The Economic Integration of Europe

273 Pages·2021·14.828 MB·English

by  Richard Pomfret

THE ECONOMIC INTEGR ATION OF EU ROPE

ECONOM IC
The
I N T EGR AT ION
EU ROPE
of
r ich a r d pomfr et
Cambridge, Mas sa chu setts | London, England 2021
Copyright © 2021 by the President and Fellows of Harvard College
All rights reserved
Printed in the United States of Amer i ca
First printing
Cover photographs: Creativ Studio Heinemann
Cover design by Lisa Roberts
9780674259430 (EPUB)
9780674259454 (PDF)
The Library of Congress has cataloged the printed edition as follows:
Names: Pomfret, Richard W. T., author.
Title: The economic integration of Europe / Richard Pomfret.
Description: Cambridge, Massachusetts : Harvard University Press, 2021. |
Includes bibliographical references and index.
Identifiers: LCCN 2020048892 | ISBN 9780674244139 (hardcover)
Subjects: LCSH: European Union. | Europe—Economic integration. |
European Union countries—Economic conditions. | Europe— Economic
conditions—1945–
Classification: LCC HC241 .P663 2021 | DDC 337.1/42—dc23
LC record available at https://lccn.loc.gov/2020048892
Contents
preface vii
1
A Brief History of Eu ro pean Union 1
2
The Customs Union
Setting Eu ro pean Integration in Motion (1957–1982) 25
3
Deep Integration
Creation of the Eu ro pean Union (1982–1993) 54
4
Deeper and Wider
From Maastricht to Lisbon (1993–2007) 84
5
Post- Lisbon Challenges and Responses (2007–2019) 110
6
The Eu ro pean Union in the 2020s 167
abbreviations 193
list of boxes, tables, and figures 197
notes 199
references 229
index 249

Preface
THE MODERN STORY of Eu ro pean economic integration started from
the postwar rubble of 1945 and passed through two stages. First on a
sectoral basis, then economy- wide, a customs union was formed by the
most integrationist countries and then expanded to include much of
Western Eu rope by the 1980s. By then, however, removal of tariffs ex-
posed nontariff barriers to trade within the customs u nion and national
currencies made common policies difficult to or ga nize. The response
was the Single Eu ro pean Act and monetary integration creating the
Single Market and the euro by the end of the 1990s. In the twenty- first
century, the Eu ro pean Union (EU) had to address challenges associated
with the Single Market including crises of sovereign debt, refugees and
Brexit, further deepening of the Single Market and consequences for so-
cial inclusion and environmental policy, and widening to include much
of Eastern Eu rope. This book offers an economist’s perspective on that
road from the nationalism and divisions of World War II to the deep
economic and po liti cal integration of the EU in the twenty- first c entury.
Although the goal is to understand the EU as it now exists, the perspec-
tive is that such understanding is impossible without analy sis of the his-
torical evolution and understanding of economic forces.
◆ ◆ ◆
Since 1945, the nation- states of Eu rope have pursued a path to integra-
tion whose catalyst was po liti cal, the quest to avoid another major Eu-
ro pean war, but whose content has been economic. Starting from the Eu-
ro pean Coal and Steel Community to the Treaty of Rome and its
successor treaties, the pro cess has been toward deeper and wider eco-
nomic integration (Box 0). This book analyzes that dynamic pro cess,
viii Preface
seeking to explain why one step led to another, why some steps were suc-
cessful and others not, and who gained and who lost at each step.
When Jacob Viner published his seminal work The Customs Union
Issue in 1950, few people expected discriminatory trading arrangements
to be an impor tant feature of the world economy in the second half of
the twentieth century. The first article of the General Agreement on Tar-
iffs and Trade (GATT) signed by the major trading nations in 1947
committed contracting parties to treat one another as their most- favored
nation— that is, without discrimination. Imperial preferences were
grandfathered, but the Eu ro pean empires largely dis appeared over the
next two de cades. Unexpectedly, however, customs u nions and free trade
areas proliferated between the 1960s and the replacement of the GATT
by the World Trade Organ ization (WTO) in 1995, and regionalism was
viewed as a major challenge to the multilateral world trading system—
or at least stimulated a debate over w hether regionalism was a building
block or a stumbling block on the path to global trade liberalization. The
EU was the lead actor in the rise of regionalism.
A second classic work in this field was Bela Balassa’s 1961 Theory of
Economic Integration (Box 1), which set out a five- stage linear pro cess
from preferential trade agreements through free trade areas (zero tar-
iffs on internal trade) to customs u nion (a free trade area with common
external trade policies) to a common market (customs union with free
movement of capital and labor as well as of goods) to economic union
(a common market with common macroeconomic and other policies).
In Western Eu rope, the merits of a f ree trade area versus a customs u nion
were debated in the 1950s and became the basis of bloc competition in
the 1960s, between the Eu ro pean Free Trade Area (EFTA) and the cus-
toms u nion of the Eu ro pean Economic Community (EEC); the compe-
tition was clearly won by the customs union. The competition illustrated
that more than economics was at stake because a customs union chal-
lenged national autonomy in two areas: trade policy, because of the
common commercial policy, and fiscal policy, because the customs du-
ties had to be a common revenue source.
By the 1980s, it had become clear that Balassa’s linear path from less
to more economic integration simplified a complex and unstable pro-
cess. Nontariff barriers to trade could undermine the internal f ree trade
Preface ix
of a customs u nion and market- determined national exchange rates
could make internal prices more volatile than in a national economy
with a single currency. The EEC member countries de cided to move be-
yond the s imple customs union t oward “completing the internal
market” between 1986 and 1992 and establishing a single currency be-
tween 1993 and 2002. The 1993 Maastricht Treaty institutionalized the
Single Market and set out a vision of ever- closer economic and po liti cal
union. The EEC became part of the EU.
The dynamic pro cess did not end at Maastricht or with introduction
of the euro. In the twenty- first c entury, the EU continued to deepen and
widen. However, the integration pro cess lay behind three crises of the
2010s: the sovereign debt crises in the eurozone, disagreement over mi-
gration policy when faced with a large influx of refugees after 2011, and
the decision to leave the u nion taken in the British referendum of 2016.
At the same time as the EU was addressing these crises, it was also
strengthening its internal structures, widening to include Eastern Eu-
ro pean countries, and coming to terms with its role as a major player in
the global economy.
◆ ◆ ◆
The Eu ro pean integration pro cess has been driven since the 1960s by
economics, but po liti cal decisions were required, and both the politics
and economics played out against a backdrop of changing international
relations and an evolving global economy. A good summary of the com-
plexity of the main institution is in the very short introduction to the
EU by Simon Usherwood and John Pinder (2018, 1):
In the simplest of terms, the Eu ro pean Union is an international
organ ization founded on treaties between Eu ro pean states. But
such a description does not do justice to a body that has grown
and developed since the 1950s to cover many areas of public
policy and to reach deep into the po liti cal, economic and social
lives of its p eoples. That change has led some to see it as a proto-
state or a new form of po liti cal organ ization altogether. . . . Th e
EU has been driven by and reflected the wider context in which