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EUROPEAN ECONOMIC AND MONETARY UNION

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					   EUROPEAN
 ECONOMIC AND
MONETARY UNION
       LECTURER
     ITIR BAGDADI
              OVERVIEW

Economic   Integration
   One of the most powerful dynamics of this era in
    world politics
   Nations are increasingly driven to unite their
    economies for greater efficiency and growth
   Integrated markets do NOT necessarily mean
    integrated states
           EUROPEAN UNION
   Began life in 1957 as the European Economic
    Community (EEC) – often called the Common
    Market
   1980s - “economic” element in group's name was
    eliminated – European Community (EC) created
   1993 – name changed to the European Union (EU)
   Fundamental question: Is economics more important
    than politics?
       Does the individualistic motives of the market matter
        more than the unifying social values of the nation-
        state?
         20th   Century in Europe

   Most violent century in history
   2 common enemies:
    1. External threat of the USSR during the Cold War
    2. Internal threat of a return to divisions and conflicts
       that created war and instability in Europe in the
       past
   Europe has been able to achieve political
    cooperation and even unify by using economics
    as a political tool
                  21st Century
   Regionalism is a distinctive feature of IPE in the
    21st century
   IPE is pulled in 2 directions:
     On the one hand security concerns make the state as
      important now as it has ever been.
     At the same time, the forces of economic
      globalization are blurring the distinction between
      home and abroad. From an economic standpoint
      the world is defined by markets – and they are
      global.
                          Regionalism
   Refers to the process by which groups of nation-states, usually in
    the same geographic region, agree to cooperate and share
    responsibility to achieve common goals.
   Regional groups are “clubs” formed by nation-states to
    accomplish objectives that require coordinated or collective action
   The goals may be narrow and specific (ex. Ecotourism) or very
    broad and ambigous (like the EU)
   Regionalism takes many forms in IPE
       Regional environmental agreements, regional economic development
        programs, regional scientific and health regimes, and regional security
        arrangements
   Regionalism is not a new thing but what is new is its strength as
    an organizing force due to the incrasing importance of economic
    integration and the rise of regional trade blocs
ECONOMIC INTEGRATION

   The process by which a group of nation states
    agree to ignore their national boundaries for at
    least some economic purposes, creating a larger
    and more tightly connected system of markets
   Several degrees of economic integration:
     Free Trade Area (FTA)
     Customs Union
     Economic Union
              Free Trade Area
   Involves a relatively minimal degree of
    integration
   Nations in FTA agree to eliminate tariff barriers
    to trade for goods and services they produce
    themselves
   However, each nation still retains the right to set
    its own tariff barriers with respect to products
    from outside the FTA
   In essence, some goods are still subject to
    differential trade barriers while some goods are
    tariff-fee (for ex. Goods from other countries) –
    this leads to complications
    North American Free Trade
          Area (NAFTA)
   Example of an FTA
   Goods from the USA, Canada and Mexico will
    be traded freely within NAFTA borders
   Goods from other countries will be subject to
    differential trade barriers of these three
    countries
       (ex. Chile has negotiated three separate bilateral
        trade agreements with each of the NAFTA
        members separately)
                     NAFTA




   Trade bloc in North America created by the U.S.A,
    Canada and Mexico
   Came into effect January 1, 1994
   Between 1993 – 2004 trade among NAFTA
    members increased 129.3%
            Customs Union
        (example: Turkey - EU)
   A group of nations agree both to tariff free trade
    within their collective borders and to a common
    set of external trade barriers
   If NAFTA were to evolve into a customs union,
    the USA, Canada and Mexico would need to
    agree to a unified set of tariff barriers that would
    apply to products from other countries
   The Treaty of Rome, which created the EEC,
    was based upon the idea of a customs union
   The movement to a customs union is an
    important step in terms of economic and
    political integration
         Customs Union (cont.)
   Nations involved give up some degree of
    sovereignty or national political economy since
    they can no longer set their own trade barriers
    without consulting their economic partners
   Nations gain a far greater degree of economic
    integration
   Products flow more easily within a customs
    union without need for border inspections or
    customs fees because of the unified trade
    structure (however, member nations still retain
    right to impose some non-tariff barriers such as
    health and safety standards
     Turkey – EU Customs Union
   Came into effect on 31 December 1995
   Does not cover essential economic areas like
    agriculture (bilateral trade concessions still apply)
    and services
   Turkey applied for full EU membership in 1987
   Helsinki Summit (December 1999) – Turkey
    given candidate country status
   October 3, 2005 – European Council began
    accession negotiations with Turkey
Turkish Exports
 Turkey in World Trade in
Regional Perspective in 1993,
      1996 and 2004
Turkey’s Foreign Trade By
         Sectors
Turkey’s Foreign Trade by
    Country Groups
Direction and Dynamics of Turkey’s Trade in
1985, 1995 and 2001-2004 (in millions of dollars
                 and percent)
Change in shares in EU external
     imports in 1992-2004
             Economic Union
              (example: EU)
   The final stage of economic and political
    integration
   Non-tariff barriers are eliminated along with
    tariff barriers creating an even more fully
    integrated market
   Member nations also agree to four “freedoms”
    of movement:
     Goods
     Services
     People
     Capital
         Economic Union (cont.)
   Four freedoms represent significant limitations
    on national sovereignty but have significant
    effects on economic activity
   Free Movement of Goods:
     Goes beyond the elimination of tariff barriers
     Requires a variety of governmental health, safety
      and other standards and regulations to be
      “harmonized” so that a product that can be sold
      somewhere in the economic union can be sold
      everywhere in it
   Free Movement of Services:
       The service sector includes many industries such as
        banking and finance traditionally subject to heavy
        regulation that varies considerably among nations
         Economic Union (cont.)
   Free Movement of People:
       Requires a unified immigration policy since a person free
        to enter and work in one member of the economic union
        would be able to live and work anywhere in the area
   Free Movement of Capital:
       Individual nations give up their ability to regulate
        investment inflows and outflows
       Many nations have traditionally imposed capital controls
        to encourage domestic investment, promote financial
        stability or reduce foreign exchange variations
       These controls are not eliminated in an economic union
        but must be “harmonized” so that national regulations
        are similar enough to not become a barrier to economic
        activity
       Economic Union (cont.)

   If we consider the different state in an alliance,
    then the US is the most successful economic
    union in the world
   Economic integration is appealing because it is a
    way for nations to achieve greater efficieny in
    their use of scarce resources and higher rates of
    economic growth
   Leads to both static efficiency gains and
    dynamic efficiency gains
         Static Efficieny Gains
   With completely free trade within the area, each
    member nation is able to specialize in producing
    the goods and services in which it is most
    efficient
   Protective barriers that preserve inefficient
    industries and promote redundancy are
    eliminated
   The creation of a large, integrated market
    promotes efficiency in certain industries where
    large scale production or long production runs
    are possible. These gains from “economies of
    scale” make products cheaper and more
    competitive
      Dynamic Efficiency Gains

   Promotion of economic growth
   A larger and more competitive market is likely
    to be more innovative
   As internal trade barriers are removed,
    previously protected firms are forced to
    compete with one another and this makes them
    more “efficient”
   If economic integration is successful, economic
    growth rates tend to increase, which raises living
    standards
            Trade Diversion Effect
   Regional Trade Blocs became important and
    controversial in the 1990s because of the trade
    diversion effect of a FTA, customs union or economic
    union
   By dropping internal barriers members create more
    trade between and among member nations
       Some of this is newly created trade but some of it is trade
        that is lost from another non-member partner
       Ex. With NAFTA, Mexican trade to the USA increased
        while other developing nations’ trade decreased
                      Trade Diversion
   Trade diversion is a two-fold problem:
       It is an economic problem because it means that economic
        integration is not as efficient as it may seem. Trade blocs
        may be economically beneficial for the nations that form
        them but they create inefficiency and economic loss for
        other countries that suffer the loss.
       It is also a political problem since as more and more
        countries enter into regional economic groups non members
        find themselves locked out and vulnerable. They have a
        strong motivation to gain membership in an existing bloc to
        get trade creation effects or to form their own bloc with
        other countries in the same boat.
            The threat of trade diversion and of being left out has led to an
             expansion in size and number of trade blocs
          Sovereignty at Risk:
        The Politics of Integration
   There are many political implications that
    should be considered when looking at an
    economic union
     Trade-offs between economic benefits and political
      costs
     Cooperation in economic sphere = cooperation in
      political sphere
          Example: an economic union requires that a nation
           negotiate a new immigration policy, safety standards,
           methods of financial regulation and adopt a harmonized
           system of investment controls
          Political choices no longer influenced mainly by domestic
           voters and groups – now the wishes of groups in other
           member states must also be considered
    Politics of Integration (cont.)
   Fundamental problem: loss of sovereignty that
    occurs when nations form regional trade blocs
   At some point each member state risks being forced
    to ignore national interests as a consequence of
    maintaing its international obligations
   This tension between national interest and
    international obligations poses a severe dilemma for
    states which tend to value security and autonomy
   Another school of thought that does not believe that
    economic integration weakens political power states
    that integration weakens the hold of national interest
    groups on political decisions – specific interest
    groups are less likely to benefit and resulting policies
    will reflect the public interest
    Politics of Integration (cont.)
   Another argument states that individual nations
    may actually gain political power, especially in
    relations with other nations, by being members
    of a powerful economic alliance.
       Example: Belgium – a more powerful political
        presence as a leading nation of the EU than if it
        were simply a small but autonomous European
        nation
   Basically, it is argued that smaller countries are
    far more powerful as members of a larger group
    than tney would be as separate, unaffiliated
    individual nations
European Economic Community
           (cont.)
   Movement toward a united Europe was founded
    upon two important ideas:
    (1)It is possible for nations to live in a state of “perpetual
      peace” (attributed to Immanuel Kant) under a federal
      system of governance, where each yields some
      sovereignty and sacrifies some national interests in return
      for like actions by others. However, it was difficult to
      transform an environment of nearly perpetual war
      (Europe from 1914-1945) into one where Kant's vision
      of perpetual peace would take hold
    (2)Economic cooperation and the gains therefrom would
      strengthen the cooperative ties that bind European
      nations together (attributed to David Ricardo)
European Economic Community
           (cont.)
   More than perpetual internal peace was desired.
    Postwar Western leaders sought to create strong,
    democratic, capitalist nations to a firm wall of
    resistance to the spread of communism
   Marshall Plan (1948):
       The first formal postwar step toward building an
        integrated European economy
       President Harry S. Truman's Secretary of State,
        General George Marshall called upon the nations of
        Europe to form a continentwide economic market
        like the USA
       Marshall Plan aid was designed to hasten economic
        recovery by providing a resource base on which to
        build a European community
         How different states viewed
           European integration
   USA – saw European integration as a strong anticommunist ally
   Many Europeans – supported it as a solution to the “German
    problem” – the need to embed German political and economic
    power in supranational insitutions
   Germany – wanted to be reintegrated into the international
    community after the disaster of Nazism
   Great Britain – Winston Churchill saw the “United States of
    Europe” as a balance to US influence in the postwar era
   France – President Charles de Gaulle imagined a “Europe of
    States” in which the structure of regionalism would enhance the
    sovereignty and status of all its members
European Economic Community
           (cont.)
   An integrated Europe also needed European
    leadership
   Jean Monnet, a French political economist,
    provided the intellectual guidance
     He proposed an alliance along functional economic
      lines: a zone of free trade uniting the heavy industry
      regions that spanned the French-German border
     This plan for the European Coal and Steel
      Community (ECSC) was implemented by Robert
      Schuman, a French statesman, in 1950
   ECSC was a critical test for Europe and
    provided a model for futher integration in
    Western Europe
European Economic Community
           (cont.)
   1957 – Treaty of Rome:
     Created the European Economic Community
      (EEC, or the Common Market) – a customs union
      that brought together the markets of Italy, France,
      Belgium, Luxembourg, the Netherlands and West
      Germany
     This union of “the six” was a great success because
      these nations were natural trading partners
     Great Britain participated in the negotiations but
      decided against it for fear of losing political and
      economic autonomy and preferential trading
      relations with the Commonwealth nations and the
      USA
    European Economic Community
               (cont.)
   European Free Trade Area:
       Great Britain did not want to be isolated from the rest of
        Europe and organized a weaker alliance of trading
        nations called the European Free Trade Area (EFTA)
       EFTA brought together Denmark, Sweden, Austria,
        Switzerland, Portugal and the United Kingdom
       An FTA, being more restricted than a customs union,
        could never offer these nations the benefit of a common
        market
       Geographic separation, deep cultural divisions, huge
        economic gaps between rich and poor members
        contributed to limit trade and growth
       EFTA members soon sought EEC membership
European Economic Community
           (cont.)
   Trade among EEC members was never entirely free – non-
    tariff barriers to trade abounded and sometimes nations
    would simply refuse to accept imports of any items from
    another member, in violation of the Treaty of Rome because
    of domestic political or economic concerns
   It was also necessary to create an elaborate system of
    agricultural subsidies across the EEC to defuse political
    opposition from powerful farm groups
      The Common Agricultural Policy (CAP) provided for a
        complex pattern of payments to farmers in all EEC
        nations
European Economic Community
           (cont.)
   Although a far cry from free trade and laissez-
    faire, CAP was the price of achieving greater
    liberalism and cooperation in other spheres of
    economic life.
   The CAP eventually led to a budget crisis in the
    1980s
   The EEC changed its name to the European
    Community (EC) in 1967 signaling intention to
    move beyond purely economic issues
    Common Agricultural Policy
   One of the most controversial and divisive
    elements of economic and political integration
    in Europe
   An EU-wide system of agricultural subsidies,
    financed through value-added-taxes imposed by
    EU member nations
   Largest item of expenditure of the EU and has
    been a point of contention both within the EU
    and in its relations with other nations
   Perfect example of the use of economic means
    to achieve political ends
Common Agricultural Policy
    Common Agricultural Policy
            (cont.)
   When the EEC was being formed, farm interests were a
    major political obstacle
   Farmers feared a more comopetitive market would make
    them suffer to sell their own goods
   Since farm groups could have potentially blocked the
    European integration the CAP was created
   CAP created a unified system of farm subsidies that
    insulated farmers from many aspects of competitive market
    forces
   CAP can be thought of as a system that collected some of
    the economic gains of European integration in the form of
    taxes that were then paid to farmers in exchange for their
    political support
    Common Agricultural Policy
            (cont.)
   Provides Europe's farmers with high prices
    through a system of price supports – the EU
    purchases excess farm produce to keep prices
    from falling and farm incomes from declining –
    a system that benefits farmers at the expense of
    the tax-paying public
   Over the years the CAP's guarantees have
    encouraged European farmers to over-produce
   CAP is now a source of deep political
    disagreement
    Common Agricultural Policy
            (cont.)
   Problems of CAP:
    (1)As the EU expanded, the cost of maintaining agricultural
       subsidies has grown. Rising costs have pitted nations that
       are net recipients of CAP funds against nations that are net
       payers of the taxes that fund the program
    (2)The future of the EU's expansion into Central and Eastern
       Europe have created additional pressures. The countries
       that believe they unfairly pay the bills are worried that the
       bills will get larger. At the smae time, current EU members
       are fearful that more subsidies to new EU members will
       come at the expense of payments to their own farmers
    (3)EU is under pressure from the US and other countries to
       reduce agricultural subsidies generally as part of the WTO's
       process of trade liberalization
- Plans are in the works to reduce agricultural
   subsidies
 Common
Agricultural
  Policy
     The European Community,
             1973-1993
   The second stage of development of the EU
    lasted from 1973-1993
   Great Britain, Ireland and Denmark entered the
    EC in 1973
   Greece entered in 1981, followed by Spain and
    Portugal in 1986
       EC membership for these three countries was in
        part a reward for the triumph of democratic
        institutions over authoritarian governments. Free
        trade and closer economic ties were intended to
        solidify democracy and protect it from communist
        influence
The European Community (cont.)
   The entry of poorer nations of Ireland, Greece,
    Spain and Portugal magnified a variety of
    tensions within the EC
     Lower living standards limited the extent of their
      trade with richer member states
     Lower wage structures threatened some jobs in EC
      industries
     The entry of four largely agricultural nations to the
      EC institutions, like the CAP, put severe fiscal
      strains on the other nations
The European Community (cont.)
   These economic and political stresses caused a split in
    the EC.
   Jacques Delors, the new president of the European
    Commission tried to find a way to reunite the EC and he
    produced a proposal for the creation of a single market
    by 1992 – the Single Market Act
   Although it seemed as if the EC was already a single
    market, it was still far from its goal
   The goals were the “four freedoms”:
       Free movement of goods
       Free movement of servies
       Free movment of capital
       Free movement of people
The European Community (cont.)
   National sovereignty and economic growth were
    often in conflict
       For example: Germany wanted its stringent
        environmental laws applied to the EC but Portugal
        and Greece objected because it was too costly
   The four freedoms required sacrifice of some
    domestic freedoms, such as the right to self-
    determination of environmental and safety
    standards
   Not all of the goals of the Single Market were
    achieved by 1/1/1993, the basic thrust of the
    program succeeded, however, Europe did not
    immediately experience economic growth
                            1995-2003
   1995 –
       Accession of Austria, Finland and Sweden to the EU
       Schengen Agreement (abolishing border controls) implemented by
        Germany, France, Benelux states, Spain and Portugal
   1997 - European Council agrees on the Treaty of Amsterdam
    strengthening EU institutions
   1999 – The Euro goes into effect in 11 of the 15 EU member
    states
   2000 – European Council agrees on the Treaty of Nice
   2002 – Euro coins and banknotes enter circulation and replace
    national currencies
   2003 – The Draft of a Constitution for Europe presented
EU-27
                         EU-27
   2004:
      10 new states (Czech Republic, Slovakia, Slovenia,
       Hungary, Poland, Cyprus, Malta, Lithuania, Latvia and
       Estonia) joined the Union
      The European Council signs the treaty establishing a
       Constitution for Europe
   2005 – The treaty for establishing a constitution is
    rejected in referanda in France and the Netherlands
   2007:
      Bulgaria and Romania join

   Today:
      Croatia, Turkey and Macedonia await future
       membership
    Political Institutions of the EU
   The Treaty of Rome did more than commit six
    nations to economic integration – it also began
    the process of developing a set of political
    institutions to make policy, settle disputes and
    provide leadership for Europe
   The most important political institutions in the
    EU today are:
     The European Commission (and its President)
     The Council of Ministers
     The European Council
     The European Parliament
     The European Court of Justice
    Political Institutions of the EU
                 (cont.)
   Each of these institutions plays a specific role in
    setting the delicate balance between the national
    interests of member nations and the collective
    interest of the EU
   President of the
European Commission
   Head of the state of the EU
   Leads the European Commission
   Represents EU to other nations
   Jose Manuel Barroso, the former Prime Minister
    of Portugal, began his term in 2004, taking over
    from Romano Prodi, the former Prime Minister
    of Italy
       European
      Commission

   The executive branch of the EU serving much the
    same function as the cabinet in the USA or UK
   Proposes legislation to the Council of Ministers
   Administers EU programs
   Represents the EU in economic relations with
    other countries or international organizations
   Each commissioner has a special “portfolio” of
    responsibilities, such as competition or agriculture
          Council of Ministers
   Main lawmaking body of the EU
   Composed of a single representative from each
    member nation
   The Council can accept or reject legislation
    proposed by the European Commission, but it
    cannot draft legislation itself
   Intended to provide a balancing forum for more
    narrow national interests
   The voting rules of the EU allow a minority of
    member states to block action in the European
    Commission when they believe their national
    interests are threatened
            European Council
   Meetings of the EU heads of states and
    governments are called the European Council
   Meetings are held at least once every six months
    by the country holding the Presidency of the
    Council of Ministers
          European Parliament
   The only body of the EU whose members are
    directly elected by the citizens of its member
    states
   European Parliament committees review
    legislation proposed by the European
    Commission and may propose amendments to
    the legislation before submitting it to the
    Council of Ministers
   May veto a proposal after it reaches the Council
    of Ministers if it does not agree with the
    Council's position
   Has 736 members as of 2009
    European Parliament (cont.)
   Organized along political party lines, not
    according to national citizenship
       For example: socialists from all EU nations act
        together, as do conservatives and other groups
   Provides a forum for debate and discussion
    from the perspective of political ideology, not
    national interest (Council of Ministers) or
    European interest (European Commission)
   Not a legislative body but can have important
    influence over EU policies
European Parliament
           European Parliament
   National apportionment of MEP seats
    (2009) Germany99 France72 Italy78 United
    Kingdom72 Spain50 Poland50 Romania33 Neth
    erlands25 Belgium22 CzechRepublic22 Greece22
     Hungary22 Portugal22 Sweden18 Austria17 Bul
    garia17 Finland13 Denmark13 Slovakia13 Irelan
    d12 Lithuania12 Latvia8 Slovenia7 Cyprus6 Esto
    nia6 Luxembourg6 Malta5

   Total: 736
     European Court of
          Justice
   “Supreme Court” of EU law
   Composed of 15 judges who are appointed to
    six-year terms
   Deals with disputes between member
    governments and EU institutions and among
    EU institutions and with appeals against EC
    rulings or decisions
   Made up of one representative from each of the
    EU member nations
                             European
                              Central
                               Bank



   EU's central bank
   Created after the decision to adopt the euro
   Executive board, appointed for eight-year terms, and a governing
    board which includes the executive board and the heads of all
    EU member nation central banks
   Currently responsible for the monetary policy of the 16 member
    states of the Eurozone
       (Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland,
        Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and
        Spain)
                    The 1990's
   The collapse of communism eliminated the
    threat of Soviet domination but not the need for
    peaceful cooperation
   The questions for Europe now are:
     Is Europe just a geographical unit that lies north of
      Africa and west of Asia?
     Will it be united by money (its common currency,
      the euro) alone?
     Or will it become more – Europa – a people with a
      common will?
Post-Cold War Issues Confronting the EU
     The EU was confronted with at least several issues at
      the end of the Cold War:
      1) The Ever-Wider Union:
          ✗ How  to accommodate the new demands for membership in the EU
            without hopelessly alienating current EU members
          ✗ How to deal with rising membership applications at the end of the
            Cold War
          ✗ 12 countries filed formal membership applications:
              ✗   Cyprus, the Czech Republic, Estonia, Hungary, Poland and Slovenia
                  were given top priority – joined in 2004
              ✗   Bulgaria, Latvia, Lithuania, Romania and Slovakia were given second
                  priority – joined in 2004 (with the exception of Romania and Bulgaria
                  which joined in 2007)
              ✗   Croatia awaits membership and Macedonia has received candidate
                  status
              ✗   Turkey's application continues to be snubbed
          ✗ New   members were and will continue to be poorer than current
            members causing tension between member states
          ✗ Like it or not, the EU opened its gates to these countries to ensure
            democracy persists
           Post-Cold War Issues
         Confronting the EU (cont.)
2)       The Challenge of the Regions:
     ✗     What to do about demands for greater regional autonomy
           within the EU
     ✗     As nation-states secede power within the EU, regions have
           begun to assume more importance
     ✗     Sometimes the regional focus is rooted in culture, for ex.:
           Catalan region in Spain
     ✗     In other places the issue is money and the perceived need
           to be free of the shackles of national government, for ex.:
           Bavaria in Germany and Northern Italy
     ✗     The EU needs to find a way to address the desires of richer
           regions while trying to accommodate newer members
            Post-Cold War Issues
           Confronting EU (cont.)
3)       The Security Issue:
     ✗    How to deal effectively with security issues other
          than the Soviet threat
     ✗    EU is surrounded by conflicts (the Balkans,
          Middle East, North Africa) and threats (terrorists,
          environmental dangers, organized crime, illegal
          immigration)
     ✗    Europe needs a common defense policy,
          however, a collective policy would require a good
          deal more political unity than the EU has ever
          demonstrated in the past
           Post-Cold War Issues
         Confronting the EU (cont.)
4)       The German Problem:
     ✗    How to make sure that Germany remains committed to a
          united Europe without dominating it
     ✗    The German problem was one of the original problems
          that the EC was meant to address
     ✗    Germany today, a decade and one half after unification of
          its Eastern and Western sections, finds itself bound by the
          EU to the rest of Europe but faced with very serious
          economic, social and political problems at home, both in
          the poorer Eastern provinces and in the rising tensions
          between East and West
     ✗    Germany has so many domestic problems that it would be
          natural for it to put domestic issues above those of
          European unity
✗        RISING NATIONALISM – a new problem??
           Post-Cold War Issues
         Confronting the EU (cont.)
5.   The Political Challenge of the Euro
        Once the Euro was launched in 2002 the member nations
         faced a transformed political environment
        Their ability to influence domestic economic conditions
         was much reduced and interest rates were now set by the
         ECB and not the policymakers of these states – this left
         national leaders in an awkward position.
        One state’s economic problems also become problems of
         other member states (ex. Greek financial crisis)
           Post-Cold War Issues
         Confronting the EU (cont.)
6.   The Constitutional Challenge
        In its movement towards an “ever closer union”
         the EU is aiming at political union and an EU
         constitution – this raises issues of national
         sovereignty.
        The draft of the Constitution was rejected in
         referanda in France and the Netherlands in 2005
             Monetary Union
   Discussed in Maastricht in 1991
   France proposed a single currency
   In theory, a monetary union was supposed to
    address the four issues mentioned previously
   A single currency would make European
    markets more efficient and Europe's economies
    more dynamic
   It would provide economic gains to offset the
    costs of enlargement and boost the prospects of
    the regions; the German problem would be
    soved because Germany would be chained to
    the rest of Europe with money
         Monetary Union (cont.)
   Finally, political cooperation would be
    accomplished through an indirect mechanism –
    with a single currency EU nations would need to
    cooperate more on political issues
   Germany did not have much interest in a
    common currency. It saw more to lose than to
    gain because of its strong deutschemark –
    however Germany wanted a political union
        Monetary Union (cont.)
   A deal was struck – Germany would gets its
    political union and France would get its
    monetary union (before Maastricht)
   However, at the end of Maastricht, the
    monetary union had been adopted and the
    political union was not
   The criteria for nations to be part of the single
    currency:
     Low government debt
     Low inflation rates
     Low interest rates
   Greece initially failed to qualify on economic
    grounds and the UK and Sweden opted to
    remain outside the euro zone
     Political Economy of the Euro
   The euro is still a political issue
     The name euro was chosen because it means nothing
      in any European language (ECU – European
      Currency Unit was considered but was rejected
      because France once had such a coin in medieval
      times)
     Images on any euro currency look like what appears
      to be classic Europe but none of them are authentic
      because putting any real European scene could lead to
      disagreements
     The euro symbol € means nothing
    Political Economy of the Euro
   Three levels of political issues that surround the euro:
     1) The monetary union has created a reason for nations to
        unify in the absence of a common security threat. Being
        left out of the euro might mean being doomed to
        peripheral status.
     2) Qualifying for membership in the monetary union has
        forced European nations to make very difficult political
        decisions like cutting government spending, increasing
        taxes and becoming more laissez-faire.
     3) The single currency changes the domestic political
        environment – member nations will not longer be able to
        spend their way out of a recession or print money to pay
        for unemployment because fiscal autonomy is
        surrendered.

				
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