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					     Economics and Policies in an
            enlarged EU

1.   History and Institutions

2.   EU Economy:
          2.1 Growth, Cohesion and Stability
          2.2 The Lisbon process and its review
          2.2 Current situation and forecast

3.   EU Budget




                            Mario Nava
                       European Commission
                          December 2007
        1.

History and Institutions
                                                               1950 - 1980
9 Maggio 1950: In un discorso inspirato da Jean Monnet, Commissaire au Plan francese, Robert Schuman, il
Ministro degli Esteri francese, propone che Francia e Germania e tutti gli altri Paesi europei che lo desiderano
uniscano le loro risorse di carbone e acciaio (“Dichiarazione Schuman”). La Repubblica Federale tedesca, guidata
da Konrad Adenauer, risponde favorevolmente all‟appello.

18 Aprile 1951: I Sei (Belgio, Francia, Germania, Italia, Lussemburgo, Paesi Bassi) firmano il Trattato di Parigi che
istituisce la Comunità Europea del Carbone e dell’Acciaio (CECA).
30 agosto 1954: l‟Assemblea nazionale francese respinge il Trattato CED per la creazione di una comunità europea
di difesa, fortemente voluto da Alcide De Gasperi.
25 Marzo 1957: I Sei firmano a Roma i Trattati istitutivi della Comunità Economica Europea (CEE) e della
Comunità Economica Europea per l’Energia Atomica (Euratom); oggi questi sono noti come i Trattati di Roma.
1 Luglio 1967: Il Trattato sulla Fusione degli Esecutivi, unisce le istituzioni delle tre Comunità (CECA, CEE,
Euratom). Da adesso in poi le Comunità Europee avranno una sola Commissione ed un solo Consiglio.
31 dicembre 1969: termina il periodo transitorio per la costituzione del mercato interno stabilito dal Trattato di
Roma. Entrano in vigore le politiche comunitarie (tra cui la PAC) e l‟unione doganale (con la relativa tariffa
esterna comune già in vigore dal 1/7/1968).
10 dicembre 1974: Al vertice di Parigi, Francia, i capi di Stato e di governo decidono di riunirsi due volte l‟anno
come Consiglio europeo.
13 marzo 1979: Il Consiglio europeo, riunito a Parigi stabilisce l‟entrata in vigore con effetto immediato del Sistema
monetario europeo (SME).
7-10 Giugno 1979: Si svolgono le prime elezioni a suffragio universale del Parlamento Europeo.
                                                             1980 - 1998
17 Febbraio 1986: Viene firmato a Lussemburgo l‟Atto Unico Europeo che reca importanti modifiche procedurali
e di merito al Trattato di Roma (1 luglio 1987).
1 Luglio 1990: Si dà avvio alla prima fase dell’Unione Economica e Monetaria (UEM) in coincidenza con
l‟implementazione di una delle disposizioni dell‟Atto Unico (libertà circolazione capitali).
16 Dicembre 1991: Vengono siglati gli ”Accordi Europei" con Polonia, Ungheria e Repubblica Ceca. Una bozza
di Trattato è elaborata a Maastricht a seguito del termine dei lavori di una Conferenza Intergovernativa
sull‟Unione Economica e Monetaria. Vengono creati i Tre pilastri: politiche comunitarie, Giustizia e Affari Interni
(GAI, poi Cooperazione di Polizia e Giudiziaria in materia Penale), Politica Estera e di Sicurezza Comune (PESC).
7 Febbraio 1992: Viene firmato a Maastricht il Trattato sull’Unione Europea (TUE) e viene contestualmente
emendato il Trattato che istituisce la Comunità Europea (TCE) (1 novembre 1993).
22 Giugno 1993: Il Consiglio Europeo di Copenhagen sancisce che i Paesi associati dell‟Europa Centro-Orientale
potranno diventare Stati Membri non appena soddisferanno tre criteri (cd. “criteri di Copenhagen”: politico,
economico, acquis communautaire). Lo stesso consiglio fissa un “quarto criterio” che s‟applica all‟Unione e che
serve a determinare se essa è pronta ad accogliere nuovi membri.
1 Gennaio 1994: Inizia la II fase dell’Unione economica e monetaria. Viene istituito l‟Istituto Monetario Europeo,
precursore della BCE.
17 Giugno 1997: Il Consiglio Europeo riunito ad Amsterdam elabora un nuovo Trattato (1 maggio 1999) per
tenere conto delle dinamiche dell‟allargamento e di più estese competenze comunitarie.
30 Marzo 1998: Il Consiglio apre il processo di formale adesione di 5 Paesi dell‟Europa Centro-Orientale (Estonia,
Polonia, Rep. Ceca, Slovenia, Ungheria) e di Cipro.
3 Maggio 1998: un Consiglio Europeo Straordinario decide che 11 Stati Membri soddisfano i requisiti per entrare
a far parte della nuova moneta unica europea a partire dal 1 gennaio 1999. Viene costituito il Comitato Direttivo
della nuova Banca Centrale Europea con la nomina del suo Presidente.
                                    Gli allargamenti
                1995                     dell’UE




         1973                     Helsinki Group


                              Luxembourg    2004
                              Group

       1957
                                    2007
1986
                                           Turchia
                                             (?)

                       1981
                                                             1999 - 2001
1 Gennaio 1999: Viene ufficialmente varato sui mercati internazionali l‟Euro. Austria, Belgio, Finlandia,
Francia, Germania, Irlanda, Italia, Lussemburgo, Olanda, Portogallo e Spagna fissano in maniera irrevocabile i
propri tassi di cambio e rinunciano alla sovranità monetaria nazionale a favore di un organismo
sovranazionale, la BCE.
15 marzo 1999: La Commissione si dimette in blocco in seguito alla presentazione della relazione del
Comitato di esperti indipendenti sui presunti casi di frode e cattiva gestione in seno alla Commissione, e sotto
la minaccia di una mozione di censura da parte del Parlamento europeo.
25 Marzo 1999: Il Consiglio europeo straordinario di Berlino vara le nuove prospettive finanziarie (2001-
2006) ed approva l‟Agenda 2000. A Romano Prodi viene offerta la Presidenza della Commissione europea.
14 Febbraio 2000: Viene avviata una nuova Conferenza Intergovernativa per le Riforme Istituzionali
dell’Unione a seguito del disposto del “Protocollo sulle istituzioni nella prospettiva dell‟allargamento” allegato
al Trattato di Amsterdam.
15 Febbraio 2000: Il processo di formale adesione dei Paesi dell‟Europa Centro-Orientale viene esteso ai
rimanenti 5 Paesi (Bulgaria, Lettonia, Lituania, Romania, Slovacchia) ed a Malta, con l‟avvio dei negoziati di
adezione. La Turchia conquista lo status formale di Paese candidato ma non vengono aperti negoziati con
quest‟ultima.
15 Marzo 2000: Il Consiglio straordinario di Lisbona approva la strategia di Lisbona per lo sviluppo
sostenibile, l‟occupazione e la coesione in Europa.
11 Dicembre 2000: Si chiude a Nizza la Conferenza Intergovernativa con un progetto di nuovo Trattato che
costituisce la base giuridica delle Istituzioni “allargate”.
15 Dicembre 2001: Il Consiglio europeo adotta la “Dichiarazione di Laeken sul futuro dell’Unione
europea” a seguito del “Protocollo sul futuro dell‟Unione” allegato al Trattato di Nizza.
                                                                2002 - 2004
28 Febbraio 2002: ultimo giorno di validità legale per le valute nazionali, sostituite dall‟Euro. Iniziano a Bruxelles i
lavori della Convenzione per le riforme istituzionali dell‟UE.
9 Ottobre 2002: la Commissione valuta che otto paesi dell‟Europa Centro-Orientale (Estonia, Polonia, Rep. Ceca,
Slovenia, Ungheria, Slovacchia, Malta e Cipro) soddisfano i criteri di Copenhagen.
19 Ottobre 2002: L‟Irlanda è l‟ultimo paese a ratificare il Trattato di Nizza (1 febbraio 2003).
25 Ottobre 2002: un Consiglio europeo straordinario tenutosi a Bruxelles approva la proposta della Commissione
sull‟allargamento, e prepara la chiusura dei negoziati di adesione (accordo agricolo).
12 - 13 Dicembre 2002: il Consiglio europeo di Copenhagen chiude ufficialmente i negoziati di adesione con gli
otto PECO, approvando per questi paesi un pacchetto finanziario di aiuti per gli anni 2004-2005-2006; si persegue
l‟obiettivo di accogliere la Bulgaria e la Romania nel 2007; resta sospesa la questione della Turchia.
1 Febbraio 2003: entra in vigore il Trattato di Nizza. Le disposizioni del Trattato relative alle Istituzioni
“allargate” entreranno in vigore dal novembre 2004, all‟insediamento della nuova Commissione europea.
16 aprile 2003: firma ad Atene dei Trattati di adesione dei Paesi candidati
20 Giugno 2003: presentazione al Consiglio europeo di Salonicco del progetto di Costituzione europea.
1 maggio 2004: ingresso dei nuovi Paesi candidati.
8-13 giugno 2004: elezioni per la nomina del Parlamento Europeo allargato a 25 Paesi.
29 ottobre 2004: firma a Roma del Trattato che adotta una Costituzione per l’Europa”, avvio della procedura di
ratifica da parte dei 25 Stati membri.
22 novembre 2004: entra in carica la nuova Commissione europea allargata a 25 Paesi.
17 dicembre 2004: il Consiglio europeo decide l‟avvio di negoziati per l‟adesione della Turchia.
                                                                 2005 - 2007
2 Febbraio 2005: mid-term review della Strategia di Lisbona.
2004-2005: iniziano le ratificazioni nazionali. Tutti si, tranne Francia e Olanda (5/05 e 6/05). Il processo di ratifica è
praticamente congelato.
3 Ottobre 2005: l‟Unione europea apre ufficialmente le negoziazioni con la Turchia.
15-16 Dicembre 2005: Le prospettive finanziarie per il periodo 2007-13 sono adottate all‟unanimità dal Consiglio di
Bruxelles sotto presidenza UK.

Luglio 2006: Adesione della Slovenia alla zona euro dal 1 gennaio 2007.
1 Gennaio 2007: Allargamento dell‟Unione Europea a 27 Stati Membri con l‟ingresso di Romania e Bulgaria.
Giugno 2007: Accordo sotto Presidenza tedesca sul Trattato di Lisbona.
20 Novembre 2007: La riforma del mercato interno.
                  Institutions
• Three main
   – COMMISSION, COUNCIL and EP
• Two Consultative
   – Comité Economique et Sociale (CES),
   – Comité des Régions (CdR)
• Two Courts
   – Court de Justice (CdJ),
   – Court des Comptes (CdC)
• Financial Institutions
   – ECB, EIB, EBRS
The Nice weighting of votes in the Council in EU-25

    Old member State   Weight     New member State   Weight
    Austria            10 (4)
    Belgium            12 (5)     Bulgaria           10
    Denmark            7 (3)      Cyprus             4
    Finland            7 (3)      Czech Republic     12
    France             29 (10)    Estonia            4
    Germany            29 (10)    Hungary            12
    Greece             12 (5)     Latvia             4
    Ireland            7 (3)      Lithuania          7
    Italy              29 (10)    Malta              3
    Luxembourg         4 (2)      Poland             27
    Netherlands        13 (5)     Romania            14
    Portugal           12 (5)     Slovakia           7
    Spain              27 (8)     Slovenia           4
    Sweden             10 (4)
    United Kingdom     29 (10)

    Total              237 (87)   Total              108
The Nice weighting of seats at the EP in EU-25

      Old member State   Seats       New member       Seats
                                     State
      Austria            17 (21)     Bulgaria         17
      Belgium            22 (25)     Cyprus           6
      Denmark            13 (16)     Czech Republic   20
      Finland            13 (16)     Hungary          20
      France             72 (87)     Estonia          6
      Germany            99 (99)     Latvia           8
      Greece             22 (25)     Lithuania        12
      Ireland            12 (15)     Malta            5
      Italy              72 (87)     Poland           50
      Luxembourg         6 (6)       Romania          33
      Netherlands        25 (31)     Slovakia         13
      Portugal           22 (25)     Slovenia         7
      Spain              50 (64)
      Sweden             18 (22)
      United Kingdom     72 (87)
      Total              535 (626)   Total            197
      The Nice weighting of seats in the Council, at the EP
      compared with population and wealth in EU-25




            Pop           GDP           Council        EP      Comm.
            455 ml                      (321)          (682)   (25)
D           90 ml         25%           29             99      1
            (20%)                       (9%)           (15%)
I-F-UK      180 ml        50%           87             216     3
            (40%)                       (29%)          (33%)
N10         80 ml         5%            84             147     10
            (18%)                       (27%)          (22%)
€12         300 ml        70%           191            432     12
            (70%)                       (60%)          (65%)
    2.

EU Economy
                                        Tools




                               Objectives


Growth – Stability – Cohesion as the main EU objectives
       The EU Economic system of tools and goals


              CUSTOM UNION & COMMERCIAL POLICY
                       SINGLE MARKET
                     COMPETITION POLICY




                        Growth


                      LISBON STRATEGY
    EMU
    SGP                                          EU BUDGET



Stability                                  Cohesion
                Five key tools
•   Customs Union (CU) and of a Common External Tariff
    (CET), since 1968.
•   Single Market Program as a strategic objective for the
    period 1986 to 1992.
•   The so-called “Financial Perspectives” in 1988, which
    were meant to structure, within a single instrument (the
    EU budget), the multi-annual economic policy at the
    EU level.
•   The progressive establishment of the Economic and
    Monetary Union from 1993 and its related rules
    (namely, the Maastricht Treaty and the Stability and
    Growth Pact)
•   The adoption of the so-called “Lisbon Agenda” in
    March 2000 supposed to inspire EU economic policy
    for the period 2000-2010
         Economic Action: :
Two key juridical principles (Art 5 TEC)
• principle of conferral: “only within the limits of
  the competences conferred upon it by the
  member States”,
• principle of subsidiarity: “only if and insofar as
  the objectives of the intended action cannot be
  sufficiently achieved by the member States,
  either at central level or at regional and local
  level, but can rather, by reason of the scale or
  effects of the proposed action, be better
  achieved at Union level”.
     Common sense principle
• “Double market failure”: the EU acts if a
  “double failure” realises:
  – the market cannot do it and
  – the national or regional authority cannot or do
    not have the right set of incentives to act.
Growth, Cohesion and Stability
• Results
• Means
                    Europe and the World
                            Population            GDP at PPP            GDP per head          GDP growth
                              (2005)                (2005)                 (2005)             (1998-2007)
                           (% of world)           (% of world)           (EU27=100)          (% per annum)
EU27                            7.6                   20.4                  100.0                 2.4
(Euro area)                    (4.9)                 (14.8)                (112.5)               (2.1)

Neighbours*                    10.9                    8.5                    29.1                4.2
(Russia)                       (2.3)                  (2.6)                  (42.1)              (5.4)

United States                   4.6                    20.1                  162.8                3.1

Other advanced                  4.5                   13.9                   115.1                1.8
(Japan)                        (2.0)                  (6.4)                 (119.2)              (1.3)

Emerging                       60.8                    34.5                   21.1                6.1
economies**
(China)                       (20.7)                  (15.4)                 (27.7)              (9.1)
(India)                       (17.3)                   (6.0)                 (12.9)              (6.6)
(Brazil)                       (2.9)                   (2.6)                 (33.4)              (2.4)

Other                          11.6                    2.6                     8.3                4.3
developing***

World                         100.0                   100.0                   37.2                4.1

-G7****                        11.4                    41.2                  134.6                2.4
-BRICS*****                    43.2                    26.6                   23.0                7.8


* Rest of Europe (including Russia and other CIS countries), Middle East and North Africa.
** Developing Asia and Latin America
*** Sub-Saharan Africa.
**** Canada, France, Germany, Italy, Japan, United Kingdom and United States.
***** Brazil, Russia, India and China.
Source: Sapir (2007).
                 Growth
• An excellent start turned into a
  disappointing outcome till mid „00s, then
  better results in more recent years
• The challenge is to understand why….
• ….and to maintain it!
                                                       GROWTH

GDP per capita in PPS for EU-15, EU-25 and Japan, 1950-2005 (US=100)


                 90

                 70

                 50

                 30

                 10
                        1950   1955   1960   1965   1970   1975   1980   1985   1990    1995   1997   2000   2003   2004   2005
                                                                                                                            (f)


                                                    EU-15           EU-25              Japan          US



 Source: Altomonte and Nava (2005), Chapter 5 on the basis of Sapir et al. (2004) and Eurostat data.
 Values for 2005 are forecasts.
EU vs. US average real growth, 1970-2005 (constant prices 1995)



                         4
                      3.5
                         3
                      2.5
                         2
                      1.5
                         1
                      0.5
                         0
                               1970-1980          1980-1990         1990-1995          1995-2000          2000-2005

                                               EU-15 growth            EU-25 growth             US growth




Source: Authors‟ elaboration on the basis of Sapir et al. (2003) and Eurostat data. Values for 2004 and 2005 are forecasts.
                               US vs. EU and Italy

                                 Tasso di crescita del Pil reale

     5
    4.5
     4
    3.5
     3
    2.5
     2
    1.5
     1
    0.5
     0
          1995   1996   1997   1998        1999    2000       2001     2002   2003   2004   2005

                                      Italia      Euro area          USA




PIL potenziale americano = 3.5% vs. PIL potenziale europeo = 2%
Italia strutturalmente inferiore alla media dell’area euro….
           Growth: the situation
Post-war structure

•   large industries, exploiting economies of scale
•   EU catch-up with US
•   assimilation of developed technologies
•   innovation to improve known technologies
          Growth: the situation
Structural change

•   EU stopped catch-up with US
•   innovation at the frontier matters
•   “radical” innovation
•   higher education needed when at frontier
              Low growth = symptom

• Failure to adapt the economic system based on
    • Assimilation of existing technologies
    • Mass production
    • Large firms with stable markets & labour relations


• Failure to become an innovation-based economy
    •   Entry
    •   Labour mobility within & across firms
    •   Retraining
    •   Difficult external financing
    •   Investment in R&D and higher education
                   Growth
• Growth can be usefully decomposed:

  – Across countries
  – Across factors (labour, productivity etc.)
     The EU growth performance in the 1990s, by groups of countries


                                              GDP weight                       GDP growth contribution

                               100%
                                                                   13%                                   18%
                               90%

                               80%
                                                                   20%
                               70%
                                                                                                         27%
                               60%

                               50%                                 26%

                               40%                                                                       25%

                               30%

                               20%                                 40%
                                                                                                         29%
                               10%

                                0%
                                                   1991                                  1991-2000


                                      Low growth           Medium growth   High growth         Cohesion countries




Source: Sapir et al. (2003).
     Growth Decomposition
Y= L*(Y/L)

dY dL      d (Y / L)
   *Y L            *L
dt dt         dt
                                                   GROWTH
            Employment and productivity growth, 1970-2000, EU vs. US

Y  L * (Y / L) =>                 DY   DL        D(Y / L)                                                  EU-GDP       US-GDP
                                          *Y L           *L                                               growth       growth
                                   dt   dt          dt                                      1970-1980          3           3.2
                              Growth = labour growth*Y/L + productivity growth*L            1980-1990         2.4          3.2
                                                                                            1991-2000         2.1          3.6
                                                                                            1991-1995         1.5          3.1
                                                                                            1995-2000         2.6          4.1




 Source: Altomonte & Nava (2005), Chapter 5. Elaboration on the basis of Sapir et al. (2004).
 DL/dt is measured as change in annual number of hours worked; D(Y/L)/dt is measured as change in GDP per hour worked;
 Labour, productivity and TFP

Y  L * ( K L) * (Y / K )

dY dL      d ( K / L)    Y d (Y / K )
   *Y L             *L*            *K
dt dt          dt        K     dt
           Determinants of GDP growth


                  Employment and productivity growth, EU15
  % p.a.
   3
 2.5
       2
 1.5
       1
 0.5
       0
-0.5
                 EMPLOYMENT               CAP.DEEPENING          TFP GROWTH
  -1
                         1991-1996                           1996-2001


Source:     Commission      services.



           Source: European Commission, 2003b
          The contribution of factors of production to growth in the
                             CEECs (1991-1999)




Source: ECP (2003) “Key structural challenges in the acceding countries: The integration of the acceding countries into the
Community‟s economic policy co-ordination processes”, Occasional Paper n.4, June 2003.
              Inflation and unemployment in Europe and the United States,
                                     1960-2000.




Source: Sapir et al. (2003)
            Employment
• Employment rates can also be
  decomposed across countries, age
  cohorts, period etc.
Employment rates by age cohort, 1980-2000
     (% of working age population)
Labour market – employment – employment rates by
                   age group
               Employment rates for age group 55-64 (OECD)
     Persons in employment as a percentage of population in that age group
                      1990        1991        2001        2002         2003   2004   2005
 Austria               -            -         28.2         29.2        30.1   28.8   31.8
 Belgium              21.4        21.6        25.2         25.8        28.1   30.1   32.1
 Denmark              53.6        51.7        56.5         57.3        60.7   61.8   59.8
 Finland              42.8        40.6        45.9         47.8        49.9    51    52.6
 France               35.6        34.8        36.5         39.3        36.8   40.6   40.7
 Germany              36.8        35.9        37.9         38.6         39    41.8   45.5
 Greece               40.8         39          38          39.2        41.9   39.4   41.6
 Ireland              38.6        38.9        46.6          48         49.3   49.5   51.7
 Italy                32.6        32.1         28          28.9        30.3   30.5   31.4
 Luxembourg           28.2        23.2        24.8         27.9         30     30    31.7
 Netherlands          29.7         28         38.8         41.8        43.5   44.2   44.9
 Portugal              47         49.3         50          50.9        51.1   50.3   50.5
 Spain                36.9        36.4        39.2         39.7        40.8   41.3   43.1
 Sweden               69.4        69.3         67          68.3         69    69.5   69.6
 United Kingdom       49.2         49         52.2         53.3        55.5   56.2   56.8
 EU15                 38.5        37.8        39.3         40.6        41.5   42.9   44.5
Labour market – employment – employment rates by age group

                   Employment rates for age group 55-64 (OECD)

     Persons in employment as a percentage of population in that age group
                      1990        1991       2001        2002        2003    2004   2005
   Australia           41.5       40.2        46.7       48.7        50.5     52    53.7
   Canada              46.2       44.5        48.2       50.1         53     53.9   54.8
   Japan               62.9       64.4        62         61.6        62.1     63    63.9
   Switzerland          -         63.4        67.3       64.6        65.7    65.1    65
   Turkey              42.7       43.4        35.9       35.3        32.7    33.1   30.8
   United              49.2        49         52.1       53.1        55.4    56.2   56.8
   Kingdom
   United States        54        53.2        58.6       59.5        59.9    59.9   60.8
   EU15                38.5       37.8        39.3       40.7        41.9    42.9   44.5
   OECD total           48        47.8        48.5       49.4        50.3     51     52
                                       GROWTH

    Employment, productivity and working hours vs. growth: a summary

• Long-term growth in Europe is lower than the United States, and the difference is
constant in per capita terms
• This is due to the interplay of three forces: employment rates, productivity and working
hours
• In the 1970s, essentially all the difference between the EU and the US was due to lower
productivity in Europe.
• After the 1970s, productivity has started to grow in Europe more than the US one. This
might well be due to higher trade integration (Coe and Helpman, 1995).
• However, at the same time the total number of hours worked by Europeans has started to
decrease. This was due to a fall of both the number of hours worked by each individual,
and a reduction in the employment rates (eurosclerosis => role of Institutions)
• Hence in the 1980s the per capita GDP remained constant w.r. to the US.
• At the beginning of the 1990s, the employment rate in Europe started to increase, thanks
to labour market reforms, while the number of hours worked by each individual stayed
more or less constant => the total n. of hrs. worked started to increase
• But the latter achievement did not succeed in boosting EU growth, because productivity
started to decrease => productivity - employment paradox
    The Cohesion Dimension
• Europeans have chosen a comprehensive
  social model.
• This model has proved to be, by far and
  large, the best of the world in terms of
  delivering cohesion and equity.
• However, continued low or sluggish
  economic growth makes it difficult to
  sustain, in the medium to long run, the
  ambitious and costly EU economic model
 Indicators of social inequalities
the three best-known ones.
• The ratio of the income held by the top 5%
  (the richest 5%) over the income of the
  bottom 20% (the poorest 20).
• The Gini coefficient.
• The Theil index.
  Indicators of total inequality in EU-15, 1970-2000



Tot. inequality 1970 1980 1990 1995 1998 2000
indicator
Top    5%                   / 2.01       1.73   1.77   1.73   1.86   1.86
Bottom 20%
Gini Coefficient 0.32 0.299 0.301 0.303 0.309 0.308

Theil Index                      0.169 0.146 0.154 0.150 0.160 0.159


  Source: Morrisson and Murtin (2004).
 Theil Index “within” and “across” countries in EU-15, 1970-2000


Index/years                              1970   1980   1990   1995   1998   2000

Within-country                           0.152 0.130 0.145 0.142 0.152 0.152


Across-countries                         0.017 0.016 0.009 0.008 0.008 0.007

Total inequality                         0.169 0.146 0.154 0.150 0.160 0.159


  Source: Morrisson and Murtin (2004).
    Social inequality and growth
• The ability to reduce within-country inequality is in direct
  proportion with growth: inequality decreased rapidly in
  the EU in periods of high growth (from 1960 to 1980) and
  increased again in periods of moderate growth (1980-
  2000).
• The reduction of inequality across countries in the EU
  points to a certain success of some EU policies (the
  single market, but also structural expenditures)
  implemented more decisively since the 1980s.
• Very large differences across countries, due to the
  eminently national character of the systems of welfare
  State and interpersonal redistributive policies.
Percentage of EU population below poverty thresholds


% of population
                1970                          1980   1990   1995   1998
/ years
Absolute
poverty                                10.4   2.2    1.0    1.1    1.1
(10$ a day)
Poverty (20$ a
               34.9                           20.1   13.8   12.4   9.2
day)

Source: Morrisson and Murtin (2004).
                                   World income Inequality

                                                USA                   World
 Inequality Indexes /
                      1980                      1986   1995   1970    1980    1992
 year
 Top 5% / Bottom 20%                     2.59   2.42   2.43   15.55   17.50   16.36
 Gini Coefficient                       0.363 0.337 0.342     0.650   0.657   0.657
 Theil Index                            0.225 0.185 0.190     0.808   0.829   0.855
  -Within-country
                                         n.a.   n.a    n.a    0.315   0.330   0.342
 inequality
  - Across-countries
                                         n.a    n.a    n.a    0.493   0.499   0.513
 inequality
 Poverty indicators
 (% of population
 below)
 Absolute poverty (10$
                                         4.9    4.4    3.2    35.2    31.5    23.7
 a day)
 Poverty (20$ a day)                     14.4   12.9   9.3    60.1    55.00   51.3
Source: Morrisson and Murtin (2004).
                     EU vs. World
• The poorest Europeans being among the 20% richest on a world
  scale
• World inequality incomparably higher than the inequality in the EU.
• EU inequality is, at any point in time, some 10% lower than in the
  US
• Within- and across-countries inequality in the world has been rising
  except than in the EU.
• Poverty: the EU record is better than the US record for the absolute
  poverty (less than 10$ a day) and comparable to the one of the US
  for the poverty measure (less than 20$ a day).


  The EU remains a high-income area, with a remarkable low level of
   income inequality (both within and across countries) and poverty, in
              a global context of much higher inequality.
        Distribution of the Pre- and Post-Tax income in EU and US,
                               1985 and 1995

       Top 5% /                                    1985                                     1995
       Bottom 20%
                                       Pre-tax            Post-tax             Pre-tax              Post-tax

       EU                                 3.49               1.51                 4.14                 1.66
       US                                 5.12               2.42                 4.97                 2.43

      Gini Coefficient                             1985                                     1995
                                      Pre-tax            Post-tax              Pre-tax              Post-tax

      EU                                0.381              0.279                0.408                 0.294
      US                                0.415              0.337                0.421                 0.342

Source: Morrisson and Murtin (2004). EU data refer to Belgium, Denmark, Germany, France, Ireland, Italy, The Netherlands, Finland,
Sweden and The United Kingdom. Unfortunately, there are no data available for the EU as a whole.
                    EU vs. World
The relative low inequality and poverty in Europe are due in
  part to a less unequal “market” distribution (pre-tax
  figures) and in part to effective policies undertaken in
  order to reduce them (post-tax figures).

   – inequality in market income is higher in the US than in the EU,
     and also that the redistributive effect of the tax and welfare
     system is lower in the US than in the EU.
   – In the EU, the tax and welfare system reduces in fact inequality
     by about 25% to 30%, while in the US by at most 20%.
   – In other words, the EU system basically doubles the income
     share of the bottom 20% of the population, while the US system
     increases it by about 70%.
   The distribution of population: EU income quantiles

                                          Bottom 20%             Top 10%

Country/Year                          1970        1998    1970             1998

Spain                                41.7%        34.4%   5.7%             6.5%

France                               14.8%        12.3%   13.8%        12.2%

Ireland                              48.8%        24.1%   3.5%         12.7%

Italy                                24.9%        25.8%   9.4%         11.3%

United Kingdom                       15.3%        20.9%   9.5%         12.3%

    Source: Morrisson and Murtin (2004)
  The distribution of population: income quantiles by country

                                       Bottom 20%       Top 10%       Percentag
                                                                          e
                                                                      Share of
   Country/Year                       1970    1998    1970    1998    Populatio
                                                                         n
   Spain                              21.9%   18.1%   5.9%    6.8%     10.5%
   France                             11.6%   9.7%    21.7%   19.1%    15.8%
   Ireland                            2.2%    1.2%    0.3%    1.3%      1%
   Italy                              20.7%   19.7%   15.7%   13.3%    15.4%
   United                             13.2%   16.4%   16.4%   19.4%    15.8%
   Kingdom
Source: Morrisson and Murtin (2004)
      Indicators of total inequality in the enlarged EU, 2000

 Tot. Inequality
                                                                EU-27
 indicator     /
                                       EU-15   EU-25   EU-27      +
 dimension    of
                                                                Turkey
 the EU
 Top     5%    /                       1.86    2.38    3.01      3.88
 Bottom 20%
 Gini Coefficient                      0.308   0.342   0.367    0.397


 Theil Index                           0.159   0.195   0.225    0.262

Source: Morrisson and Murtin (2004).
Theil Index “within” and “across” countries in the enlarged EU, 2000


 Theil Index /
                                                              EU-27 +
 dimension of the                     EU-15   EU-25   EU-27
                                                               Turkey
 EU
 Within-country                       0.152   0.152   0.152    0.166

 Across-countries                     0.007   0.043   0.073    0.096

 Total inequality                     0.159   0.195   0.225    0.262


Source Morrisson and Murtin (2004).
Social Spending in OECD countries




Source: De Grauwe and Polan (2003)
And the winner is…




     US
Social inequalities and employment
                        LOW                  Employment Rate %                                 HIGH
           50.0                55.0          60.0                65.0             70.0                75.0             80.0
         2.0

                                      SLOV


 LOW     2.5                                                                         SW
                                                                        FIN
                                        BE
                                                                                         NOR                 DK
                                                     LUX                      A
         3.0                                                            CZ               NL
Income                                         FR
                                                                   DE

Inequality                                                                                                        CH

         3.5



                  ES
         4.0                                   POL
                         HUN                               IRL
  HIGH
                                                                                     UK
         4.5
                   IT           GR
                                                                        POR


         5.0
         The Stability issue
• Price stability (monetary side)
• Sound money and sound finances (fiscal
  side)


   The so-called Frankfurt-Brussels
               consensus
  Maastricht rules on price stability
• Gpi< AVERAGE (i=1…3) Gpi + 0,015 (1,5%)

• i<AVERAGE (i=1…3) ii + 0,02 (2%)

• (Central bank target and mean independence)
 Figure 4.2. Central bank independence and inflation.




Source: Grilli, V., Masciandaro, D. and Tabellni, G. (1991) “Political and Monetary Institutions and Public Financial
Policies in the Industrial Countries”, Economic Policy, October, pp. 341-392.
        Inflation and unemployment in Europe and the United States,
                                1960-2000.




Source: Sapir et al. (2003)
               Fiscal side
• Fiscal profligacy since 1973
• Credible fiscal commitment
• Implementation issues
Output gap and budget balance, EU countries, 1970-1990.


                                                             6


                                                             5


                                                             4


                                                             3
    Budget Deficit




                                                             2


                                                             1


                                                             0
                     -5   -4   -3        -2          -1          0        1        2                 3   4   5

                                                            -1


                                                            -2


                                                            -3
                                                          Output Gap

                                    Cyclical component    Structural component   effective deficit




Source: Buti and Sapir (1998)
  Maastricht rationale and rules
Sound Finance: non-Keynesian effect

dDiIgSIi
    D  gp BCE cred (impact on RoW)

                                 S space for
                                  - automatic stabilisers
                                  - ageing effect
                                  - asymmetric shocks
      i  G restructuring (i other Gi)
       Maastricht fiscal rules
• 3% maximum deficit per year
• 60% debt/GDP

(The two numbers square under the
  assumption of 5% of nominal growth (e.g.
  2% real+3% inflation)
Maastricht rules: Art 104 TEC (extracts)
1. Member States shall avoid excessive government deficits.
2. The Commission shall monitor the development of the budgetary situation and of
    the stock of government debt in the Member States with a view to identifying gross
    errors. In particular it shall examine compliance with budgetary discipline on the
    basis of the following two criteria:
(a) whether the ratio of the planned or actual government deficit to gross domestic
    product exceeds a reference value, unless: either the ratio has declined
    substantially and continuously and reached a level that comes close to the
    reference value; or, alternatively, the excess over the reference value is only
    exceptional and temporary and the ratio remains close to the reference value;
(b) whether the ratio of government debt to gross domestic product exceeds a
    reference value, unless the ratio is sufficiently diminishing and approaching the
    reference value at a satisfactory pace.
[…]
3. If a Member State does not fulfil the requirements under one or both of these
    criteria, the Commission shall prepare a report. The report of the Commission shall
    also take into account whether the government deficit exceeds government
    investment expenditure and take into account all other relevant factors, including
    the medium term economic and budgetary position of the Member State. The
    Commission may also prepare a report if, notwithstanding the fulfilment of the
    requirements under the criteria, it is of the opinion that there is a risk of an
    excessive deficit in a Member State.
[…]
5. If the Commission considers that an excessive deficit in a Member State exists or
    may occur, the Commission shall address an opinion to the Council.
Maastricht rules: Art 104 TEC (extracts)
6. The Council shall, acting by a qualified majority on a recommendation
    from the Commission, and having considered any observations which
    the Member State concerned may wish to make, decide after an
    overall assessment whether an excessive deficit exists.
7. Where the existence of an excessive deficit is decided according to
    paragraph 6, the Council shall make recommendations to the Member
    State concerned with a view to bringing that situation to an end within
    a given period. Subject to the provisions of paragraph 8, these
    recommendations shall not be made public.
8. Where it establishes that there has been no effective action in response
    to its recommendations within the period laid down, the Council may
    make its recommendations public.
9. If a Member State persists in failing to put into practice the
    recommendations of the Council, the Council may decide to give
    notice to the Member State to take, within a specified time limit,
    measures for the deficit reduction which is judged necessary by the
    Council in order to remedy the situation. In such a case, the Council
    may request the Member State concerned to submit reports in
    accordance with a specific timetable in order to examine the
    adjustment efforts of that Member State.
Maastricht rules: Art 104 TEC (extracts)
11. As long as a Member State fails to comply with a decision
  taken in accordance with paragraph 9, the Council may
  decide to apply or, as the case may be, intensify one or
  more of the following measures:
   - to require the Member State concerned to publish additional
      information, to be specified by the Council, before issuing bonds
      and securities;
   - to invite the European Investment Bank to reconsider its lending
      policy towards the Member State concerned;
   - to require the Member State concerned to make a non interest
      bearing deposit of an appropriate size with the Community until the
      excessive deficit has, in the view of the Council, been corrected;
   - to impose fines of an appropriate size.
   …after Maastricht, the SGP
• achieving „medium-term‟ close to balance
  position  to allow the use of automatic
  stabilisers
• allowing for „exceptional and temporary‟
  breaching of the 3%
• early-warning system (art 99)
• introducing fines (on the basis of art 104), but
  based only on the deficit criterion (3%), not on
  the medium term target.
The rationale of the Stability and Growth Pact

                                                Budget deficit




                          Actual budget (cyclical + structural component) before SGP



                                               3%

                                                A: Structural deficit before SGP




                  B’                   A’      O =B: Structural deficit after SGP
 Output gap < 0                                                                     Output gap > 0



                                Room of manoeuvre of
                                automatic stabilisers
                                                                  Actual budget after SGP
                                before reforms
  Room of manoeuvre of
  automatic stabilisers                         Budget surplus
  after reforms
         SGP and discipline
• Maastricht and SGP very effective in the
  run up to the Euro (till 1998)
• « discipline fatigue » especially in the
  good years (99; 00; beginning 01)
• 2002, 2003, 2004 difficult years for the
  respect of the SGP
• 2005, 2006 and 2007 situation back to
  normal.
         The convergence criteria of public finances in EMU
                                                     Deficit/GDP
       Belgium Germany Spain France          Ireland Italy      Lux       Netherl Austria Portugal Finland
1991       -6,3     -3,1 -4,4     -2             -2,3 -10,1         1,9        -2,9    -3        -6       -1
1992         -7     -2,6   -4   -3,8             -2,5 -9,6          0,7        -3,9    -2        -3     -5,9
1993       -7,3     -3,2 -6,8   -5,7             -2,2 -9,5          1,6        -3,2  -4,2      -6,1     -7,1
1994       -4,9     -2,4 -6,2   -5,8             -1,7 -9,2          2,7        -3,8    -5        -6     -6,4
1995       -3,8     -3,3 -7,1   -4,9             -2,1 -7,7          1,8        -4,1  -5,1      -5,7     -4,6
1996       -3,1     -3,4 -4,5   -4,1             -0,2 -6,6          2,8        -1,8  -3,7      -3,3     -3,1
1997       -1,6     -2,7 -2,5     -3                1 -2,7          3,8          -1  -1,8      -2,5     -1,2
1998       -0,9       -2 -1,7   -2,9              2,4 -2,7          2,5        -0,7  -2,2      -2,2      0,9

                                               Public Debt/GDP
       Belgium Germany    Spain    France Ireland Italy     Lux           Netherl     Austria Portugal    Finland

1991     128,5     41,4     44,6      35,7      94,3   101,5         4           79     57,9       62,9       23,1
1992     130,1       44     47,1      39,6      91,1   108,7       4,9           80     57,9       56,3       41,3
1993     136,8       48       59      45,7      92,6   119,1       5,9         81,2     62,7         61       57,6
1994     135,1     50,2     61,3      48,5      86,1   124,9       5,5         77,9     65,4       63,8       59,3
1995       132     58,3     64,2      52,8      78,4   125,3       5,8         77,9     69,4       65,9       58,1
1996     128,8     60,8     68,5      55,7      68,6   124,6       6,3         76,1     69,8       64,9       57,6
1997     123,4     61,5     67,1      58,1      59,9   122,4       6,4         70,8     64,1       61,7         55
1998     118,2     61,1     65,1      58,8      49,5   118,7       6,9         67,5       63       57,8       49,7
  General Budgetary position - Euro area and EU27




Source: European Commission, Economic Forecast Autumn 2007
               Numbers…
• 2002: D, F, PT breached the 3% ceiling
• 2002/3: EDF procedure opens against D, F, PT.
• 25/11/2003: Council « freezes » the SGP
• 2004: n countries breach the 3% ceiling.
• 13/7/2004: ECJ rules against Council
  « freezing » of the SGP
• 2/2/2005: Link of Lisbon to SGP
• 23/3/2005: SGP revision adopted
• 2006: D, F and I reduce their deficits and EU
  closes EDP.
                                  STABILITY in EU-25

               The fiscal criteria for EMU in new Member States




             Source: ECB Convergence Report Dec. 2006



• New Member States account for less than 10% of EU GDP
• New Member States are not expected to join the monetary union before 2008
   Why the SGP was under attack?
• Does SGP hinder the EU on the road to Lisbon (SGP calls for
  current taxes=current outlays so also net public investment should
  be financed by current taxes)?
• Does SGP accounts for public debt and future hidden liabilities
  (pensions)?
• Is heterogeneity of fiscal positions, of debt levels and of debt
  sustainability, compatible with a one-size-fit all rule for budgetary
  deficits?
• Is the long run objective of a close to balance debt level optimal?
• Does the SGP provides incentives for “creative accounting”?

                        – Is the SGP too rigid?
                 – Is the SGP all sticks, no carrots ?
          SGP: Commission stance
  (Communications of 27/11/2002 and 3/9/2004)
• Take account of the economic cycle: „close to balance or
  in surplus‟ defined in structural terms.
• Isolate the impact of transitory factors (both the
  economic cycle and else), on the budget position, as
  previously discussed.
• The rate of improvement in the underlying budget
  position should be higher in countries with high deficits
  or debt;
• a more ambitious annual improvement should be
  envisaged if growth conditions are favourable,
• Last provision corrects the asymmetric functioning of the
  SGP both across different phases of the cycle and
  across countries with different debt positions.
    Which SGP is SMARTer?
Three possibilities:

• “Rigid” implementation
• “Flexible” implementation
• “New SGP” with Golden/Lisbon Rule
              What is “Flexible”
• The benchmark for the structural deficit in the medium
  run is different across countries provided it remains
  below the 3% limit.
• Countries with a lower burden of debt serving can have a
  higher deficit (still below 3%), high burden of debt
  servicing should keep a deficit close to balance (until the
  debt level is sufficiently reduced) (as in Sapir et al.,
  Pisani-Ferry et al.).
• flexible SGP fully respects the spirit of the Maastricht
  Treaty (deficit and debt).
• Somewhat similar to the format defended by Buti,
  Eijffinger and Franco (2003): structural deficit of 1 to
  1.5% of GDP, while keeping the upper limit of 3% for the
  nominal deficit in any year.
             SMART Rule
• Synthetic: comprehensive; able to provide
  an overall picture of the fiscal deficit
• Measurable: official reporting practices, at
  regular intervals are available.
• Accommodating: double requirement for
  both cycle and investment needs
• Robustness to cycle and opponents
• Transplantable: can be used in the NMSs
    Results of the SMART test
                    Strict    Flexible   New SGP
                    SGP       SGP        Golden /
                                         Lisbon
Synthetic           Y         Y          N
Measurable          Y         Y          N
Accommodating
-cycle              In part   Y        Y
-investment needs
                    N         Feasible Maybe/Y
Robust              N         Y        N/Y
Transplantable      N         Y          N
…better more flexible than new!
• no need for a brand new SGP, but only for
  a more flexible implementation of the
  existing SGP rules.
• flexible SGP is consistent with Maastricht,
  literature (Buti et al., Sapir et al. etc.,
  Pisani-Ferry, Moesen and Nava) and the
  ECJ ruling.
       Council Conclusions
         23 March 2005

There is need for:
• Improving governance
• Strengthening the preventive arm
• Improving the implementation of the EDP
        Council Conclusions
          23 March 2005
Improving governance
• More cooperation, communication and
  peer pressure within MS and between MS
  and COMM
• A Stability programme for the legislature
• Reliable macro forecast
• Statistical Governance
        Council Conclusions
          23 March 2005
Strengthening the preventive arm:
• Definition of the MTO budgetary objective
  in relation to debt and growth
• Adjustment path to the MTO (0.5% or
  more in good times)
• Taking structural reform into account
  (major reforms with direct long-term saving
  effects): link with Lisbon
           Council Conclusions
             23 March 2005
Improving the implementation of the EDP:
• Report of 104 (3) taking into account “All other relevant
  factors”
• Exceptional and temporary from -2% to 0%.
• All other relevant factors: cycle, budgetary position, debt
  sustainability, public investment, high level of financial
  contribution for international solidarity and EU policy
  goals
• No redefinition of MT ref. Values
• Taking into account pensions reforms (Lisbon)
• Focus on debt and sustainability
• Deadlines
EU economy with and without €
Annual average in % for the           Without euro:                   With euro:
whole euro area
                                       1989-1999                      1999-2008
Real GDP growth                            2.2                            2.1
Employment growth                          0.6                            1.3
Inflation                                  3.3                            2.0
Long term interest rate                    8.1                            4.4
Budgetary balance                          -4.3                           -1.9



• Provides stability and protection from domestic turbulence
• Effective actions during global crises. During last summer‟s turbulence
   could you imagine what would have happened if central banks in each MS of the euro area
   had dealt individually with the Federal Reserve and the Bank of England? What would have
   been the impact on the exchange rates, especially in the most exposed countries? EURO
   avoided all that
• Incentive towards innovation, binding the possibility for
  competitive devaluation
• Cons: a EURO too strong may damage exports, but thinks at
  the advantages for imports (e.g. oil)
EMU: pictures not only numbers




 Linda Evangelista, 1990,          Gisele Bündchen, 5/11/2007:
 Before the Euro:                 “Contracts starting now are
 “I don't get out of my bed for   more attractive in euros
 less than $10,000 a day"         because we do not know
                                  what will happen to the
                                  dollar”,
               Summary of Objectives

• To what extent Growth – Stability – Cohesion have been
  achieved in the EU
  • The EU regional policy has succeeded in increasing cohesion within the
  EU, notwithstanding the concerns associated with the trade and labour
  flows deriving from the creation of the Single Market

  • The EMU has succeeded in ensuring to the EU a remarkable level of
  stability, without overigidities (through a earning by doing process)

  • Sluggish economic growth dominated the EU till 2005, associated to a
  productivity – employment paradox. In 2006 numbers have turned positive:
  the greatest issue is to understand why and to ensure that it remains the
  same.
          2.2 Lisbon Agenda
• Targets (easy): 3!

• Strategy (difficult)

• Tools (very difficult)
   Lisbon targets took long to be
              defined
• The Lisbon agenda is the result of a two-
  year long decisional process and of five
  European councils:
  – Lisbon in March 2000,
  – Nice in December 2000,
  – Stockholm in March 2001,
  – Göteborg in June 2001,
  – and Barcelona in March 2002.
        Lisbon, March 2000:
        a grand declaration
• “The Union has today set itself a new
  strategic goal for the next decade: to
  become the most competitive and dynamic
  knowledge-based economy in the world
  capable of sustainable economic growth
  with more and better jobs and greater
  social cohesion”.
         Lisbon: specific targets
• “recognising their different starting points, member
  States should consider setting national targets for an
  increased employment rate. This, by enlarging the labour
  force, will reinforce the sustainability of social protection
  systems targets”.

• “the overall aim [should be] to raise the employment rate
  from an average of 61% today to as close as possible to
  70% by 2010, and to increase the number of women in
  employment from an average of 51% today to more than
  60% by 2010”
           Nice Social Agenda
• The Social Agenda “defines, in accordance with the
  Lisbon European Council conclusions, specific priorities
  for action for the next five years around six strategic
  orientations in all social policy areas [full employment,
  labour mobility, management of the technological
  progress, ageing, implications of enlargement and
  globalisation].
• This Agenda constitutes a major step towards the
  reinforcement and modernisation of the European social
  model, which is characterised by the indissoluble link
  between economic performance and social progress”
    Stockholm: labour targets
• “to set intermediate targets for
  employment rates across the Union as a
  whole for January 2005 of 67% overall,
  and 57% for women.
• It has also agreed to set an EU target for
  increasing the average EU employment
  rate among older women and men (55-64)
  to 50 % by 2010
        Goteborg: the sustainable
               dimension
• “sustainable development – to meet the needs of the
  present generation without compromising those of future
  generations – is a fundamental objective under the
  Treaties”.
• “it requires dealing with economic, social and
  environmental policies in a mutually reinforcing way.
  Failure to reverse trends that threaten future quality of
  life will steeply increase the costs to society or make
  those trends irreversible”.
• It also agreed on a “strategy for sustainable
  development, which completes the Union's political
  commitment to economic and social renewal, adds a
  third, environmental dimension to the Lisbon strategy
  and establishes a new approach to policy making”
   Barcelona European Council:
           March 2002
• Reinforcement of the Employment
  Strategy along national and EU-wide
  policy lines aiming at full employment.
• Three broad areas: “Active policies
  towards full employment, a reinforced
  Employment Strategy, promoting skills and
  mobility in the European Union”
• Full employment at the core of the EU
  strategy
        Lisbon: 8 area of action
Within a healthy macro-environment:
              Completion of the single market
1) product market liberalisation and State aids‟ reduction;
2) completion of the EU networks (telecoms, utilities,
    transport etc.);
3) completion of the EU financial markets.
                       Other policies
4) improving the information society;
5) fostering R&D and innovation;
6) improving the business environment;
7) maintaining and reinforcing the European social model;
8) environment and climate change.
   Lisbon Agenda: the strategy
• “Achieving this goal [sustainable economic growth with
  more and better jobs and greater social cohesion]
  requires an overall strategy aimed at:
   – preparing the transition to a knowledge-based economy and
     society by better policies for the information society and R&D, as
     well as by stepping up the process of structural reform for
     competitiveness and innovation and by completing the internal
     market;
   – modernising the European social model, investing in people and
     combating social exclusion;
   – sustaining the healthy economic outlook and favourable growth
     prospects by applying an appropriate macro-economic policy
     mix”.
Lisbon strategy: plus and minus
• Plus:
   – the multi-faceted strategy of response to the problem of the lack
     of growth in Europe is the “political equilibrium”: every country
     (and EU Institution) finds the policy and objective more suited to
     its contingent needs, yet in an overall coordinated framework.
• Minus:
   – the Lisbon process mixes final targets (sustainable growth,
     social cohesion), intermediate objectives (e.g. employment
     rates, themselves declined under various categories of the
     workforce and undifferentiated across member States), and
     policy measures.
   – more a list than a strategy? Too many priorities imply in fact no
     priority at all.
   – Too many goals and structural indicators imply a risk of
     complacency, as any country can find at least some dimensions
     in which it performs relatively well
      Lisbon Agenda: the tools
• mix of community method and a new method, the so-
  called open method of coordination (OMC), where
  individual member States act directly, without the need
  of a Commission proposal or a Council adoption, but
  rather through a mechanism of peer pressure and
  periodical review of the progresses achieved.
• Community method to implement the measures related
  to the single market, where across-countries spillovers
  are greater (e.g. rules related to a better working of
  financial markets or trans-European networks of
  infrastructures) and where therefore there is a rationale
  for an EU competence.
• OMC is used for the other policies where across-
  countries spillovers are smaller
      Lisbon Agenda: the tools
• To coordinate the use of the tools, both the community
  method and the OMC are managed within a single
  framework made of:
• the Broad Economic Policy Guidelines (BEPGs)
• and the Employment Guidelines (EG).

 This single framework is the object of the annual Spring
  European Council, which monitors, reviews and fosters
   the progresses of the EU economy towards the Lisbon
                           targets.
Employment and Productivity in the EU-25, 2005:
        How far are we from Lisbon?




Source: European Commission, 2006
                                  GROWTH

Changes in employment and productivity in 2000/2005




                                           Productivity – Employment
                                                    paradox




   Source: European Commission (2007)
Figure 5.5. Labour productivity per person employed in EU-25, 2001/2002




                                                           USA=120


       EU avg. = 100




                                        CEECs=50




Source: Eurostat
Unemployment and long-term unemployment rates, 2005
         Has Lisbon worked?
• Till the Mid-term review (2005), it worked not
  uniformly across the EU. Essentially it worked
  where it was applied and it did not work where it
  was not applied.
• Why a community policy worked “as a leopard
  skin”? What is then the added value of the
  Community?
• Essentially, there are the causes? :
  – Who‟s the boss?
  – Where are stick and carrots?
  – Too many objectives
      Lisbon mid-term review
The Sapir report (July 2003, Commission‟s
  President request) has been probably the most
  influential document preceding the mid-term
  review:
     Lisbon objectives are correct
     Policies needs to be upgraded
     Governance tools as well

     Implementing Lisbon will not be easier and requires tough
       choices: however there is political support for it in the new
       Commission, in the new EP, in the Council. Moment must be
       seized.
     Lisbon mid-term review
The KOK report (Council request in March
  2004) made three main suggestions:
• National ownership
• Benchmarking plus naming, shaming and
  faming
• Role for the EU Budget
     Lisbon mid-term review
Council 2/2/2005: a new start for the
          Lisbon strategy)

Three avenues for improvement:

•   Ensuring delivery
•   Renewed program
•   Improving Lisbon governance
     Lisbon mid-term review:
Council 2/2/2005: a new start for the
          Lisbon strategy

Ensuring delivery:
• partnership between COMM and MS (National
   Lisbon Programmes) to make MS “owners” of
   Lisbon and because MS possess tools for
   structural reforms
• Appointment of Ms or Mr Lisbon in every MS.
 Lisbon mid-term review (2/2/2005)
(a new start for the Lisbon strategy)
Renewed programme
• Single market (regulation, open and
  competitive markets, infrastructure)
• Knowledge and innovation (R&D, EIT,
  Eco-innovation)
• More and better jobs (social protection
  system, flexibility, long-life training)
            Lisbon review:
           Pisani-Ferry and Sapir 2006

Analysis of the Lisbon process:
Rational and Challenges
• Motives for acting jointly (interdependece
   vs. learning)
• Specific EU dimension (economic,
   politics and euro dimension)
• Difficulties for a strategy (structural
   heterogeneity, policy heterogeneity)
               Lisbon review:
              Pisani-Ferry and Sapir 2006

                  R&D                 Employment


Main reason Interdependence Learning


Main              Structural          Policy
difficulty        Heterogeneity       Heterogeneity
EU                Weak                Strong
specificity
             Lisbon review:
           Pisani-Ferry and Sapir 2006

Good
• Ownership of National Reform Programmes
Questionable
• Acceptance of a trade off between ownership
   and transparency of the results
Bad
• Name and shame rejected
• EU budget role too small
• Euro dimension not enough addressed.
    2006 Spring Council on Lisbon

•   Welcome Commission‟s paper
•   Welcome NPR and their wide discussion
    in national Parliament and civil society

Priority actions

Maintaining momentum
   2006 Spring Council on Lisbon
Priority actions
•    Investing more in knowledge and innovation (7° FP for
     research, LLP, EIT)
•    Unlocking business potential, namely of SME (one-
     stop-shop to set up new firms, financing opportunities,
     simplification)
•    Increasing employment opportunities for priority
     categories (life-cycle approach to work, school leaving
     offers, flexicurity concept endorsed)
•    An energy policy for Europe (security of supply,
     competitiveness, sustainability)
  2006 Spring Council on Lisbon
Maintaining momentum
• Ensuring sound and sustainable public
   finances
• Completing the internal market and
   promoting investment (e.g. FSAP
   measures, Service directive, better
   regulation
• Enhancing social cohesion
• Environmentally sustainable growth
Lisbon mid-term review: conclusions
Is this enough to re-establish coherence between
     objectives and tools?
• Goals are more focused
• Tools are certainly upgraded (NRPs, but
     naming & shaming is not used, benchmarking
     nearly abandoned)
• In spite of the wish, little link with EU budget
• There is no “big bang” change
• No Euro area dimension
  2.3 Current economic situation and
       forecast: 2006 numbers:
      An episode or a new trend?

•The numbers

•The reasons

•The forecast and its risks

•Why is it has been so difficult?
                          The numbers
• 2006: Growth in the EU and employment creation are (finally!) back!

 Growth 97-01             01-05         06           07           08

 EU           2.9%        1.8%          3.0%         2.9%         2.4%

 € Area       2.8%        1.5%          2.8%         2.6%         2.2%

 D            2.1%        0.9%          2.9%         2.5%         2.1%

 I            2.1%        0.6%          1.9%         1.9%         1.4%

 US           3.5%        2.9%          2.9%         2.1%         1.7%
                          The numbers
• 2006: Growth in the EU and employment creation are (finally!) back!

 Empl.        97-01       01-05         06           07           08

 EU           1.3%        0.8%          1.5%         1.5%         0.9%

 € Area       1.7%        0.8%          1.3%         1.5%         1.0%

 I            1.1%        0.6%          1.6%         0.8%         0.6%

 D            0.0%        -0.7%         0.2%         1.4%         0.5%

 US           1.7%        1%            1.7%         0.7%         0.8%
                          The numbers
• 2006: Growth in the EU and employment creation are (finally!) back!

 Deficit      97-01       01-05         06           07           08

 EU                       -2.5%         -1.6%        -1.1%        -1.2%

 € Area                   -2.6%         -1.5%        -0.8%        -0.9%

 I            -2.2%       -3.7%         -4.4%        -2.3%        -2.3%

 D            -1.6%       -3.4%         -1.6%        0.1%         -0.1%

 US           0.3%        -3.8%         -2.2%        -2.4%        -2.8%
                           The reasons
• Why? Macro:

  •Domestic demand/investment (addressing productivity/employment
  issue and cohesion issue)

  •Rebalancing of global growth as a response to reduced US growth and
  more buoyant Asia growth)

  •Excellent financial conditions:

       •Low interest rates (which are consider a peak!)

       •Low gp (ECB focus), low oil prices in 2006

       •-reducing D and d (2% in 2006), improving primary balance
                           The reasons
• Why? Micro:

   •Labour Market Reforms,

   •Integration and Liberalisation of the EU infrastructure (Telecoms, Energy,
   Air transport, rail etc)

   •Financial Integration (FSAP) :

        •More competition in the banking sector (C-B consolidation) lowering
        the cost of intermediation (especially in less competitive countries):
        banking integration.

        •More competition in Trading and Post-Trading Area (MiFID and C&S
        CoC and T2S from ECB): stock exchange integration

        •More C-B corporate consolidation
              The reasons
The Role of the FSAP into Lisbon
• FS Policy has been very innovative and
  courageous:
  – A bold and comprehensive plan
  – An unrivalled wide consultation with all
    possible stakeholders
  – A new method (Lamfalussy)
       Lamfalussy Framework
   Level 1: Broad Framework Principles in Directive/Regulation



Level 2: Implementing Rules delegated to Commission, assisted by
              Regulators and Securities Committees


   Level 3: Strengthened Co-operation between Supervisors to
                     Improve Implementation


     Level 4: Strengthened Enforcement of Community Law
             Lamfalussy committees
              Securities and                Banking          Insurance and Pension    Financial Conglomerates
            Investment Funds                                         Funds

Level 1                                   Commission, Council and Parliament
Level 2    European Securities        European Banking       European Insurance & Financial Conglomerates
            Committee (ESC)            Committee (EBC)       Occupational Pensions    Committee (FCC)
                                                              Committee (EIOPC)

            Chair: Commission          Chair: Commission       Chair: Commission          Chair: Commission
              representative             representative          representative             representative
            Site: Brussels              Site: Brussels           Site: Brussels             Site: Brussels
Level 3 Committee of European       Committee of European    Committee of European       Cooperation of CESR,
         Securities Regulators       Banking Supervisors          Insurance &             CEBS and CEIOPS
                (CESR)                      (CEBS)           Occupational Pensions
                                                              Supervisors (CEIOPS)
          Chair: Eddy Wymeersch        Chair: Danièle Nouy    Chair: Thomas Steffen


                Site: Paris               Site: London           Site: Frankfurt
Level 4                          Commission, MS Governments, European Court of Justice
Average growth of GDP and FS in EU-25 in %

     7

     6

     5

     4

     3

     2

     1

     0
               EU GDP       EU retail finance      EU wholesale finance

                         1996-2001     2001-2006



  Sources: CEBR (2007)
EU-15 contribution to world financial activity

       100                      9                              15
                  25                          26
                                17
        80                                                     13
                   9                           9
                  14                                                      Others
        60                      36                             39         Japan
                                              39
                                                                          US
        40
                                                                          EU
                  52
        20                      38                             34
                                              26

         0
             Bank Assets   Insurance   Stock Market     Debt Securities
                           Premiums    Capitalisation


  Sources: IMF (2007) and SwissRe (2007).

 Data reflects that EU financial system is strongly bank-based, nevertheless
 the importance of equity finance is growing (see next slide).
 EU has also a dominating position in the Forex with 60% of Mkt share (av.
 daily turnover) US 18%, Japan 8%.
                     Equity Markets ($ trillion)
     $ trillion
40

35

30

25

20

15

10

 5

 0
       1995       1996    1997     1998    1999   2000     2001   2002   2003       2004     2005    2006

                   Europe capitalisation     US capitalisation    Europe turnover          US turnover


Source: IFSL Research (2007), World Federation of Exchanges
Average annual growth in intra-EU 25 trade (2000-2005)




    Source: CEBR 2007


    Intra-EU trade in finance and insurance growing at 14% per year
      Price discrepancy among banks in
      different geographic regions (in %)
100
                                                                                90,6
 90                                                                   82 84,2
 80
 70
 60                                              53,9          55,9
                             52,9 51,6                  50,6                              2005
                                         48,8
 50     43,3                                                                              2006
               40
                    36,6                                                                  2007
 40
 30
 20
 10
  0
       Europe eurozone       Europe non-        North America         Asia Pasific
                              eurozone


Source: Capgemini, World retail banking report (2007). Note: The data refers to the regions' average
price for day-to-day banking services (account management, cash utilisation, exceptions handling,
payments) in the period 2005-2007.
Is Europe an attractive place to invest?
    Cumulated value of Initial Public
   Offerings (IPOs) in the EU and US
          € million
         70

         60

         50

         40

         30

         20

         10

          0
                EU           US   EU          US   EU          US   EU          US   EU          US   EU          US

                      2001             2002             2003             2004             2005             2006

                                       All IPOs     International IPOs



      Source: PricewaterhouseCoopers (2007), "IPO Watch Europe"

The increased attraction of international IPOs (from companies
registered in third countries) is due both to the increase
competitiveness of the EU capital markets, but also to the restrictive
provisions of the Sarbanes-Oxley Act in the US.
                 The reasons
FSAP Priorities for the next five years:
• Finish unfinished business
• “Better regulation” – consultation, ex-ante & ex-post
  evaluation, evidence-based policy making
• Emphasis on implementation and enforcement of
  agreed measures
• International Dialogue with US, China, India, Japan,
  Russia etc.

  Certainty of the legal framework is conducive to an
        investment prone economic environment
                The Forecast and its risks
Upside and downside risks:

• Financial turmoil

• Gp? Oil prices? Wage dynamics?

• Labour productivity and attractiveness of EU for FDI? SWF issue

• Greater financial integration and market competition

• World trade dynamic, neighbouring countries dynamic, US soft or hard
  landing?

• Global imbalances issue and their asymmetry

• SWF debate
    What are the recent events?
Triggers:
•    Financial innovation – Originate and distribute model
•    Role of Credit Rating Agencies (conflict of interests,
     methodologies)
•    Mispricing of the liquidity risk and excessive risk taking
•    Herd behaviour (pre and post turmoil and in relying on
     someone else)
•    Funding mismatch
•    Lack of transparency and loss of confidence
    What can we learn from the
              past?
US 1987 Market Crash
•   Disruption of stock market functioning -> Informational
    problem
•   Herd behaviour
•   Uncertainty in stock mkt worsened the adverse selection
    problem causing a contraction of the credit market
•   Program trading -> potential problems for trading limits
    attached to standard risk management models
LTCM
•   Absence of transparency on large leveraged positions and
    off-balance sheet exposures -> difficult in measuring
    counterparty risk
•   Mispricing of liquidity risk (flight to liquidity)
•   Financial markets and products are so complex that even
    nobel prize winners may lose
  What do we learn from the recent
             events?
• Financial innovation is not a bad thing
   – Can improve stability smoothing the risk among investors;
   – Can allow for a more efficient allocation of capital, making it
     available to new segments of the economy;
   But
   – It should not alter incentives of market participants (originate and
     distribute Vs. buy and hold)
• Moral hazard of little relevance (the facto tendency towards
  public intervention, excessive risk taking was due to mispricing of
  liquidity risk, market conditions, funding mismatch)
• Asymmetric information leads to market disruption
            What are we doing?
• No knee-jerk reaction;
• Analysis of best policy response to improve product
  transparency and transparency on exposures
• Closer look at valuation and account treatment of assets
• Strengthening the prudential framework, risk
  management and supervision in the financial sector
• Improving financial-market functioning (incentive
  structures and conflicts of interest)
        Global imbalances: the numbers
• A Huge imbalance in the “odd” sense worldwide:

Graph: IMF World Economic Outlook 2006
       Global imbalances: the magnitude
• Very large numbers : US 6,5% of its GDP (US$860bn)

• Build up of large new creditors (Japan, new industrial Asian countries and
  oil exporting countries)

• First private investors, then central banks (unprecedented level of reserves
  in developing countries).

• EU area is at “close to balance”. Within the EU area, imbalances in the
  “right” sense.

                    Solving the US imbalance is

          the Big and Key Issue in global imbalances
              US and global imbalances:
             what are the risks for the EU
• “The issue is not whether, but how and when” (IMF, WEO 2006)

• It could be sudden and sharp, it could be smooth and overtime

• It could start from external factors ($ depreciation) or from internal one:

   •$ depreciation, ↑ USX, ↓ US M, ↓World assets in $, and change in
   investors’ sentiments would reinforce $ drop

   •US financial crisis, leading to US demand drop would ↑US S ↓ US C (both
   DC and M)

• Impact on the EU depends upon the rebalancing with the rest of the world
  (namely oil exporting and Asia, because of very great numbers)

• EU Countries running a current account deficit (NMS, E, P) more exposed.

• Need to work with Asia (foreclosure is a suicide, economic missions are
  beneficial), including on FX markets
             US and global imbalances:
            what are the recommendations
Country G8 recommended action
US             ↑ S (both private and public = fiscal
               consolidation)
EU             Structural reforms and ↑DD (both I and C)
Japan          Structural reforms and Fiscal stability
Asia           X-rate flex; ↑DD (both I and C), ↑ Fin. System
Oil       X-rate flex; diversification, invest in capacity
exporting
     For the EU, to follow the Lisbon Agenda is the best way to grow and to be
      prepared to the resolution of the global imbalances
                          SWF Debate
•Chinese entities         •Financial institutions         •Stake   •Estimated   •Date
                                                                   amount




•ICBC                     •PT Halim Bank (Indonesia)      •90%     •< $100 mn   •Dec 06
•Bank of China            •Singapore Aircraft Leasing     •100%    •$ 965 mn    •Dec 06
•CIC                      •Blackstone (US)                •10%     •$ 3 bn      •July 07
•China Development Bank   •Barclays (UK)                  •3.1%    •€ 2.2 bn    •July 07
•ICBC                     •Seng Heng Bank (Macao)         •80%     •$ 580 mn    •Aug 07
•CITIC Securities         •Bears Stearns (US)             •6%      •$ 1 bn      •Oct 07
•Minsheng Bank            •UCBH (US - California)         •9.9%    •$ 205 mn    •Oct 07
•ICBC                     •Standard Bank (South Africa)   •20%     •$ 5.5 bn    •Oct 07
•Ping An Insurance        •Fortis (Belgium)               •4.2%    •€ 1.8 bn    •Nov 07

Total                                                              € 16
Why is has been so difficult to boost growth in the EU?

• To pursue growth, after the creation of the monetary union, solving the
  productivity-employment paradox without endangering stability

• To pursue cohesion, after the enlargement, without sacrificing growth




 • Rule out traditional demand-driven policies:
   •   growth comes at the expenses of stability (e.g. more public spending)
   •   cohesion comes at the expenses of growth (e.g. state aids to poor regions)

 • Supply-side approach:
   1. comprehensive reform of markets (not only labor market, but also services, financial
      and not; innovation rather than imitation) => new focus of the Lisbon Strategy (feb ‟05)
   2. reform of the Stability and Growth Pact not to crowd-out (1) (mar ‟05)
   3. band-wagon effect induced by (1) + increased resources with this focus for lagging-
      behind regions/countries => reform of the EU Budget (december ‟05)
Why is has been so difficult to boost growth in the EU?

• Governments still favor demand-driven policies (electoral cycles)
   • the reform of the Stability and Growth Pact risks of opening up loopholes for increased
   public expenditure and budgetary instability => watchdog role of the Commission

• Governments are subject to lobbies’ pressures
   • a comprehensive strategy of supply-side reforms is very expensive in terms of
   electoral consensus since it pays back only in the medium to long run:
          risk of partial unsuccessful reforms (e.g. labor market and the productivity-
         employment paradox)
          risk of policy reversals (e.g. the debate on the euro in some countries)

   • a reform of the EU Budget “towards” the Lisbon goals + increased cohesion implies a
   trade off in financial resources given the limited size of the EU budget (~1.00% of EU
   GDP) => partial nationalization of the Common Agricultural Policy and reform of the UK
   rebate

  The EU “crisis”: an unprecedented asymmetry between a more or less clear
 policy agenda and the difficulty for Member States to pursue it properly, due to
                     (short-sighted!) national political issues
  An example of what can go wrong: the EU Constitution
• The current asymmetry between “forward-looking” policy agenda at the EU level
  and the national electoral cycles is not likely to be a stable outcome, due to…

• …an asymmetry between citizens‟ expectations and Governments‟ ability to
  meet these expectations:
     In the past years, Governments have delivered cohesion and stability (mainly through
    EU policies, e.g. the regional policy and the EMU) => high expectations from citizens
     More recently, Governments have not been able to deliver growth (also due to an
    unsatisfactory implementation of other EU policies, i.e. the Single Market and the
    Lisbon Agenda) => sense of frustration by EU citizens (e.g. F, D, I political consensus)
    and blind refusal of any further step in the integration process

How to respond to citizens‟ expectations: two polar ways
• Further widen the asymmetry between national choices and the EU policy agenda
  through short-sighted, inward oriented, protectionist policies (some immediate political
  gains at the expenses of painful costs in the future) => EU becomes another FTA
• Close the asymmetry between national choices and the EU policy agenda (some
  immediate political costs, at the advantage of future, long lasting gains) => integration
  process starts again (December 05 was a positive step in this direction)
    An example of what can go right: 2006 economics!
• Some governments (including EU large MS) ready to pay the short political
  costs for lasting gains

   •Good planning (D and d reduction)

   •Good practice (some market opening: energy, financial services)

   •...some good luck (low interest rate and low -2006, early 2007,- oil prices)
      The EU Budget

  Delicate Political Equilibrium
                Or
An useful tool of economic policy?
             The EU Budget
             History      Analysis Propos. Future
             Till today
Procedures   1975         Buti-    Const. No
             +            Nava     Treaty change
             1988         2003
                          Sapir et
                          al. 2004
Revenues     2005                  C 12/05 2008/9

Expenditure 2005                  C 12/05 2008/9

Net Balance 2005                  C 12/05 2008/9
                    The EU Budget
• Overall the EU budget has a very modest dimension.
• Maximum ceiling of the financing of the EU budget: 1.27% of the EU
  GNP (which is equivalent to 1.24% of the EU GNI.
• Public expenditure in the EU budget corresponds to only about 2.5%
  of the sum of the public expenditure implemented through the
  national budgets
• The whole EU Budget is as large as the budget of a small-size
  country such as Denmark or Portugal and is about 1/5 of a large
  size country such as Italy or France.


• In practice, the EU budget always well below that ceiling.
    – 1996 at 1, 20
    – Then down to some 1% of the EU GNI
    – and then it is increasing progressively, being expected to reach some
      1.15% of the EU GNI by 2013
         Budgetary principles
• Unity.
• Universality (no contraction between
  expenditure and revenues is possible, no
  earmarking apart from SGP).
• Annuality.
• Specification (definite scope and purpose).
  Financial reserves constitute the only exception
  to this principle.
• Unit of account.
  Towards a unification of budgetary instruments


   1957       ECSC         ECSC          EEC       Euratom     Euratom
             operating   administr.     single    administr.     R&D
    EEC
              budget      budget        budget      budget      budget
   Treaty


   1965       ECSC                       EEC                   Euratom
             operating                  single                   R&D
  Merger      budget                    budget                  budget
  Treaty


  1970        ECSC                     General
             operating                budget of
Luxembourg
              budget                   the EU
   Treaty
           Budgetary principles
• Equilibrium art. 268 which reads: “the revenue and
  expenditure shown in the budget must be in balance”.
• Total lack of inter-temporal flexibility for the EU budget.
• The EU budget must always be balanced in each and
  every year, while national budgets have to be broadly
  balanced over the cycle, thus allowing for deficits (up to
  3% of the GDP) to appear in recession years and
  surpluses in boom years
• Flexibility at the lower level (national budgets), and no
  flexibility at all at the higher level (EU budget), amounts
  to an institutional design atypical for a federalist setting
  and potentially destabilising.
        The EU Budget adoption
• Small, but cumbersome: The Council and the European Parliament,
  together, represent the so-called “budgetary authority” and their
  agreement, following a specific Commission‟s proposal, is needed
  for budget adoption.
• Negotiation among the member States has often represented a
  critical point in the political life of the Union.

• In particular, the EU budget is subject to:

    – the maximum thresholds set within a multi-annual budgetary framework
      both for the expenditure “Financial Perspectives” (FP), and for the
      revenues “Own Resources Decision” (ORD). (Last Berlin 1999, next in
      2005/6)
    – an annual adoption procedure, which fixes the actual annual authorised
      expenditure for the year in question for any given policy
  Towards a balance of power between EP and
  Council
•   1957 Rome Treaty
    - Council is sole budgetary authority; adopts budget and
    gives discharge
    - Commission presents PDB and implements budget
•   1970 Luxembourg Treaty
    - EP gets power to adopt budget but not to decide;
    discharge given by joint decision
    - CE-NCE distinction first introduced
•   1975 Brussels Treaty
    - EP gets final say on non-compulsory expend.;EP
    grants discharge alone; EP can reject the budget
    - Court of Auditors established: technical control
                  Table 6.1. The phases of the annual EU budget

Budgetary Phase            Institution             Timing
                           responsible
0. Multi-annual            Comm. proposal      6 months before the
Proposal                   Unanimity C, advise end
                           EP
1.Proposal                 Commission              By end of April N-1
2.Adoption                 EP and Council          By December N-1
3.Execution                Commission              During year N
4.Technical Control        EU     Court        of Around      November
                           Auditors               N+1
5.Political clearing       EP                      Around March N+2
         Financial Perspectives
Pros:
• Determine the maxima per entry and per year of any
  expenditure
• Allow for multi-annual planning
• Are the greatest instruments for fiscal discipline at the
  EU level
Cons:
• Shift power away from EP to C.
• Unanimity rule
• Have become increasingly more rigid
• Not in the Cons. Treaty, will they stay?
     The EU Budget procedure:
        analysis and future
• A nearly unanimous view of the literature
  (Sapir et al. 2004, Buti and Nava 2003), is
  against unanimity in the FP.
• Still, no advance in the Treaty
• With unanimity, difficult to use the Budget
  in a EU value-adding perspective
   The EU Budget expenditure
• Long term dynamic: reduced expenditure
  in the agricultural area and greater
  expenditure in other areas depending on
  the needs at the moment of approval of
  the strategy.
      Table 6.2. A comparison of the Financial Perspectives over time



                  Delors I    Delors I Delors II Agenda                 2007-
                   (1988)      (1992)   (1999)    2000                  2013
                                                 (2006)
CAP                 60%          56%         47%         43%            34%
Structural          17%          25%         36%         36%            36%
expenditure
Internal Policy     2.5%        4.5%          6%          8%            10%

External            3.6%        3.7%          7%          5%             6%
Expenditure
Context             SEA         EMU           Enlargement          Lisbon?
      The first own resources system 1957-1975



    Major developments


•Move towards unification of budgetary instruments
•Move towards financial autonomy
•Move towards balance of power between EP and Council
        The crisis in the Community’s finances (1975-
1987)


•   Difficulties in the years: „80, „82, „85, „86, „87 and „88.
    Provisional-twelfths arrangements applied a number of
    times, actions before the Court of Justice etc.
•   Causes:
    1. Dispute between the Council and Parliament: double
       decision-making power: (legislative power vs
       budgetary power).
    2. Budget imbalances (UK and D).
        The crisis in the Community’s finances (1975-
1987)

        3. The growing inadequacy of resources because of:
           a) the diminishing yield of TOR (GATT, food self-
        sufficiency) and VAT resource (grows slower than GNP)

          b) the rise in expenditure:
              - Strengthening of existing policies (ESF, ERDF);
              - Launching of new policies (fisheries policy, research);
              - Inability to contain CAP expenditure
              - Enlargement (EL, ES, P);
1.2. The crisis in the Community’s finances (1975-
1987)

 •   Solutions:
     1. Joint declaration (EP and Council) in 1982 and AII in
        1988 (followed by a second in 1993 and a third in
        1999).
     2. Introduction of the concept of budgetary discipline
     3. Two attempts prior to the Fontainebleau European
        Council (1984) when the UK correction was agreed
        (Germany: a one-third reduction)
     4. Increase in own resources: VAT ceiling to 1.4%.
        Fontainebleau (1984), but new ceiling reached in 1987
1.3. The Delors I reform of revenue and
expenditure       (1988)
In Feb 1987 the Commission presented two comprehensive reform
proposals:
            • Single European Act (COM 87/100)
            • Report on the Financing of the Budget (COM 87/101)


        CONTEXT:
        -Reforms unavoidable: need for financial resources
        -12 years of financial crisis and conflicts between the Council and
        Parliament;
        -The European enthusiasm of SEA and the need to underpin the
        project financially
        -Crucial roles for: Chancellor Kohl and Delors
1.3. The Delors I reform of revenue and
expenditure       (1988)


  Objective:
  Change the EU budget into a framework that allows:
  -   Economic growth
  -   Cohesion policies
  -   Financial autonomy


  AGREEMENT REACHED AT SPECIAL BRUSSELS EUROPEAN
  COUNCIL OF FEB 1988

                   MILESTONE
1.3.    The Delors I reform of revenue and expenditure
             (1988)


         Three main political points:



 •     - Reform of own resources system
 •     - Budgetary discipline
             - financial perspective
             - containment of agricultural expenditure
             - non-compulsory expenditure
 •     - The reform of the Structural Funds
1.3.    The Delors I reform of revenue and expenditure
             (1988)



     •Own resources:

 •         - “capping” of VAT base (“equity”) to 55% of GNP
        - Introduction of a fourth resource based on GNP
          (“efficiency and equity”)
        - The new own resources ceiling increasing from 1.15% to
          1.20%
          (“sufficiency”)
        - Confirmation of the UK correction
                  Budgetary discipline


The financial perspective:
 Determines the ceiling available per year per major
  category of expenditure
 Is politically binding for N years, (1988-1992; 1993 to
  1999 and now 2000-2006)
 Is subject to a “technical” update each year by the
  Commission in line with GNP and prices
 May be revised only by a joint decision of the Council and
  Parliament
 Is based upon an agreement between the presidents of Commission,
  Parliament and Council, the so-called Inter-institutional Agreement
Basically the annual budget puts the details into the framework provided
by the financial perspective for that year.
Delors I financial perspective, 1988 – 1992, (EUR million, 1998 prices)
                                                              1988    1989    1990    1991    1992
          Appropriations of commitments


          1. EAGGF Guarantee Section                          27500   27700   28700   29000   29600
          2. Structural Funds                                 7790    9200    10600   12100   13450
          3. Policies with multiannual allocations            1210    1650    1900    2150    2400
          4. Other policies                                   2103    2385    2500    2700    2800
            of which: non-compulsory expenditure              1646    1801    1860    1910    1970
          5. Repayments and administration                    5700    4950    4500    4000    3550
            of which: stock disposal                          1240    1400    1400    1400    1400
          6. Monetary reserve                                 1000    1000    1000    1000    1000
          Total:                                              45303   46885   48900   50950   52800


          of which
          compulsory expenditure                              33698   32607   32810   32980   33400
          non compulsory expenditure                          11605   14278   16090   17970   19400
          Appropriation for payments
          Appropriation for payments required                 43779   45300   46900   48600   50100
          of which
          compulsory expenditure                              33640   32604   32740   32910   33110
          non compulsory expenditure                          10139   12696   14160   15690   16990
          Appropriations for payments as % of GNP             1,12    1,14    1,15    1,16    1,17
          Own resources ceiling as % of GNP                   1,15    1,17    1,18    1,19    1,2


         *Interinstitutional Agreement (OJ C 331,7.12.1993)
Budgetary Discipline



            - Containment of Agricultural expenditure
             Agricultural guideline
                    - annual rate of growth (74% of GNP)
                    - agricultural stocks
                    - stabilizers

           - non-compulsory expenditure
           (agreement to accept FP ceilings and therefore
          neutralize the maximum rate of increase)
Reform of the structural funds




      - SEA: increased coordination between and rationalization
 of three existing Structural Funds
     - Brussels Council: -commitment approp 1993 = 1987 *2
                         - general objectives


 AIM: promote harmonious development of the entire
 Community by reducing the gap between the various regions
 by helping the less-favored regions to catch up.
1.3. The Delors I reform of revenue and
expenditure       (1988)
  WAS IT A SUCCESS????


  YES.
  • Budgetary peace: full compliance with IIA and financial perspective
  • Expenditure growth kept beneath the ceiling of the financial
    perspective.
  • Less CAP and more Structural and External Policies.
  • Financial resources sufficiency (GNP resource).




                                                                          175
1.3. The Delors I reform of revenue and
expenditure       (1988)

  NO
  • Equity ??
  • Agricultural reform?? (favorable economic conditions)
  • The problem of net balances




                                                            176
1.4.    The Delors II package: 1993-1999



       The improvements needed to Delors I:



         • Own resources ceiling
         • The problem of equity
         • A further CAP reform
         • Full application of the Maastricht Treaty, including
            - Cohesion policies
                 - Internal policies (single market, TEN,...)
                 - 2nd and 3rd pillars
1.4.    The Delors II package: 1993-1999



 Context:


       Tight constraints on MS public finances


                (Maastricht criteria)
1.4.   The Delors II package: 1993-1999

Results of the Edinburgh European Council


       Expenditure

        • Maintain agricultural guideline (CAP)
        • Structural and cohesion funds: increase of 75%
        • Internal policies will be increased by 30%, especially
        focused on the area of research and TEN
        • External action: increase of 55%, including two new
        reserves (emergency aid and guarantee fund)
        • New FP
1.4.      The Delors II package: 1993-1999

Results of the Edinburgh European Council
       Revenue
  (The present system is defined in the Council Decision of 31 October
  1994)
  • Ceiling for commitments(1.335%)
  • Own resources ceiling (1.27%)
  • Traditional Own Resources
       - Agricultural and sugar levies
       - Customs duties
  • Reduction of VAT resource (“capping”, reduction of maximum rate,
    frozen rate) for reasons of equity.
  • To maintain the GNP resource as marginal.
                                                                         180
1.4.        The Delors II package: 1993-1999

Results of the Edinburgh European Council

  • The UK correction remains applicable (slightly modified)
  • Report on the system (1998) and particularly on:
       1.   UK Correction
       2.   New resources
       3.   Fixed VAT rate




                                                               181
Delors II financial perspective, 1993 - 1999 (EUR 12)*, (EUR million, 1992 prices)
                                                         1993    1994    1995    1996    1997    1998    1999
   Appropriations of commitments


   1. Common agricultural policy                         35230   35095   35722   36364   37023   37697   39389


   2. Structural Funds                                   21277   21885   23480   24990   26526   28240   30000
     2.1 Structural Funds                                19777   20135   21480   22740   24026   25690   27400
     2.2 Cohesion Fund                                   1500    1750    2000    2250    2500    2550    2600
   3. Internal policies                                  3940    4084    4323    4520    4710    4910    5100


   4. External action                                    3950    4000    4280    4560    4830    5180    5600


   5. Administrative expenditure                         3280    3380    3580    3690    3800    3850    3900


   6. Reserve                                            1500    1500    1100    1100    1100    1100    1100
     Monetary reserve                                    1000    1000    500     500     500     500     500
     External action:
       Loan guarantees                                   300     300     300     300     300     300     300
       Emergency aid                                     200     200     300     300     300     300     300
   Commitment appropriations - Total                     69177   69944   72485   75224   77989   80977   84089
   Payment appropriations - Total                        65908   67036   69150   71290   74491   77249   80114
                                                         1,2     1,19    1,2     1,21    1,23    1,25    1,26
   Appropriations for payments as % of GNP               0       0,01    0,01    0,01    0,01    0,01    0,01
   Own resources ceiling ( % of GNP)                     1,2     1,2     1,21    1,22    1,24    1,26    1,27


  * Interinstitutional Agreement (OJ L 185, 15.7.1998)
AGENDA 2000: THE 2000-2006 CHALLENGES TO
THE EU BUDGET


 1.    The Political framework of enlargement




 2.    The Cost of enlargement
AGENDA 2000: THE 2000-2006 CHALLENGES TO
THE EU BUDGET


 1.     Enlargement : Politics
 1.1.   Copenhagen summit (1993)
 1.2.   Luxembourg summit (1997)
 1.3.   Berlin summit (1999)
 1.4.   Helsinki summit ( 1999)
 1.5.   Nice summit (2000)
2.     Enlargement: costs (Berlin summit,
       March 1999)
2.1    Pre-accession expenditure
2.2.   Accession expenditure
2.3.   Agricultural expenditure reform
2.4.   Structural expenditure reform
2.5.   Conclusions expenditure
2.6.   Own resources decisions
2.7.   Own resources conclusions
2.8.   Berlin summit evaluation
                                                             Eastern Enlargement to the EU: Economic Costs and Benefits for the EU
                                                                                         Member States

                              Economic "history" of EU-enlargement
                        500                                                                                                             20.000


                        450                        GDP-per-cap. (nom.exch.)                                                             19.000


                        400                                                                                                             18.000
                                    GDP-per-cap. (PPP)




                                                                                                                                                 GDP / cap. (ECU/yearr)
                                                                                                                            BL
Population (Millions)




                                                                                                                            LE
                        350                                                                                                 LI          17.000
                                                                                                                                     CEEC2
                                                                                                                            RM
                                   Population                    Normalization: 1995 observations                           SK
                        300                                                                                                             16.000
                                                                                                                     ?
                        250                                                                                                             15.000
                                                                                                           ES       „Helsinki“
                                                  73                                        95             PL
                        200                      DK                           86            AU             SL       CEEC1               14.000
                                   57            IRL           81             SP            FN             TS
                                  EEC            UK            GR             PR            SW             UN
                        150                                                                                                             13.000
                              original EEC   enlargement   enlargement    enlargement   enlargement    first eastern second eastern
                                                1973          1981            1986         1995         enlargem.        enlargem.




      Johannes Kepler                                                                             Prof. Wilhelm Kohler
      Universität Linz
                                 Eastern Enlargement to the EU: Economic Costs and Benefits for the EU
                                                             Member States


    Point of departure

     Enlargement takes place through unilateral adjustment by new members:
      adoption of the “acquis communautaire”

     Incumbent members will nonetheless be affected:
        1 budgetary burden
        2 integrated commodity and factor markets
        3 required institutional reform (intergovernmental conference)

     QUESTION: Overall, will eastern enlargement be
       – to the advantage also for incumbent countries,
       – or is it a “price” to be paid for a continuing peaceful reform in CEECs,
         a price-tag for pan-european integration?




Johannes Kepler                                              Professor Wilhelm Kohler
Universität Linz
                                      Eastern Enlargement to the EU: Economic Costs and Benefits for the EU
                                                                  Member States

    From an incumbent’s perspective, there are THREE dimensions
    in the enlargement scenario
     An enlarged Union will be a more expensive union
       -     Common Agricultural Policy and
       -     European Structural Funds
        larger net contributions to (lower net return from) the Union
     An enlarged Union will also be a (potentially) more valuable Union
          -        larger and more diversified set of partners to do business with on the basis of the
                   principle of free trade and factor movements
                  lower transaction costs and potential efficiency gains

     Institutional reform :
        -      size and composition of European Commission
        -      voting power in the European Council
        -      rules of decision making (majority voting)
                  different political power within the Union



Johannes Kepler                                                   Professor Wilhelm Kohler
Universität Linz
      THE 2000-2006 CHALLENGES TO THE EU BUDGET




2.   Enlargement: costs (Berlin summit, March
     1999)
COST L-6:         14,220      New Expenses (payment
    approp.)
                   3,740      New Revenue
                  10,480


How is this to be achieved?
        Increase contributions?
        Reduce/Reform expenditure for the EU-15?
        A combination of the two?
                                                             Eastern Enlargement to the EU: Economic Costs and Benefits for the EU
                                                                                         Member States


                                          Budgetary Costs of enlargement to CEECs5
                                                                Agenda 2000 - „Berlin 1999“

                                              payments      new own resources      internal policies     admin.     CAP    commitments
                              6.000

                              3.000      new own resourc.


                                  0
   Mio. Euro (1999 prices)




                              -3.000

                              -6.000
                                                                                                                           Cost:
                                                                                                Com. for CAP, ESF          10.480        Cost:
                                                                                                                                         13.040
                              -9.000

                             -12.000             Approp. f. payments


                             -15.000               Approp. f. commitments

                             -18.000
                                       2000       2001         2002         2003         2004           2005        2006
                                                                                         Year


Johannes Kepler                                                                                        Professor Wilhelm Kohler
Universität Linz
4.2.     Berlin Council decisions (1999)

4.2.1.       Pre-accession expenditure
Annual ceiling for the three sub-headings should remain at
a constant level throughout the period and should not
exceed:
   Heading 7 (Pre-accession instruments)                           (Mio. Euros 1999 prices)
                       2000       2001        2002           2003       2004       2005        2006
   Pre-accession      3.120       3.120      3.120           3.120     3.120      3.120       3.120
   instruments

   PHARE              1.560      1.560       1.560           1.560       1.560    1.560       1.560
   Agricultural         520        520         520             520         520      520         520
   Structural         1.040      1.040       1.040           1.040       1.040    1.040       1.040




                                     1.040

                                                            1.560


                                           520


                                  PHARE      Agricultural   Structural
4.2.      Berlin Council decisions (1999)

Accession expenditure

   Heading 8 (Enlargement) (appropriations for commitments)       (Mio Euros 1999 prices)
                                   2002          2003        2004        2005           2006
   Heading 8 (Enlargement)        6.450          9.030     11.610       14.200        16.780

   Agriculture                                         1.600             2.030          2.450           2.930    3.400
   Structural operations                               3.750             5.830          7.920          10.000   12.080
   Internal policies                                     730               760            790             820      850
   Administration                                        370               410            450             450      450


                                            12.000
                                            10.000
                   Mio. Euros 1999 prices




                                             8.000
                                             6.000
                                             4.000
                                             2.000
                                                0
                                                     2002      2003        2004       2005      2006

                                                     Agriculture                  Structural operations
                                                     Internal policies            Administration
EU-15
• Agricultural expenditure in 2006: 46% (44% in 1999)
• Structural expenditure in 2006: 32% (38% in 1999)
N-6:
• Agricultural expenditure: 20%
• Structural expenditure: more than 72%
EU-21
• Agricultural expenditure: 42%
• Structural expenditure: 38%
4.2.3. Agricultural expenditure reform

  The cornerstone of the Agreement is to shift part of
   the burden from consumers to taxpayers so that EU
   prices will tend towards world prices
  Total expenditure will stay at € 40.5 billion per year
   with a “bell-shaped” profile
  Enforcement of dairy reform from 2005/2006
  Two-step reduction of cereal prices by 7.5% in 2000-
   2002. Further reductions from 2002/2003 will be
   decided on the basis of price movements
  The Commission will examine the development of
   prices on agricultural products and produce a report
              Mio. euros 1999 prices
46000

44000

42000

40000

38000

36000

34000

32000


          2000 2001 2002 2003 2004 2005 2006

        cap     rural development etc.
4.2.4. Structural expenditure reform

  EU allocation and total amount of structural funds is
   the most debated point among EU-15
  Among other reasons, this is also due to the “efficacity”
   of the EU structural funds: former “poor” countries are
   much less poor than they were some ten years ago
                 Mio. euros 1999 prices
34000
32000
30000
28000
26000
24000
22000
20000



        2000   2001   2002   2003     2004     2005   2006

                Structural          Cohesion
                Funds               fund
A central and crucial issue in EU structural funds
discussion is concentration (I.e. the amount of money
destined to objective 1)


                 69.7%
                                      11.5%

                                   12.3%
                  Objective 1   Objective 2
                  Objective 3

Reform:
  Objectives decrease from       seven       to three (thus
   increasing   transparency        and         administrative
   simplicity)
  The maximum amount of structural funds per each
   country is capped at 4% of the countries GNP (“logic of
   the absorption capacity”)
The Three Objectives


Objective 1:
    Main Objective: Promotion of development and
    structural adjustments for regions lagging behind
Objective 2:
    Main objective: Support the economic and social
    conversion of areas facing structural difficulties
    (economic and social changes in industrial, service
    sectors, related problems in rural or urban areas)
Objective 3:
    Main objective: Support the adoption and modernisation
    of policies and systems of education, training and
    employment
4.2.5. Reform evaluation

  The CAP reform is less far-reaching than hoped by
   many but is a step forward
  Cuts in the other headings have been large
  Sufficient room has been created for N-6 expenditure,
   which deals mainly with structural issues (and there
   is still some margin), but there is still no date fixed for
   enlargement
  The ceiling of 1.27% is a guarantee for the large
   contributors
4.2.8 Conclusions

  Berlin summit makes room for the enlargement and it
   creates some “margin”
  “Margin” could be enough to accommodate the
   increase from N-6 to N-10 (GNP increases by some
   15%)
  “Margin” could not be enough if there is some “radical
   changes” in some policy
  The own resources system seems in need of a major
   reshuffling after so much fine-tuning. The 2006 review
   might be a substantial one
Agenda 2000 Financial Perspectives, 2000-2006 (EU-25)*, (EUR million, 1999 prices)

 Millions of Euro – 1999 prices – commitment appropriations   2000    2001    2002     2003     2004     2005     2006

 1. AGRICULTURE                                               40920   42800   43900    43770    44657    44657    45807
 CAP (excluding rural development)                            36620   38480   39570    39430    38737    39602    39612
 Rural Development                                            4300    4320    4330     4340     5920     6075     6195

 2. STRUCTURAL ACTIONS                                        32045   31455   30865    30285    35665    36502    37940
 Structural funds                                             29430   28840   28250    27670    30533    31835    32608
 Cohesion fund                                                2615    2615    2615     2615     5132     4667     5332

 3. INTERNAL POLICIES                                         5930    6040    6150     6260     7877     8098     8212

 4. EXTERNAL POLICIES                                         4550    4560    4570     4580     4590     4600     4610

 5. ADMINISTRATION                                            4560    4600    4700     4800     5403     5558     5712

 6. RESERVES                                                  900     900     650      400      400      400      400
 Monetary reserve                                             500     500     250      0        0        0        0
 Emergency aid reserve                                        200     200     200      200      200      200      200
 Guarantee reserve                                            200     200     200      200      200      200      200

 7. PRE-ACCESSION STRATEGY                                    3.120   3.120   3.120    3.120    3.120    3.120    3.120
 Agriculture                                                  520     520     520      520
 Pre-accession structural instrument                          1.040   1.040   1.040    1.040
 PHARE (applicant countries)                                  1.560   1.560   1.560    1.560

 8. COMPENSATIONS                                                                               1273     1173     940



 TOTAL APPROPRIATIONS FOR COMMITMENTS                         91995   93385   100255   102035   102985   105128   106741
 TOTAL APPROPRIATIONS FOR PAYMENTS                            89590   91070   98270    101450   100800   101600   103840

 Appropriations for payments as % of GNI (ESA 95)             1,07%   1,08%   1,11%    1,10%    1,08%    1,06%    1,06%

 Margin for unforeseen expenditure                            0,17%   0,16%   0,13%    0,14%    0,16%    0,18%    0,18%

 Own resources ceiling as % of GNI (ESA 95)                   1,24%   1,24%   1,24%    1,24%    1,24%    1,24%    1,24%



  * As retrieved from OJ L 147, 14.7.2003
2006 EU Expenditure by heading and by Member State




      Million of EUR, ranked by sized. Source: European Commission, EU Budeget Financial Report 2006
            Expenditure analysis
               (Buti-Nava 03 and Sapir et al. 04)
• “As it stands today, the EU budget is an historical relic”.
• “if the Union is serious and determined to achieve growth and
  solidarity in an enlarged Europe, the EU budgetary envelope should
  move away from the present inertia, which allows for only minor
  tinkering, and be radically restructured”.
• “A radical restructuring of the EU budget to support the growth
  agenda proposed by this Report in line with the Lisbon objectives.
  The budget should be organised into three funds:
   – 1) a fund to promote growth through expenditure for R&D, education
     and training, and infrastructure;
   – 2) a convergence fund to help low-income countries catch up;
   – 3) a fund to support economic restructuring. Meeting the growth agenda
     implies, if the overall size of the budget remains the same, a sharp
     reduction in EU agricultural expenditure”
Table 6.3. The Sapir report’s proposal for the budget in the
                 post-2007 financial period

 Expenditure                            % of EU GDP
 Growth                                 0.45
  of which:

   - R&D                                0.25
   - Education & Training               0.075
   - Infrastructure                     0.125
 Convergence                            0.35
  of which:
   - to new member States               0.20
   - to old member States               0.10
 … - Phasing out for regions            0.05
 Restructuring                          0.20
  of which:
   - for displaced workers              0.05
   - for agriculture                    0.05
   - Phasing out for agriculture        0.10
 Total economic and social activities   1.00
Source: Sapir et al. (2004)
  Commission‟s recommendation
       (February 2004)
• Sustainable growth
  – Single market reforms
  – Investment in poorest area (cohesion)
  – Environmental resources (including agri)
• European Citizenship
  – (fundamental freedoms, justice rules, security
    and safety)
• External Dimension
 New Financial Perspectives, 2007-2013 (EU-25), (EUR million, 2004 prices)


COMMITMENT APPROPRIATIONS                                                       2006 (a)      2007       2008        2009        2010        2011       2012        2013
1. Sustainable growth                                                             47.582     59.675      62.795      65.800     68.235      70.660      73.715     76.785

 1a. Competitiveness for growth and employment                                     8.791     12.105      14.390      16.680     18.965      21.250       23.540    25.825

 1b. Cohesion for growth and employment (b)                                      38.791      47.570      48.405      49.120     49.270      49.410       50.175    50.960

2. Preservation and management of natural resources                              56.015      57.180      57.900      58.115     57.980      57.850       57.825    57.805

 of which   : Agriculture - Market related expenditure and direct payments       43.735      43.500      43.673      43.354     43.034      42.714       42.506    42.293

3. Citizenship, freedom, security and justice                                      1.381      1.630       2.015       2.330       2.645      2.970        3.295      3.620

4. The EU as a global partner (c)                                                11.232      11.400      12.175      12.945     13.720      14.495       15.115    15.740

5. Administration (d)                                                              3.436      3.675       3.815       3.950       4.090      4.225        4.365      4.500

  Compensations                                                                    1.041

                            Total appropriations for commitments                120.688     133.560     138.700    143.140     146.670     150.200     154.315    158.450


                           Total appropriations for payments(b)(c)               114.740     124.600    136.500     127.700     126.000     132.400    138.400     143.100    Average
 Appropriations for payments as a percentage of GNI                               1,09%       1,15%      1,23%       1,12%       1,08%       1,11%      1,14%       1,15%      1,14%
 Margin available                                                                 0,15%       0,09%      0,01%       0,12%       0,16%       0,13%      0,10%       0,09%      0,10%
 Own resources ceiling as a percentage of GNI                                     1,24%       1,24%      1,24%       1,24%       1,24%       1,24%      1,24%       1,24%      1,24%

  (a) 2006 expenditure under the current financial perspective has been broken down according to the proposed new nomenclature for reference and to facilitate comparisons.
  (b) Includes expenditure for the Solidarity Fund (€ 1 billion in 2004 at current prices) as from 2006. However, corresponding payments are calculated only as from 2007.
  (c) The integration of EDF in the EU budget is assumed to take effect in 2008. Commitments for 2006 and 2007 are included only for comparison purposes. Payments on
  commitments before 2008 are not taken into account in the payment figures.
  (d) Includes administrative expenditure for institutions other than the Commission, pensions and European schools. Commission administrative expenditure is integrated in
  the first four expenditure headings.
    Table 6.4. A comparison of the most recent proposals on the future FP
    (percentage points of PNL)

   Commitments          Agenda    Commission    Commission        Sapir
   appropriations        2000      proposal      proposal        Report
       (year)           (2006)      (2007)        (2013)         (2013)
Heading 1                0.08         0.11          0.21          0.45
Sustainable growth,      0.37         0.44          0.41          0.35
of which
- Growth
- Cohesion
Heading 2                0.53         0.53          0.46          0.15
Preservation and
management of
natural resources
Heading 3                0.01         0.02          0.03          0.05
Citizenship, freedom,
security and justice
Heading 4                0.09         0.09          0.1       No position.
External dimension
     The “debate” in the Council
• Positioning war: 6 countries are asking a
  ceiling to 1%
• Others are supporting Commission‟s view
• Some are saying too little
• Some help from the NEW SGP
• first attempt under LUX in 6/2005: failed
• second attempt under UK in 12/05:
  success!
  The Council agreement for 2007-
               2013
• It is only Council agreement. EP position not yet
  definitive (EP Committee proposed adoption with very
  minor changes)
Council:
• Comm Proposal: 1,14% of GNI
• LUX: 1.056% of GNI
• UK final deal: 1.045% of GNI. That means 132 bn € over
  a 7 year period, 18 bn € per year, i.e. twivce the
  administrative costs.
• The EU Budget of 2007-13, is smaller (50 bn € less!)
  than the EU budget of 2000-06, in spite that there are 12
  more MS and 110 more million citizens!
          Where are the cuts?
•   Competitiveness and growth expenditure
•   Justice, home affairs and security
•   Cohesion
•   CAP expenditure untouched with respect
    to Council Agreement of 2002 that “froze”
    them at a 1% nominal increase with
    respect to previous period (real decrease).
                           Where are the cuts?

                                      Proposta Commissione     Proposta Commissione        Percentuale
                                       Accordo Consiglio         Accordo Consiglio      di ciascuna spesa nel
                                     Totale fondi 2007-2013    Totale fondi 2007-2013      bilancio totale
                                      Riduzione percentuale      Riduzione assoluta
Spese per competitività e crescita           -40,7%                   -49577                   8,4%
Spese per coesione economica e               -8,5%                    -41383                   35,7%
sociale
Agricoltura                          Quasi Invariato (-2,6%)      Invariato (-9969)            34,0%
Cittadinanza e sicurezza                    --30,2%                    -4454                   1,2%
Azione esterna                               -20,3%                   -12770                   5,8%
Totale                                       -13,3%                   131890
           Budget and Lisbon?
•   CAP expenditure increase from 29% a 34%
•   Growth down from 13% to 8,4%
•   External expenditure down from 9,3% a 5,8%
•   How to square that with Lisbon strategy (2000)?
•   How to square that with Lisbon mid-term review?
    that foresaw a “role for the EU budget to support
    the Lisbon Agenda”?
              Some hopes
• Globalisation Fund: very similar to the
  Sapir report. Pity it has no (own) funds (it
  will receive unspent money – in principle
  to a max of 0.5 bn €)
• Revision clause in 2008/9 to discuss:
  – expenditure
  – revenues
  – structure
              Some fears
• very little money and not allocated
  according to Lisbon
• revenue side more complicated than ever:
  – VAT further reduced and differentiated (D
    0,15%, A 0,225%, SW and NL 0,10%, others
    0,30%),
  – a one-off discount on NL and SW, GNI
    contribution
  – No financial autonomy only intergovernative
    funding
Budget 2008: similar…but different!


• Historical shift in the structure: for the first time
  spending on economic growth & jobs has the largest
  share of the budget;
• New challenges are more precisely reflected: the
  highest spending increases are in the fields with the
  biggest pressures;
• Stable support for agriculture remains guaranteed;
• Further integration of EU-12 into common policies -
  clear trend, different speed;
• The EU‟s influence on the global stage is sustained.
Proposed EU spending for 2008

Increase - moderate, gradual, reasonable

• Commitment appropriations
     €129.2billion
     1.03%of EU GNI
     +€2.6billion, +2.0%compared to 2007

• Payment appropriations
     €121.6billion
     0.97%of EU GNI
     +€6.0billion, +5.3%compared to 2007
   How the money could be spent
  COMMITMENT APPROPRIATIONS                                 Billion €   % of total budget   % change
  BY HEADING                                                                                    from
                                                                                                2007
  1. Sustainable growth:                                      57.2            44.2            +4.2
       Competitiveness                                        10.3             8.0            +9.6
       Cohesion                                               46.9            36.2            +3.1
  2. Preservation and management of natural resources:        56.3            43.6             0.0
       Direct payments & market related expenditure           42.5            32.9            -0.5
       Rural development, environment fisheries               13.8            10.7            +1.8
  3. Citizenship, freedom, security and justice               1.3             1.0            +11.1
  4. The EU as a global partner                               6.9             5.4             +4.5
  5. Administrative expenditure (for all EU institutions)     7.3             5.7             +5.7
       of which Commission                                    3.4             2.6             +4.1
  6. Compensation for Bulgaria & Romania*                     0.2             0.1            -53.5
                                    Total commitments       €129.2                            +2.0


                                   In % of EU-27 GNI          1.03



* adjustments due to changes in status of BG and RO, as decided in the Accession Treaties
The highest spending lines cross in 2008
 • Constant increase for Growth & Jobs
 • Firm stability for Agriculture
Proposed structure: how much for what?
 Record investment in economic progress/1
• Competitiveness for growth & employment (Heading 1A)

                   Commitments,     % from 2007
                   In billion EUR
                      10 270          9.6%

  Some examples:

  Research: +11%
   Enterprise: +16%
  Trans European Networks: + 14%
   Galileo: +51%
   Lifelong Learning: +9% (Erasmus Mundus: +64%)
Record investment in economic progress/2
• Cohesion for growth & employment (Heading 1B)

                  Commitments,     % from 2007
                  In billion EUR
                     46 878          3.1%

  Strengthening regional policy:
  Cohesion Fund: +14%

  Further integration of new Member States into structural
  actions:
  Share of EU-12: 47% from 44% (in 2007)
Shift in agricultural spending

• Management of natural resources (Heading 2)

               Commitments,     % from 2007
               In billion EUR
                  56 276         No change


  Major structural changes –a response to new
  challenges:
  Market related expenditure: -11%
  Direct aid: +1%
  Rural development: +1.6%
  Tackling environmental challenges: +11%
Europe working for its citizens
• Citizenship, freedom, security, justice (Heading 3)

                        Commitments,              % from 2007
                        In billion EUR
                             1 288                 +11.1%*


Some examples:
Management of migration flows: +24%
 Health & Consumer protection: +15%
 Audiovisual and Media: +21%
 Europe for citizens: +18%
 Civil protection: +21%
*excluding Solidarity Fund and Transition Facility for BG and RO in 2007
Europe‟s role on the world stage
• EU as a global partner (Heading 4)

                         Commitments,            % from 2007
                         In billion EUR
                               6 911              +4.5%*



Some examples:
Common & Foreign Security Policy: +26%
 Democracy and Human Rights: +5%
 Instrument for stability: +29%
 Macroeconomic assistance: +58%
*excluding reserve for loan guarantees in 2007
Structure of administrative expenditure

• Administration (Heading 5)

              Commitments,     % from 2007
              In billion EUR
                  7 336         +5.7%


Commission: +4.1%
 Other institutions: +5.7%
 Pensions (all EU): +10.2%
 European schools: +11.1%
EU-12: further integration into common
policies
  The Budget 2008: a big step, but not
  the final destination
• Size: moderate, but steady increase -a balance of ambition, realism and
  respect for taxpayers‟ money;
• Consistency: the road towards the modernisation of EU spending is
  preserved and developed;
• Shift: declared goals –competitiveness, growth & cohesion –are now
  translated into concrete budgetary priorities;
• Stability & certainty: other policies are not sacrificed –an adequate
  response to needs and challenges in all areas is guaranteed;
• Integration: the basic principle of solidarity is upheld –gradual integration of
  EU-12 into common policies is secured;
• Implementation: 2008 –the first full year of the new financial rules
  promising simpler, more flexible and more transparent access to EU funding.
             Budget Revenues: History

•   1957 Rome Treaty
    - The Community budget was financed exclusively by
       contributions from the Member States
•   1970 Luxembourg Treaty
    -         Introduction of the system of own resources:
        1.    Customs duties (gradual implementation 1971-1975)
        2.    Agricultural levies (immediately)
        3.    The VAT resource (1%) (harmon. base since 1979)
        4.    Transitional and declining contrib. (until 1979)
   Budget revenues: History
1984: UK correction (or rebate to UK
 contribution) was introduced as an
 ORD integral part.
1988: Delors introduced a fourth
 resource, which is known as the GNP
 resource (now GNI resource).
1999:Tor ↓, VAT ↓ , GNP ↑,
 UK Rebate ↑,
2005: VAT ↓, Ad hoc ↑ , GNP ↑,
 UK Rebate ↑ capped
Evolution of EU Resources 1997 - 2006




 Million of EUR. Source: European Commission, EU Budeget Financial Report 2006
National Contribution by Member State - 2006
   Budget revenues: GNP/GNI
• GNP resource, or “fourth” resource is a marginal
  resource equal to the shortfall between the total
  expenditure and the revenues raised by the first
  three other resources.
• This shortfall is redistributed among member
  States according to their GNP (nowadays GNI)
  shares in the total EU GNP.
That means:
• The taxpayers of the GNP resource are the
  governments and not the citizens directly, which
  considerably reduces the EU financial
  autonomy.
• The GNP resource is at the centre of a trade-off
  between financial sufficiency and financial
  autonomy.
          Budget revenues:GNP
• GNP resource in 1988 due to:
   – expenditures started to outstrip revenues in the EU budget. (Southern
     enlargement, success of its policies)
   – The GNP resource has ensured financial sufficiency to the EU,
   – The GNP reduces the EU financial autonomy

• The EU has never been able to regain the financial autonomy lost
  with the introduction of the GNP resource
• Because of the expansion of the EU budget, GNP resource is bound
  to increase: from 0% in 1988 it could reach some 90% in 2013, That
  means, the resources for the supranational EU policies (and thus
  the willingness to contribute) are entirely in the hands of the EU
  Governments.
• The GNP resource is a “Pact with the Devil” (Nava, 2000)
Budget revenues: UK correction
• The UK correction is, economically speaking, the most
  flagrant deviation from the rational financing rules of the
  EU budget.
• Its existence traces back to the beginning of the UK-EU
  relation. In 1975, the UK was the second poorest country
  in the Union and, because of the Community bias
  towards agricultural expenditure, the UK had a negative
  net balance vis-à-vis the Union, i.e. its contributions to
  the EU budget were higher than the share of EU
  expenditures it was receiving.
• After several years of negotiations, the UK decided from
  1982 to oppose a systematic veto to any EU proposal,
  thus effectively blocking the EU legislative activity.
• The 1984 Council of Fontainebleau agreed (at unanimity)
  to the UK correction mechanism, which, with some
  marginal modifications, introduced by the Delors’
  packages and by the Agenda 2000, is still implemented
  today.
Budget revenues: UK correction
• UK rebate= 66% (UKREV%-UKEXP%)*TAE
• Example by using the 2013 budget numbers:
   – Total budget 158 billion Euro
   – TAE: 142 billion EU (total expenditure minus the
     external expenditure).
   – UK REV% is assumed to be about 18%
   – UK EXP% is assumed about 9% (this is the
     average UK’s share into the EU expenditure post
     the 2004 enlargement).
   – Result: UK Rebate= 66%*(18%-9%)*142=8,5 billion
     Euro.
   – That amounts to a two-third reduction of the UK
     net balance towards the EU, that in absence of the
     UK correction would have amounted to 12,8
     billion Euro.
Budget revenues: UK correction
• Back in 1984 the UK budgetary position was judged
  excessively negative with respect to its relative
  prosperity and, on this ground, the Uk was granted a
  rebate to its contributions to the EU budget.
• Clearly, both the economic situation of the UK and its
  position towards the EU budget have dramatically
  changed since 1984: what could have been economically
  justifiable in the past, it is not so any longer today.
• The UK rebate, introduced to correct a distortion, today
  turns out to be the single largest distortion of the EU
  budget, and the very first blocking element of any
  budgetary negotiations aiming at modernising the EU
  budget.
• Since the UK correction is enshrined in the ORD,
  however, unanimity is required to make any changes to
  the mechanism, and obviously one country (guess which
  one) opposes any change of this situation.
       GCM vs. UK correction
• In 2004, the EU Commission proposes a
  Generalised Correction Mechanism (GCM), open
  to all countries, to replace the UK correction.
• The logic of the GCM would be to grant a
  correction not with respect to the whole net
  balance (as in the case of the UK) but only with
  respect to the part of the net balance that
  exceeds a commonly agreed threshold, or that is
  generated by a well identified type of
  expenditure.
• The overall amount of the GCM would not be
  much higher than the amount of the UK rebate.
       GCM vs. UK correction
• Financially speaking, this proposal would
  basically translate into more countries sharing a
  sum of money a bit larger than the UK rebate.
• Most probably 24 countries will be immediately
  in favour of it and one (guess who) would need
  to be convinced.
• It is extremely early at this stage to foresee what
  the chances are that the Council would actually
  accept the GCM at unanimity
  Budget revenue assessment
• Very Good on resource adequacy,
  sufficiency, cost-efficiency
• Good on equity (lack of progressivity is
  justified) and simplicity (apart from the UK
  rebate, differentiated VAT and recent ad
  hoc measures)
• Very poor on financial autonomy (because
  of the GNP/GNI resource)
          Budget revenue:
        needed improvements
• To move away from REV linked to MS
  towards REV linked with citizens (an EU
  tax instead of GNP/GNI contribution)
• It would solve at once the net balance
  issue and the financial autonomy issue
            Budget revenue:
           possible candidates
• The budget is very small, so any existing
  national tax would be vastly enough: need only
  for tax sharing, not tax transfer.
• Those sources with a clear link with EU policies.
• Many have been named: ECB seignorage, VAT,
  excise duties, corporate taxes, etc. (See
  Commission report of 98 and 04)
• The issue is much more political than technical
    Budget revenue changes at
     Brussels meeting (12/05)
• Exactly the reverse of what theory would
  suggest!
• Reduced role of VAT (D 0,15%, A 0,225%,
  SW and NL 0,10%, others 0,30%),
• more ad-hocism (a one-off discount on NL
  and SW, GNI contribution)
• Need for financial autonomy!
         Net balance issue
• The issue of burden-sharing of the net
  financing or net balances, has become
  in the last few years an unavoidable
  stumbling block of nearly every EU
  negotiations.
• MS agree at unanimity REV and EXP, so
  why they disagree on their difference?
          Net balance issue
• Issue is more political than economic
• Issue has to do with
  intergovernamentalism, not with
  community policy (the net balances are
  not a policy per se, but a simple outcome
  of policies)
• A positive or a normative concept
             Net balance issue
Positive:
• Economic significance of the accounting
  evidence:
  –   TOR+VAT
  –   Structural funds
  –   Agricultural funds
  –   Internal expenditure
  –   Administrative expenditure
  –   External expenditure
  –   Regulatory policy
Net balance issue: Comm. Position
• Commission‟s allocated expenditure report
  “constructing estimates of budgetary balances is
  merely an accounting exercise of the purely
  financial costs and benefits that each Member
  State derives from the Union. This accounting
  allocation gives no indication of many of the
  other benefits gained from EU policies such
  as those relating to the internal market and
  economic integration, not to mention political
  stability and security”.
           Many net balances
•   à la UK rebate
•   Berlin balance (presentational purpose)
•   Ministry of finance
•   Economic net balances
        The EU net balance
Normative concept:
• Vertical equity vs. horizontal equity, which
  means:
• Inverse relationship with income of the MS

• Not possible in the present set of EXP!!
         The EU net balance
• An inverse relationship between per capita
  income and net balance is not possible
  – Allocative expenditure (mainly CAP) counts for more
    than half of the total,
  – Redistributive expenditure uses a regional, not
    national, key.
  – Growth exp does not follow an inverse correlation
    with income (if anything a positive one!!)
  – Only cohesion funds (3% of the budget) are inversely
    correlated with MS income!
 The EU net balance: economically
            flawed….
• At best it is meaningless, at worst it is completely biased.
• They are very small compared to PF numbers
• Furthermore, the accounting evidence of the net balance
  is disconnected from the economic benefits, both in
  space and time.
• In spite of all that, the concept of net balance is widely
  used and it has had a dramatic impact on EU policy
  making.

  The attempts to adjust net balances in a direction more
   favourable to the big payers have been the driving force
      behind the 1999 Berlin negotiations, and Brussels
   negotiations (2005) could only be closed when the logic
             was abandoned for a little moment!
         …but politically crucial
• In spite of all that, the concept of net balance is widely
  used and it has had a dramatic impact on EU policy
  making.
• The attempts to adjust net balances in a direction more
  favourable to the big payers have been the driving force
  behind the 1999 Berlin negotiations,
• Brussels negotiations (2005) could only be closed when
  the logic was abandoned for a little moment!
                                                          Net balances in the EU
"Operational" budgetary balance (after UK correction) based on the UK rebate definition                                                    (1), (2)



          1996                     1997                         1998                     1999                     2000                     2001                      2002


          Mecus        % GNP       Mecus         % GNP          Mecus       % GNP        Meuro         % GNP      Meuro        % GNP       Meuro       % GNP         Meuro         % GNI


BE         16.5        0.01%       - 395.7       -0.18%         - 406.5     -0.18%       - 314.6       -0.13%     - 214.1      -0.09%      - 629.5     -0.25%        - 256.4       -0.10%

DK         273.4       0.20%        131.0        0.09%          7.1         0.00%        122.6         0.08%      240.5        0.15%       - 229.0     -0.14%        - 165.0       -0.09%

          -10
DE                     -0.56%      -10 552.9     -0.58%         -8 044.2    -0.43%       -8 494.0      -0.44%     -8 280.2     -0.42%      -6 953.3    -0.34%        -5 067.8      -0.24%
          405.9

EL        4 039.0      4.13%       4 360.5       4.09%          4 735.7     4.36%        3 818.0       3.27%      4 433.3      3.66%       4 513.2     3.52%         3 387.9       2.39%

ES        5 970.2      1.28%       5 782.8       1.20%          7 141.1     1.40%        7 382.4       1.35%      5 346.8      0.91%       7 738.3     1.23%         8 870.8       1.29%

FR        - 822.2      -0.07%      -1 284.3      -0.11%         - 864.5     -0.07%       30.0          0.00%      - 739.4      -0.05%      -2 035.4    -0.14%        -2 184.2      -0.14%

IE        2 421.8      4.61%       2 814.4       4.43%          2 379.2     3.38%        1 978.7       2.38%      1 720.8      1.77%       1 203.1     1.15%         1 576.7       1.50%

IT        -1 693.0     -0.18%      - 229.6       -0.02%         -1 410.6    -0.14%       - 753.9       -0.07%     1 210.1      0.11%       -1 977.9    -0.17%        -2 884.5      -0.23%

LU        - 45.8       -0.31%      - 54.3        -0.33%         - 76.6      -0.44%       - 85.0        -0.44%     - 56.6       -0.28%      - 144.1     -0.74%        - 48.9        -0.25%

NL        -1 295.0     -0.41%      -1 087.5      -0.34%         -1 539.8    -0.45%       -1 827.0      -0.50%     -1 540.3     -0.39%      -2 256.8    -0.54%        -2 187.7      -0.51%

AT        - 264.5      -0.15%      - 779.8       -0.43%         - 629.2     -0.34%       - 628.8       -0.32%     - 447.8      -0.22%      - 536.4     -0.26%        - 226.3       -0.11%

PT        2 839.1      3.28%       2 717.3       2.97%          3 018.9     3.09%        2 858.2       2.72%      2 168.5      1.95%       1 794.2     1.53%         2 692.3       2.14%

FI         72.6        0.08%        39.8         0.04%          - 102.4     -0.09%       - 194.8       -0.17%     274.5        0.22%       - 150.4     -0.11%        - 5.7         0.00%

SE        - 587.9      -0.30%      -1 097.7      -0.54%         - 779.9     -0.38%       - 897.3       -0.41%     -1 059.5     -0.45%      - 973.3     -0.43%        - 746.6       -0.29%

UK(3)     - 518.3      -0.06%      - 242.6       -0.02%         -3 489.3    -0.28%       -2 826.7      -0.21%     -2 985.9     -0.19%      707.5       0.04%         -2 902.8      -0.17%

Total      0.0         0.00%        121.4        0.00%          - 60.9      0.00%        167.8         0.00%      70.8         0.00%       70.3        0.00%         - 148.2       0.00%
(1)The method was changed slightly in the report on the year 2001 as compared to the preceding years‟ reports in order to make the total EU-15 “operational” budgetary balance sum up to zero
before deduction of the UK rebate.
(2)The latest available GNP and GNI data have been used (GNI has replaced GNP in the area of the EU budget as from 2002 – see also the previous page).
(3)The positive budgetary balance in 2001 is due to the particularly high amount of the rebate budgeted in this year. See also footnote (2) of table 4d.
  The EU Budget Conclusions:
• Net balances at centre-stage = need for
  overhaul.
• The two main policies (CAP and structural
  expenditures for cohesion), representing some
  85% of the current EU budget, still largely reflect
  a double deal: money versus Single market.
• Confused perception that the current EU budget
  is a “political equilibrium” whereby money is
  transferred across countries according to the
  logic of the net balances
• Away from the past to the future: use the budget
  as an instrument for economic policy to reach
  the Lisbon objectives.
   The EU Budget Conclusions:
• For the future, three types of changes are needed:
   – expenditure should be refocused on growth and
     convergence (the Lisbon objectives),
   – revenues should accrue more from tax-based
     resources and less from member State contribution
   – the multi-annual budget procedure should not be
     subject to Council unanimity.
• 2004 Commission‟s proposal in this vein (except for PF).
• Lux failed on 6/05, UK had an agreement which per se is
  a success, but not fully in this line.
     The EU Agricultural policy
• The most-well known and the most debated
  common policy of the EU.
• Origins, in the 50s and 60s, are mostly historic
  and relate essentially to the transition of the
  post-war EU economy from an economy based
  on agriculture to an economy based on industry
  and services.
• Its continuation in the eighties, nineties and the
  first decade of the 21st century is a delicate
  balance between political and economic
  reasons.
     The EU Agricultural policy
• The CAP is the only entirely communitarian
  policy.
• Debate on the CAP is generally hot and often for
  the wrong reasons.
• The divide line between those “in favour” and
  those “against” the CAP is however resilient to
  all possible classifications (political, national or
  cultural categories are normally not a good
  indicator of one‟s preferences towards CAP)
     The EU Agricultural policy
• History and rationale (section 2)
• Tools (section 3)
• Results (section 4).
• Reforms, from the mid-eighties till today, in
  which various environmental, commercial,
  social, political and economic concerns were
  tackled, especially in light of the recent
  enlargement of the European Union (section 5).
• Future prospects within a global world (section
  6)
• Conclusions (section 7)
    CAP: History and rationale
in the 50s and 60s two opposite options:
  – a) to let the “market” do the necessary
    adjustment (massive emigration out of the
    countryside and into the towns)
  – b) to find ways to accompany this
    transformation of economy and society.
  a: cheaper in money, costly socially
  b: costly in money, cheaper socially
     CAP: History and rationale
The objectives of the CAP are in TEC art. 33:
• to increase agricultural productivity by promoting
  technical progress and by ensuring the rational
  development of agricultural production and the
  optimum utilisation of the factors of production, in
  particular labour;
• thus to ensure a fair standard of living for the
  agricultural community, in particular by increasing
  the individual earnings of persons engaged in
  agriculture;
• to stabilise markets;
• to assure the availability of supplies;
• to ensure that supplies reach consumers at
  reasonable prices.
      CAP: History and rationale
Contradictory objectives? May be, but...
...there are several dimensions to be addressed

• The historical dimension: 25% of the working force engaged in
  agriculture and sustained by national agricultural policies
  based on different tools
• The economic and social dimension: agricultural prices have a
  great degree of variability over time and generally, due to
  technological progress, they have a decreasing trend.
• The political dimension: workers engaged in agriculture
  constitute a formidable lobby, because of their rooted
  allegiance to the territory and their links with many sectors of
  the economy (and also Collignon, 2003)
• The environmental concerns (not explicitly mentioned in article
  33 but article 6) and have become more and more prominent in
  the Union in recent years.
            CAP: Tools
Common organisation of the
  agricultural markets (COM or OCM)
  art 34 TEC
• “This organisation shall take one of
  the following forms, depending on the
  product concerned:
• common rules on competition;
• compulsory coordination of the
  various national market
  organisations;
• a European market organisation”.
                      CAP: Tools
The OCM were introduced gradually, and now exist for most EU
   agricultural products (e.g. OCM beef, OCM rice, etc.). Three main
   principles, defined in 1962, characterise them:
• A unified market denoting the free movement of agricultural
   products within member States (disregarding whether they are of
   internal or external origin).
• Community preference, implying preference and barriers for EU
   products.
• Financial solidarity, implying no national cofinancing (unicum)

Within the above principles, two measures are possible:
•       price support measures
•       income support measure (section 7.3.2).
The working of the price support mechanism in the CAP


         p
                      DH

                                       SH

             pT



         p0


                  1

          pw                            Sw


                                                 q
         O        A        C Q B   D
    CAP Tools: Price support
It needs:
• fixing prices
• duties
• exports refund

It entails:
• isolation of prices from the market
• regressive burden sharing
   CAP Tools: Income support
It needs:
• fixing “fair” income

It entails:
• no market distortion
• decoupling of income and production
• progressive burden sharing
             CAP Results
Positive
• Self-sufficiency in the agricultural
  consumption (no food shortage)
• Transition from an agricultural to an
  industrial economy successful and
  smooth,
• Income of farmers increasing and
  becoming more stable.
• EU agricultural production units remained
  family-sized.
• No land is abandoned and has no market
  value.
             CAP Results
Negative
• Market insulation
• Competitiveness
• WTO critics
• Very high costs (export refunds out of
  control)
• Too complicated
• Budgetary disequilibrium
           CAP Reform
• Mansholt Plan
• Price policy cut
• price support becomes unsustainable
  (internally and externally)
• need for gradual move to income
  support
              CAP Reform
Delors I:

• The EU “agricultural guideline”.

• The reduction of target prices, to allow a
  progressive reduction of overproduction,
  import tariffs and export refunds.

• The imposition of production quotas to
  limit overproduction.
                CAP Reform
Mc Sharry:
• a drastic reduction of target prices (particularly
  in those sectors where competition was fierce
  and where no particular EU specificity was
  evident, as, e.g., cereals)
• an increase in the compensation of farmers for
  the subsequent loss of income through direct
  aids;
• other measures relating to the market
  mechanism and the protection of the
  environment, such as the imposition of
  production quotas (already foreseen in the
  Delors‟ reform of 1988), and measures of
  agricultural land set-aside
                  CAP Reform
Agenda 2000:
• further reducing target prices and by fixing a mid-term
  review in 2002 to monitor the gap between target prices
  and market prices;
• the creation of substitute jobs and other sources of
  income for farmers;
• the formation of a new policy for rural development,
  which becomes the second pillar of the CAP;
• the integration of more environmental and structural
  considerations into the CAP;
• the improvement of food quality and safety;
• the simplification of agricultural legislation and the
  decentralisation of its application, in order to make rules
  and regulations clearer, more transparent, easier to
  access and less conducive to fraud.
        The EU budget contributions to the different CAP mechanisms

                100%
                 90%
                 80%
                 70%
                 60%
                 50%
                 40%
                 30%
                 20%
                 10%
                  0%
                                Traditional CAP      Mac Sharry Reform         Agenda 2000 (1999-
                                                        (1995 data)            2006 average data)


                   Income support (direct aids)   Price support (export refunds)   Rural development



Source: authors‟ elaboration on EU budget data
                 CAP Reform
June 2003 reform (in preparation of
  enlargement):
• Progressive extension to NMS of direct payments: from
  25% in 2004, 30% in 2005, 35% in 2006, and thereafter
  10% annual increments till 100% in 2013
• The total annual expenditure for CAP in a Union of 25
  cannot – in the period 2007-2013 – exceed the amount
  agreed with the Agenda 2000 reform for the year 2006.
• Same resources in the period 1999-2006 as in 2007-
  2013, but 25 instead of 15 countries.
• Once fully implemented, in per-capita terms this may
  probably amount to the single largest reduction of the
  CAP support ever agreed by the member States in the
  history of the Union.
                  CAP Reform
Key measures for the reform
• direct aid in the form of a single farm payment,
  progressively independent from production (decoupling)
• link of those payments to the respect of environmental,
  food safety, animal welfare, health and occupational
  safety standards, as well as the requirement to keep all
  farmland in good condition (cross-compliance);
• a stronger rural development policy with more money,
  new measures to promote quality, animal welfare and to
  help farmers to meet EU production standards;
• a reduction in direct payments (degression) for bigger
  farms, in order to minimise the existing distortions of the
  CAP harming small producers and generate additional
  money for rural development and the financing of further
  reforms.
                 CAP Reform
That entails
• Internal prices in line with world prices
• income support mechanism becomes
  completely linked to the concept of potential
  income, with no reference to the historic
  production records.
• Greater flexibility in the allocation of the aids,
  and a better compliance to the objective of
  overall reduction of the individual financial
  support in the EU-15
              CAP Reform
What made such a change in only 4 years?
EU enlargement has:
• doubled the agricultural labour force
• doubled the arable area of the EU,
• added as well over 100 million food consumers
  to the internal market.
• increased the need for restructuring in the
  NMS.

WTO Issues.
     Basic agricultural facts for the new member States, 2001.



                                                Agricultu
                                                              Ag.     Ag.
                Farmlan Number of Average          ral
                                                           share of share of
                d (million  farms     farm size employm
                                                           employm   GDP
                hectares) (millions) (hectares)    ent
                                                            ent (%)   (%)
                                                (millions)
Poland               18.2                  12.3                    1.5                 2.74                19.2    3.1
Other                20.1                  11.6                    1.6                 1.16                 7.2    3.1
CEECs
EU15                128.3                   6.8                   18.7                  6.7                 4.2    1.7



Source: Table 2.0.1.2 in Agriculture in the EU – Statistics and Economic Information, 2002, European Commission.
       CAP: External aspects
• Protection and assistance of the agricultural
  sector is far from being a unique EU feature
• 50% of the EU budget corresponds to about
  1.2% of the total public spending, the latter is
  the figure actually benefiting the 4% of the EU
  population engaged in agriculture.
• 2000-2002:
   – slightly less than 40% for the EU (more
     before the last reforms),
   – 20% for both Canada and the US,
   – around or above 60% for Iceland, Japan and
     Korea.
   – Norway and Switzerland have the highest
     level of support, at around 70%.
                     The support received by the agricultural sector in
                                 various OECD countries


                                    Producer Support Estimate (PSE) by Country (% of value of gross farm receipts)

100




80




60

                                                                                                                                                                        1986-1988
                                                                                                                                                                        2000-2002

40




20




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       Source: PSE/CSE Support Estimate Database, OECD 2003
        CAP: External aspects
• Relationship between farmers‟ income and all
  households‟ income: little variety across OECD
  countries
• Outcomes of agricultural policies are in fact such
  that farmers‟ income in most countries is very much
  comparable with other household incomes.
• Agricultural sector is considered as very sensitive all
  over the world, due to
   – multifunctional character
   – the pressures of lobbies particularly
   – environmental issues
   – Genetic-Modified Organisms (GMO) related
     issues.
• Agriculture is at the core of the WTO negotiations.
Income of farmers as a percentage of total income in OECD countries


                             Total income of farm households compared to total income of all households


    Switzerland, 2000

          Korea, 2001

        Canada, 2000

        Greece, 1998

   Ireland, 1999/2000

        Sweden, 1997

         Poland, 2001

  United States, 2001

         Japan, 2001

        Belgium, 1999

        Finland, 2000

  Australia, 1999/2000

      Denmark, 1999

    Netherlands, 1997

                         0     0,25         0,5        0,75         1         1,25   1,5   1,75           2   2,25   2,5

          Source: OECD (2003), Farm household incomes: issues and policy responses
        Farmer income by farm size, EU12, 1991/92

     Income                                   Number
                           Number
 generated by                                    of      Average
                              of                                                         Average       Farm net
  the farm, by                                holdings annual farm-
                           holdings                                                        size       value-added
 income class                                 as share income per
                          (millions)                                                    (hectares)    per hectare
   (euros per                                  of all     farmer
      year)                                   holdings
     0-5000                    2.0               45%                  €900                     15.0      €287
5,000-10,000                   1.0               22%                €7,300                     18.4      €668
     10,000-                   0.9               20%               €14,100                     27.8      €813
     20,000
     20,000-                   0.3                7%               €24,300                     37.4     €1,061
     30,000
 Over 30,000                   0.3                6%               €51,800                     55.4     €1,527
  All holding                  4.4              100%                €9,300                     22.3      €762
Source: Table 3.2.4, The agricultural situation in the Community, 1993, European Commission.
   Inequity of direct payments, receipts per farm by farm size, 2000.

                                                                                                          Cumulative      Cumulative
                                            % of EU15            Number of           % of EU15
                       Payment per                                                                        % of budget     % of farms
 Size of farm                              farms in size        farms in size        payments to
                          farm                                                                           (from largest   (from largest
                                              class                class              size class
                                                                                                          to smallest)    to smallest)
 0-1.25                     €405              53.76%              2,397,630              4.3%                100.0%        99.97%
 1.25-2                    €1,593              8.54%               380,800               2.7%                95.7%         46.21%
 2-5                       €3,296             16.30%               726,730               10.7%               93.0%         37.67%
 5-10                      €7,128              9.17%               409,080               13.0%               82.2%         21.37%
 10-20                    €13,989              6.81%               303,500               19.0%               69.2%         12.20%
 20-50                    €30,098              4.13%               184,100               24.8%               50.2%          5.39%
 50-100                   €67,095              0.94%                41,700               12.5%               25.4%          1.27%
 100-200                 €133,689              0.24%                10,720               6.4%                12.9%          0.33%
 200-300                 €241,157              0.05%                2,130                2.3%                 6.5%          0.09%
 300-500                 €376,534              0.03%                1,270                2.1%                 4.2%          0.04%
 Over 500                €768,333              0.01%                  610                2.1%                 2.1%          0.01%
 Average, all              €5,015
 farms
Source: Table 3.6.1.10 in Agriculture in the EU – Statistics and Economic Information, 2002, European Commission.
           CAP: Conclusion
1) It did work....but at a high costs, which
  generated a flurry of reforms!

2) Reforms worked but...EU rationale for
  income support?

3) Future Issues
   – Co-financing?
   – Multi functionality?
The EU Structural funds
              EU expenditure       National
                                 expenditure

Growth-
               Cohesion and      RA + aSA +
enhancing
              Structural Funds     NMF
expenditure
Other                              (1-a)SA
                 CAP + IP
transfers                        Other policies
       1991: all regions, correlation with GDP/head

                                                         National Budgets
                          EU Budget
                                                         in addition
Growth-enhancing          CSF: negative relation,        CSF + RA + NMF:
at the local     level    R2 = 0.2                       Negative rel., R2 = 0.34


                          CSF + CAP + IP: very
Other Transfers           mild negative rel., R2 =       No data
                          0.08

1995: all regions, correlation with GDP/head
                                                          National Budgets
                           EU Budget                      in addition

 Growth-enhancing          CSF: negative relation         CSF + RA + NMF:
 at the local     level    R2 = 0.24                      Negative rel., R2 = 0.32


                           CSF + CAP + IP: almost
 Other Transfers                                          No data
                           no negative rel., R2 = 0.03


  2000: all regions, correlation with GDP/head
                                                         National Budgets
                          EU Budget                      in addition
Growth-enhancing          CSF: negative relation         CSF + RA + NMF:
at the local     level    R2 = 0.35                      Negative rel., R2 = 0.35


                          CSF + CAP + IP: almost
Other Transfers                                          No data
                          no negative rel., R2 = 0.03
2000: eight Objective 1 macro-regions, correlation with GDP/head

                                             National
                                              Budgets
                        EU Budget
                                            in addition
  Growth-
                                            CSF + RA +
  enhancing              CSF: no
                                              NMF:
  at the local          correlation
                                           No correlation
  level
                      CSF+CAP+IP:
  Other              positive rel., R2 =
                                              No data
  Transfers          0.46 (negative if
                     IRL is excluded)
    GDP per capita in                               Average change
                        1980   1990   1995   2000
    PPS (EU-15=100)                                   1980/2000
Obj. 1 - BE              82     77     82     73        -0.11
Rest of BE              111    109    117    112         0.01
DK                      113    107    118    119         0.05
Obj. 1 - D                             71     77         0.57
Rest of D               116    115    121    113        -0.03
Obj. 1 - EL              70     58     66     68        -0.03
Obj. 1 - E               73     76     78     82         0.12
F                       110    107    104    101        -0.08
Obj. 1 - IRL             66     74     93    116         0.76
Obj. 1 - I               69     71     69     69         0.00
Rest of I               119    120    123    125         0.05
L                       133    152    171    194         0.46
NL                      108    103    109    113         0.05
A                       106    106    110    113         0.07
Obj. 1 - P               56     62     71     73         0.30
Fin                      97    103     97    104         0.07
S                       113    110    103    101        -0.11
Obj. 1 - UK                            76     78         0.16
Rest of UK              101    107     98    101         0.00
EU-15                   100    100    100    100         0.00
                                 0,35

                                  0,3
Average growth rate, 1980-2000




                                 0,25

                                  0,2

                                 0,15


                                  0,1

                                 0,05


                                   0
                                        1   10             100               1000   10000
                                                 1980 GDP (at 1995 prices)
Income b-convergence in a sample of EU-15 regions (1983-1999)

                               Convergence 1984-89                                                                      Convergence 1989-94


   0,2                                                                                            0,2

  0,15                                                                                           0,15

   0,1                                                                                            0,1

  0,05                                                                                           0,05

     0                                                                                              0

  -0,05                                                                                          -0,05
          0     5000           10000     15000     20000           25000     30000                       0      5000       10000     15000       20000       25000    30000



                           Convergence 1994-99                                                                          Convergence 1983-99

   0,2                                                                                0,2

  0,15                                                                               0,15

   0,1                                                                                0,1

  0,05                                                                               0,05

     0                                                                                  0

 -0,05                                                                               -0,05
          0   5000     10000     15000   20000   25000     30000     35000   40000           0           5000   10000     15000    20000     25000   30000    35000   40000




 Source: Authors‟elaboration on the basis of Eurostat data and Altomonte and Bonassi (2003).
Regional inequalities in EU-27, regional per capita GDP in PPS (2001)
                              < 50 EU average
                              50 - 75
                              75 - 90
                              90 - 100
                              100 - 125
                              >= 125
                              No data




Source: European Commission (2003), Second intermediate report on Economic and Social Cohesion.
         Income absolute convergence in EU-15 member States and regions,
                         1991-2000 (per capita GDP in PPS)


 Standard deviation of
GDP normalised to EU15
   45 average

    40

    35

    30

    25

    20

    15

    10

     5

     0
            B        D        EL       E         F       IRL       I       NL        A        P       FIN       S        UK    EU15 (by EU15 (by
                                                                                                                                region) Member
                                                                                                                                         State)
                                                                  1991     1995     2000




Source: Authors‟ calculations on Eurostat data. Luxembourg and Denmark are excluded from the regional calculations due to their territorial size.
                  Structural and cohesion funds in EU-15,
                     2000-2006 (million € at 2004 prices)




Source: European Commission, Regional Policy website
Convergence in the six EU lagging behind macro-regions



        GDP growth rate          1980-1990   1991-2000   1991-1995   1995-2000
        6 macro regions             2.6         3.3         2.8         3.7
        Rest of Europe              2.3         1.9         1.3         2.4
        EU-15                       2.4         2.1         1.5         2.6



        Per capita GDP in PPS      1980        1990        1995        2000
        6 macro regions            69.3        70.7        73.5        76.8
        Rest of Europe             109.5       109.1       109.9       108.7
        EU-15                      100         100         100         100




  Source: Sapir et al. (2004).
         Structural and cohesion funds in the new member States,
                  2004-2006 (million € at 2004 prices)




Source: European Commission, Regional Policy website
The Single Market Dimension
Transposition deficit in the Single Market, 1992-2004



                          22.50
                                       21.4
                          20.00
                          17.50
                                          13.4
             percentage

                          15.00
                                                       11
                          12.50                                    9.6
                          10.00                                             7.8
                                                                                     6.3
                           7.50
                                                                                              3.9      3.6
                           5.00                                                                                 3.0
                                                                                                                         2.0      2.1 2.4
                           2.50
                           0.00
                              92


                                       93


                                                  94


                                                              95


                                                                         96


                                                                                  97


                                                                                           98


                                                                                                    99


                                                                                                             00


                                                                                                                      01


                                                                                                                               02
                              -


                                      -


                                                 -


                                                               -


                                                                        -


                                                                                 -


                                                                                          -


                                                                                                   -


                                                                                                            -


                                                                                                                     -


                                                                                                                              -
                           ov


                                   ov


                                              ov


                                                            ov


                                                                     ov


                                                                              ov


                                                                                       ov


                                                                                                ov


                                                                                                         ov


                                                                                                                  ov


                                                                                                                           ov
                          N


                                   N


                                              N


                                                        N


                                                                    N


                                                                              N


                                                                                       N


                                                                                                N


                                                                                                         N


                                                                                                                  N


                                                                                                                           N
Transposition deficit: percentage of internal market directives not yet communicated as having been transposed in relation to the
total number of internal market directives which should have been transposed by the deadline.
Source: European Commission, DG Internal Market
Convergence of the 3 month money market rates
Convergence in bank lending rates: short term loans to corporations
             Implementing the single market




                               Fragmented markets
       Regulatory framework     (Mutual recognition)     Macroeconomic
                                                          coordination
(Single Market Programme &                             (European Monetary
        Single European Act)     Single Market         System)
Chronology and taxonomy of European Economic Integration


       Until 2nd WW                                               Protectionism
                                                                  High Barriers to trade (tariffs, quotas) among countries.
                                                                  Control of capital movements. Tight immigration rules.
       1.Treaty of Rome                                           Custom Union (CU)
       Since 1968                                                 A free trade area with a common external tariff replacing
                                                                  the different barriers to trade towards the RoW.
       1985             Single European Act (entered into         Common Market (CM)
                        force in 1987)                            A Custom union plus free movement of capital, goods,
       1992             Target of the Single Market               services and people (four fundamental freedoms).
                        Programme
       1.European Monetary System (EMS)                           Economic Union
       1993           Treaty of Maastricht                        A common market with harmonisation of economic and
                                                                  social policies to ensure an effective free movement and
                                                                  co-ordination of macroeconomic policies (EMS).
       1999 onwards                                               Economic and Monetary Union (EMU)
                                                                  An Economic Union with a common monetary policy
                                                                  run by an independent body (ECB).

       Other forms of economic integration pursued by the EU with third countries

       2000: EU-Mexico                                            Free Trade Area (FTA)
       2002: EU-Chile                                             All barriers to trade among integrating countries are
       2010 (possibly): EU-South Mediterranean countries          removed. Existing barriers to trade of single countries
                                                                  towards the Rest of the World are in place.
The gains from competing the internal market (Cecchini Report)



                              Category of gain                                    % EU GDP in
                                                                                     1985 a
                              - Elimination of trade barriers                            0.3
                              - Elimination of production barriers                       2.4
                              Gain from reducing cost-increasing barriers                2.7
                              - Economies of scale                                       0.5
                              - Competition effects                                      1.6
                              Gain from reducing market-entry restrictions               2.1
                              Total gains from Single Market Programme                   4.8




 Source: European Commission (1988), Table 10.1.1.
 a Estimates are based on partial equilibrium methods and on 1985 data at 1985 prices.
The timing of the CEECs’ accession (as of December 2004)

                       Signature of   Accession     Closed
              Country Association     Application   Chapters
                       Agreement      date          (Tot. 31)
            Bulgaria   1-3-1993       14-12-1995    28
            Cyprus     19-12-1972     3-07-1990     31
            Czech Rep. 6-10-1993      17-1-1996     31
            Estonia    12-6-1995      24-11-1995    31
            Hungary    16-12-1991     31-3-1994     31
            Latvia     12-6-1995      13-10-1995    31
            Lithuania 12-6-1995       8-12-1995     31
            Malta      5-12-1970      3-7-1990      31
            Poland     16-12-1991     5-4-1994      31
            Romania    8-2-1993       22-6-1995     28
            Slovakia   6-10-1993      27-6-1995     31
            Slovenia   10-6-1996      10-6-1996     31
            Turkey     12-9-1973      14-4-1987     -
 The evolution of transition in the CEECs
                                                                  Maximum negative
                                         Number of
                                                                     percentage of
                                     consecutive years of
                                                                variation of real output
                                      real GDP decline
                                                                  before the recovery

              Central Europe                  3,2                        -16,2
                Poland                         3                          -19
                Hungary                        4                          -18
                Czech Rep.                     3                          -13
                Slovenia                       2                          -14
                Slovak Rep.                    4                          -17
              Baltic Countries                 4                          -41
                Estonia                        3                          -29
                Lithuania                      4                          -44
                Latvia                         5                          -50
              CIS                             4,7                        -35,1
                Russia                         5                          -39
                Ukraine                        7                          -50
                Kazakhstan                     4                          -27
                Kyrgyz Rep.                    3                          -36
                Moldova                        7                          -37
                Tajikistan                     4                          -49
                Uzbekistan                     3                          -8

Source: Authors‟ elaborations based on World Bank – WDI data.
          The contribution of factors of production to growth in the
                             CEECs (1991-1999)




Source: ECP (2003) “Key structural challenges in the acceding countries: The integration of the acceding countries into the
Community‟s economic policy co-ordination processes”, Occasional Paper n.4, June 2003.
The external dimension
                    Europe and the World
                            Population            GDP at PPP            GDP per head          GDP growth
                              (2005)                (2005)                 (2005)             (1998-2007)
                           (% of world)           (% of world)           (EU27=100)          (% per annum)
EU27                            7.6                   20.4                  100.0                 2.4
(Euro area)                    (4.9)                 (14.8)                (112.5)               (2.1)

Neighbours*                    10.9                    8.5                    29.1                4.2
(Russia)                       (2.3)                  (2.6)                  (42.1)              (5.4)

United States                   4.6                    20.1                  162.8                3.1

Other advanced                  4.5                   13.9                   115.1                1.8
(Japan)                        (2.0)                  (6.4)                 (119.2)              (1.3)

Emerging                       60.8                    34.5                   21.1                6.1
economies**
(China)                       (20.7)                  (15.4)                 (27.7)              (9.1)
(India)                       (17.3)                   (6.0)                 (12.9)              (6.6)
(Brazil)                       (2.9)                   (2.6)                 (33.4)              (2.4)

Other                          11.6                    2.6                     8.3                4.3
developing***

World                         100.0                   100.0                   37.2                4.1

-G7****                        11.4                    41.2                  134.6                2.4
-BRICS*****                    43.2                    26.6                   23.0                7.8


* Rest of Europe (including Russia and other CIS countries), Middle East and North Africa.
** Developing Asia and Latin America
*** Sub-Saharan Africa.
**** Canada, France, Germany, Italy, Japan, United Kingdom and United States.
***** Brazil, Russia, India and China.
Source: Sapir (2007).
                        The EU “Pyramid of Preferences”



                                      EU membership      acquis communautaire

                         Association Agreement                Customs union


                  Cooperation Agreement                             Free trade area


 Generalised System of Preferences                                         Reduced C.E.T.

Common Commercial Policy                                                          C.E.T.

                                     GATT/WTO principles =>   Free Trade
The role of the euro in international financial markets




  Source: ECB (2003)
The role of the euro in foreign exchange markets




 Source: ECB (2003)
The EU-25 external economic position (2002)




                                                           Japan          US            EU

      Share in world trade in goods                          7.6         19.7           19.1

      Share in world trade in services                       7.7         20.2           24.3

      Share in Foreign Investment                             3          29.1           32.2

      Share in world GDP                                     7.3         21.3           19.8

      Degree of openness a                                  17.1         16.6           19.9



Source: European Commission DG Trade.
a Exports + Imports / GDP. Intra-EU trade and investment flows are excluded from calculations.
  The EU-25 external trade (million Euro)

                                 IMPORTS from the World
                         1997         1998        1999           2000         2001      2002
  TOTAL                672,568      710,538     779,825      1,033,436    1,028,238   987,196
  Manuf. Products      461,332      516,308     571,815       720,249      720,331    694,316
  Agr. prod.            71,177       72,460      71,359        79,130       82,802     82,262
  Energy                85,198       61,690      78,275       149,091      145,302    137,564


                    Of which: IMPORTS from developing countries
                           1997          1998        1999         2000       2001       2002
  TOTAL                 268,133       275,858      311,705     431,492    420,587     402,749
  Manuf. Products       165,528       182,394      206,000     270,493    268,588     264,253
  Agr. prod.             41,811        42,748       42,075       46,447     48,717     48,207
  Energy                 48,761        35,639       46,088       88,297     81,392     72,346



                                   EXPORTS to the World
                         1997         1998        1999           2000         2001      2002
  TOTAL                721,128      733,428     760,192       942,044      985,783    993,859
  Manuf. Products      619,983      635,925     656,374       809,992      856,653    860,918
  Agr. prod.            54,790       52,938      52,862        60,626       61,776     63,803
  Energy                17,144       14,014      16,593        30,250       26,064     26,317


                     Of which: EXPORTS to developing countries
                           1997          1998        1999         2000       2001       2002
  TOTAL                 289,086       272,027      274,028     337,585    352,714     349,316
  Manuf. Products       252,523       236,599      234,761     290,258    310,455     305,062
  Agr. prod.             22,200        21,381       21,789       25,364     24,429     23,953
  Energy                   6,891        5,476        5,830        9,420      6,186      6,440




Source: European Commission DG Trade.
    The EU-25 external trade with selected regional groups
                     (2002, million Euro)

                       Country                      Exports    Imports   Net Balance

                       NAFTA                        277,186    207,015     70,171

                       Andean Pact                   7,335      7,907       -572

                       MercoSur                      19,105    25,851      -6,746

                       EFTA                          97,598    107,259     -9,661

                       ACP                           39,734    45,785      -6,051

                       MED countries                 73,670    65,777       7,893

                       Middle East                   35,722    18,333      17,389

                       Turkey                        29,300    25,800       3,500

                       CIS                           46,688    75,058      -28,370

                       India                         16,412    21,287      -4,875

                       China                         52,893    98,595      -45,702

                       Japan and Korea               58,560    96,844      -38,284

                       ASEAN                         39,814    68,578      -28,764

                       Australia and New Zealand     18,792    11,283       7,509



Source: European Commission DG Trade.

NAFTA: US, Canada, Mexico
Andean Pact: Venezuela, Colombia, Bolivia, Ecuador, Peru
MercoSur: Brazil, Argentina, Uruguay, Paraguay, Chile (associated)
EFTA: Switzerland, Norway, Iceland, Liechtenstein
ACP: African, Caribbean and Pacific Countries
MED: Morocco, Algeria, Tunisia, Egypt, Israel, PNA, Syria, Lebanon, Jordan
ASEAN: Thailand, Taiwan, Indonesia, Malaysia, Singapore, Vietnam, Laos, Cambodia, Philippines, Myanmar, Brunei
                          The EU Pyramid of preferences in practice

Partner               Nature of agreement             Type of agreement           Status                                 Comments
Central and Eastern       Free Trade Area             Association Agreement       In force      Limited to Bulgaria and Romania after the 2004 EU
      Europe                                          “Europe Agreements”         1994-99       enlargement. A Stabilisation and Association agreement has
                                                                                                been signed with Croatia in 2001, with membership as a goal.
 Turkey, Andorra           Customs Union              Association Agreement       In force      The CU started in 1992 with Andorra and 1996 with Turkey
       EFTA               Free Trade Area             Association Agreement       In force      In addition to FTA provisions, the agreements call for the
 (Iceland, Norway,                                  “European Economic Space”      1994         implementation of the four fundamental freedoms in the
   Liechtenstein,                                                                               partner countries, with the exception of Switzerland, were
    Switzerland)                                                                                specific provisions have been negotiated
  Mediterranean            Free Trade Area           Association Agreements     Part in force   Agreements with Israel, Morocco, PNA, Tunisia, Lebanon and
   Countries          (to be fully established by    “Euro-Med Agreements”                      Egypt in force. Algeria ready to enter into force. Negotiations
                                 2010)                                                          ongoing with Syria
African, Caribbean       Regional Economic            Association Agreements     In force       Essentially FTA with non-reciprocal preferential access to the
    and Pacific        Cooperation Agreements            (Lomè-Cotonou          1963-2000       EU market. EU-ACP Joint Assembly
 Countries (ACP)                                           Conventions)
       Chile              Free Trade Area             Association Agreement       In force      Free trade in goods plus common rules on investments,
                                                                                   2002         services, rule-making, standards, non tariff measures
      Mexico              Free Trade Area            Co-operation Agreement       In force      Rules of origin negotiated in order to clear controversies with
                                                                                   2000         NAFTA. Extended to services.
   South Africa           Free Trade Area            Co-operation Agreement       In force      Under an Exchange of Letters, the provisions establishing an
                                                                                   2000         FTA in Goods are applied provisionally pending entry into
                                                                                                force of the full agreement..
  Latin America           Free Trade Area            Co-operation Agreement       In force      Seven rounds of negotiations since 1999 have been already
   (MercoSur)                                                                      1995         undertaken in order to sign an association agreement
 Other developing       Generalised system of             EU Regulation         1995-2004       Development-oriented reduced tariff rates on non sensible
    countries               preferences                                                         products. EBA clause for the 45 least developed countries

                               Source: authors‟ elaboration based on the information available on the European Commission – DG Trade website
                                                          http://europa.eu.int/comm/trade/issues/bilateral/index_en.htm
The external role of the EU before and after the enlargement, 2002 data


                                                                        EU-15        EU-25


    Population – million (% world)                                     379 (6.1%)   455 (7.3%)
    GDP - € billion (%world)                                              9275         9712
                                                                        (26.9%)      (28.7%)

    Total external trade - € million                                     1977         1799
    Share in world trade – Goods &                                        20.1         19.8
    Services

    Degree of openness                                                    21.1         19.9
   Source: European Commission DG Trade, COMEXT and AMECO databases.
The structure of EU trade before and after the enlargement, 2002 data




Source: European Commission DG Trade, COMEXT database.
                                   History of the GATT/WTO
                  Year                       Place           Issues                                       N. of
                                                                                                        Countries
                  1947                       Geneva          Tariffs and Duties on Goods                    23
                  1949                       Annecy          Tariffs and Duties on Goods                    13
                  1951                       Torquay         Tariffs and Duties on Goods                    38
                  1956                       Geneva          Tariffs and Duties on Goods                    26
                  1960-1961                  Geneva          Tariffs and Duties on Goods                    26
                  (Dillon Round)
                  1964-1967                  Geneva          Tariffs and Duties on Goods                    62
                  (Kennedy Round)                            Anti-dumping measures
                  1973-1979                  Geneva          Tariffs and Duties on Goods                   102
                  (Tokyo Round)                              Non tariff Barriers

                  1986-1994                  Punta   del     Tariffs and Duties on Goods                   123
                  (Uruguay Round)            Este            Non tariff Barriers
                                             Geneva          General Agreement on Services
                                             Marrakech       (GATS)
                                                             Intellectual Property (TRIPs)
                                                             MFA (textiles)
                                                             Agreement on Agriculture (AoA)
                                               Creation of WTO (1st January 1995)
                  1999                       Seattle         Tariffs and Duties on Goods                  147 a
                  (Millennium Round)         Doha            Non tariff Barriers
                  2001- …                    Cancùn          Agriculture
                  (Development Round)                        Services
                                                             Intellectual Property
                                                             Competition and Investments
                                                             Environment
                                                             Development
aThe WTO requires a formal membership procedure. In 2004, 147 countries were members, and 30 observers. Observer countries are due to start
negotiations for membership within five years of becoming observers.
      Percentages of tariffs bound before and after the Uruguay Round


                                                                        Before 1986                         After 1994




        Developed countries                                                 78%                                99%


        Developing countries                                                21%                                73%


        Transition economies                                                73%                                98%




Source: WTO Secretariat. Percentages are calculated over the total number of tariff lines, hence not weighted by trade volumes.
The impact of WTO rules on the Common Commercial Policy

  CCP tool before WTO                                  WTO rule                            CCP tool after WTO

  Average tariffs on manufactured goods at 6% of       Reduction of at least 38% by year   Average tariffs on manufactured goods at
  import values (1995)                                 2000                                3.7% of import values in year 2000



  Average tariffs on agricultural goods at 26% of      Reduction of at least 38% by year   Average tariffs on agricultural goods at 18.4%
  import values (1995)                                 2000                                of import values in year 2000



  Quotas on textiles and other agricultural products   Banned under WTO                    Multi-fibre arrangement dismantled in 2005.
                                                                                           Other quotas abolished.


  Voluntary Export Restraints (e.g. on Japanese        Banned under WTO                    Abolished
  cars)


  Anti-dumping measures                                Allowed                             Extensively used by the EU also as a
                                                                                           protectionist tool



Source: authors‟ elaboration from European Commission and WTO official documents.
   The role of the euro in Central Bank reserves




Source: ECB (2003).
   The external role of the EU
• Trade and GDP figures
• The relations with the world
• The Euro
The external role of the EU before and after the enlargement, 2002 data


                                                                        EU-15        EU-25


    Population – million (% world)                                     379 (6.1%)   455 (7.3%)
    GDP - € billion (%world)                                              9275         9712
                                                                        (26.9%)      (28.7%)

    Total external trade - € million                                     1977         1799
    Share in world trade – Goods &                                        20.1         19.8
    Services

    Degree of openness                                                    21.1         19.9
   Source: European Commission DG Trade, COMEXT and AMECO databases.
            The EU-25 external economic position (2002)



                                                                       Japan                US   EU

Share in world trade in goods                                            7.6              19.7   19.1

Share in world trade in services                                         7.7              20.2   24.3

Share in Foreign Investment                                                3              29.1   32.2

Share in world GDP                                                       7.3              21.3   19.8

Degree of openness a                                                    17.1              16.6   19.9

Source: European Commission DG Trade.
a Exports + Imports / GDP. Intra-EU trade and investment flows are excluded from calculations.
                       The EU “Pyramid of Preferences”



                                      EU membership      acquis communautaire

                         Association Agreement                Customs union


                  Cooperation Agreement                             Free trade area


 Generalised System of Preferences                                         Reduced C.E.T.

Common Commercial Policy                                                          C.E.T.

                                     GATT/WTO principles =>   Free Trade
                          The EU Pyramid of preferences in practice

Partner               Nature of agreement             Type of agreement           Status                                 Comments
Central and Eastern       Free Trade Area             Association Agreement       In force      Limited to Bulgaria and Romania after the 2004 EU
      Europe                                          “Europe Agreements”         1994-99       enlargement. A Stabilisation and Association agreement has
                                                                                                been signed with Croatia in 2001, with membership as a goal.
 Turkey, Andorra           Customs Union              Association Agreement       In force      The CU started in 1992 with Andorra and 1996 with Turkey
       EFTA               Free Trade Area             Association Agreement       In force      In addition to FTA provisions, the agreements call for the
 (Iceland, Norway,                                  “European Economic Space”      1994         implementation of the four fundamental freedoms in the
   Liechtenstein,                                                                               partner countries, with the exception of Switzerland, were
    Switzerland)                                                                                specific provisions have been negotiated
  Mediterranean            Free Trade Area           Association Agreements     Part in force   Agreements with Israel, Morocco, PNA, Tunisia, Lebanon and
   Countries          (to be fully established by    “Euro-Med Agreements”                      Egypt in force. Algeria ready to enter into force. Negotiations
                                 2010)                                                          ongoing with Syria
African, Caribbean       Regional Economic            Association Agreements     In force       Essentially FTA with non-reciprocal preferential access to the
    and Pacific        Cooperation Agreements            (Lomè-Cotonou          1963-2000       EU market. EU-ACP Joint Assembly
 Countries (ACP)                                           Conventions)
       Chile              Free Trade Area             Association Agreement       In force      Free trade in goods plus common rules on investments,
                                                                                   2002         services, rule-making, standards, non tariff measures
      Mexico              Free Trade Area            Co-operation Agreement       In force      Rules of origin negotiated in order to clear controversies with
                                                                                   2000         NAFTA. Extended to services.
   South Africa           Free Trade Area            Co-operation Agreement       In force      Under an Exchange of Letters, the provisions establishing an
                                                                                   2000         FTA in Goods are applied provisionally pending entry into
                                                                                                force of the full agreement..
  Latin America           Free Trade Area            Co-operation Agreement       In force      Seven rounds of negotiations since 1999 have been already
   (MercoSur)                                                                      1995         undertaken in order to sign an association agreement
 Other developing       Generalised system of             EU Regulation         1995-2004       Development-oriented reduced tariff rates on non sensible
    countries               preferences                                                         products. EBA clause for the 45 least developed countries

                               Source: authors‟ elaboration based on the information available on the European Commission – DG Trade website
                                                          http://europa.eu.int/comm/trade/issues/bilateral/index_en.htm
The role of the euro in international financial markets




  Source: ECB (2003)
The role of the euro in Central Bank reserves




Source: ECB (2003).

				
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