Economic Integration: Stages, EU Law & Eurosystem PDF

Stages of Economic Integration Economic integration develops gradually, with countries cooperating more closely over time: 1. Free Trade Area (FTA): - Tariffs between members are eliminated, but each country maintains its own tariffs for non-members. 2. Customs Union: - In addition to eliminating in...

Stages of Economic Integration Economic integration develops gradually, with countries cooperating more closely over time: 1. Free Trade Area (FTA): - Tariffs between members are eliminated, but each country maintains its own tariffs for non-members. 2. Customs Union: - In addition to eliminating internal tariffs, a common external tariff is established. 3. Single Market: - Free movement of goods, services, capital, and labor between member states. 4. Economic and Monetary Union (EMU): - Member states harmonize their economic and monetary policies (e.g., the introduction of the euro). 5. Political Union: - Common government, integrating economic and political decision-making. The Single Market Began with the Treaty of Rome (1957), which aimed for "ever closer union" among the peoples of Europe. Sought to establish a customs union first, and a single market in time. The Single European Act (1986) set the establishment of the single market by 1992. Four Freedoms: Free movement of goods/ service/ capital/ people. - 1985 Delors Commission → In Delors his term, the internal market came about + Schengen. - 1988 Cecchini: Cost of Non-Europe (Examined costs & benefits EU common market) Integration Measures: - Negative integration: Removing physical, fiscal, technical trade barriers (like tariffs). → (e.g., mutual recognition principle established in Cassis de Dijon case) - Positive integration: Common standards, such as social and environmental norms, creating a level playing field (for the economic factors). → Brussels Effect: EU regulations often set global standards due to its market size. Key Rulings for EU Law Van Gend en Loos (1963): Dutch company argued that NL had violated EU law by imposing tariffs on imported goods. This established the principle of direct effect, making EU law enforceable by individuals in national courts. → Ex. If an EU directive protects workers’ rights, an employee can sue their employer in their national court based on that directive. Costa v. ENEL (1964): Mr. Costa challenged Italy by arguing their electricity sector was in conflict with EU law. This established the principle of supremacy: EU law takes precedence over national law. → Ex. if a member state's environmental law conflicts with EU environmental regulations, the EU regulation must be applied. Cassis de Dijon (1979): A German importer wanted to sell French liquor in Germany, but Germany refused to sell alcohol that did not meet its national criteria. This introduced the principle of mutual recognition: A product legally sold in one member state must be accepted in others unless there are overriding reasons (e.g., public health). → Ex. If a drink complies with safety standards in France, it must be accepted in Germany without additional restrictions. The Eurosystem The path to the euro began with the fixation of exchange rates: Bretton Woods system: Fixed exchange rate system until 1973 (currencies linked to US) - Snake in the tunnel: European currencies were pegged to each other and the dollar. - Snake outside the tunnel: Currencies were only pegged to each other with a fluctuation margin of Å}2.25%. - The European Currency Unit (ECU) was introduced as banking currency. Three Stages of EMU 1. 1990-1993: Free movement of capital; closer economic policy coordination; cooperation between central banks. 2. 1994-1998: Convergence with Maastricht criteria compliance (inflation, public debt, budget deficit, interest rates, exchange rate stability). 3. Since 1999: Establishment of the European Central Bank (ECB); fixed exchange rates; introduction of the Euro. → The political agenda of the time was to use the Maastricht plan to contain Germany after the end of the Cold War and German reunification. Maastricht Convergence Criteria To join the EMU, member states had to meet strict economic criteria: Stability and Growth pact 1997 Agreed upon in 1997 SGP aims to ensure that member states continue their fiscal discipline post-Euro adoption, through: - A medium-term budgetary objective → keeping a country's budget balanced or in surplus over several years to ensure fiscal discipline. The SGP involves multilateral budgetary surveillance and a deficit limit, through the excessive deficit procedure (EDP). - Financial penalties in countries in excessive deficits; - Fear of high public debt; - Especially German fear that the Euro will be a weak currency, otherwise; - Fear of the ECB having to purchase government debt; - No bailout clause, governments will not take on each other’s debts. Theory: Optimum Currency Area (OCA) An optimum currency area (OCA) is an area that is economically closely linked by trade in goods and services and factor mobility (capital/labour) → that also will increase further intra EU trade. - MS should only share a single currency, if they have ways to help each other during tough economic times (ex. helping struggling regions, like greece, without this the struggling region may face severe problems because they can't fall back on their own currency). - In a currency union devaluing the currency is not an option, so MS need other ways to handle economic differences, such as better coordination, fiscal transfers or shared policies → like the EU. Thus an OCA requires: - High factor mobility - Production factors, such as labor and capital, can easily move between countries or regions. - Similar economic structure - OCA works best when countries have cooperation in economic systems. (ex. big differences between northern and southern EU MS economies is not optimal for the OCA) - Fiscal federalism - Is like a safety net within a group of countries using the same currency. Wealthier members help out struggling members (by transferring money) to keep the whole group stable. The euro hoped for closer fiscal cooperation. (ex. Eurozone crisis with Greece) - Banking union - Unified banking system. Bank regulation and supervision are centralized at the level of currency union, like the Eurzone, instead of being managed by individual countries. (ex. During eurozone crisis many national banks were exposed to risks, a unified bank would have allowed for a coordinated oversight → thus potentially better outcomes.) EU’s Economic Leverages The EU has three powers when it comes to economic leverage: 1. Regulatory Powers: Setting market standards, antitrust regulations, merger controls, etc. (ex. the EU sets rule to ensure fair competition and high standards across all MS, ensuring an even playing field like a dumping ban) 2. Redistributive Powers: Cohesion, agricultural, and structural funds. (ex. The EU relocates money from wealthier areas and help poorer regions grow, such as agricultural funds etc.) 3. Expenditure Powers: EU budget funded by VAT, customs duties, and national contributions. (ex. the usage of taxes and contributions of member states to invest in programs towards the common good) Eurozone Crisis The financial crisis began in Greece (2009) and spread to other member states. New Institutions were created: - European Financial Stability Facility (EFSF): Temporary bailout fund. - European Stability Mechanism (ESM): Permanent financial stability fund. Changes to rules of Stability and Growth Pact (Fiscal Compact → Rulebook to keep EU countries budgets in check to ensure they; don't overspend, reduce debt levels and follow stricter rules to avoid another debt crisis.) - Stricter rules in the SGP: importance of deficit and debt was reinforced. - Enhanced role of the European Commission in monitoring public finances. The Banking Union: Strengthened regulation of the banking sector by placing Eurozone banks under the centralized supervision of the European Central Bank (ECB). Corona Rescue Package (Next Generation EU) Stimulus package of €750 billion, divided into loans (€386 billion) and grants (€364 billion), to recover the economy post-COVID-19 and become stronger & more innovative. - Solidarity mechanism: - Joint borrowing by the EU via bonds issued by the European Commission, ECB, and EIB. (Shared risk through joint debt issuance) - Spending is controlled by the EU Commission & peer monitoring. (ex. EU MS can review each others spending plans → this process fosters peer pressure to ensure compliance to EU rules) - Money will be used by MS, regions and entrepreneurs to focus on digitalization and green innovations. The Next Turn in the Single Market European Green Deal: - Launched in 2019 to make Europe the first climate-neutral continent by 2050. - Tools: Regulatory tools (EU laws) and financial instruments (e.g., incentives, taxation). - Updated 2030 target: Reduce greenhouse gas emissions by at least 55% compared to 1990 levels. - Political opposition: This has led to rebranding the effort as a "clean, just, and competitive transition", emphasizing fairness and economic opportunity alongside environmental goals. Digital Single Market: - Focus on digitalization of the single market to maintain global competitiveness. - Post-COVID rescue fund supports digital, innovative, and green businesses.