EEC – The concept and the

challenge
Crisis of the Eurozone
 The phases of unification; status and
outlook.
• Concept and formation.

• Achievements and critical success factors.

• Affects of Enlargement and Globalisation.

• Implications of Financial pressures and diverging

societies.

• What will preserve the Euro?

 Concept and formation
• World Wars I and II crystallized awareness among France and
Germany that European economic integration was critical to
avoid future war.
• Treaty of Paris 1951 set up E.Coal and Steel Community
(ECSC), as a supranational body.
• Early on, the idea of a European Defence Community and a
European Political Community (EPC)were proposed, but set
aside.
• This ensured the focus became simply the European Economic
Community, with national sovereignty retained for a variety of
subjects.
• 1957 – Treaty of Rome signed, setting up a 6 member EEC
(France, Germany, Italy, Belgium, Netherlands).
 C&F cont’d
• All agricultural prices were made uniform- and heavily subsidized - across EEC in
1962 (Common Agri. Policy); in 1968, internal tariffs removed.

• European Parliament formed in ‘60s and Courts established for Trade and related
regulation.

• 1967 saw UK, Denmark and Ireland join; Greece, ’81; Spain and Portugal,’87;
Austria, Sweden and Finland, ‘95; Turkey applied ‘87, still pending. Pre Eastern
Europe accession, 15 countries.

• In ‘70s, policy instated to transfer Grants to less developed EEC countries

• In 1986, ‘single market’ created, i.e. unrestricted movement of goods within EEC –
subsequently extended to services, money and people. Introduced ERM (Eur. Exch.
Rate Mechanism)
• By 1993, had laid framework for achieving Monetary Union (Maastricht Agr’mnt)-
Euro achieved 1999 with single currency replacing national ccys.
 C&F cont’d
• Institutions of the EU
+ European Council – EU heads of State; meets 4 times a year; establishes
political priorities and major initiatives, but cannot pass laws.
+ European Parliament – MEPs elected in each member country, with total
per country based on population(not < 6, not > 96). Reviews and proposes
Laws put forward by EC- passed with approval of EU Council.
+ EU Council (2nd House) - Govt. Ministers representing each member
country. Approves laws proposed by Parliament, and signs EU agreements
with other countries. Basic policy development body.
+ European Commission (EC) – Responsible for implementing Laws and
spending EU Budget. Manages day to day business of the EU. Each country
appoints a Commissioner. Initiates/recommends EU laws to European
parliament
 C&F cont’d
• Institutions of the EU.
+ European Central Bank – sets Euro interest rates; oversees
coordination with national Central Banks.
+ European Investment Bank – finances infrastructure and
development projects in member countries.
+ Also: Courts for inter European disputes; plus other Agencies
and bodies to deal with specific subjects.
• EU subjects: two sets of subjects – EU has sole authority; EU and
nation both, but EU prevails.
• EU Budget ( E $150bn, 1.1% of EU GDP - countries contribute 1%
of GDP plus a %age of VAT and tariff duties. Major Budget payments
go for CAP(40%) and infrastructure, and funding for less developed
regions (25%).
 Critical Success factors till ‘95
• The ambition of EU’s founders threefold:
i) that Trade and Supranational institutions would
bind Europe into a single community ( not nation) so
that common interests would eliminate historic
rivalry and suspicion;
ii) that synergy from economic integration would
raise standards of living across Europe;
iii) that EU could pull its weight in international affairs
in line with super-powers, USSR and USA.
 CSF cont’d
Given these three aims, EU has been largely successful:
• 70% of EU trade within EU countries, up from 35% pre
EEC.
• Largest global economy, GDP $1.6trn.
• Has widened – from 6 to 27, soon 33, countries; and
deepened, through integration of Institutions; Capital;
Markets, and labour mobility.
• Highest technical standards for product quality.
• Heavy influence on world economy: biggest overseas
Investor and Donor(EU – Japan – US), while will not be
military superpower, is “soft’ superpower.
 Affects of Enlargement and
Globalisation
• To gain eligibility for membership, new applicants
have to meet comprehensive political, legal and
commercial standards – commonly requiring a
few years to achieve.
• From original 6 countries, EU grew to 16 by 1995:
with accession of Eastern European countries (9)
besides Malta and Cyprus, now 27 countries.
There are 6 ‘candidate’ countries. NOTE: only 17
countries in Euro currency unit(e.g. UK and
Sweden are not).
• In economic terms, Enlargement has had beneficial
impact on new joiners, with est. GDP benefit of 1.75%.
Deepening of labour market has put downward
pressure on wages in some industries (e.g. Building
trade).
But critics of Enlargement point out:
• Europe widening instead of deepening (too many
different societies);
• Central bureaucracy will become too powerful;
• newer states will suck up development funds..
….these trends will create a two or three speed Europe…
 E&G contd.
• Fiscal and Banking crisis in Euro periphery (PIIGS) in 2010-12
created fissures in public opinion around desirability of Euro.
• Greece lost access to private lender market; Portugal had sharply
higher debt, and Italian and Spanish debt costs rose.
• Bail-out lending through ESM, and partly ECB. Support from IMF.
• In all this, Germany emerged as the ‘powerhouse’ of the EU.
• Euro has survived….Future of Euro will still raise question:
- Issue for Southern Europe countries is whether they will
continue to have necessary access to EFSF(ECB) while managing
austerity and macro-stabilisation;
- Issue in Northern Europe is whether popular opinion will put
pressure to cut funding “Lifebelt” to Southern Europe next time a
crisis point is reached – on grounds that bail-out funds can become
Tax liability of North.
 Basic issue with maintaining Euro.
• EURO IS THE NEW ‘GOLD STANDARD’…… MONETARY
UNION, BUT NO FISCAL UNION, I.E. each country
prepares its own Budget, can runs deficit, and can
borrow globally.
• Unlike the USA, Euroland has no central authority that
can support its constituent members with ‘bailouts”
• Lack of fiscal union meant no central monitoring of
national accounts –
• - and guidelines for Budget deficit(<3%) and country
debt ceiling(<60%) of GDP were breached without
penalty (incl. by Germany, as cost of reunification).
 Implications of Fiscal independence
and diverging economic societies
• The roots of the Euro crisis really lay in the broader 2007 financial crisis,
and were transmitted to Europe via troubled Banks, in three ways:
+ Losses by Euro/UK Banks in sub-prime and RE lending had to be
compensated by Governments(UK, Ireland, Spain), raising Budget deficits;
+ Banks bought Sovereign Debt as safest form of exposure, bringing
down spreads on Greece, e.g., to same level as Germany(total to PIIGS
rose by $175bn to $875bn,’07 to ’09);
+ If borrowing to support national Banks had been undertaken at a
central, pan – European level, instead of each country borrowing on its
own --- the sharp deterioration of the weaker countries and the resultant
contagion impact would have been much more muted.
 IFI & DS
• Diverging economies and societies: high, entrenched
unemployment in all Southern European (above 20% in
Sp/Po/Gr vs 4% in Benelux, ave. EU 9%) is putting pressure on
Govts to spend.
• Northern European opinion also deeply concerned about
their Welfare States being hi-jacked by immigration from
poorer parts of EU, and from North Africa/Africa….but with
falling population, it is realized that immigration necessary.
 Cont’d
Types of European Welfare States:
Welfare State aims to guarantee a minimum standard of living (income,
education, health, accommodation) for all citizens, when “Market”
cannot.
1.Continental /Corporatist:(Germany, Benelux, France)
+ State is ‘compensator’ of first resort for eligible population via many
programmes managed though Insurance/Funds; funded by employee,
employer and State.
+ No employment guarantee;
+ Moderate national taxation level; Welfare spending 25% -27% of GDP.
+ Benefits tiered according to economic status.
+ Much of service provision in private/corporate hands, not delivered by
State.
+ Low poverty rates(under 15%).
 Cont’d
• Scandinavian :(Sweden, Norway, Denmark)
+ State is ‘provider’ of the first resort; State provides services
directly to all without qualification;
+ Absolute freedom to hire and fire, no payroll taxes; hence
low-cost labour employment levels remain higher than in
Continental;
+ High national taxes(upto 50%); Welfare spending 31%-40%
of GDP;
+ Most egalitarian of all European schemes, nationals have
‘equal rights’ to all aspects of welfare, irrespective of status.
+ - and therefore most ‘redistributive’…..lowest Poverty rates
(under 12%).
 Cont’d
Liberal Welfare State: ( UK, Ireland).
+ Distinguishes between ‘deserving’ and ‘undeserving’ poor by
‘means-testing” some welfare benefits;
+ Although free Education services universally available, lower
quality than private provision; Health services universal, but
can have long waiting times.
+ Encouraged to seek Insurance (e.g. BUPA) and cooperative
schemes to allow use of private hospitals;
+ Full freedom to hire and fire: low unemployment benefits, low
pensions;
+ Low Taxation; low Welfare expenditure, 21% of GDP;
+ Highest Poverty rates in Europe(20%);
 Contd.
Mediterranean:(Italy, Spain, Greece, Portugal).
+ Welfare state began development much later than
in N & W Europe; Health usually covered, but
service outreach not universal.
+ Intention is to build Welfare on Continental
pattern, but without much State provision.
+ Heavy pension payments, and early retirements
(45 to 65); slanted in favour of pubic sector
workers.
+ Moderate tax rates, but heavy tax evasion:
Welfare expenditure 21% of GDP.
 Cont’d
• Escalated by economic slowdown, considerable social pressures are
building within Europe, in different ways, that are forcing leadership to
face tough decisions.
• Major financial pressure arises from aging population and rising
pension payments, not fully funded in most cases(relied on “pay as you
go”).
• ‘Cost of Welfare State becoming burdensome as older population
takes up more Health costs; while economic growth and tax revenue
growth are slowing down.
• Needs for austerity is forcing roll-back of some aspects of Welfare
expenditure, which could show up in inter-Group conflicts…Scotland
referendum, Catalonia refereundum.
• Immigrant groups are rising %age of population (higher birth rates),
generally work in lower paid occupations, and in many cases, are not
blending into general population even after 3rd generation.
 What will save the Euro….
• Nevertheless, European economic integration
and incremental gains from unity will not be
forfeited in reaction to regional or Nationalist
pressures…all members have gained from unity.
• European leadership has to be more forceful in
demonstrating that EU ‘owns’ problems of
individual countries and will exert more authority
in future to prevent fiscal and financial excesses.
• ECB is establishing new institutions to monitor
and critique oversight of Fiscal and Banking
operations by individual EU Central Banks..