University of Canterbury courses ECON339: Lecture 2

1. ECON339
EURO339
Lecture 2: European Union
institutions and policies
January 2012

2. ECON339 / EURO339
Summary of Lecture 1
 Economic means to a political end
 Non-linear process:
 Common market - 1960s
 Eurosclerosis – 1970s
 Single European Market – 1980s
 Reunification of Europe – 1990s
 EMU – 2000s
 Economic crisis – 2010s
 Force for inclusion
 Supranationality vs intergovernmentalism
2

3. ECON339 / EURO339
Overview of Lecture 2
 The basics of creating an economic union
 An overview of the EU: population, income and
economic weight
 The “Big Five” EU Institutions
 Legislative process and decision-making
 The EU budget
3

4. ECON339 / EURO339
The basics of creating an economic
and monetary union
 “If markets are so integrated, you can’t cook a different
soup in one corner of the pot” (Andres Sutt, DG, Bank
of Estonia)
 Treaty of Rome, 1957 – now retitled “Treaty on the
Functioning of the EU”
 Article 1: establish European Economic Community
 Article 2: establish a common market and approximate
economic policies
 Article 3: free movement of goods, services, labour and
capital and common policies
4

5. ECON339 / EURO339
Main elements (1)
 Free trade in goods
 Eliminate tariffs, quotas and all other barriers that act like tariffs
or quotas
 Common trade policy with the rest of the world
 Formation of a Customs Union necessary to avoid controls inside
EU (Rules of Origin) - forces supranationality
 Ensuring undistorted competition (to avoid other policies
offsetting trade barrier removal):
 State aids regulated by Commission (most prohibited)
 Anti-competitive behaviour regulated by Commission
 Approximation of laws (ie, harmonisation) necessary to ensure
free movement of goods
5

6. ECON339 / EURO339
Main elements (2)
 Unrestricted trade in services
 Non-tariff barriers, technical standards
 Labour and capital market integration
 Free movement of workers (not people)
 Free movement of capital
 Exchange rate and macroeconomic coordination
 Managed exchange rates
 The euro and the growth and stability pact
6

7. ECON339 / EURO339
The bumpy road to economic
integration
90 BN index
80
70
Integration index
60
DFFM index
50
EMS,
40 1979
30
20 CAP,
1962 Monetary
integration
10 failures
0
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Customs Union Single Market EMU
phased in Programme
1958-68 phased in,
phased in, 7
1993-2001
1986-1992

8. ECON339 / EURO339
The EU in 2013
8

9. ECON339 / EURO339
EU populations
9

10. ECON339 / EURO339
Population
 6 „big‟ nations:
 > 35m (Germany, the UK, France, Italy, Spain and Poland)
 2 in-betweens:
 Romania (21.5m), Netherlands (16m)
 8 „medium‟ nations (size of a mega city):
 8-11m (Austria, Belgium, Bulgaria, Czech Republic, Greece, Hungary,
Portugal, Sweden)
 5 „small‟ nations (size of a big city)
 1-5m (Denmark, Estonia, Finland, Ireland, Latvia, Lithuania, Slovak
Republic, Slovenia)
 3 „tiny‟ nations
 <1m (Cyprus, Malta, Luxembourg)
 Small and tiny nations less than 5 % of EU27 population
10

11. ECON339 / EURO339
Income per capita (PPP)
11

12. ECON339 / EURO339
Income per capita
 11 high income (above EU25 average) over €22,500
 Ireland, Netherlands, Austria, Sweden, Denmark, Belgium, Finland, UK,
Germany, France, and Italy
 6 medium income category – from €19,000 to €22,500
 Greece, Cyprus, Slovenia, Czech Republic, Malta
 9 low income nations, less than €19,000
 Portugal, Estonia, Slovakia, Hungary, Lithuania, Latvia, Poland, Romania,
Bulgaria
 Luxembourg is in the super-high income category by itself
 per capita income more than twice that of the Dutch
12

13. ECON339 / EURO339
Size of economies (1)
13

14. ECON339 / EURO339
Size of economies (2)
"Other"
Ireland 1.5% Luxembourg 0.3%
Finland 1.5% Slovenia 0.3%
Portugal 1.3% Bulgaria 0.3%
Czech Republic 1.2% Lithuania 0.3%
Romania 1.0% Latvia 0.2%
Hungary 0.9% Estonia 0.1%
Slovakia 0.5% Cyprus 0.1%
Malta 0.04%
14

15. ECON339 / EURO339
Size of economies (3)
 Economic size distribution is VERY uneven
 Six nations (Germany, the UK, France, Italy, Spain and the
Netherlands) account for more than 80% of EU27‟s economy.
 Other nations are small, tiny or miniscule
 „Small‟ is an economy that accounts for between 1% and 3% of
the EU25‟s output:
 Sweden, Belgium, Austria, Denmark, Poland, Finland, Greece,
Portugal and Ireland
 „Tiny‟ is one that accounts for less than 1% of the total:
 Czech Republic, Hungary, Slovak Republic, Luxembourg,
Slovenia, Lithuania, and Cyprus
 Miniscule is one that accounts for less than 0.1%:
 Latvia, Estonia and Malta 15

16. ECON339 / EURO339
The constant tension: supranationality vs
intergovernmentalism
 Supranationality:
 European Commission, Europe Parliament
 Intergovernmentalism:
 European Council, Council of the European Union
 EEC supranational, Luxembourg Compromise in 1966
 Single European Act 1986 restored Qualified Majority
Voting (QMV) to economic integration
 From Nice to Lisbon. QMV extended
16

17. ECON339 / EURO339
Lisbon Treaty
 Nice Treaty 2001 – paved the way for institutional reform
pending accession of new member states
 Constitutional Treaty signed by EU25 on October 29, 2004
 Needed to be ratified by member states, some by
referendum
 Netherlands and France voted no in referendums in 2005
 Lisbon Treaty was an attempt to rescue key parts of the
Constitutional Treaty
 Lisbon Treaty signed December 13, 2007
 Came into force January 1, 2009
17

18. ECON339 / EURO339
Governments, parliaments
and judiciary
 Government – develops policy, controls the
Executive (ministries)
 Parliament – votes legislation, holds
government to account
 Often there is an upper house and a lower house
 House of Lords vs House of Commons, Senate vs
House of Representatives
 Judiciary – implements legislation,
independent of government and parliament
18

19. ECON339 / EURO339
EU Institutions: The „Big Five‟
 There are dozens of EU institutions, but only
five are really important:
Government
 European Council
Upper
House
 Council of the EU
 European Commission
Parliament
Lower
House  European Parliament
 EU Court
Judiciary
19

20. ECON339 / EURO339
European “capitals”
Luxembourg
Strasbourg
Brussels
20

21. ECON339 / EURO339
European Council (1)
 Leader (prime minister or president) of
each EU member plus:
 President of the European Council (new
under Lisbon Treaty)
 First appointment 1 December 2009 to 31
May 2012
 Herman Van Rompuy, 49th Prime Minister of
Belgium until he became President
 On 1 March 2012, Van Rompuy was
appointed for a second term until 30
November 2014
 The President of the European Commission
also sits on the European Council 21

22. ECON339 / EURO339
European Council (2)
 By far the most influential EU institution
 first meeting in 1961
 Formalised in 1974
 not mentioned in Treaties until 1986
 now permanent institution under Lisbon Treaty
 Provides broad guidelines for EU policy
 Thrashes out compromises on sensitive issues:
 reforms of the major EU policies
 the EU‟s multiyear budget plan
 Treaty changes
 final terms of enlargements, etc
22

23. ECON339 / EURO339
European Council (3)
 Meets at least twice a year (June and December)
 Chaired by the President of the European Council
 Formerly the chair rotated between heads of government/state
every six months
 Highest profile meetings used to be at the end of each six-
month term, when agenda can be set by presiding member
state – eg, Copenhagen 2002, admitting 10 CEECs
 No longer the same driver with a permanent president
 Determines all of the EU‟s major moves
 No formal role in EU law-making - its decisions must be
translated into action via Treaty changes or secondary
legislation
23

24. ECON339 / EURO339
Council of the European Union (1)
 Mostly called by it old name, “Council of Ministers”
 Consists representatives at ministerial level from each
Member State, empowered to commit his/her
Government
 typically minister for relevant area – eg, finance ministers on
budget issues
 Council uses different names according to the issue
discussed –EcoFin (for financial and budget issues), the
Agriculture Council (for CAP issues)
 Member state chairing various meetings rotates six-
monthly (Cyprus July-December 2012)
24

25. ECON339 / EURO339
Council of the European Union (2)
Exception:
 Council of EU Foreign Ministers is chaired by
High Representative
 High Representative of the Union for Foreign
Affairs and Security Policy– often called EU
Foreign Minister
 High Representative is a member of the
European Commissioner (First VP of the
European Commission)
 Currently Baroness Catherine Ashton
(December 1, 2009 – November 30, 2014)
25

26. ECON339 / EURO339
Council of the European Union (3)
 The branch of the bicameral EU‟s decision-making body that
represents governments of member states
 US Senate vs House of Representatives
 Main task to adopt new EU laws:
 measures necessary to implement the Treaties
 also measures concerning the EU budget and international
agreements involving the EU
 is also supposed to coordinate the general economic policies of
the Member States (e.g. famous 3% deficit rule)
 chaired by relevant minister from member state with EU
presidency
26

27. ECON339 / EURO339
The European Commission
 European Commission is at the heart of the EU‟s institutional
structure – executive arm/civil service
 Driving force behind deeper and wider European integration
 Has three main roles:
 propose legislation to the Council and Parliament
 to administer and implement EU policies
 to provide surveillance and enforcement of EU law
(„guardian of the Treaties‟)
 to represent the EU at some international negotiations
27

28. ECON339 / EURO339
EU Commissioners (1)
 Before the 2004 enlargement, one
Commissioner from each member, two
from Big Five = 20
 Under Nice Treaty 2003, each member in
EU27 has one Commissioner
 Lisbon Treaty originally proposed
reducing number to 15 from 2014
 “26+1 compromise” – one fewer than the
number of member states, with “loser”
getting High Representative President José
Manuel Barroso
28

29. ECON339 / EURO339
EU Commissioners (2)
 Commissioners are chosen by their own national
governments:
 subject to political agreement by other members
 Commission and President approved by Parliament
 President chosen by European Council
 Commissioners are not national representatives:
 should not accept or seek instruction from their country
 "the only body paid to think European"
 Appointed together, serve for five years (2010-14) –
the second “Barroso Commission
29

30. ECON339 / EURO339
EU Commissioners (3)
 Commissioner = minister of state
 Each is in charge of a specific area of EU policy
 Directorate-Generals (DGs)
 Executive powers
 Commission executive in all of the EU‟s activities
 power most obvious in competition policy and trade policy
 manages EU budget, subject to EU Court of Auditors
 decides on basis of a simple majority, if vote taken; mostly
consensus basis
30

31. ECON339 / EURO339
European Parliament (1)
 The branch of the bicameral EU‟s decision-making body that is
directly elected by the population
 Two main tasks:
 shares legislative powers, including budgetary power, with
the Council and the Commission
 oversees EU institutions, especially Commission
 Based in Strasbourg, but also holds meetings in Brussels
 nationalistic struggles to keep an EU institution in each
country
31

32. ECON339 / EURO339
European Parliament (2)
 736 MEPs
 Directly elected every five years
(2009-14)
 Serve the 2nd largest democratic
electorate (after India) – 375m
eligible voters
Martin Schultz
President
32

33. ECON339 / EURO339
European Parliament (3)
 MEPs represent local constituencies, but generally
organised along classic European political lines, not
national lines as in Council
 The European People's Party - centre-right, includes
members from every EU state
 Progressive Alliance of Socialists and Democrats - centre-left
 The Alliance of Liberals and Democrats for Europe
 European Parliamentary elections are, in principle, a way
for Europeans to have their voices heard on European
issues, but often national referenda on incumbent national
governments
33

34. Number of seats per country (2009 – 2014 parliamentary term)
ECON339 / EURO339
European Parliament (4)
Number of seats per country
(2009 – 2014 parliamentary term)
Austria 17 Latvia 8
Belgium 22 Lithuania 12
Bulgaria 17 Luxembourg 6
Cyprus 6 Malta 5
Czech Republic 22 Netherlands 25
Denmark 13 Poland 50
Estonia 6 Portugal 22
Finland 13 Romania 33
France 72 Slovakia 13
Germany 99 Slovenia 7
Greece 22 Spain 50
Hungary 22 Sweden 18
Ireland 12 United Kingdom 72
Italy 72 TOTAL 736 34

35. ECON339 / EURO339
European Parliament (5)
European People's Party
2009 Results: 7th European Parliament
Progressive Alliance of
Socialists and Democrats
Alliance of Liberals and
Democrats for Europe
The Greens–European
Free Alliance
European Conservatives
and Reformists
European United Left–
Nordic Green Left
Europe of Freedom and
Democracy
Non-Inscrits
35

36. ECON339 / EURO339
European Court of Justice (1)
 EU laws and decisions open to interpretation that lead
to disputes that cannot be settled by negotiation:
 Court settles these disputes between Member States,
between the EU and Member States, between EU
institutions, and between individuals and the EU
 Supranational authority:
 1963 ruling established the principle that EC law was
directly applicable in the courts of the members
 1964 ruling established EC law as an independent legal
system that takes precedence over national laws in EC
matters
 1979 Cassis de Dijon on NTBs started SEM
36

37. ECON339 / EURO339
European Court of Justice
 Influence:
 Court has had a major impact on European integration via
case-law
 Organisation:
 located in Luxembourg
 one judge from each member
 appointed by common agreement for six years
 also eight „advocates-general‟ to help judges
 the Court reaches its decisions by majority voting
37

38. ECON339 / EURO339
Legislative Process
 European Commission has a near-monopoly on proposing
legislation
 Ordinary legislative procedure (OLP – used to be called co-
decision) requires:
 proposal to be adopted by the European Parliament (deciding
by simple majority) and
 Council of the European Union (deciding by qualified
majority)
 if the Parliament and/or the Council disagree, proposal
only adopted if both agree through conciliation procedure
38

39. ECON339 / EURO339
Types of EU legislation
 Primary legislation ( treaties)
 Secondary legislation (collection of decisions made by EU
institutions)
 Regulation - Applies to all member states, companies,
authorities and citizens. Regulations apply immediately they
are written.
 Directive - Set out the result to be achieved, Member states
decide how to comply with directive
 Decision - legislative act that applies to a specific member
state, company or citizen.
 Recommendations and opinions - not legally binding, but can
influence behaviour
39

40. ECON339 / EURO339
Council of the European Union –
decision-making
 Two main decision-making rules:
 unanimity - on the most important issues, eg, Treaty
changes, enlargement, multi-year budget plan
 qualified majority voting (QMV)
 QMV is complex and has changed over time
 Three sets of QMV rules:
 Procedure 1958-2003 (from Treaty of Rome)
 Procedure 2004-14 (from Nice Treaty)
 Procedure 2014- (from Lisbon Treaty)
40

41. ECON339 / EURO339
QMW until 2004 enlargement
 Each member‟s minister gets fixed number of
votes based on population
 But fewer than pro-rata
 eg, France (60m) had 10 votes; Denmark (5m) had
3
 total number of votes in the EU15 was 87
 the threshold („qualified majority‟) for a winning
majority was 62 votes (71 %)
41

42. ECON339 / EURO339
Pre-2004 QMV - implications
 Bigger members have more votes, so 71 % of the votes
does not mean 71 % of members
 three large members voting „no‟ could block adoption even
if the other 12 voted „yes‟
 Small nations get far more votes than population-
proportionality, so 71 % of the votes does not mean
71% of the EU population
 71 % threshold can theoretically be reached, e.g. by a
coalition of just eight members representing 58 % of the
EU population
42

43. ECON339 / EURO339
QMV 2004-14
 Proposition passes the Council when coalition of
yes-voters meets three criteria:
 votes:
 72 % of the Council votes (232 votes of the 321
Council votes in the EU25)
 number of members:
 50 % of the member states
 population:
 62 % of the EU population
43

44. ECON339 / EURO339
Post-2004 - votes reallocated to
favour big nations
44

45. ECON339 / EURO339
QMV: Nice Treaty Reforms
Malta 50%  Percentage increase in
votes by member state
Luxembourg 100%
Cyprus 100%
Estonia 33%
Slovenia
Latvia
33%
33%
 Poland, Spain are
Lithuania 133% relative biggest
Ireland
Finland
133%
133% winners
Denmark 133%
Slovakia 133%  Tiny members biggest
relative losers
Austria 150%
Sweden 150%
Portugal 140%
Hungary 140%
Belgium 140%
CzechRepublic 140%
Greece 140%
Netherlands 160%
Poland 238%
Spain 238%
Italy 190%
France 190%
UnitedKingdo 190%
Germany 190%
45

46. ECON339 / EURO339
Lisbon Treaty – takes effect October
2014
 „Double majority‟ system:
 to pass: majority of countries (55% or 72% if EC does not
initiate) representing 65% of the population or condition to
block not met
 to block: at least 4 countries against the proposal or
 if not all members participate (eg, if some have opt-out)
the minimum number of members representing more than
35% of the population of the participating Member States,
plus one member are against the proposal
 Better reflects population size, but prevents smaller
member states being overruled by the larger countries
46

47. ECON339 / EURO339
Council of the European Union –
voting in practice
 Council normally aims at unanimous decisions
 QMV used to encourage compromises for consensus
 Final decision rarely uses QMV
 For example, in 2008:
 128 of 147 Council decisions unanimous
 Of other 19, 32 abstentions and only 8 votes against
47

48. ECON339 / EURO339
EU Budget: expenditure
 €864.3 billion for the period 2007–2013
 Expenditure is in four main areas:
o Agriculture (about half) = preservation and management
of natural resources (CAP, fishing policy, etc)
o Cohesion (about one third) = growth and employment
o Other internal policies = competitiveness for growth and
employment & citizenship, freedom, security and justice
o External policies = the EU as a global partner
48

49. ECON339 / EURO339
EU Budget 2011
49

50. ECON339 / EURO339
Evolution of Spending Priorities
1.0
0.8
% of Budget
0.6
Administration
0.4
External
Other Internal
0.2 Cohesion
CAP
0.0
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
50

51. ECON339 / EURO339
Evolution of Spending Level
120,000 Total Spending, Million euros, 1958-2006
100,000
80,000
60,000
40,000
20,000
0
62
70
74
82
90
94
02
58
66
78
86
98
06
51
19
19
19
19
19
19
20
19
19
19
19
19
20

52. ECON339 / EURO339
Spending received by member state
(€m)
52

53. ECON339 / EURO339
Funding of EU Budget
 EU‟s budget must balance every year
 Financing sources:
 Tariff revenue
 „Agricultural levies‟ (tariffs on agricultural goods)
 „VAT resource‟ (like a 1 % value added tax – reality is
complex)
 GNP based (tax paid by members based on their GNP) –
top up to ensure EU budget balances
 Only partially related to per capita GDP
53

54. ECON339 / EURO339
Evolution of Funding Sources
100%
GNP
80% VAT
Miscellaneous
Share of total revenue
Customs Duties
60% Agricultural Duties
40%
20%
0%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: “The Community Budget: The facts in figures” European Commission, 2000. Downloadable from
http://eurpoa.eu.int/budget/ 54

55. ECON339 / EURO339
Contribution as % GDP
55

56. ECON339 / EURO339
EU budget “problem”
 On expenditure side:
 Receipts depend on economic structure rather than per
capita GDP
 On revenue side:
 Contribution depends also on economic structure
 Approximately 1 percent regardless of per-capita income
 EU contributions are not „progressive‟ - richest nation,
(Luxembourg) pays less of its GDP than the poorest
nation (Bulgaria)
56

57. ECON339 / EURO339
Net Contribution by Member
57

58. ECON339 / EURO339
Conclusions
 EU economies heterogeneous by population, pc GDP,
absolute GDP, economic development
 so different national interests
 EU institutions have executive, parliament/legislature +
judiciary
 Voting in Council vexed issue
 how to weight votes, ensure small country voice heard
 Budget reallocates funding to poorer/rural members
 So further emphasis on different national interests
58