort of all signatory states; however, they should participate in climate protection measures in accordance with their contributions to polluter costs and the (technical and economic) capabilities available to them. The Framework Convention on Climate Change makes a central distinction between industrialized and developing countries. When the Convention was established, the industrialized countries (Annex I) formed the main threat to global warming due to their historically caused greenhouse gas emissions (polluter pays principle). The industrialized states, including the EU and its member states, also recognized individual historical guilt for global warming with the CBDR principle and gave themselves more far-reaching, albeit not binding, commitments (Biermann 1997). The developing countries (non-Annex I countries) did not undergo any commitments but received financial support for climate policy measures from the industrialized countries. For the developing countries, the maintenance of the CBDR principle in the course of the negotiations was regarded as a sine qua non condition and could only be undermined by the Paris Agreement. The United States has repeatedly criticized the distinction between industrialized and developing countries during the climate negotiations (Selin and Vandeveer 2011). They demanded that the countries now referred to as emerging economies such as China, Brazil, and India, participate in climate protection measures with their own emission reductions. In 2001 President Bush justified the withdrawal of the United States from the Kyoto Protocol mainly with the lacking participation of the developing countries (Bush 2001). The Byrd-Hagel resolution passed by the United States Senate demanded to extend binding commitments to developing countries as well (Lisowski 2002). This resolution stated that the United States must not suffer any economic disadvantages as a result of a climate protection agreement. As a consequence of this resolution, the

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United States could only comply with the Paris Agreement in 2015 utilizing an executive order, thus circumventing Senate approval. The EU and its member states, on the other hand, supported the interests of the developing countries and the maintenance of the CBDR principle from the onset of the negotiations. In association with the Alliance of Small Island States (AOSIS), a group of small island states whose existence is massively affected by climate change, both called for ambitious targets (Otto 2017). Especially in the 1990s and at the beginning of the 2000s, the EU strengthened this position by pursuing ambitious goals and providing financial commitments (Bäckstrand and Elgström 2013; Lindenthal 2009). Although the EU signed both climate agreements from Rio and Kyoto, it was rejected by other governments, particularly by the United States, as an equal negotiation partner due to its position as a regional organization (Otto 2015). The leading role of the EU in the area of climate protection culminated with the Kyoto Protocol at COP 3 in 1997, which was also the first legally binding agreement on climate protection (UNFCCC 1997b). The negotiation process began in 1995 with the first meeting of the COP in Berlin under the presidency of the then Environment Minister Angela Merkel (Quennet-Thielen 1996). The COP is the highest body of a Convention and, in the case of the Framework Convention on Climate Change, the negotiating delegations of all signatory states meet annually for two weeks to review and promote the measures and goals agreed so far (Sands 1992). Decisions in the COP are based exclusively on the principle of unanimity, which in most cases leads to an agreement on the lowest common denominator. Individual parties such as the OPEC (Organization of the Petroleum Exporting Countries) and the United States have repeatedly blocked or slowed down the negotiation process (Otto 2016). That the unanimity principle could be a hurdle to an agreement became evident during the Kyoto process. To achieve consensus among all 197 contracting parties, many passages in the Treaty text had to be formulated as openly and vaguely as possible (UNFCCC 1997b). A large number of legal publications dealt with the text of the Treaty and interpreted it (Grubb et al. 1999; Holtwisch 2006; Oberthür and Ott 2000). The decisive negotiating parties in Kyoto were the EU and the United States (Oberthür and Ott 2000). Under Clinton’s presidency and mainly supported by Vice President and later Nobel Prize winner Al Gore, the United States had moved away from the blocking stance of the previous Bush administration. During the negotiations on the Framework Convention on Climate Change, Bush had already expressed his skepticism about the scientific soundness of global warming and the need for action derived from it (Paterson 1996). The Clinton administration, on the other hand, ostentatiously acknowledged the IPCC’s second progress report. With the support of Al Gore, the head of the United States negotiating delegation, Timothy Wirth, thus positioned himself at COP 2 in Geneva in 1996 against the dominant US interest groups. These included, in particular, the Global Climate Coalition, an interest group primarily of the automotive and petroleum industries which doubted the credibility of the IPCC (Ott 1997). Due to this changing position of the United States, Russia, and the OPEC were isolated in their efforts to stall the negotiations.

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Article 3 of the Kyoto Protocol stipulates that the industrialized countries undertake efforts to reduce their greenhouse gas emissions between 2008 and 2012 by a total of 5.2% compared to 1990 levels (UNFCCC 1997a). The EU declared to take on the largest share of reductions with 8%, followed by the United States with 7% and Japan with 6%. Since the accession of Sweden, Austria, and Finland, the EU was represented by 15 states at the Kyoto negotiations. The share of the EU in the total emissions of the industrialized countries was 24.3% in 1990, the second-highest after the United States (Oberthür and Ott 2000). The Protocol did not contain any obligations for developing countries. In the negotiations, the EU asserted that industrialized countries should commit to binding emission reductions. Based on the agreement on internal burden-sharing (EU bubble), the EU distributed the reduction commitments among EU member states internally (Schröder 2001). Germany (
21%), Denmark (
21%), and Luxembourg (
28%) assumed the most substantial reduction commitments, while countries such as Greece (+25%) and Portugal (+28%) were even allowed to increase their greenhouse gas emissions. Although sanctions for noncompliance with reduction obligations were included in the Protocol, they had no direct effect in practice, as Canada’s withdrawal from the 2011 Protocol has demonstrated (Holtwisch 2006; Otto 2017). In addition to binding reduction targets, the Kyoto Protocol created a new institutional architecture that includes scientific and technical advisory bodies as well as various policy instruments such as emissions trading, JI (Joint Implementations), and the CDM (Clean Development Mechanism) to achieve emissions reductions (Oberthür and Ott 2000; Yamin and Depledge 2004). In the Kyoto negotiations, the EU had rejected these flexible measures, mainly propagated by the United States. However, the CDM, in particular, has subsequently proven to be an effective economic instrument allowing industrialized countries to compensate own reduction commitments by measures implemented jointly with non-Annex I countries. The balance of emissions trading, on the other hand, is ambivalent: through a cap and trade system, it allows certificates to be traded between countries and regions, thus promoting economic incentives for reduction measures. In 2003, an EU-wide emissions trading scheme was adopted by the European Parliament and the Council of the EU, which came into force on January 01, 2005. While part of the certificates will be auctioned, the remaining shares will be issued centrally by the Commission since the start of the third trading phase (2013–2020). However, the economic efficiency and political effectiveness of EU emissions trading are controversial, mostly because of the decline in the price of certificates (Bel and Joseph 2018; Zhang et al. 2018). The adoption of the Kyoto Protocol has marked the beginning of a phase in which attempts were made to answer its open questions and thus enable ratification of the Protocol by the nation-states (Otto 2017). To enter into force, 55 countries responsible for at least 55% of global greenhouse gas emissions had to ratify the agreement. This ratification phase has ended with the entry into force of the Kyoto Protocol through Russia’s ratification on February 16, 2005. A low point during the ratification phase was the United States’ withdrawal from the Protocol in 2001. This was precedented by a conflict between the EU and the

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United States at COP 6 in The Hague over noncompliance, flexibility mechanisms, and the inclusion of natural sinks such as forests (Grubb and Yamin 2001). Bilateral efforts to find a compromise between the United States and the United Kingdom failed. The host of the conference, Dutch Environment Secretary Jan Pronk, presented a compromise paper without consulting the other negotiators, which was promptly rejected by the EU. The EU was unable to internally agree on a common position, thereby creating confusion in its relation with the United States. Ultimately, the negotiations were terminated prematurely while the inclusion of sinks remained an unresolved issue (Lindenthal 2009). Canada’s mediation attempt in Ottawa was unsuccessful as well. The EU saw the failure of the negotiations and the withdrawal of the United States as an opportunity to underline its own claim to leadership and to enter the Protocol into force as soon as possible. Although the US delegation had announced that it would follow the course of the negotiations as a participating observer after its withdrawal, they repeatedly attempted to influence the negotiating positions of other states (Holtrup 2001). The ratification of the Kyoto Protocol was only possible through massive concessions by the EU to other key states such as Japan, Canada, and Russia. The EU experienced one of its darkest hours in climate diplomacy at COP 15 in Copenhagen in 2009 (Groen and Niemann 2013; Bodansky 2010). These negotiations were crucial to reach a follow-up agreement to the Kyoto Protocol, expiring in 2012. Beginning with COP 10 in Bonn, the EU supported by AOSIS had pushed the search for a post-Kyoto agreement (Stone 2006). In order to include the United States, Australia, and other emerging states in these efforts, a nonbinding dialogue forum in the form of an AWG (Ad-hoc Working Group on the further commitment for Annex I parties) was initiated within the Framework Convention on Climate Change. The participation of these countries seemed all the more necessary as China had overtaken the United States in absolute greenhouse gas emissions shortly before COP 13 in Bali in 2007 (Otto 2017). The EU was able to exert negotiating pressure with its decision to reduce its greenhouse gas emissions by 20% by 2020 and, if other states would adopt similar targets, by as much as 30%. Finally, in Bali, the United States was formally reintegrated into the process of follow-up negotiations (Knothe 2010). Institutionally, the negotiation process was divided into two parts. The Ad Hoc Working Group on Further Commitments for Annex I parties under the Kyoto Protocol (AWG-KP) hosted negotiations of a successor agreement to the Protocol and the extension of the commitment period. A parallel round of negotiations on a new post-2012 agreement took place at the Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA). This Bali Roadmap (Bali Action Plan or Bali Roadmap) should prepare consensus on a final agreement at COP 15 in Copenhagen (Schroeder 2010). The general expectation that the parties to the Convention on Climate Change and the Kyoto Protocol would conclude a post-Kyoto agreement in Copenhagen created enormous pressure for action (Groen and Niemann 2013). The importance and the expectations were also manifested in the 40,000 participants who brought the venue to the brink of its resilience. Observers’ assessments of the conference results are

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ambivalent. While some people describe Copenhagen as a collapse, others interpret it as a constructive interim step toward a new climate agreement (Bodansky 2010; Ottinger 2010). However, most observers agree on the EU’s moderate performance in Copenhagen (Qi 2011; Oberthür 2011a). The course of the negotiations clearly revealed the EU’s loss of importance in the climate regime and, at the same time, exhibited the incremental role of the emerging economies in the form of the BASIC (Vogler 2016). It became clear early on in the negotiations that it would not be possible to reach an agreement between the contracting parties on a follow-up agreement. Twenty-five countries entered into in-depth negotiations at the level of heads of government, including the most significant greenhouse gas emitters. Only a core group consisting of United States President Obama, China’s Premier Wen Jiabao, India’s President Singh, and Brazil’s President Lula succeeded in negotiating a final document that has gone down in COP history as the Copenhagen Accord (Bodansky 2010). The EU, on the other hand, had literally stood in front of closed doors in these negotiations. The Copenhagen Accord sets the recognition of the 2  C target and the need for “deep cuts” in global greenhouse gas emissions as key decisions (UNFCCC 2009). A ceiling on greenhouse gas emissions (peak) should be reached as soon as possible, earlier for industrialized countries than for developing countries. Due to an objection by Bolivia, Sudan, and Tuvalu, among others, the Copenhagen agreement was only “acknowledged” by the participants, but not transferred into law (Rajamani 2013). The pledge and review were a core element of the agreement. All countries publish emission targets (pledge), which are reviewed to determine whether the 2  C target can be achieved (review); this includes both industrialized and developing countries (UNFCCC 2009). Every two years, all contracting states must report on their measures undertaken according to the MRV (monitoring, reporting, and verification) principle. In Copenhagen, commitments were also made to finance mitigation and adaptation measures, underscoring the longer-term goal of making 100 billion US dollars available annually in the form of a Green Climate Fund from 2020. According to the current state of the OECD, however, the annual public funding provided in 2020 amounts to only 67 billion US dollars and would, therefore, have to be increased (Dröge and Rattani 2018). In addition to mitigation, adaptation has become increasingly important in the course of climate negotiations, above all due to the demands of the climate justice movement. The loss and damage program adopted at the following COP 16 in Cancun was intended to attempt to reduce the effects of climate change through adaptation (Oberthür 2011a). This program supports developing countries that are particularly affected by the effects of climate change. The Paris Accord of 2015 is the provisional endpoint of the efforts to reach an international follow-up agreement to the Kyoto Protocol. Compared with the Copenhagen Agreement, the Accord is assessed positively not only by the politicians themselves but also by press representatives and NGOs (Groth et al. 2016). According to many observers, the Paris Agreement from 2015 signified a milestone in efforts to limit global warming (Arens et al. 2015). Like a “phoenix risen from the ashes,” twenty-five years after the beginning of climate diplomacy, the

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Paris Agreement created a treaty under international law encompassing all 197 contracting parties. At the same time, the agreement is seen to reflect the necessity and the possibility of environmental multilateralism (Obergassel et al. 2016). By the start of COP 21 in Paris, 160 of 187 states had already submitted their contributions to the UN Climate Secretariat in the form of legally nonbinding INDCs (Intended Nationally Determined Contributions), which must contain quantifiable targets with a reference year and a concrete time frame for implementation (INFCCC 2018). Bilateral talks in November 2014 between United States President Barack Obama and China’s President Xi Jinping had created a constructive atmosphere for the negotiations in Paris (Clémençon 2016). As a result of the bilateral talks, the United States aims to reduce its greenhouse gas emissions from 26 to 28% by 2025 compared to 2005. China aims to limit CO2 emissions by 2030 or earlier and to increase the share of non-fossil fuels in its energy mix to 20% by 2030. By abandoning the principle of differentiation in the text of the Paris Convention, i.e., the distinction between industrialized and developing countries, it is recognized that adequate climate protection can only be achieved by including all contracting states (UNFCCC 2016). The ambition to reach the peak of greenhouse gas emissions by 2050 is reviewed in a five-year cycle. It remains unclear whether the 100 billion dollars annually for climate financing form a final frame of reference and who acts as a donor. In order to enable the United States to participate, the question of climate financing was shifted to the more nonbinding second part of the summit decision. Similar to the previous agreements, the Paris Accord merely provides a rough framework to be further elaborated in follow-up negotiations.

4.4.2

European Actorness in the Climate Regime: Three Case Studies

In this section, European actorness and its effectiveness will be examined and evaluated based on three case studies. We will analyze the extent to which the EU has succeeded in behaving as an actor in the climate regime and achieving its negotiating goals. It can be assumed that actorness is a prerequisite for effectiveness. The relation between actorness and effectiveness will subsequently be examined by focusing on the negotiations around the three agreements already mentioned in the previous sections—the Kyoto Protocol (1997), the Copenhagen Agreement (2009), and the Paris Accord (2015). While the EU was mostly able to achieve its negotiating goals during the negotiations for the Kyoto Protocol in 1997 and the Paris Agreement in 2015, it failed to do so during the Copenhagen Accord in 2009. Here, the EU was largely marginalized. Various theoretical approaches are used to explain this seemingly different actorness and effectiveness of the European Union. Moravcsik’s liberal intergovernmentalism to analyze the emergence of the Kyoto Protocol in 1997 takes a liberal view of international relations and postulates the importance of state-society relations, which influence state behavior in world politics

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(Schimmelfennig and Moravcsik 2009). States are seen to act as rational actors that are primarily influenced by domestic economic interests. The limited actorness and low effectiveness of the EU in Copenhagen 2009 are explained based on Jupille and Caporaso (1998) and Groen and Niemann (2013). The four actorness criteria include authority, autonomy, recognition, and coherence. Effectiveness is understood as the ability to achieve the desired goals in the negotiations. The Paris Agreement 2015 is seen as a success not only by the international community but also by the EU, which attributes it to its negotiating tactics. Leadership approaches can be used to explain the EU’s regained effectiveness in the climate regime. These can be assigned to the actor-centered version of constructivism and are based on the premise that a leader uses crises in his environment to spread his interests, convictions, and ideas (Lindenthal 2009, p. 86). Leadership approaches are based on a normative approach to environmental problems and examine the political and societal framework conditions, which would allow states to contribute as leaders to the promotion of international environmental agreements. Following Lindenthal, leadership refers to an equal relationship between a guiding actor and voluntary followers. Allegiance is always done without coercion or threats of sanctions. Leaders have to take into account both their own goals and the needs of the following actors. The different forms of leadership that an actor can exercise will be described in subsequent sections and applied to the Paris Agreement. The following sections present the effect of the independent (explanatory) variables in terms of actorness for the three cases. Since the analytical approaches can only be elaborated cursorily here, we refer to a more detailed analysis that can be found in the cited references.

4.4.2.1 The Kyoto Protocol 1997 The negotiation of the Kyoto Protocol at COP 3 in Kyoto in 1997 has been considered as one of the EU’s greatest moments in international climate policy (Grubb et al. 1999; Oberthür and Ott 2000). The Protocol comprised legally binding reduction commitments on greenhouse gas emissions for all industrialized countries. It was adopted without the participation of the developing countries and against the resistance of the United States and demonstrated the EU’s ability to act effectively and as a unified actor in the negotiations. How can this substantial degree of European actorness be explained? The following discussion draws on a (neo-)liberal approach. (Neo-)liberal theories differ from neorealistic approaches, which consider states as central and uniform actors in the international system (Moravcsik 2009). (Neo-)liberal approaches postulate reciprocity between the systemic and subsystemic levels and, accordingly, assume a nexus between the social constitution of a state and its behavior in foreign relations. External actorness will thus be determined by the most assertive societal actors within the state. Andrew Moravcsik’s liberal intergovernmentalism is a lean version of a liberal approach. As a central explanatory mechanism, Moravcsik postulates that the foreign policy of the EU is primarily shaped by the interests of the most influential

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member states which represent the preferences of the dominant domestic economic interests. As a result, foreign policy decisions are the result of a series of rational deliberations by political decision makers with regard to domestic economic interests. Moravcsik (1998) presents a framework of international cooperation, according to which rational actors strive to implement their preferences. This framework is divided into three phases: 1. National preferences reflecting domestic economic interests are formed with regard to the topic of negotiation. 2. Intergovernmental agreements on the subject have to be negotiated. 3. The result of these aggregated and balanced interests determines the negotiating position of the EU in international fora and institutions. According to liberal intergovernmentalism, the EU forms an intergovernmental negotiation arena in which the member states strive to assert their domestic interests and thus their attainable profits. Applied to the Kyoto process, the European negotiating position would represent the preferences of the most influential and assertive member states, which in turn reflect the respective national economic interests. In the following section, this hypothesis will be further explored. The negotiation of a legally binding climate agreement began with COP 1 in Berlin in 1995 and was to be completed by COP 3 in Kyoto in 1997 (Oberthür and Ott 2000). At the beginning of the intergovernmental climate negotiations, two groups of states had emerged, which can be distinguished in leaders or laggards (Andresen and Agrawala 2002). In the run-up to the Kyoto negotiations, the United States, OPEC, and Russia joined as an umbrella group acting primarily as laggards. The AOSIS and the EU, in particular the member states Germany, the Netherlands, and Denmark, acted as leaders or pioneers. The United States, responsible for 36% and the EU, responsible for 24% of global greenhouse gas emissions in 1990, were the main contributors to global warming. Within the EU, Germany dominated with 28.5% and the United Kingdom with 17.9% (Otto 2015; Sardemann 1999). In the 1990s, Germany also was the dominant economic force in the EU. At the same time, Germany formed the so-called “Green Troika” with the Netherlands and Denmark. It pushed both within the EU and at the international level for binding climate agreements (Andresen and Agrawala 2002, p. 46). Following liberal intergovernmentalism, three stages of international cooperation can be distinguished: 1. Preferences for an ambitious legally binding agreement primarily represent the interests of the German industry seeking to avoid international competitive disadvantages. 2. Germany was able to assert itself with its preferences as the economically strongest member state. 3. In the Kyoto negotiations, the EU was committed to an ambitious and legally binding agreement.

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Within the German government, the environmental policy had become firmly institutionalized since the 1980s when a Federal Ministry for the Environment was established (Weidner 2008). At the end of the 1980s, Germany was the first country to commit itself to reduce its greenhouse gas emissions. This was primarily meant to maintain the competitiveness of the German industry by preventing possible regulatory measures resulting from international agreements (Beck 2009). As a result of German reunification, greenhouse gas emissions had fallen sharply since 1990 due to the deindustrialization of East Germany and the closure of old energy-intensive factories. These side benefits of the German reunification for the German climate policy are often referred to as the “Falling Wall Bonus.” Thus, even before Kyoto, Germany had pursued ambitious reduction targets which went far beyond the targets discussed in the negotiations. Since these were voluntary agreements, they enjoyed great support from the German Industry Association (Andresen and Agrawala 2002). As compensation, the German government had promised not to take any further regulatory measures. To avoid competitive disadvantages, Germany sought to impose the preferences of its industry for ambitious reduction targets on all member states during the Kyoto negotiations. As a net energy importer, Germany was interested in reducing its dependence on oil and gas imports through shifting to alternative energies (Groenleer and van Schaik 2007). In December 1997, the German government succeeded in establishing a joint European negotiating position for Kyoto, which provided for a 15% reduction of three greenhouse gases by 2010 compared with the base year 1990. In addition, an interim target was proposed in the form of a 7.5% reduction by 2005, provided that the other industrialized countries committed themselves to similar targets. The European proposals were thus the most ambitious of all industrialized countries. During the Kyoto process, the EU aimed to reach a negotiated solution between the signatory states and, above all, the United States. A purely unilateral EU strategy would have risked competitive disadvantages, especially for the energy-intensive industries, which at least partly competed on the global market (Groenleer and van Schaik 2007). Before the negotiations, the cost of saving one ton of CO2 had been estimated by economists to be almost ten times higher for the United States than for the EU (Tilly 2011). During the Kyoto negotiations, the current EU Troika was critically monitored by the member states, while its negotiating position was largely supported. At an early stage in the negotiations, the EU had to refrain from its goal of imposing binding obligations on all participants. Nevertheless, the EU succeeded in getting 38 industrialized countries to commit themselves to a collective reduction of their greenhouse gases of 5.2% in the period 2008–2012 to the base year 1990 (UNFCCC 1997a). The commitments of these Annex B countries included a wide range of 8% for the EU and 7% for the United States while Canada, Japan, and Poland only had to stabilize their greenhouse gas emissions. A major reason for the EU’s comparatively high targets was the so-called “bubble”, i.e., an internal burden-sharing of reduction commitments, which was implemented against the resistance of the United States and Canada. Germany, together with the other members of the aforementioned “Green Troika” was

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Table 4.1 Reduction targets of EU member states Burden-sharing agreement Germany Austria Denmark Finland France Greece Belgium Luxembourg Ireland Italy Netherlands Portugal Spain Sweden Great Britain EU-15

Targets for the commitment period 2008–2012 in % 21
13 21 0 0 + 25 7.5 28 6.5 6.5 6 + 27 + 15 +4 12.5 8.

Source: https://ec.europa.eu/clima/policies/strategies/progress/kyoto_1_en. Accessed: February 25, 2020

prepared to accept the highest reduction commitments of 21% in this Burden Sharing Agreement (Sardemann 1999). The base year of 1990 determined in the negotiations had an advantageous effect on the reduction commitments due to the “fall of the Berlin Wall bonus” mentioned before (Weidner 2008). By taking into account the heterogeneous economic starting conditions of the member states, Germany succeeded in persuading the Eastern European states to approve the Protocol (Marklund and Samakovlis 2007) (Table 4.1). The flexible mechanisms contained in the Kyoto Protocol, such as emissions trading, Joint Implementation (JI), and the Clean Development Mechanism (CDM), provided an economic incentive to achieve reduction targets. The CDM enables industrialized countries to offset climate protection measures implemented in non-Annex I countries against their reduction commitments. The JI provides for joint measures by the Annex B states to enable the participating countries to acquire additional emission rights for their domestic industry. Emissions trading functions according to a cap and trade procedure for the trading of emission certificates and thus shall allow reducing pollution at the lowest possible economic cost. In the CDM and JI in particular, the German government advocated the priority treatment of measures to promote energy efficiency and renewable energies. This was meant to provide market opportunities for the German export industry, which dominates in these areas (Harris 2007). In summary, from the perspective of liberal intergovernmentalism, Germany’s role provides an explanation for the high level of European actorness in the Kyoto negotiations. Germany’s influence can be regarded as the main precondition for the

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agreement within the EU. While in Germany, environmental issues traditionally enjoy high priority in politics, protecting industrial competitiveness is equally important (Beuermann and Jäger 1996; Hatch 2007). In the early 1990s, Germany had adopted ambitious national reduction targets that went far beyond the targets discussed in the Kyoto negotiations. In order to avoid competitive disadvantages, the German government strived for a climate agreement with legally binding targets that would include all industrialized countries. Germany, as the economically strongest and politically very influential actor, used the EU as an arena to implement national preferences together with other pioneers such as Denmark and the Netherlands. The base year of 1990 and the promotion of energy technologies under the flexible measures was particularly crucial for German industry and thus for the German government. By taking these preferences into account, the EU was mostly able to act as a mediator and moderator between member states in the Kyoto negotiations. In the Burden Sharing Agreement negotiated by the EU, Germany was prepared to contribute well over half to achieving the EU reduction target.

4.4.2.2 The Copenhagen Accord 2009 While the Kyoto negotiations are regarded as one of the EU’s “greatest moments,” the COP 15 in Copenhagen is widely characterized as a failure and marked a new low-point in the history of EU climate diplomacy (Bodansky 2010). After COP 3 in Kyoto, COP 15 in Copenhagen was the climate conference with the highest media attention, the importance of which was underlined by the presence of several Heads of State and Governments (Otto 2017). The main objective of the EU negotiations was to decide on a successor agreement to the Kyoto Protocol which was to expire in 2012. This follow-up agreement should contain concrete reduction commitments for all major greenhouse gas emitters and ensure climate financing. Early in the negotiations, however, it became clear that the EU would not be able to realize these high ambitions (Oberthür and Groen 2015). The negotiations in Copenhagen symbolize the declining role of the EU and the increasing importance of emerging economies such as India and China (Bäckstrand and Elgström 2013). During the second week of negotiations, this became apparent in the isolation of the EU from other influential actors such as the United States and China. In order to intensify discussions and facilitate agreement, a group of 25 states was formed at the level of Heads of Government which included the largest emitters. A reduction in the number of participants to an influential core group around US President Obama, China’s Premier Wen Jiabao, India’s President Singh, and Brazil’s President Lula led to an agreement on a document that went down in COP history as the Copenhagen Accord. This actor constellation reflects, on the one hand, the growing importance of the BASIC states; on the other hand, it signified the moderate performance of the EU (Bodansky 2010). To what extent did the EU manage to act as a unified actor in Copenhagen? Vice versa, does the lack of actorness explain the EU’s lack of performance? In classifying the results of the negotiations, José Manuel Barroso, then President of the Commission, said that the EU’s inability to internal coordination and to speak with one voice was an essential factor for the ineffectiveness in Copenhagen:

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Copenhagen showed that, while others did not match our ambition, we did not help ourselves by not speaking with one voice (Barroso 2010, quoted in Delreux 2014, p. 1017).

The actorness of the EU in Copenhagen will be examined below, drawing on the criteria by Jupille and Caporaso (1998). The authors understand actorness basically as the ability of an actor to act. The four key indicators of actorness are recognition, authority, autonomy, and coherence. However, the first three indicators mentioned preceding the last one in terms of coherence (Delreux 2014). For Jupille and Caporaso (1998), actorness cannot be equated with the influence and assertiveness of an actor. Thus, the criterion of effectiveness will be analyzed based on Groen and Niemann (2013). While this study can only present a cursory overview of the EU’s role in the Copenhagen negotiations, the articles by Niemann, Groen, Bretherton, and Oberthür offer a comprehensive and more detailed description of European actorness in Copenhagen (Groen and Niemann 2013; Niemann and Bretherton 2013; Oberthür 2011a). Recognition is defined as the acceptance of the EU as an actor by other actors in the international system, essentially states. We might consider this indicator as fulfilled in the climate regime in general, but also for the COP 15 in Copenhagen. In multilateral environmental negotiations, the recognition of the EU by other actors is given and can even be classified as high (Delreux 2014; Niemann and Bretherton 2013). Nevertheless, it used to be difficult for the EU to be recognized as an equal partner during the negotiations of the various multilateral environmental agreements in the 1970s and 1980s (Sbragia and Damro 1999). In the subsequent negotiations on the Framework Convention on Climate Change in Rio in 1992, some nation-states also rejected the EU as an equal participant. Nevertheless, the EU managed to be listed as a full member of the Framework Convention on Climate Change and thus to participate with all rights in the following COP negotiations. It thus acted de jure and de facto as a member of the Framework Convention on Climate Change and enjoyed a high degree of recognition during COP 15 in Copenhagen. Authority is conceived as the legal competence of an actor to act at the international level. The EU has systematically expanded these competences to negotiate multilateral environmental agreements. Since the EEA, this competence has been explicitly mentioned in the treaties. Internal legislative capacity in the field of environmental and climate policy has also increased incrementally, thus extending the EU’s authority in external relations (Delreux 2014). Nevertheless, as already mentioned, “mixed agreements” entail a shared competence for international climate policy between the EU and the member states. In this respect, authority is also given for the COP 15 negotiations of the EU. Autonomy describes the EU’s ability to act independently from its member states in the negotiation process and to achieve the goals defined in agreement with the member states (Delreux 2014). Before COP 15 in Copenhagen, the Swedish Council Presidency and the Commission succeeded in exerting significant influence on the formulation of a common EU negotiating position (Groen and Niemann 2013). The Commission pushed through a proposal, based on a decision of the Environment Council in 2007, to replace the expiring Kyoto Protocol with a new agreement for

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COP 15. The Swedish Council Presidency had made the decision that to accomplish an agreement in Copenhagen is one of its two priorities. It had, therefore, advocated an ambitious negotiating position for the EU in the Council meetings of Environment Ministers and also held bilateral meetings with various member states. However, since the negotiating position remained vague in many respects, this primarily impaired the EU’s ability to act independently of the restrictions imposed by the member states (see also the section on coherence). This has also become particularly visible during the informal negotiations between 25 influential states during which the Troika was marginalized and largely ousted by France, Germany, and the United Kingdom. This also indicated the substantial degree of politicization of the negotiations (Groen and Niemann 2013). Coherence is understood as the ability of the EU to represent a common negotiating position with the member states, both internally and externally and especially in situations of heterogeneous preferences (Delreux 2014). Groen and Niemann (2013) differentiate this coherence into three subcategories: First, preference coherence as the extent of common shared preferences and objectives for COP 15 in Copenhagen. Second, procedural tactical coherence is understood as the EU’s ability to overcome divergent preferences and resolve inconsistencies. Third, output coherence is defined as the formulation of common policies and negotiating positions, regardless of procedural agreements and agreements by the different EU actors. Overall, the EU shows a low degree of preference coherence. Before COP 15, the EU was not in a position to define a hierarchy of preferences for the negotiations. Many of the member states were not prepared to put their interests aside in favor of a common European negotiating position. It is true that there was agreement on the common goal of once again assuming a leading role at COP 15 and achieving an ambitious agreement for the period after the expiry of the Kyoto Protocol in 2012. Nevertheless, the EU merely reaffirmed its previous target of reducing greenhouse gas emissions by 20% by 2020 compared with the base year 1990 and offered to increase this target to 30% (Oberthür and Groen 2015). The concrete reduction targets remained vaguely formulated in the run-up to the negotiations, mainly by the opposition of Poland and Italy, and thus had to be repeatedly coordinated with the member states during the course of the negotiations, which significantly weakened the EU’s negotiating position. There was also controversy over possible reduction commitments for the previously excluded Eastern European member states and financial support for developing countries in mitigation and adaptation measures. In particular, the financial crisis had led to a noticeable decline in the willingness of many member states to make substantial financial commitments (Otto 2017). The low level of procedural tactical coherence in Copenhagen was influenced primarily by the unanimity requirement. Thus, the EU’s negotiating position always represented the lowest common denominator (Groen and Niemann 2013; Otto 2016). Despite numerous meetings between the EU and the member states before and during COP 15, no uniform approach could be reached for most areas (Groen and Niemann 2013). The member states were reserved to deviate from the

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negotiating text. This impeded the ability of the EU to react quickly to changing circumstances in the negotiations. Thus, the EU has not been able to adapt its negotiating strategy to changes in the course of the negotiations. The dissonances mentioned above among the member states are also reflected in the output coherence, i.e., in the diverging assessments of the negotiation results achieved at COP 15 (Groen and Niemann 2013). While the Commission, France, the United Kingdom, and the Swedish Presidency considered the failure of a follow-up agreement to the Kyoto Protocol as disappointing, Italy and most Central and Eastern European member states expressed their fundamental satisfaction with the results achieved. Effectiveness as the fifth indicator relates to the negotiation results. Groen and Niemann (2013) consider effectiveness as the ability to achieve the desired goals in the negotiations. Groen and Niemann (2013) blame, especially the actor constellation in Copenhagen for the lacking effectiveness of the EU. The Copenhagen agreement reflects the increasing influence of the BASIC, which considered themselves as representatives of the developing countries acting against the interests of the industrialized countries (Otto 2017). At the same time, the reduction targets of the most influential actors, the United States and China, were much less ambitious than those of the EU. With an emissions reduction of 17% between 2005 and 2020, the United States targets were low and meant only a return to the level of 1990 (Oberthür and Groen 2015). United States President Obama was constrained by Congress as a strong national veto player in the form of the Senate and House of Representatives (Otto 2016). China announced that it would reduce its greenhouse gas emissions “per unit of the gross national product” by 40–45% until 2020 compared to the base year 2005 (Oberthür and Groen 2015). The EU has shown itself as incapable of adapting its original negotiation strategy to the new negotiating constellation (Groen and Niemann 2013). Due to this lack of actorness, the EU had to play an observer role when China and the United States came to a final agreement (Otto 2017). In summary, the EU displayed low-to-moderate actorness in Copenhagen. In particular, the low degree of coherence and the high degree of politicization inhibited a flexible adaptation of the EU’s negotiating strategy. Although the Commission and the Council Presidency had succeeded in developing a certain degree of autonomy in the run-up to the negotiations, this was not met by the national governments. The EU’s interests were severely curtailed, making it rigid and inflexible. Lacking actorness caused a lack of effectiveness as well. The EU was unable to achieve its goals vis-à-vis other influential states such as China and the United States and felt increasingly isolated in the negotiations.

4.4.2.3 The Paris Agreement 2015 Compared with Copenhagen, the Paris Agreement reached on December 12, 2015, at COP 21 signified a milestone in climate diplomacy (Otto 2017). The agreement, announced by the French Foreign Minister and Chairman of COP 21, Laurent Fabius and adopted by the 197 contracting parties, was met with exuberant cheering by the negotiating delegations. The core of the treaty is to keep global warming below

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2 degrees compared to the pre-industrial age and to make efforts to limit it to 1.5 degrees (UNFCCC 2016). The EU assessed the Paris Agreement in particular as its own success (Parker et al. 2017). The Commissioner for Climate Protection and Energy, Cañete, described the EU’s negotiation strategy before and during COP 21 as “decisive” (Parker et al. 2017). In the academic literature, the Paris Accord is attributed to the EU’s regained ability to lead before and during the negotiations (Otto 2017). This impression is confirmed when we compare the EU’s objectives with the negotiation results in order to determine effectiveness and performance (Oberthür and Groen 2018). The EU succeeded in four key areas. The treaty: 1. Is an internationally binding contract that includes all contracting parties, both developed and developing countries. 2. Contains fair, ambitious, and quantifiable commitments for all contracting parties. 3. Has review mechanisms at its disposal, based on which the contractual ambitions are increased at intervals of 5 years. The objectives, communicated in advance by the contracting parties were considered inappropriate to meet the limitation of global temperature of 2 degrees. 4. INCLUDES common rules for all parties, including transparency and accountability obligations. How can the European failure at the Copenhagen Accord in 2009 compared with the success reached at the Paris Accord in 2015 be explained by drawing on the concept of actorness? The role of the EU before and in Paris will be analyzed drawing on a leadership approach. According to Nye and Young, leadership refers to the ability of an actor to mobilize and lead other actors in order to enable collective negotiation solutions for complex problem constellations (Nye 2008; Young 1991). The concept of leadership must be distinguished from the neorealist concept of hegemony, according to Keohane (2005). The assertion of interests through a leading hegemon presupposes an asymmetrical power structure and the instrumentalization of material resources. In contrast, leadership is considered to be based on an equal relationship between a leader and voluntary followers (Lindenthal 2009). According to Young, four different forms of leadership can be distinguished (Young 1991), which in political science literature still form the central frame of reference for studies of political leadership in negotiation processes (Lindenthal 2009; Parker et al. 2015; de Águeda Corneloup and Mol 2014). Structural leadership is based on the ability of an actor to create incentives through actions or the use of power resources in order to change the behavior of other actors. It presupposes the use of material resources and the credibility of threats or benefits offered. Idea-based leadership refers to the ability of an actor to identify and shape a problem. The actor can influence the course of negotiations by setting an agenda.

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Idea-based leadership enables the actor to identify common political options for solving collective problems and to act as an honest broker. Directional leadership is characterized by an actor leading through exemplary behavior. The actor must credibly represent the role model function. He or she defines ambitious goals and measures and shows problem-solving strategies that can be used to address current challenges. Instrumental leadership refers to the ability of an actor to form coalitions and present innovative package deals in difficult negotiation constellations. Diplomatic skills and negotiating experience are essential in order to aggregate interests and launch consensus among the negotiating parties. The EU has apparently been learning from the failure of its negotiating strategy in Copenhagen. This learning effect was already evident at COP 17 in 2011 in Durban when the EU exercised idea-based leadership and succeeded in significantly influencing the course and content of the agenda for further negotiations for a post-2020 agreement (Parker et al. 2017). A central conflict in Durban was the dispute between the United States and the BASIC over whether binding reduction commitments in a new agreement should only cover industrialized countries or also developing countries (Otto 2017). In the course of the negotiations, the EU managed to overcome this deadlock and commit Brazil and other developing countries to a more progressive agreement against the resistance of China and India (Lederer 2014). With the decision on a Durban Agreement, an Ad Hoc Working Group on the Durban Platform for Enhanced Action (ADP) was established, which includes all major greenhouse gas emitters. Supported by the Least Developed Countries (LDCs), the EU was thus able to enforce a mandate for the immediate negotiation of a new legally binding followup agreement by 2015. In return for this negotiation success, the EU agreed at COP 18 in 2012 in Doha (Qatar) to a second commitment period for the expiring Kyoto Protocol, beginning with 2013 until the start of a follow-up agreement from 2020 (Otto 2017). Surveys of the participants at COP 18 by Parker et al. (2017) show that the successful setting of the agenda for agreement on the ADP after 2008 has once again given the EU a leading role in climate diplomacy. The instrumental leadership was primarily responsible for the success of the EU’s negotiation diplomacy at COP 21 in Paris (Parker et al. 2017). In the run-up to the Paris Conference in March 2015, the EU presented an ambitious reduction target which envisaged a 40% reduction by 2030 comparable to 1990, thus exceeding the targets of China and the United States (Oberthür 2016). In contrast to Copenhagen, the EU pursued a moderate agenda with regard to the further negotiation goals and thus showed itself to be flexible and able to follow the preferences of influential states such as the United States and China (Obergassel et al. 2016). After the failure of Copenhagen, a process toward raising the issue of climate protection began worldwide at the economic, social, and technological levels. In addition, lower prices for renewable energies created national and transnational pressure for action on the influential contracting parties. This provided an opportunity for the EU to include both in negotiated solutions (Oberthür 2016). Through its diplomatic skills and negotiating experience, the EU achieved the formation of a High Ambition

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Coalition (HAC) covering a large number of industrialized and developing countries. This HAC was initiated by Climate Commissioner Cañete and Norwegian Environment Minister Vidar Helgesen. Both played an active role in the Paris negotiations, supporting ambitious and long-term goals, a transparency system, rules for accountability, a five-year review process, and intended to secure climate financing (Parker et al. 2017). Cañete had already been engaged in diplomatic travelling in the run-up to the conference to solicit support and visited several countries, including Morocco and Brazil. At the same time, the EU provided financial support for the corresponding diplomatic initiatives of the Foreign Minister of the Marshall Islands, Tony de Brum. With the start of COP 21, the HAC had grown to 80 members and received an additional boost from the announcement of United States accession by Secretary of State John Kerry (Parker et al. 2017). This strengthened the EU and helped to overcome the reservations of China and India against certain issues of the HAC proposals, such as the transparency system and reporting rules. The French Foreign Minister and COP, President Fabius played a central role in the Paris negotiations (Obergassel et al. 2016). Before and during the negotiations, he acted as a mediator and “honest broker” rather independently of the member states and established a relationship of trust between the contracting parties in numerous meetings. By involving all contracting parties and providing transparency on the results, Fabius succeeded towards the end of the conference in presenting a final compromise proposal for a decision. In summary, the success of the EU’s negotiating diplomacy in Paris can be largely attributed to the fact that it acted as an independent actor and was thus able to exercise a leading role in the negotiations. Through instrumental leadership, the EU was able to form coalitions and use its diplomatic skills and negotiating experience to aggregate interests and bring negotiating parties together. An important factor here was the EU’s learning effect after Copenhagen and the resulting adjustment of the negotiating strategy. Through its ambitious reduction targets and travel diplomacy in the run-up to the negotiations, the EU established decisive foundations for goal-oriented and successful negotiations at an early stage. Through the formation of the HAC and its consistent expansion, not least to include the United States, a coalition of interests cross-cutting the traditional blocs of industrialized, developing and emerging countries could be formed. The COP Presidency under Fabius finally aggregated and bundled the divergent interests into a final negotiating package.

4.5

EU Climate Policy Between Energy and Trade Issues

So far, this analysis has concentrated primarily on the climate regime as the central arena for international climate negotiations. As has been demonstrated, the central decisions on legally binding multilateral agreements on climate protection are taken with the participation of the EU, on an equal footing with its member states and 196 other contracting parties. The climate regime is therefore essential for the EU’s external relations in this policy area.

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However, climate policy has increasingly substantial ramifications and spill-over effects on other policy areas. These mainly affect the EU’s external economic relations, as decisions between economic and ecological aspects have to be balanced there. Tensions between energy, trade, and climate policy are symptomatic in this regard.

4.5.1

Energy Policy

The nexus of climate and energy policy has steadily intensified over the last decades. In the EU’s external relations, this primarily affects initiatives to reduce the dependence on energy imports, primarily fossil fuels, through the promotion of renewable energies and energy efficiency. As illustrated in the Fig. 4.4, the EU’s dependence on energy imports is projected to increase significantly by 2030, with the EU relying mainly on politically unstable countries for higher imports. In addition, the relative weight of the EU on the world market for energy is decreasing compared with emerging economies such as China and India (Crastan 2016). To further reduce this external dependence, the EU seeks a proactive climate policy (Kuhn and Tröltzsch 2011). The Green Paper on “Sustainable, Competitive and Secure Energy Supply” presented by the Commission in March 2006 indicates a

Fig. 4.4 EU dependence on imports (2005–2030). Source: http://www.bpb.de/politik/wirtschaft/ energiepolitik/152502/gemeinsamen-energieaussenpolitik-der-eu (translated by author). Accessed: February 25, 2021

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new internal and external energy policy. An important external impulse that has spurred the development of a common energy policy was the gas dispute with Russia in 2006, during which Russia temporarily suspended its gas transports to Europe and Ukraine (Proedrou 2012). The EU had already initiated numerous informal energy dialogues with various producer and transit states, primarily with states at Europe’s external borders. However, these were intensified in the aftermath of the conflict. In addition to these dialogue fora, the EU has established a hierarchical governance approach in the form of an Energy Community since 2006. The main objective is to integrate third countries into the European internal energy market by extending its existing energy policy regulations and standards to them (Sielker et al. 2018). Its current members are the Western Balkan countries, Moldova, Ukraine, and Georgia. Armenia, Turkey, and Norway have observer status. In contrast to many other bilateral agreements, the Energy Community as an international organization has a differentiated institutional system. It consists of a Council of Ministers, a Permanent High-Level Group, a Regulatory Committee, a Secretariat, a Parliamentary Plenary, four fora for the electricity, oil and gas sectors, and a Social Forum (Buschle 2020). The Council of Ministers is the institutional decision-making body and is composed of two representatives of the European Commission and one representative of each of the other Contracting parties. All member states of the EU can participate in the meetings but without the right to vote. In 2007, an “integrated EU energy and climate policy” (Fischer 2017) was developed under the German EU Council Presidency. The Heads of State and Government in the European Council agreed to pursue an energy and climate policy geared to common future objectives. The integrative 20-20-20 concept reflected the priority to secure the energy supply through energy efficiency and the promotion of renewable energies. By 2020, in addition to an emission reduction target of 20%, energy consumption should also be reduced by 20% while the share of renewable energies in primary energy consumption should be increased to 20% as well (European Commission 2007). Since 2009, the EU has been aiming for an internal energy market and promoting links between the energy markets of the member states. With the Treaty of Lisbon, the EU has a primary legal role in shaping energy and climate policy (Fischer 2009). Energy issues thus formally fall within the area of shared competence between the EU and the member states. This duality also creates a tension between intergovernmental coordination in the European Council and the powers of the Commission in the internal market. So far, the established cooperative and coordinating structures have not significantly impeded the agenda-setting in energy policy (Thaler 2016). Another vital impetus on energy issues came from the Commission, led by JeanClaude Juncker in 2014. It establishes the concept of an Energy Union in an effort to simplify and deepen energy policy in the EU (Siddi 2016). By linking energy, sustainability, and climate protection, the Energy Union allows the Commission to partially overcome the sovereignty over the national energy mix guaranteed to the member states by the treaty. The Energy Union can thus be seen as an important step toward reforming European energy governance and regional cooperation. The core objectives are security of supply, sustainability, and competitiveness. The

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transformation of energy systems was supported by the German turnaround in energy policy and the associated nuclear phase-out as a reaction to the Fukushima reactor accident in March 2011. Another driver is to secure the future energy supply. In October 2014, the Environment Council formally adopted a package of measures for climate and energy policy until 2030. The EU Heads of State and Government agreed in principle to emit at least 40% less greenhouse gas emissions in the EU by 2030 than in 1990, to increase energy efficiency to 27% and to increase the share of renewable energies to 27% (Umbach 2015). While the EU level defines the targets for energy policy, the responsibility for the composition of the national energy mix and the policy instruments to achieve targets remains with the member states. The interrelation between the European and national levels in energy policy bears a certain potential for tensions in the EU’s external relations and undermines the EU’s persuasiveness and perspectives (Tänzler and Wolters 2014). Formally, European energy foreign policy does not fall within the Community sphere and is, therefore, primarily an intergovernmental matter (Rompel 2015). This results in limited foreign energy policy competences of the EU, which are primarily derived from the internal energy market but have not changed significantly as a result of the innovations introduced in the Lisbon Treaty (Fischer 2009). In contrast to trade policy, elements of responsibility or institutional procedures for foreign energy policy are lacking. The competence to conclude intergovernmental agreements with external partners remains with the member states. As part of the CFSP, foreign energy policy has an intergovernmental character; decisions are subject to the unanimity principle (Baur 2016). The hitherto incomplete and heterogeneous internal energy market, which is strongly affected by different national energy mixes and diverging economic and political national interests is another limiting factor for foreign energy policy. Competing economic interests of the member states are significant in the gas sector, which accounts for 24% of energy consumption within the EU. Sixty percent of the gas has to be imported, 80% of which comes from the three countries Russia, Algeria, and Norway (European Commission 2011). In March 2014, Polish Prime Minister Donald Tusk proposed a six-point package of measures to reduce the dependence of Eastern European countries in particular on Russian gas (Fischer and Geden 2015). Reducing import dependency on Russian gas also includes a security aspect. With this policy package, Tusk primarily addressed the concerns of the Central and Eastern European states, which also advocated diversification of supplier countries and supply routes as well as alternative forms of energy such as liquid gas supplies in the wake of the Ukrainian crisis. Tusk’s concern was primarily based on the long-term security of gas supply and a potential reduction in prices for the Eastern European states; aspects of climate protection and sustainability were omitted. The focus was thus clearly on economic efficiency, also given the high share of coal-fired power generation in Central and Eastern Europe (Szulecki et al. 2016). Against this background, stricter emission targets in the EU hardly seemed enforceable. Tusk’s position is illustrative of the existing disagreement on climate and energy issues among the Northern and Western European member states, especially Germany. Accordingly, Tusk’s proposal and

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Fig. 4.5 EU electricity generation is very different (energy mix in percentage terms). Source: https://www.welt.de/wirtschaft/energie/article137835904/EU-will-mit-Energie-Union-Geschichteschreiben.html (translated by author). Accessed: February 25, 2021

further suggestions of the Eastern European Heads of Government for increased transparency in existing gas supply contracts were not supported by the majority of member states (Fischer and Geden 2015). Even beyond the case described above, the main reasons for a lacking common position are the respective national bilateral treaties, the different national energy mixes, and the associated dependencies on energy imports, which determine preferences in foreign energy policy (see Fig. 4.5). Neither internally nor in external relations does it seem possible for the member states to adopt a common stance, which has led to an increased renationalization of climate and energy policy since 2010.

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Up to now, all of the Member State governments have taken a positive stance on the Energy Union—but they consistently try to use the concept in support of their own energy and climate policy positions within the EU (Fischer and Geden 2015, p. 2).

Cross-border emissions trading, which is potentially a key instrument for achieving climate and energy objectives, is another negative example. Despite numerous initiatives and reforms, there has been no sustainable revival of emissions trading in the EU so far (Meckling and Hepburn 2013; Bel and Joseph 2018; Zhang et al. 2018). With the reform of emissions trading approved on September 18, 2015, the continuing price decline shall be halted and reversed from the beginning of 2019 onwards by means of the scarcity of emissions certificates. As for the period 2021–2030, it was decided to increase the linear reduction factor from 1.74% to 2.2%, i.e., the emission ceiling is to be reduced by 2.2% annually. This reduction factor is to be adjusted in 2024 at the earliest. However, critics argue that a more effective and comprehensive alternative would be linking up with other emissions trading systems such as in the United States, thus making emission rights tradable across countries and systems (Lerch 2017). At the international level, other multilateral arenas and institutions to address energy and climate policy issues have been established. Examples include the International Renewable Energy Agency (IRENA) based in Abu Dhabi, the United Arab Emirates and Bonn, which was initiated mainly by Germany with the aim of promoting the comprehensive and sustainable use of renewable energies worldwide and the Clean Energy Ministerial (CEM) as an exchange forum for major industrialized and emerging countries and private actors to accelerate energy transformation. The EU also maintains a number of important strategic dialogue fora with energy partners worldwide, among them Norway, Russia, OPEC, the United States, and numerous other countries in the Middle East. Notwithstanding this increasing differentiation at the international level, a multilevel approach to sustainable energy governance is gradually emerging, which is mostly complementary to the international climate negotiations. Here, the EU could act as a driving force: Both ambitious target setting processes and harmonized instrumentation in climate and energy policy at the EU level can support significant progress at the global level (Tänzler and Wolters 2014, p. 152, translated by author).

As has been shown, foreign energy policy exhibits similar problems as international climate policy. The member states are reluctant to give up their control over energy issues in favor of a common foreign energy policy. However, it is precisely the diversification of fossil energy suppliers that could reduce independence from authoritarian states. A coordinated focus on renewable energies with investments in energy efficiency could contribute to climate protection (Siddi 2016). Key issues concern the future strategic orientation of the EU on energy issues. This applies above all to the shift away from a market-liberal orientation and toward Russia (Krickovic 2015). A further question relates to the incremental

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Europeanization of energy policy and national sovereignty in energy matters (Herranz-Surrallés 2016). Against the background of fragmented and national interests, influenced by daily political events, a rapid Europeanization, and thus an external European actorness seems questionable (Fischer and Geden 2015). Interests can only be bundled, and long-term visions for an integrated energy and climate protection policy only be developed based on the partial transfer of control rights to the Commission (Rompel 2015). That an ambitious energy and climate policy not only serves to maintain international economic competitiveness but also enhances security might be a favorable factor for the EU. Worldwide battles for the distribution of resources or the increase of refugees due to climate change indicate possible security problems (Reul 2016). An indicator of sustainable changes in the institutional architecture will be the governance structure to achieve the energy and climate goals for 2030. A major problem of climate and energy policy is the lack of comprehensive and integrative planning to ensure the compatibility of the various objectives (Szulecki et al. 2016). In the field of foreign energy policy, the EU has low actorness with few initiatives for Europeanization and a strong influence of the member states. More promising is the Commission’s objective to create an internal energy market with closely connected energy networks, which has been stimulated by external events, particularly the gas dispute with Russia. Through restricting or facilitating market access for companies and gas suppliers, the EU exercises “soft power” with regional implications (Goldthau and Sitter 2015). Although the internal energy market is a crucial prerequisite for a stronger EU presence as an actor in external energy relations, there is no evidence of coherent action so far. The Commission is neither consulted on bilateral energy agreements. There is also a lack of solidarity among the member states and the development of common long-term strategic interests. So far, the different national energy mixes of the member states pose a pivotal obstacle to this.

4.5.2

Trade Policy

In contrast to the genuine interdependencies of climate and energy issues, European trade policy traditionally had only a loose connection to climate protection. In contrast to the institutionally fragmented external energy policy, European foreign trade policy is substantially integrated and thus a cornerstone of the EU’s external relations (see Chap. 2 on trade policy). Given its high share of world trade (in 2018, EU exports represented 15.2% of global exports and EU imports 15.1%), the EU is by far the largest trading power (Zimmermann 2013). According to Article 3 of the TFEU, trade policy falls into the category of “exclusive competences” of the EU (EUR-Lex 2012). The EU has a wide range of instruments at its disposal for managing the common trade policy. The comprehensive and centralized trade policy competences also reflect the single market based on a customs union and the effort to protect competition within this single market (Fröhlich 2014). The Commission claims the sole competence of representing the

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member states externally and therefore has a high degree of political power. The Council decides based on a qualified majority on proposals from the Commission and can set common customs tariff rates for third countries (Fröhlich 2014). Article 207 of the TFEU, however, gives the Commission broad powers: The Commission shall make recommendations to the Council, which shall authorise it to open the necessary negotiations. The Council and the Commission shall be responsible for ensuring that the agreements negotiated are compatible with internal Union policies and rules. (EUR-Lex 2012).

With the Treaty of Lisbon, foreign trade policy has been significantly expanded and strengthens the EU’s claim as an actor in global trade (Ohler 2011). The Common Commercial policy is supranationally oriented and falls under the first pillar, for which majority decisions can be taken. Trade agreements thus require the approval of the European Council, whereby the Commission can also use the threat of rejection through the European Parliament as a lever against the member states. Since the Treaty of Lisbon, the EU has been able to play a decisive role in many trade agreements, both in multilateral and in bilateral negotiating contexts, and to enforce international standards. The so-called euro crisis, on the other hand, only temporarily restricted the power of the EU as a global actor and did not result in its often postulated comprehensive and lasting loss of significance (Zimmermann 2013). Recent debates on the EU’s foreign trade policy focused for instance on the free trade agreement TTIP (Transatlantic Trade and Investment Partnership) with the United States (Young 2016; De Bièvre and Poletti 2017), which the EU was aiming for, flanked by further initiatives for bilateral trade agreements with Canada and Japan (Bollen et al. 2016). In autumn 2017, the European-Canadian free trade agreement CETA (Comprehensive Economic and Trade Agreement) was concluded within the EU. Nevertheless, the failure of the TTIP agreement, the protectionist traits under the United States President Trump, and the resulting decline in the importance of the WTO as a mediator have posed significant challenges to multilateral free trade. It remains to be seen whether the new Biden Administration will embrace the principles of reciprocity and open trade relations, and thus will reengage in negotiating a transatlantic trade agreement with the EU. Given the current and future challenges for the rule-based global trading system, initiatives to link climate protection and trade issues did so far not enjoy high priority within the international community. Nevertheless, empirical studies show that environmental aspects are taken into account in many trade agreements. Morin et al. (2018), for example, show through their analysis of a data set of over 630 trade agreements from 1947 to 2016, that particularly democracies, states with import competition and states with a high level of environmental awareness take environmental aspects into account. As early as 1993, the principle of sustainable development was enshrined in the preamble of the North American Free Trade Agreement (NAFTA) (Knorr 1997). Sustainable development has also been codified as an objective in the preamble to the WTO since 1995 (Knorr 1997). In both trade regimes, the member states also have instruments for implementing environmental

4.5 EU Climate Policy Between Energy and Trade Issues

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policy measures (Johnson 2015). Thus, the NAFTA Agreement ensures through dispute settlement procedures that environmental aspects are taken into account in trade liberalization. Most recently, the bilateral trade agreement CETA between the EU and Canada contains a separate chapter on environmental commitments which goes beyond those in other multilateral agreements. The consideration of climate aspects in trade agreements as a way to global climate protection has so far been little investigated (Morin and Jinnah 2018). It can be demonstrated that there are some significant synergies between the Framework Convention on Climate Change and the WTO, which could be implemented in the course of measures to achieve the 2 or even 1.5-degree target (Kulovesi 2014). To this end, the Paris Agreement, which has since been ratified by 169 states, is a window of opportunity for an integrative approach to climate protection and foreign trade policy. In particular, an integrative approach would be possible, since the concrete form of the Paris Agreement, similar to the Kyoto Protocol, will only be determined in the follow-up negotiations. Hitherto, also the most recent negotiations at COP 25 in Madrid have not brought any progress in this respect either. While the Framework Convention on Climate Change and the Kyoto Protocol stipulates that climate policy must not conflict with free trade rules, the Paris Agreement contains no cross-reference to free trade rules (Dröge and Schenuit 2018). It is, therefore, up to the signatory states to determine whether and to what extent trade aspects are taken into account in achieving the national climate targets (INDCs) laid down in the agreement. The fact that this approach involves potential conflicts for international competition becomes apparent in the discussion on the inclusion of cross-border aviation in European emissions trading (Schladebach 2015). Within the EU, aviation has been included in emissions trading since 2012. As this had a monetary impact on airlines worldwide, the EU was engaged in disputes with the United States, China, and Russia, among others. They rejected an air traffic tax for flights to and across the EU due to the associated additional costs for their national airlines and justified this by referring to their sovereignty rights. At the end of 2017, the European Parliament and the Council of Ministers reached an informal agreement to suspend the inclusion of international flight connections in the emissions trading system until the end of 2023. Until then, the EU has to review whether international flight connections can be integrated into emissions trading. Notwithstanding this negative example, the EU and the Commission, in particular, have the means and instruments to identify synergies between trade and climate protection and to implement joint initiatives with trading partners. Following Article 6 of the Paris Agreement, climate policy coalitions between signatory states to link emissions trading systems could be formed. This would lead to considerable efficiency gains in the case of the EU and the United States (Lerch 2017). In organizations such as the UN and the WTO, the EU can identify and develop viable options and cross-connections. In addition, the Commission has the opportunity to review existing trade agreements in terms of climate policy and to modify them if necessary (Dröge and Schenuit 2018). When negotiating new regional free trade agreements, the Commission can encourage partner countries to push ahead with the implementation of their climate objectives, as in the negotiations on the Japan-EU

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Free Trade Agreement (JEFTA) with Japan. In regional and bilateral free trade agreements with developing countries, climate-related technology transfer and customs relief for climate-friendly products would be attractive incentive systems (Dröge and Schenuit 2018). This would also promote export opportunities for the European economy, which has a strong position in climate protection technologies and renewable energies in international competition. In summary, there are opportunities for the EU in external relations to strengthen climate protection through its trade policy. In particular, the EU’s actorness in trade would further this. So far, however, potential synergies and concrete measures have been primarily theoretical in nature: But if the EU positions itself as a shaper of trade and climate policy, it will not only have the opportunity to live up to its pioneering role in climate policy. It can thus also proactively give impetus to international trade policy and pursue its political, economic and geostrategic interests (quote translated by the author from Dröge and Schenuit 2018, p. 8).

4.6

Conclusion and Further Perspectives

Our analysis has shown that the EU has been perceived as an environmental pioneer at the international level. Since the Treaty establishing the European Community in 1957, there has been a steady increase in competences in this policy area. Especially since the Treaty of Lisbon (2009), these competences can be considered far-reaching. While the external environmental policy has for a long time been considered as “low politics,” the EU has developed a leading position in the emergence of the climate regime and has provided significant impetus for further development. The study has clearly demonstrated that the EU is recognized de facto and de jure as an actor in the international climate negotiations and, in particular, in the climate regime. Although climate policy formally falls under the shared competences of the EU and not within the exclusive competence of the Commission, the EU is considered to be one of the most important actors in international climate policy. The shared competence is manifested in the so-called troika, consisting of the current and forthcoming Council presidencies and the Commission. In order to be able to act effectively in the negotiations with other contracting states, the EU has professionalized its negotiating structures. Since 2004, an informal procedural system has been in place which, by differentiating between issue leaders and lead negotiators, facilitates the conduct of negotiations and relieves the burden on the current Council Presidency. These changes shall allow the EU to maintain a strong and solid negotiating position and should favor a long-term strategy of the Council Presidency. As a contracting party to the Framework Convention on Climate Change and to numerous other environmental agreements, the EU is thus in a strong position vis-à-vis its member states. The EU enjoys autonomy and authority to negotiate climate agreements, although this is limited by the need for ratification by the

4.6 Conclusion and Further Perspectives

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European Council. Member states still participate in the negotiations and have to accept the negotiation results. The EU’s external action displays different degrees of effectiveness. While in the 1990s and 2000s the EU had widely achieved its negotiating objectives, the Copenhagen Accord of 2009 marked a low point in this regard. The high degree of politicization, the inability of the EU to reach an internal agreement and the diverging negotiation goals compared to the United States and China were the main reasons for the lack of effectiveness. At the subsequent Treaty conferences such as COP 17 in Durban in 2011 and, above all, at the negotiation of the Paris Agreement in 2015, the EU’s external action could be considered rather effective again. It will be seen how the EU can influence the upcoming negotiations on the concrete design of the Paris Agreement. To this end, the EU faces a number of challenges that could be explored further. This concerns the role of the EU as a middle power and how it can act effectively in a changing geopolitical environment, characterized above all by the rise of China. At the time of writing it is still unclear to what extent the United States will actively support multilateral solutions in general and binding commitments to reduce emissions of greenhouse gases in particular. The EU for its part, aims to be climate neutral in 2050. The European Green Deal is an ambitious plan to make the EU’s economy sustainable. Reaching this target will require action by all sectors of the economy and to support the improvement of environmental standards on the global level. If the EU pursues sound and credible policy measures to achieve the ambitious aim of climate neutrality on the European continent, it will very likely become a leader in international climate negotiations as well. As has also been elaborated in this chapter, adjacent policy areas (primarily an integrated energy and climate policy) offer synergetic potential for advancing goals such as decarbonization. Energy policy could be closely linked with climate policy as has already been envisioned in the European Green Deal. However, a European foreign energy policy is severely constrained by the diverging national interests due to different energy mixes of the member states. In particular, the further development of an EU internal integrated energy and climate policy and a concrete policy framework by 2030 and beyond will have a decisive impact on the EU’s credibility at international level. In this context, the constructivist approaches presented in the introductory chapter are suitable to study to which extent the EU acts as a normative and value-oriented actor in these policy fields. A further challenge will be to link the areas of trade and climate policy strategically. How the Paris Agreement could be reconciled with other foreign policy projects is an interesting issue. Against the backdrop of the recent wave of protectionist measures, it should be examined how free trade in environmental goods can be promoted in this environment. The WTO and the UN are the two key organizations in which the EU can act to strengthen climate aspects of trade policy issues. Regional and bilateral free trade agreements are further opportunities to advance climate protection. In summary, European actorness will manifest itself within the framework of the “classical” negotiations in the climate regime, but also in policy areas closely related

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to climate policy. The concepts and theoretical approaches presented in this textbook shall allow to study European actorness in climate policy and beyond.

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5.1

Institutional Preconditions of European Actorness

Trade policy represents one of the European Union’s oldest and most important areas of competence. In addition to agricultural, internal market, and competition policy, it was one of the first policy areas to be given supranational competences by the then member states of the European Union (EU) (or the EEC, then the EC). In the Treaty of Rome (1957) the states committed themselves to gradually reduce their internal tariffs and to maintain a common external tariff. The EU Commission was given extensive powers to coordinate the trade policy positions of the member states, to represent them externally and to negotiate with third countries at the international level. The Council of Ministers in turn was given rights to control the European Commission. The adoption of the Single European Act (SEA) in 1986 created a common internal market, guaranteeing the four freedoms of cross-border movement of goods, services, persons, and capital. The principle of mutual recognition of rules was enshrined in the Treaty as the cornerstone of market integration. At the same time, the areas in which the Council of Ministers could decide by qualified majority were extended, thus facilitating the harmonization of internal market rules. With the SEA, the EU was given explicit responsibility for environmental policy. It established environmental policy objectives, principles, and decision-making procedures. With the Amsterdam Treaty (1997) the subject of environmental protection was institutionally upgraded. From now on, environmental concerns should be integrated into the definition and implementation of other Community policies. The Council of Ministers and the European Parliament were now involved in the decision-making process under the co-decision procedure. For financial and monetary policy, the beginning of the 1990s marked a watershed. The Maastricht Treaty (1992) not only replaced the European Economic Community (EEC) with the European Community (EC), but in particular established the European Monetary Union (EMU). In addition to the introduction of a common currency and the establishment of the European Central Bank (ECB) in 1998, the # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 S. Lütz et al., The European Union as a Global Actor, Springer Texts in Political Science and International Relations, https://doi.org/10.1007/978-3-030-76673-3_5

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Treaty laid down comprehensive criteria for European member states to adopt the euro as their currency. The ECB became the key supranational player in the monetary policy of the euro area. The primary objective of the ECB was laid down in the Treaty as the maintenance of price stability (Article 127, TFEU 2009). With regard to the fulfilment of its mandate, it is formally independent of political or institutional influence. In contrast, in the area of financial market supervision and regulation, a different distribution of competences between the national and European level emerged since tasks of budgetary policy and macroeconomic stabilization remained essentially a national responsibility. The Treaty of Nice (2001) in turn extended the scope of the common commercial policy to most services and trade-related intellectual property rights. However, sensitive service sectors such as education or health were excluded from this and remained within the competence of the member states. For both trade and environment policy, the Treaty of Lisbon (2009) represented another watershed. It formally assigned environmental policy to the EU and the member states as a joint task (Articles 191–193 TFEU 2009). The EU Commission was entrusted with the external representation in environmental issues and also in international climate negotiations. However, it has to cooperate with the Council of Ministers and now also with the European Parliament, to which rights of information and above all the ratification of international agreements have been assigned. However, questions of energy supply and energy mix still required unanimity in the Council of Ministers and provided only consultation rights for the EU Parliament. In the area of trade policy, too, the EUP was now included in decision-making processes as a ratification body on an equal footing with the EU Commission and the Council of Ministers. In terms of content, the treaty extended the exclusive competences of the EU to new trade issues such as services, foreign direct investment, and intellectual property rights. To sum up, in the three policy areas examined in this textbook, a gradual centralization of institutional responsibilities at the European level and the expansion of tasks took place between the 1980s and the first decade of the 2000s. At the same time, rules providing for co-decision making of European institutions and member states or parallel competences of both the EU and its members inhibit external European actorness.

5.2

Evaluating Actorness in Trade, Finance, and Climate Policy

In trade, Tobias Leeg (Chap. 2) discusses European actorness with respect to presence, opportunity, and capability. The EU can rely here primarily on its presence. The size of the European internal market makes market access attractive for third countries and can open up the possibility of imposing European standards (e.g., in the area of food safety) on non-European exporters. In international trade negotiations, the EU also enjoys substantial capability, as negotiating powers were transferred to the EU Commission at a very early stage. However, the remaining rights of the member states to confer a negotiating mandate to the European

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Commission, to approve negotiated results as well as the European Parliament’s new rights of approval limit this capability to act. Leeg expects further constraints of capability in the future, against the background of growing protectionist ideologies and the reservations of right-wing populist governments about liberal trade policies. Externally, the EU’s opportunity structure in trade policy has changed. Power shifts within the international trading system in favor of emerging economies such as China, Brazil, and India limit the ability of the old industrial powers to determine the rules of the global trade regime on their own. The Trump administration’s shift toward a neo-mercantilist understanding of trade relations has called old transatlantic coalitions into question, but also offered the EU opportunities to realign its trade strategy. The EU presence is also strong in the financial sector. In addition to the world’s second most important single market, the EU also has the second most important international currency after the dollar, measured by its use in international trade and capital movements. Control over access to the European market gives European decision makers potential influence in setting global market rules. Vincent Woyames Dreher (Chap. 3) also considers the EU’s opportunity in the financial sector to be potentially high. The European financial market has been increasingly linked with global financial markets since the beginning of the 2000s. The withdrawal of the United States from international regulatory bodies (at least until 2020) leaves a new vacuum of power to be filled with new and also European initiatives. As in trade, European capability is substantially constrained in finance. If the EU speaks with one voice, it is perhaps the most influential player in the international financial system. In many cases, however, there is a lack of coherence in the positions of the different EU institutions (horizontal coherence) as well as in relation to the member states (vertical coherence). Institutional coherence in terms of the coordination of decision-making processes varies over time and across financial sector policy areas. The external representation of the EU also presents a varying picture. In almost all of the institutions examined, the EU is represented by both European institutions and member states. In Chap. 3 on climate policy, Daniel Otto distinguishes between recognition, coherence, authority, and autonomy. The EU enjoys de facto and de jure recognition as an actor in international climate negotiations and especially in the climate regime. Although climate policy falls under the shared competences and, since the Treaty of Lisbon, the EUP also has a full right of co-determination, the EU manages to establish internal coherence before international negotiations. Since 2004, an internal, informally organized system has been in place to coordinate internal climate negotiations. By differentiating between issue leaders and lead negotiators, this system facilitates the conduct of negotiations, relieves the burden on the current Council Presidency and promotes a longer-term strategy of the EU. The author also considers the autonomy and authority of the EU to be given, but always subject to the ratification of negotiation results by the Council. In a second step, Daniel Otto discusses the effectiveness of the EU in achieving its negotiation goals and finds mixed results. While the EU was able to implement its goals to a large extent in the international climate regime in the 1990s and 2000s, the Copenhagen summit of

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2009 marked a failure of the EU’s engagement. Due to diverging positions of European member states, the EU was not able to present uniform positions to the outside world and thus remained isolated. A core group consisting of the United States, China, Brazil, and India prepared the agreement on a final document instead. The Paris Summit (2015) was comparatively more successful. Here, the EU was able to assert itself in key objectives which the author attributes to skillful “leadership” in the negotiations. In general, the EU can capitalize on its presence due to its market size and worldwide use of its currency to leverage its external influence. In addition, the rise of emerging markets, but also the withdrawal of the United States from international bodies and multilateral fora (until 2020) has offered the EU new opportunities to fill the power gap and to realign its strategy toward third parties. However, in trade, finance, and climate policy the EU’s capability to effectively assert its positions externally is inhibited by internal constraints such as cleavages between European institutions and member states.

5.3

Further Prospects

The EU as a global actor has to face substantial challenges in the future. Re-nationalization and a mercantilist understanding of trade challenge the multilateral rules of the liberal order which the EU and especially the European Commission upholds. The COVID-19 pandemic and its new and unexpected repercussions for European society, finance, and economy led to recurring debates about shouldering the costs of the crisis and distributing financial help among those member states deeply affected by the pandemic. The European Commission’s “Green Deal” and the aim to further decarbonize European energy systems by 2050 will face greater economic and political barriers in light of the upcoming European and global recession. Time will tell whether Europe will live up to these challenges or whether the well-known gap between expectations and European capabilities to shoulder these demands will widen. Concepts of actorness are not confined to the study of the European Union, but can be applied to international or regional organizations whose external capacities to act depend to a large extent on the consent of their member states. The actorness perspective allows us to compare international organizations in different policy areas, but also to study how international actors assert their positions in international fora, regimes, and other organizations. Theories in the realm of realism, liberalism, and constructivism can be easily linked with actorness analyses and help to explain why international organizations “at work” display varying degrees of actorness. The study of actorness of international organizations is relevant against the background of increasingly dense institutional landscapes in the international system. Actorness studies are thus an integral part of multilevel and global governance perspectives in International Relations, International Political Economy, and European Integration.