CHAPTER 12
TOWARD A MORE PERFECT (EUROPEAN) UNION
Overview:
This chapter examines the political economy of integration in the European Union (EU). Increasingly,
nations in close proximity to one another are driven to coordinate and sometimes harmonize their political
economies for political and economic reasons. However, integrated markets do not necessarily mean integrated
states. Europe provides the most important and relatively successful example of regional integration in the world. Its
dynamics shed light on European history and point to pressures and calculations that exist in other regions that seek
greater collaboration and policy convergence.
The beginning of the European Union can be traced back to the early post-WW II period. The ECSC
spurred functional cooperation between a few countries, whereas serious steps toward regional integration
commenced with the 1957 European Economic Community (EEC), often called the Common Market. In the 1980s,
the economic element in the group’s name was eliminated, creating the European Community (EC) or often just “the
Community,” not so much because the economic function was diminished, but because political and social functions
were growing. In 1993, the name changed again to “European Union” (EU) as part of an effort to expand integration
from the economic sphere to the political and social spheres of European life.
The European Union is the product of fifty years of political and economic activity aimed at creating a
prosperous and cooperative environment for Europe. It is, on the one hand, arguably the largest and richest unified
market in the world—a postwar success story and model for many other regional organizations. On the other hand,
in some ways the EU is on the verge of disintegration as a result of the financial crisis which has revealed flaws in
EU political institutions and Eurozone policies.
The fundamental question that the European Union seeks to answer in our day is whether economics can be
reconciled with political and social values and ideals. Are the dynamic interests of the market compatible with the
political and social values of the nation or state? Significantly, this is still an unanswered question after the first
decade of the twenty-first century.
Learning Objectives:
• To articulate whether the EU can overcome current divisive trends within its existing structures while still
respecting fundamental national and democratic interests.
• To examine how, according to economic liberals, the forces of the economy tend to unite nations while the
forces of politics divide them.
• To discuss how the EU has gradually adopted different forms of integration to where today it aspires to be more
complete political-economic union.
• To explain the difference between static and dynamic efficiency and how economic integration promotes both
forms of efficiency.
• To examine how economic integration reduces or inhibits national sovereignty.
• To discuss important events in the history of the EU and how economic integration was used to promote
political integration.
• To define the Common Agricultural Policy (CAP) and explain why is it controversial both within the EU and in
the EU’s relations with other nations.
• To identify the most important economic divergences between national economies since 2008 and the interest
of ruling elites, Germany, and the Troika.
• To identify the most important political institutions of the EU and their functions.
• To discuss the Maastricht Treaty and why it is controversial.
• To identify some forces that are simultaneously leading to the integration of nations and their disintegration in
the world today.
Chapter Outline:
INTRODUCTION
a) Postwar European nations hoped to solve “the German problem”—to entrench Germany in an integrated
set of regionally based supranational institutions so that no other country would be dominated by it.
b) As membership in the community grew, economic successes on issues like trade “spilled over” into an
assortment of agreements on political and social issues.
c) While the European community has had several crises in the past, today it faces a critical situation due to
the spread of the financial crisis to much of the EU. In particular, the debt crisis in the Economic and
Monetary Union (EMU) states of the EU (often referred to as the Euro zone) is at a critical point. They
have to figure out how to endure severe cuts in their domestic programs imposed on them by the austerity
policies of the IMF and EU finance agencies
d) Now many blame Germany it for perpetuating the EMU crisis by insisting that austerity is the best way to
deal with debt problems and generate economic recovery. Many worry that austerity could very well drive
many of the heavily indebted countries into leaving the EMU.
e) Paradoxically, although economic integration was all the rage in the early 2000s, it is economic
interconnectedness itself that today is blocking efforts to further many of the Union’s objectives related to
integration.
THE IPE OF INTEGRATION
a) The economic efficiency that comes with shared markets has to be weighed against the loss of some
sovereignty associated with a relatively interconnected system of political and social institutions.
b) Economic liberals suggest that economic integration is appealing early on because it is a way for nations to
achieve greater efficiency in their use of scarce resources and higher rates of economic growth. Integration
promotes greater static efficiency by aiding specialization and economies of scale. In the long run, dynamic
efficiency from integration promotes economic growth.
c) Nations sometimes sacrifice some sovereignty to enhance their political power in a security alliance and to
counter the influence of domestic special-interest groups
THE COMMUNITY BUILDING PROJECT
a) European integration was pursued by actors with widely divergent hopes and goals.
b) What finally allowed Europe to come together was the need to find a political solution to nationalism in the
aftermath of the destructiveness of World War II.
c) Although there were considerable economic incentives for regional integration, the primary motivation was
political—the need to create an enduring peace and promote political freedom in the face of the totalitarian
security structure established by the Soviet Union in Eastern Europe.
d) The immediate economic objective of the Treaty of Rome was to advance integration from the level of an
FTA to a Common Market. It did so by creating a customs union.
e) The elimination of trade barriers was not as complete as theory suggested; some nations retained the right
to impose nontariff trade barriers such as health and safety standards on one another.
f) Great Britain participated in the negotiations for the Treaty of Rome but decided to stand apart from the
EEC. There were several reasons for this decision, which was eventually reversed in 1973. The British
were concerned about the loss of political and economic. Britain was forced to weigh the trade-offs
between self-determination, domestic democracy, and economic growth, which present a constant tension
in economic integration. It was also unwilling to give up its “imperial preferences” or its highly valued
“special relationship” with the United States.
The CAP: The Glue That Holds Together the Community
a) The Common Agricultural Policy (CAP) is an EU-wide system of agricultural subsidies financed through
taxes imposed by EU member nations.
b) At first, the EEC agreed on a system of expensive price supports—which guaranteed farmers high prices—
and protective barriers against foreign agricultural produce. These policies helped farmers survive the
required adjustments to more rational farm policies and addressed the food security concern.
c) By the 1990s, CAP was under fire for being too costly, causing overproduction, and harming poor farmers
in LDCs.
d) In 2013, the CAP is expected to remain at 31 percent of the EU budget (€43.8 billion), down from 71
percent in 1984.
e) The CAP has been blamed for the stalled WTO trade talks (see Chapter 6). The United States has refused to
reduce its agricultural subsidies as long as the EU keeps its CAP. The continuing stalemate between the EU
and United States has not been good for taxpayers in these countries and for poor farmers in the developing
world.
Geographic Expansion
a) Table 12-1 gives a chronology of EU integration.
b) The bicycle theory of European integration states that the community structure will remain stable so long
as it keeps moving (integrating), but once it stops, its stability disappears and it tends to fall over (break
up).
c) Britain joined the EC in 1973 after two referenda and a series of painful negotiations. Britain’s ambivalence
about its relationship with Europe was (and in large part remains) high.
d) Ireland and Denmark joined when Britain became a member. Greece joined in 1981, while Spain and
Portugal were admitted in 1986.
e) The broadening expanded the EC market, but also introduced lower-income, CAP subsidy- receiving
nations. This put a great deal of stress on some EC members.
f) The Single European Act (SEA), which went into effect in 1987, created a true common market. It
introduced the four freedoms: free movement of goods, services, people, and capital.
g) Although an economic union does not eliminate all of these controls, they must be “harmonized” (or
mutually recognized) so that they do not become a barrier to economic activity. Thus, a common
administrative organization such as the European Commission is inevitable if one wants to realize an
economic union.
h) The SEA introduced a qualified voting majority (QVM) rule, meaning that a decision was taken if at least
sixty two of eighty-seven votes (571.26%) of the European Council were in favor of a proposal. Votes were
allotted to the twelve member states on the basis of their size.
The Treaties of Maastricht and Lisbon
a) The Treaty of Maastricht, which established the EU in 1992, was mainly a result of negotiations during
the process of German reunification. France proposed a monetary union that would solve the German
problem by chaining Germany to the rest of the EU through a strong link—a common currency—that
would force Germany to give up the most powerful symbol of its economic strength: the Deutsche Mark.
b) The leaders of the twelve member states decided to establish a monetary union by 1999 and replace their
national currencies with one common currency (named the euro in December 1995). They agreed to
establish a European Central Bank (ECB) that would be independent in its monetary policies from other
European institutions and from national governments and would be committed to the objective of price
stability. They also agreed that only those countries that fulfilled the so-called convergence criteria—a low
inflation rate, low interest rates, and low government debt—would join the Euro zone.
c) The Treaty of Maastricht (1992) brought together three areas of cooperation: the Single Market, which was
accomplished in the SEA; cooperation in Foreign and Security policy; and cooperation in Justice and Home
Affairs. Each of these areas were often referred to as “pillars.”
d) The process of “deepening” European integration was followed by “broadening”: There were big
enlargements in 2004 (from fifteen to twenty-five members) and 2007 (with the entry of Bulgaria and
Romania, to twenty-seven members).
e) Officials decided in 2007 to sign the Treaty of Lisbon (ratified in November 2009). It gives the EU a
President elected for two-and-a-half years. A new position called the High Representative of the Union for
Foreign Affairs and Security Policy is designed to resolve frequent disagreements among Europeans on
foreign policy. The European Parliament is to have equal standing with the Council of the EU. After
November 2014, qualified majority voting will apply a double majority rule: Decisions will need to be
approved by 55 percent of the member states representing at least 65 percent of the EU’s population.
EU POLITICAL INSTITUTIONS
a) The EU has six major political institutions: the President of the European Commission, the European
Commission, the Council of Ministers, the European Council, the European Parliament, and the European
Court of Justice.
b) The European Council, comprising the heads of state and government of all member states, meets at least
twice every six months. It engages in strategic decision making such as setting EU priorities, negotiating
EU treaties, and agreeing on the EU’s budget.
c) The Council of the European Union (or Council of Ministers), composed of a single representative from
each member nation, is the main lawmaking body.
d) The European Commission, composed of a president and twenty-seven commissioners (one for every
member state), acts as the EU’s executive cabinet.
e) The European Parliament, whose members are directly elected by European citizens for five-year terms,
has become like a traditional parliament.
f) The European Court of Justice (ECJ) adjudicates legal conflicts between EU institutions and between the
EU and member states. The ECB is responsible for monetary policy and price stability in the Euro zone.
THE FINANCIAL DEBT CRISIS IN THE EURO ZONE
a) The EU lacked the tools to insulate member states or to deal with the shocks the financial crisis had on their
economies. The 1992 Maastricht Treaty provided little guidance.
b) In December 2008, the EU decided on a €200 billion stimulus package (about 1.5% of EU GDP). However,
national differences about how to handle the crisis became more visible. Many began to doubt whether EU
members and institutions could effectively deal with the crisis. Whereas Germany and France promoted
stringent new safeguards on financial markets, Great Britain wanted to avoid strong foreign control of the
“City”—London’s powerful financial marketplace. Germany favored moderate action in order to avoid an
excessive increase in state debt.
c) By late 2009 Greece began to fall into a severe crisis as investors feared that the country might default on
its huge public debt. Euro-zone members, especially Germany and France, were forced to consider bailing
Greece out while the country made deep spending cuts that were politically unpopular.
Institutional Weaknesses: The Unfinished Union
a) Euro zone countries became dependent on the EU-ECB-IMF troika for financial assistance, making this
loose coalition of finance agencies a central player in the EMU financial crisis. Each leg of this financial
triumvirate has its own mandate, constituency, and outlook on debt issues, which makes it difficult for them
to agree on common solutions to the debt crisis as a whole.
b) Policies to deal with the financial crisis include: a European Stability Mechanism (ESM) that could lend up
to €500 billion in new funds to help bailout struggling countries and a European System of Financial
Supervision (ESFS) that included a European Systemic Risk Board (ESRB) in charge of monitoring the
stability of the entire EU financial system.
c) There has been a fierce debate amongst debtor countries, the troika, and private investors about conditions
attached to borrowing by the heavily indebted states. Led by Germany, supporters of austerity have dug in
on their demand that states must decrease their debt by reducing pensions, health care, and other public
welfare programs.
d) Many critics agreed that austerity was proving to be nothing more than a sociopolitical disaster and a debt
trap. An increasing number of economists and national officials argue that deep cuts in state spending have
only undermined growth and raised unemployment rates in most EMU countries, making it harder for them
to shrink their debt.
What Can the Troika Do?
a) Today, Mario Draghi supports regulation of big banks at the European level rather than only at the national
level. He has also tried to increase the authority of the bank’s president and make the ECB more like the
U.S. Federal Reserve. He favors letting the ECB use its funds to help Greece, Spain, and others by
purchasing their sovereign debt, as long as they adhere to their commitments to restructure their budgets
and economies.
b) Like the IMF as a whole and her personal friend Angela Merkel, Christine Lagarde tends to shuffle back
and forth between supporting austerity policies and recommending that their impact be softened to improve
the EMU’s chances of survival. She warned that governments around the world had systematically
underestimated the damage done to growth by severe austerity policies.
Mapping the Minefield
a) A number of economists suggest that there are still many practical things that can be done to save the
EMU. Even if the ECB cannot alone contain the contagious effects of the financial crisis, it could buy the
bonds of Italy, Spain, and the other heavily indebted countries. But Germany, the Netherlands, and Finland
do not support the move; to them, the ECB has gone rogue if it buys bonds from the Club Med states. The
Bank could purchase low-risk covered loans, backed by packages of loans. It could encourage emergency
lending. It could lengthen loan repayment periods. It could also expand the range of securities it accepts as
collateral.
b) Instead of actively promoting more cooperation, Euro zone states seem only to be buying time as the EMU
muddles along looking for band aid solutions for what are really structural and political problems.
c) If the EMU should fall apart, the troika and Germany are sure to bear a good deal of the responsibility for
its failure.
CHALLENGES IN WORLD POLITICS
a) The dominant economic challenge is the financial crisis.
b) Growing economic competition from countries like India and China is yet another challenge. To keep its
technological lead in some sectors, the EU needs to reinforce its research and development efforts with a
special emphasis on cross-border R&D cooperation.
c) A third economic challenge is energy policy. Europe is dependent on energy imports. In recent years
Russia has shown that it will not hesitate to use its gas exports for political pressure as in the case of cutting
off natural gas to Ukraine, but also Bulgaria and Romania. The EU has pushed member states to reduce
energy consumption by using new technologies and shifting to renewable energies.
d) The EU is also worried about political developments in Russia. After a period of democratization in the
1990s, Russia, under Presidents Putin and Medvedev, has turned into an authoritarian regime. EU members
Poland and the Baltic states have been eager to defend their independence from Russia by offering to
deploy antimissile systems on their territory.
e) Another major issue in security policy is the combat against international terrorism.
f) Another major challenge for the EU is to define its relations with Islamic countries and with its own
Muslim population. Between five and ten percent of the population of countries like Germany, the
Netherlands, France, and Great Britain is Muslim. Many EU countries have had fierce debates over issues
of freedom of religion and freedom of speech that involve immigrant communities.
g) Finally, the relationship between the EU and Islam has been at the core of the debate over Turkey’s
potential membership in the EU. Turkey has been officially recognized as a candidate for membership in
the EU since 1999. Proponents of an accession of Turkey argue that its membership would help to build a
bridge between European and Islamic countries. Critics stress that, despite a number of political reforms in
Turkey, its political and judicial system is still far from meeting European standards for rule of law and
religious freedom.
CONCLUSION
a) A combination of the economic liberal, mercantilist (including realism) and structuralist perspectives help
explain different aspects of the European integration process.
b) The EU’s role in international conflicts often appears as weak.
c) Since the end of the Cold War, political negotiations in the EU have become more complicated—not only
because of the rising number of member states but also because of the rise of nationalism.
d) Despite all the EU’s historical efforts, the motivation to integrate further seems to be waning. The EU as a
whole is left with states trying to save themselves and others that resist cooperating unless the solution
satisfies them completely.
e) The EU is neither an international organization (in terms of a cooperation of independent states) nor a
federal state. Rather, it is an entity sui generis, a specific mix of supranational and intergovernmental
elements. There is a possibility that it will convert itself into two groups of states, those in the north that are
better off and those weaker states that are not prepared to integrate their economies any further.
f) There is hardly any way for the EMU to go forward without Germany. And yet, there is no way to go
backward without all EMU members paying a heavy economic price.
Key Terms:
• European Union (EU)
• austerity policies
• Economic and Monetary Union (EMU)
• Euro zone
• Integration
• Common Market
• Customs union
• Common Agricultural Policy (CAP)
• Bicycle theory
• Single European Act (SEA)
• Qualified voting majority (QVM)
• Treaty of Maastricht
• European Central Bank (ECB)
• European Parliament (EP)
• Treaty of Lisbon
• European Council
• Council of the EU
• European Commission
• European Court of Justice (ECJ)
• Troika
Teaching Tips:
• Each of the chapters in Part III of the text has a dual mission: to provide specific information while also
developing a much broader theme. This chapter, for example, provides a good deal of history and political
economy analysis of Europe and its problems and opportunities. This is important information for today’s
students, but the larger theme of integration is perhaps more important in the long run.
• A useful discussion is to contrast the tradeoff between maintaining strong national sovereignty and pursuing
deep integration. The Euro zone crisis provides an opportunity to clearly see some of these tradeoffs.
• This chapter can be supplemented with current news articles about developments in the European Union. The
Guardian website, for example, has many articles, videos and a detailed timeline of key events in European
countries since 2009. See the webpage on the Eurozone crisis at www.theguardian.com/business/debt-crisis.
• Students would benefit from being given more background on EU institutions, which they are nor usually
familiar with. Moreover, it would help to elucidate some of the competing national interests and blocs within
the EU today, and at earlier periods.
• You might want to have a longish debate about the changing role of Germany within the EU. Ask students if
Germany is re-emerging as the dominant power in Europe. Is history repeating itself? What are the dangers to
Germany of being uncooperative or pushing austerity without being willing to bail out debtor countries by
imposing short-term costs on German banks and taxpayers?
• To bring out these themes, consider “transplanting” ideas. Ask your students for examples they are familiar with
when it comes to the EU, NAFTA, and other regional organizations and institutions.
• Two major developments when it comes to integration and regionalism are: the increasing number of criticisms
surrounding the idea of globalization and its economic liberal values and policies; and the impact of the current
global financial crisis on both regionalism and integration. Discuss with students the difficulty Greece, Spain,
Ireland, Iceland, and other states are having when it comes to continuing to meet the EU requirements for debt,
the impact their problems have had on other states, and the speculation these generated that the EU could be
soon coming apart. Students may be particularly engaged by a focus on the social effects of unemployment,
foreclosure, pension cuts, and loss of health care services.
• This chapter tries to walk a fine line—not too technical in the economics and not too institutional in the politics
and sociology. Supplement and expand based on your own strengths and interests.
Sample Essay-Discussion Questions:
1. What is the European Union (EU)? How has it changed and evolved over the last sixty years? Discuss both its
broadening and its deepening. What is its importance today?
2. One theme of this chapter is the tension between the uniting forces of markets versus the dividing force of the
state. Discuss the ways that markets bring the citizens of different countries together and the economic benefits
that integration creates. Discuss the political, cultural, and historical forces that bear on the state and that
continue to divide nations.
3. Explain the difference between static efficiency and dynamic efficiency as products of economic integration.
How is each important to the integration process? Explain.
4. What is the Common Agricultural Policy (CAP)? Explain how the CAP creates tensions both among EU
members and between the EU and its international trading partners.
5. Discuss two important post-Cold War challenges facing the European Union. Why are these changes unique to
the post-Cold War period? What are possible resolutions to the problems? See some of the Teaching Tips
above, especially related to the financial crisis and the Euro zone crisis.
6. Based on recent trends, what do you think the European Union will look like in twenty years? What nations is it
likely to include? Will its focus be on economic, political, or social issues? Explain using examples from the
chapter and other readings.
7. Why do you think that the Troika has been so insistent on austerity policies in Greece, Spain, and elsewhere
when it seems evident to many economists that these policies have many intolerable and possibly
counterproductive effects? Are EU institutions behaving in ways that are undemocratic? What is the most
important institutional change the EU needs to make?
8. What would be some of the likely consequences of a breakup of the Euro zone? What would be potential
political and economic consequences of a German or Greek exit from the euro?
Sample Examination Questions:
d) Portugal and Italy.
2. This European leader envisioned a “United States of Europe” to check U.S. power and influence after World
War II.
3. Which of the following is the least restrictive form of economic and political integration?
a) economic union
4. The _____ created the original European Economic Community based on the idea of a customs union
5. According to many economic liberals, with economic integration we should expect
a) dynamic gains as nations more completely use their comparative advantages.
6. Which statement about the EU’s foreign relations is correct?
7. This president of the European Commission was heralded as the major force behind the SEA in 1987 and the
Maastricht Treaty in 1992.
8. Which of the following is NOT expected to be a result of political integration in the EU and other
organizations?
9. The Maastricht Treaty is important in the history of the EU because
10. Which of the following institutions is not part of the troika?
11. Which of the following has not been a major criticism of the Common Agricultural Policy (CAP)?
12. Which of the pairs includes one of the original six members of the European Economic Community in 1957 and
13. The Treaty of Lisbon, which went into effect in December 2009, establishes which of the following?
a) An EU president that rotates every six months
14. This EU institution is made up of the heads of state and government of all member states.
15. Which of the following statements best describes the EU’s approach to addressing the Eurozone crisis?
a) German, French, and British banks agree to forgive more than 30 percent of the debt of Greece and Spain.