University of Canterbury course ECON339: Lecture 1

1. ECON339
EURO339
Historical and Political
Integration in Europe,
1945-2012
January 2012

2. ECON339 / EURO339
The EU in 2012
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3. ECON339 / EURO339
Early Post War Period: the Climate
for Radical Change
D eath to ll T he E co no m ic S et-B ack: Pre-
w ar year w he n G D P equa lle d
that o f 1945
A u stria 525,000 1886
B e lg iu m 82,750 1924
D enm ark 4,250 1936
F in la nd 79,000 1938
Fra nce 505,750 1891
G erm a ny 6,363,000 1908
Italy 355,500 1909
N etherla nd s 250,000 1912
N o rw ay 10,250 1937
S w eden 0 G D P grew during W W II
S w itzerla nd 0 G D P grew during W W II
UK 325,000 G D P grew during W W II
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4. ECON339 / EURO339
Early Post War Period: the Climate
for Radical Change
London 1940 East London, 1940
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5. ECON339 / EURO339
Early Post War Period: the Climate
for Radical Change
Rotterdam, 1940
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6. ECON339 / EURO339
Early Post War Period: the Climate
for Radical Change
Reichstag, 1945
Frankfurter Allee, 1945
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7. ECON339 / EURO339
Early Post War Period: the Climate
for Radical Change
Brandenburg Gate
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8. ECON339 / EURO339
Early Post War Period: the Climate
for Radical Change
Unter der Linden, 1945 Unter der Linden, 1997
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9. ECON339 / EURO339
Early Post War Period: the Climate
for Radical Change
Berlin Cathedral, 1945 Berlin Cathedral, 1997
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10. ECON339 / EURO339
Refugees and famine
 The situation worsens 1945-47
 1946/47 winter
 Famine and starvation
 1m refugees in UN camps
 7m Displaced Persons (DPs) returned home
 Political turmoil – monarchies abolished
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11. ECON339 / EURO339
How can Europe avoid another
war?
 What caused the war?
 Blame the loser (as in 1919)
 Capitalism
 Rampant nationalism (fascism)
 Three different post-war solutions
 Blame the loser? - deindustrialise Germany – Henry
Morgenthau (US Treasury Secretary), 1944
 Capitalism? - adopt communism
 Nationalism? - pursue European integration
 European integration ultimately prevailed
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12. ECON339 / EURO339
Emergence of a divided Europe
Germany, Austria & Berlin divided into four zones 12

13. ECON339 / EURO339
Winston Churchill, Fulton, Missouri,
March 5th, 1946
‘From Stettin in the Baltic to Trieste in the
Adriatic an iron curtain has descended across
the Continent. Behind that line lie all the
capitals of the ancient states of Central and
Eastern Europe. Warsaw, Berlin, Prague,
Vienna, Budapest, Belgrade, Bucharest and
Sofia…’
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14. ECON339 / EURO339
Winston Churchill, Fulton, Missouri,
March 5th, 1946
‘… all these famous cities and the populations
around them lie in what I must call the Soviet
sphere, and all are subject, in one form or
another, not only to Soviet influence but to a
very high and in some cases increasing
measure of control from Moscow.’
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15. ECON339 / EURO339
The Iron Curtain
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The Iron Curtain
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The Iron Curtain
East German Guard Towers
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The ‘Cold War’ begins
 USSR enforces communism in the East
 UK, French and US zones merged by 1948
 Moves towards creation of West German
government
 Berlin „air bridge‟, June 1948
 'Neuter (“deindustrialise”) Germany' solution
abandoned for strong West Germany plus
European integration
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19. ECON339 / EURO339
First Steps at European integration
 The Organisation for European Economic
Cooperation and the European Payments
Union
 Marshal Plan, 1948-52: $12bn US aid to western
Europe (CMEA USSR response, 1949-)
 OEEC (1948-61) coordinated aid distribution and
prompted trade liberalisation
 EPU (1950-58) multilateralised bilateral barter deals
between bankrupt states and fostered trade
liberalisation
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20. ECON339 / EURO339
Need for deeper European
integration
 As Cold War got more war-like, West
German rearmament became necessary.
 1949, Federal Republic of (West) Germany
established
 Strong and independent Germany feared
 OEEC too weak to bind strong, rearmed
Germany and avoid future wars
 Economic integration of Germany essential to
permit rearmament
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21. ECON339 / EURO339
Brief aside from the chronology
 Nobel Peace Prize 2012 awarded to
EU for:
 „for over six decades [having] contributed to
the advancement of peace and reconciliation,
democracy and human rights in Europe‟
 „By building up mutual confidence, historical
enemies can become close partners‟
 „introduction of democracy‟ in Greece, Spain
and Portugal
 overcoming of „the division between East and
West‟
 contributing to „process of reconciliation in
the Balkans‟
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22. ECON339 / EURO339
Two strands of European integration
 Federalism vs intergovernmentalism
 Federalism – supranational institutions (G, F, I)
 Intergovernmentalism – nations retain sovereignty
(UK, Scandinavia, neutrals)
 Intergovernmental initiatives
 OEEC (1948)
 Council of Europe (1949)
 Court of Human Rights (1950)
 EFTA (1960)
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23. ECON339 / EURO339
Two strands of European integration
 Federal initiatives
 Robert Schuman Plan – European Coal and Steel
Community (1951)
 Coal and steel – „commanding heights‟
 1955 Germany joins NATO, Warsaw Pact formed
 ECSC not enough
 1957 „Treaties of Rome‟
 Euratom
 European Economic Community (EEC) – customs union
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24. ECON339 / EURO339
1960-1973, two non-overlapping
circles
IS
EEC-6 NL EFTA-7
B D
L N
S FIN
F
I DK
EEC-6 UK
P A
IRL CH
E
EEC GDP 2x > EFTA and
GR
growing faster
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25. ECON339 / EURO339
Evolution to Two Concentric Circles
 Preferential liberalisation in EEC and EFTA proceeded
 Discriminatory effects emerge, leading to new political
pressures for EFTA members to join EEC
 Trade diversion creates „force for inclusion‟
 As EEC enlarges, force for
inclusion strengthens
 When UK decides to apply for
EEC (1961), I, DK and N also
change their minds.
 De Gaulle‟s „non‟ (twice)
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26. ECON339 / EURO339
Force for inclusion
 „Domino theory‟ of regional integration
 Preferential lowering of trade barriers leads to
trade diversion
 …which leads to pressure on outsiders to join
 …as bloc grows…
 …‟force for inclusion‟ on remaining outsiders
grows further
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27. ECON339 / EURO339
Evolution to Two Concentric Circles
 1st enlargement, 1973
 UK, Denmark, Ireland & Norway admitted
(Norwegians say „no‟ in referendum)
 Enlargement of EEC reinforces „force for
inclusion‟ on remaining EFTA members
 Remaining EFTA members sign FTA agreements
with EEC-9
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28. ECON339 / EURO339
Two concentric circles
IS
FIN
DK N
NL S
UK B D
IRL L
EEC-9
F A
I
CH EFTA-7
P
E GR
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29. ECON339 / EURO339
Euro-pessimism/Eurosclerosis, 1975-
1986
 Political shocks:
 „Luxembourg Compromise‟ – unanimity/switch to
intergovernmentalism (1966) + enlargement (1973)
leads to decision-making jam
 Economic shocks:
 Bretton Woods falls apart, 1971-1973, kills Werner
Plan for monetary union
 1973 and 1979 oil shocks with stagflation
 Growth of NTBs to trade
 Growing cost of Common Agricultural Policy
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30. ECON339 / EURO339
Positive milestones 1975-86
 Democracy in Spain, Portugal and Greece
 Greece joins in 1981 (2nd enlargement)
 Spain and Portugal join in 1986 after difficult accession
talks (3rd enlargement)
 EMS set up in 1979 works well
 Budget Treaties
 1979 Cassis de Dijon decision
 Challenged validity of national rules that introduce non-tariff
barriers to trade
 Mutual Recognition Principle introduced
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31. ECON339 / EURO339
Deeper circles: single market
programme
 Mutual recognition as threat to national regulatory control;
race to bottom?
 How to put member governments back in charge?
 Delors launches completion of the internal market with Single
European Act
 create 'an area without internal frontiers in which the free
movement of goods, persons, services and capital is ensured'
 Important institutional changes, especially move to majority
voting on single market issues
 Mutual recognition is disciplined by minimum harmonisation
 More efficient decision making procedures allow agreement on
minimum standards
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32. ECON339 / EURO339
Single Market Programme: ‘EC92’
 Goods Trade Liberalisation
 Streamlining or elimination of border formalities
 Harmonisation of VAT (GST) rates within wide bands
 Liberalisation of government procurement
 Harmonisation and mutual recognition of technical standards
in production, packaging and marketing
 Factor Trade Liberalisation
 Removal of all capital controls and deeper capital market
integration
 Liberalisation of cross-border market-entry policies
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33. ECON339 / EURO339
Domino effect, part II
 Deeper integration in EC-12 strengthened the „force for
inclusion‟ in remaining EFTA members
 End of Cold War loosened EFTA members‟ resistance to
EC membership (eg, Austria, Finland)
 Result of „force for inclusion‟
 European Economic Area (EAA) – initiative to extend single
market to EFTA members
 Membership applications by all EFTA members except
Iceland
 Concentric circles, but both deeper
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34. ECON339 / EURO339
4th enlargement
1994
1973
2004
1994, Austria,
Finland, 1958
Norway and
Sweden
admitted
(Norwegians
again vote no) Cyprus
1973 Malta
1981
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35. ECON339 / EURO339
Communism’s creeping failure and
spectacular collapse
 By the 1980s, Western European system
clearly superior due to the creeping failure of
planned economies
 Up to 1980s, Soviets thwarted reform efforts
(economic and military pressure)
 Gorbachev reforms:
 restructuring (perestroika)
 opening up (glasnost)
 Our „common European home‟ Prague, April 1987
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36. ECON339 / EURO339
Mathias Rust (19), May 28, 1987
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37. ECON339 / EURO339
Velvet/bloody revolutions in
eastern European
 June 1989 Polish labour movement „Solidarity‟ forced free
parliamentary elections - communists lost
 Moscow accepted new Polish government
 Moscow‟s hands-off approach to the Polish election
triggered a chain of events:
 Reformists in Hungarian communist party pressed for
democracy, Hungary opened its border with Austria
 „000s East Germans moved to West Germany via Hungary and
Austria.
 Mass protests in East Germany; Berlin Wall falls November 9th
1989
 End of 1989: democracy in Poland, Hungary, Czechoslovakia,
East Germany, Romania and Bulgaria
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38. ECON339 / EURO339
The fall of the Berlin Wall
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The end of the USSR
 1990, Estonia, Latvia and Lithuania declared
independence from USSR
 August 1991, Soviet coup
 December 1991, USSR dissolved
 Cold War ends (Georgia 2008?)
 Military division of Europe ends
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40. ECON339 / EURO339
The EU and the reconstruction of
the CEECs
 The EU reacted to the end of the Cold War by:
 providing emergency aid and loans to the fledgling
democracies in the Central and Eastern European
Countries (CEECs)
 signing of „Europe Agreements‟ with newly free
nations in Central and Eastern Europe
 Europe Agreements were free trade
agreements with promises of deeper
integration and some aid
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41. ECON339 / EURO339
From Copenhagen to Copenhagen
 EU says CEECs can join the EU (June 1993)
 Copenhagen criteria for membership
 stability of institutions guaranteeing democracy,
 the rule of law
 human rights and respect for and, protection of
minorities
 the existence of a functioning, robust market economy
 Copenhagen summit December 2002 says 10 CEECs can
join in 2004
 5th enlargement in May 2004 (10 CEECs)
 6th enlargement in May 2007 (Bulgaria and Romania)
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42. ECON339 / EURO339
The by-product of the peace dividend:
German unification and Maastricht
 Jacques Delors proposes radical increase in European
economic integration - formation of a monetary union
 Pending 1990 unification of Germany opens door to a
„grand bargain‟ (Mitterrand, Kohl).
 Germany gives up DM for European Monetary Union…
 …and East Germany joins the EU without negotiation
 Maastricht Treaty, signed 1992
 monetary union by 1999, single currency by 2002
 sets up EU‟s „three pillar‟ structure to reduce EU‟s
„competency creep‟
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43. ECON339 / EURO339
Mid-2000s – high water mark for the
EU?
 By 2007:
 European Union of 500m people, 27 countries, 20%
global GDP
 Single European Market complete – single European
market for goods, services, labour and capital
 European monetary union – single currency for 17 of
EU27
 CEECs reintegrated into „western Europe‟
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44. ECON339 / EURO339
2008-2012 European sovereign
debt crisis
 Causes of European sovereign debt crisis
complex
 Easy credit in US and EU 2002–08 period and
financial engineering led to:
 high-risk lending by banks (believed to be safer
because of securitisation of bank loans)
 Real estate „bubble‟ in many countries
 Borrowing to fund capital projects by national and
regional EU governments
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45. ECON339 / EURO339
2008-2012 European sovereign
debt crisis (2)
 Default on loans led to collapse in a number of
banks in 2008
 Credit dried up, real estate market crashed
 Governments nationalised banks to avoid
financial contagion (socialised private debt)
 As economy went into recession, fiscal
stabilisers increased budget deficits and added
to rising public debt
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The Eurozone’s double dip
recession
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Government debt in the EU, 2012
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Government debt and the euro
 Eurozone governments are effectively borrowing in
„foreign currency‟
 They cannot borrow from their own central banks,
monetise the debt and inflate away their debts (like US
and UK)
 Financial markets demand ever-higher risk premium
from indebted governments and eventually they will
default
 Bail-outs of countries like Greece is putting huge
pressure on the European project
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The spread of Euroscepticism
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Conclusions
 Economic means to a political end
 Non-linear process:
 Common market
 Eurosclerosis
 SEM
 EMU
 Reunification of Europe
 European sovereign debt crisis
 Force for inclusion
 Supranationality vs intergovernmentalism
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