The European Union and the single currency in the global economy

1. The European Union and the single currency in the global economy 1 – historical background

2. Reconstruction and the Marshall Plan • The US encouraged co-operation when they extended the Marshall Plan.They acted to remove barriers to trade and payments, which were still paramount in Europe after the War, as they had been in the 1930s. • However the American agenda for a swift integration of Europe into a single market, including West Germany was too ambitious. European Nations, particularly Britain, but also France, resisted it.

3. The Schuman Plan and the ECSC • France was worried by the resurgence of West Germany and it advanced its own proposals for pooling Franco-German coal and steel resources under a supranational authority. • The Schuman Planwas universally considered an enlightened act of offering integration and co-operation in the place of competition and distrust. With the Schuman Plan began the process of European integration. Although the Plan was primarily directed at West Germany, other countries, which were directly interested, joined. What emerged was a Community of 6 countries- list - which was to play a key role in the process of integration. The UK, however, had decided not to be a part.

4. The Treaties of Rome • The next step towards integration was taken by the Six with the Treaties of Rome signed in March 1957, and it contained a mixture vertical and horizontal integration. The vertical element was Euratom, which pooled efforts to achieve atomic civil energy. Again the results, however, were limited. The military side of the nuclear programme was left out of it and jealously guarded by the French. The pooling of resources was only partial and countries continued to develop their own national strategy in this field alongside the European one. • The horizontal integration of the Treaties of Rome, namely the EEC (European Economic Community), was more important. Horizontal integrationinvolves measures covering the entire economy. What the EEC Treaty did was to lay out a timetable for the achievement of a Customs Union among the Six. Over a period of 12 to 15 years all barriers to trade, be it TARIFFS or QUOTAS would be progressively removed. At the same time a Common External Tariff was established.

7. The Single European Act and the 1992 Programme • The 1992 program culminating in the Single Act of 1987 dominated the 1980s. The central package in the re-launching of the Community was the bid to complete the internal market by 1992, eliminating all the remaining obstacles to the free movement of goods, persons, services and capital. The date 1992 was chosen because it corresponded to lifetime of two commissions, which was thought necessary to achieve the objective.

9. Background to the Single European Act • Evidence of a growing fragmentation of the EC market as a result of protectionist policies followed during the 1970s. • A sense that European producers were unable to compete with Japanese and American ones in new technologies etc. • Economic policy makers were increasingly convinced that the way to higher productivity and efficiency was in free-trade policies such as deregulation, privatisation and market discipline, together with a firm macro-economic framework.

10. The Single EuropeanACt • The Single Actwas a liberalisation programaiming at eliminating: • non-tariff barriers such as - national standards, safety and health regulation etc. • state aid and subsidies designed to protect particular sectors or give an advantage to leading national firms.

11. SEA and capital liberalization • All restrictions to capital movementwere also targeted for elimination. • France and Italy followed the example of Germany liberalising capital in 1990. In the next few years all the countries in Southern Europe followed suit. • The liberalisation of capital markets offered more opportunities for raising funds at the European level and brought about rationalisation and mergers in the financial sectors. • It allowed for faster and more dangerous speculative movements: see currency upheavals of the early 1990s - with the devaluation of the pound and the lira. • Currency instability was yet another argument towards achieving European Monetary Union which came to the front of the European Union agenda in the 1990s.

14. Towards monetary union: ERM and EMU • The end of Bretton Woods meant fluctuating exchange rates which endangered European integration. Attempts at monetary union in the 1970s failed because too ambitious. • At the end of the 1970s the French and German leadership, who were emerging as key leaders in Europe, agreed on a flexible arrangement, the ERM - Exchange rate mechanism, approved in 1978 by most EC members and started in 1979.

15. The Exchange rate mechanism • It was essentially a pragmatic agreement. Each currency was put into a common basket, called the ECU, and given a central exchange rate against the ECU. Each currency could move upwards or downwards in a narrow band in relation to its bilateral central rates. Once it reached the upper or lower limits of the band, there would be intervention by the combined Central banks and eventually realignment, which would have to be, however, negotiated. The mechanism functioned in such a way that the stronger currency would act as an anchor for all the others. • The ERM sanctioned the leading role of the DM.As a result Germany's anti-inflationary policies were transmitted through the mechanism to the other countries. Germany's monetary policy was tight and other countries would also have to tighten theirs.

16. The ERM: how it worked • On the other hand, the ERM was not a rigid system, since it allowed for some flexibilityand in the first few years especially many countries realigned their currencies within it. Increasingly it provided for exchange-rate stability in the EU. • The British initially did not to join the ERM, although sterling was part of the ECU. The reasons given were that sterling feared for its international status or reserve and petro-currency. However throughout the 1980s there was a long debate on whether to join or remain out. In the end Britain joined in 1990 at the worst possible time, with an overvalued currency. Two years later sterling fell under speculative attack and Britain left the ERM.

21. The road toward EMU: economic arguments • Basically the desire to achieve EMU and a single currency was fed both by political and economic arguments. On the economic side the argument was that the ERM was insufficient to create conditions of stability. Currencies were still open to speculative attack if the markets perceived that they were weak. A single market if it is truly integrated, it was argued, cannot function properly without a single currency. • The dominance of the DM meant that other currencies such as the franc or the lira (let alone the smaller ones) had very little room for independence anyhow. They were compelled to follow the policies of the Bundesbank. Why not create a Central European Bank, in which other countries could hope to have a say on Germany's and EU’s monetary management? This consideration was particularly strong in France.

22. The road towards EMU: political arguments • Crisis in the Community when German re-unificationtook place. One or the touchstones of the Community since the Schuman Plan was to keep Germany within Europe, particularly by securing a good balance between Germany and France. The risk was that Germany would disengage herself from Europe and start playing a nationalist role again. Such fears were particularly strong in France and were articulated by President Mitterand. • In Germany, on the other hand, Chancellor Kohl did not want to go it alone and that particularly after re-unification there was a need to work together with the other European partners to the point of surrendering the much valued DM for a European currency.

24. EMU and the Maastricht Treaty • The combination of economic and political pressures rapidly led to a proposal for EMU becoming part of the new 1991 Maastricht Treaty. Strict convergence criteria were set. Member countries had to bring down their inflation levels, their budget deficits and their national debt to established criteria within 5 to 7 years and qualifyto become members of EMU. • Convergence criteria: • maximum 3% budget deficit; • a max. 60% government debt • No devaluation for 2 years • Inflation kept down (no more than 1.5% above lowest inflation country) • Interest rates kept down (no more than 2% above best performing economy)

26. 1990s: the road toward the Euro • The 1990s were marked by a consistent policy of deflationcarried out throughout the European Union. in order to achieve the convergence criteria. The Stability and Growth pact of 1996 tightens the criteria further, by establishing a system of penalties. • Many countries struggled to meet the convergence criteria. Italy was only allowed in at the last moment. In more than one cases the convergence criteria set at Maastricht were fudged. Clearly following tight policies aggravated the unemployment problemsand kept growth rates low. • On the 1st of January 1999the Euro was launched, with the ECB assuming the function of setting interest rates for the whole Euro area. Britain, Denmark, Sweden, Greece remained outside, but for the other 11 countries after a 3-year transition the Euro was to completely replace their national currencies.

28. Eastern Enlargement • April 16 2003: the Treaty of enlargment is signed. !0 new countries join the EU from May 1, 2004 • 10 New Member States: the three Baltic States (Estonia, Latvia, Lituania), Poland, Hungary, Czech Republic, Slovakia, Slovenia, Cyprus and Malta. • January 1, 2007 Bulgaria e Rumania become EU members.

30. Fonti:Commission, Eurostat, IMF, UNO.

31. 11 –Key commercial trading partners of EU-15 (average 1999-2001) (b) Imports (a) Exports

32. 12 – FDI inside the EU 15 as a share of total FDI *With the exception of reinvested profits

34. The road to the Euro • 1992-1993 crisis in the ERM. Devaluation in Italy and the UK. Italy, beset by political as well as economic crisis, commits to emergency budget. • Summer of 1996. New economic measures in Italy to match the Mastricht Treaty convergence criteria. • March 1998 The European Commission rules that eleven countries qualify for membership of the single currency. Greece and Sweden remain out, while the UK and Denmark exercise their option not to take part. • May 1998 Wim Duisenberg appointed to become the first President of teh ECB.. • Greece is admitted in the euro in 2001, Slovenia in 2007,Malta and Cyprus in 2008 and Slovakia in 2009.

35. From Nice to Lisbon: developments in European Union • The results of the Nice Treaty were judged to be unsatisfactory. There were also signs of growing unease on the part of the citizens of the Union. The Treaty was actually rejected in a referendum held in Ireland in June 2001 • The European Council of Laeken in December 2001 decided to convene a Constitutional Convention on the future of Europe in view of framing a new Treaty.

36. From Nice to Lisbon: developments in the European Union • The Constitutional Convention was followed by a Intergovernmental Conference, which drafted a Constitutional Treaty (October 2004) • Referenda held in May 2005 in Holland and in June 2005 in France reject the Treaty • After this rejection member states decide to take a less ambitious route in drafting a new treaty. The outcome is the Treaty of Lisbon, approved by the European Council in December 2007

37. The Treaty of Lisbon • Less ambitious that its forerunner. It consists of 70 articles (as opposed to the 448 of the Constitutional Treaty). • The Lisbon Treaty establishes new rules on the composition and functioning of the three main EU Institutions: The Commission, the Council of Ministers and the European Parliament. • The Treaty establishes a permanent president of te European Council and a Foreign High Representative of the EU. • The Treaty has come into force on December 2009.

38. Current issues in the European Union • External problems • Relationship with the US: tensions over a wide range of issues. • The war on terrorism and multicultural Europe • Enlargment to include Turkey?