European Economic Area: European Free Trade Association and European Union

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1 Article history: Received 17 January 2013; last revision 30 February 2013; accepted 9 March 2013 European Economic Area: European Free Trade Association and European Union Ivan Kondratenko Abstract: This paper is focused on the two biggest European institutions European Free Trade Area (EFTA) and the European Union. Paper is in the first part focused on the development of their relationship, the history of participation on common market. It finds out that in the beginning these two organisations were mainly competing rivals and after years began to cooperate and in the 1990 s established the single common market by European Economic Area. In the second part the economic analysis of benefits of membership in EFTA is provided. Keywords: European Economic Area, European Free Trade Association, European Union, free trade, liberalization JEL classification: F13, F42, J21, J61 Introduction European Free Trade Association (EFTA) is an European free trade organisation between advanced countries in Western Europe, which are not members of the European Union (EU). The EFTA was primarily founded to promote closer cooperation and trade in reflect to this kind of cooperation in The Inner Six (or just The Six) Benelux, France, Germany and Italy. In contrast to The Inner Six are sometimes the seven founding countries of EFTA called the outer seven. The EFTA is clearly linked to the European Union and it operates in the similar way. The main goals of the EFTA's third-country policy are following: to support integration process of European countries and interregional integration, to keep safe the economic interests of its members and to liberalise trade and investment in the same way as it happens worldwide. Current (January 2013) members of the (EFTA) are Iceland, Principality of Liechtenstein, Norway and Switzerland. Ivan Kondratenko (ivan.kondr(at)seznam.cz) is a Master student at the Institute of economic studies, Faculty of social sciences, Charles University in Prague, Opletalova 26, Praha 1, Czech Republic. INTERNATIONAL ECONOMICS LETTERS Volume: 2, No: 1, pp March

2 EUROPEAN ECONOMIC AREA This paper is focused mainly on the development of relations of the EU and the EFTA, from the discrimination at the beginning to full cooperation. During the decades relations developed and also a political map of the Europe significantly has changed. 38 Chronological summary 1960 Founding of EFTA 1961 Finland enters the EFTA 1970 Iceland enters the EFTA 1973 UK and Denmark move from the EFTA to the EU 1977 Establishing of the EFTA Parliamentary 1984 The Luxembourg Declara 1986 Portugal moves from the EFTA to the EU 1991 Liechtenstein enters the EFTA 1992 The European Economic Area (EEA) agreement is signed 1994 The EEA is established EEA Financial Mechanism for the reduction of disparities between EEC and EFTA 1995 Austria, Sweden and Finland leave the EFTA and become the EU members 2009 Iceland applied for a membership in the EU 2012 Four EFTA members and 27 EU members 2013 Croatia enters the EU and the EEA The EFTA Liberalisation of trade in Europe was carefully prepared by the Organisation for European Economic Cooperation (OEEC) with national nondiscriminating liberalisations. However the European Economic Community (EEC) decided to implement deeper integration and remove all barriers in trade, but with some discrimination. The Inner Six established the united tariffs fot all imports from countries outside the EEC. The rest of the OEEC countries (mostly small countries like Portugal, Austria and Denmark) were suddenly in the very disadvantageous position and were afraid of strong discrimination and bigger competition. As a result of increasing uncertainty these outsiders established their own organization European Free Trade Area. INTERNATIONAL ECONOMICS LETTERS UNIVERSITY SERVICE PUBLISHING TRANSNATIONAL PRESS LONDON

3 KUČOVÁ European Free Trade Association (EFTA) was established by the Stockholm convention in 1960 as a coordinated answer to the discrimination tariffs in the EEC. The agreement was signed on 4 th January, by seven countries Denmark, Portugal, Sweden, Great Britain, Austria, Norway and Switzerland. Success of this new organisation was supported mainly by the Great Britain, which had very strong throne at that time in Europe. The Stockholm convention obligated the EFTA members to remove common tariffs. The EFTA was a zone of free trade, not a tariff union, so every member could have his own outside tariff. This was important for Great Britain; British government was able to regulate tariffs for countries in Commonwealth. In the end of 1960 s was liberalisation of trade in the Western Europe finished in the way, how it was described in the Roman Treaty and Stockholm convention. There were two large organisations with own rules and with removed trade barriers. However the effects of discrimination appeared which meant the loss of profit for exporting producers. At the same time, the gap in growth (measured by GDP) of these two groups was increasing quickly. The market of the richer EEC was of course more interesting for producers from the EFTA. In the beginning of 1970 s mostly the whole Western Europe (except Ireland, which traded mostly with Great Britain) left the bilateral agreements. The EFTA is governed similarly as in the EU by the Council and services by the Secretariat. The Secretariat is settled in Geneva and the General Secretary is elected for 6 years. Since 2012 it is Kristinn F. Árnason from Iceland. In 1992 due to the EEA agreement two more institutions were established to deal with similar institutions from the EU. The executive role of the European Commission performs in the EFTA. The last institution was not surprisingly created the EFTA Court, which is a supranational judicial body. It responses for the three EFTA members who are in the EEA (does not applied to Switzerland). 39 Cooperation of the EFTA and the EEC Progressive reduction of inner barriers created new political and economic forces in favour of enlargement of EEC. Deep integration of the EEC damaged relative competitiveness of companies from non-member states and affected their profits. Similar situation was on the other side, in the EFTA. However due to capacity of economic area of the EEC was the EFTA the weaker player. Advantages of economic integration between members could change the political attitudes of nonmembers. This is called the domino effect in theory of regional integration (see Baldwin, Wyplosz, 2006). Removing the trade barriers inside of some political or

4 EUROPEAN ECONOMIC AREA economic organisation influences on non-members to join this organisation. The bigger the organisation is, the bigger pressure is. First, country, which wasn t able to face this pressure, was Great Britain. In 1961 Great Britain applied for membership in EEC. This move was not hard to understand. Back in 1950 s Great Britain did not expect the success of the EEC as a political union. However right after that it was clear the market of EEC is growing and the concept of these kind of union really works, Great Britain did not want to be on the other side. British producers were facing the large discrimination in the EEC and British government had to react quickly, because the EFTA was not the satisfying substitute of the Inner Six. 40 It is not surprising that after this one-side British decision had domino effect, which was mentioned and explained earlier. Other non-member of the EEC started to consider the membership and changed the positions. Denmark, Norway and Ireland immediately followed the step of Great Britain. The rest of EFTA members did not requested for the membership in Community for various reasons: political neutrality (Austria, Finland, Sweden and Switzerland), non-democratic political system (Portugal) or non-dependency on the EEC market (Iceland). The entrance of these four countries to the EEC was not automatic; al members had to agree with that and French president Charles de Gaulle in 1963 differed with it. At the same time, the Norway refused a membership in referendum. After long durable discussion the EEC enlarged in Conversion of these three countries (Great Britain, Ireland and Denmark) had the secondary domino effect the market of the European Economic Community significantly raised and the trade balance in the EFTA decreased. Producers in the EFTA were in disadvantage, they had fewer opportunities to sell the goods. Producers urged on their governments, which led to the series of new bilateral agreements free trade agreements (FTA) between members of the EEC and the EFTA, which came into force in It is quite interesting, that these, let s say neutral countries did not agree with the system in the EEC politically, but they strongly supported economic cooperation. And deepen economic cooperation led to change in political concepts. Similar domino effect we can find in the present days the enlargement in 2004 led to pressure on eastern countries, such as Croatia, Serbia etc. to join the EU too. The European Economic Area However the economic shocks in the 1970 s led to the so-called europesimism, which lasted until During this period was the European economy very unstable and EFTA countries took advantage of this uncertainty to deepen cooperation with the EEC. In 1977 was established The EFTA Parliamentary Committee. By this kind of steps we can clearly see the increasing impact of the EEC. During the decades (and we will return back to it lat- INTERNATIONAL ECONOMICS LETTERS UNIVERSITY SERVICE PUBLISHING TRANSNATIONAL PRESS LONDON

5 KUČOVÁ er) EFTA practically copied the organisation system of the EEC. It has to be noticed that EFTA members were not so duty bound by rules (or law) as EEC/EC/EU members. In the same year tariffs on industrial goods were eliminated. In 1984 was signed The Luxembourg Declara, which guaranteed broader cooperation. After the end of europesimism the producers of non-members realized the similar raise of discrimination, as in early 1960 s, mainly given by the Single European Act. The closer cooperation of the EFTA and EEC was unavoidable; some countries (Austria) actually started to consider the membership. Jacques Delors, French economist and politician, introduced in 1989 concept of the European Economic Area (EEA). The agreement was signed in Oporto (Portugal) in 1992 by the EEC members and all EFTA members except Switzerland, which refused this kind of cooperation in referendum. The agreement came into force in 1994, when officially the European Economic Area was established between the EU and five EFTA states (Austria, Sweden, Finland, Norway, Lichtenstein and Iceland). Right after the EEA was established, the first EEA Financial Mechanism for the reduction of economic and social disparities was approved for the period For simplicity, we can understand the complex agreement establishing the European Economic Area as an extension of single European market to members of the EFTA, except Common Agricultural Policy and single customs tariffs. As we described the political and economic pressures on governments to closer cooperation and integration, it is clear why the EFTA countries participating on single market would profit. At the same time, two important aspects have to be noticed. First, this single market created new pressure on the EF- TA governments to not only participate in single market, but also accept the legislative rules of the EEC without possibility to influence them. Secondly, non-members by accepting the single market suddenly became members of area of supranationality. The EEC called for this step to simplify the negotiation for maintenance of homogeneity of the single market. Accepting the single market (with elements of supranationality) by non-members was very surprising at that time, because countries like Finland, Austria or Norway were refusing all forms of supranationality for more than 40 years (since WWII). In consequence of agreement on single market several countries applied for membership in the European Union, particularly Finland, Austria and Sweden. Norway and Switzerland did not apply for membership because of negative results in referenda. Current (January 2013) members of the EEA are the 27 member states of the European Union plus Iceland, Liechtenstein and Norway. 41

6 EUROPEAN ECONOMIC AREA EEA Rights, obligations and legislative The rights are based or four freedoms, as it is in the European Union. The EFTA members have to adopt of part of the Law of the EU. At the same time they contribute to the European single market but they do not receive any funding from the EU policies. The EEA law covers cooperation in some important areas like research and development, education, social policy, the environment, consumer protection, tourism and culture. EEA EFTA members accepted EU Law in several areas: social policy, consumer protection, environment and company law. But they do not have any representation in the EU Institutions. This we can simply show on socalled two-pillar structure of decision making (Figure 1). Table 1: The Two Pillar EEA Structure. EEA joint institutions EEA Council (Foreign Ministers) 42 1 st pillar EFTA bodies 2nd pillar EU bodies EFTA Standing Committee EFTA Surveillance Source: Own figure Switzerland refused participating in the EEA in 1992 by referendum. In 1999 Switzerland signed bilateral agreement with the EU. The EFTA: an effective alternative? EU Council European External Action Service (EEAS) The European Free Trade Association is a simple alternative for European countries which do not want to be a part of the EU for some reason with immediate benefits. Sovereign states in the EFTA are much more dynamic and politically free. They are much better-off. INTERNATIONAL ECONOMICS LETTERS UNIVERSITY SERVICE PUBLISHING TRANSNATIONAL PRESS LONDON

7 KUČOVÁ On the example of these countries we can see, what maybe Great Britain could achieve outside the EU. Great Britain is a very specific country with also specific rules (does not participate on Schengen Area, is not member of Eurozone, opt-out from Lisbon Treaty etc.). The case of Britain shows, that it does not matter, how strict may be rules, some kind of opt-out is always possible. The EU laws are very well defined and they are enforced by the Commission or Court of Justice. However, as we know Great Britain in a traditional conservative country with scepticism to European liberalization and free movement of the EU citizens. British do not share European enthusiasm for deep integration and also the opinion polls are predicative. In the last several years, in the middle of economic recession British government actually started the discussion, whether UK should leave the EU. By this reason the Bruges Group in 2011 made interesting research (see Van Randwyck, 2011), where the researcher focused on the possibility of British quitting the EU and strategies, which could be in this case available for the Britain. In our days it is clear that every country has to be in some international organisation, even for example so neutral and well-prospering Switzerland. The reason is simple to prosper and support the international trade, especially the export of the own products. Country, which will open their borders to foreign producers will benefit from that. Consumption surplus will probably arise by better competition conditions, so does total welfare. 43 Table 2. The economic indexes of EFTA members (2011). Country Population 7,954,662 36,476 EU ,519,9 00 Switzerland Norway 4,985,00 0 Liechtenstein Iceland 319,50 0 $ 36,485 GDP per capita $ 51,262 $ 60,405 $ 98,432 $ 32,644 Unemployment 3.1 % 3.3 % 1.5 % 6 % 9.7 % Public debt % 48.9 % 0 % as % GDP % 82.5 % Source: Eurostat, OECD Statistics, World Bank, World Trade Organization, Official government statistics (2012); own calculations Perspectives for the future EFTA (and EEA) offers an opportunity to be involved in a international organization with free trade in Europe with possibility not to accept EU Law. However there is still strong position of EFTA in the world economy despite the fact Iceland in the recent time applied for the membership in the EU and

8 EUROPEAN ECONOMIC AREA will probably move to the EU until We should not pass up strong economic partnership of Norway and Switzerland+Lichtenstein. 44 Main conclusions In my view, the most negative problem of the European Union is the regulations and too much bureaucracy and costs. And that s not just question of medialized light bulbs or similar goods, like cadmium in batteries etc. Producers in the EU member countries are duty bound by regulation like in no other country in the world. Is that right? Of course some regulation is always needed, to protect the interests of consumer in case of monopoly or some cartel. But we cannot forget that regulation defuses the level of production. Due to British research, which was mentioned before, can hypothetically the cancellation of regulation in Great Britain manage expansion of companies, of business and create about 1 million new jobs. Second negative aspect of the EU which I mentioned is bureaucracy and the burden on taxpayer. The costs of common taxpayer will be probably lower, especially in rich members of the EU, which supports the poorer ones. And if for example Great Britain would leave the EU (and join the EFTA), it will not lose the benefits from trade (due to the EEA agreements) and still would be able to somehow influence the decision making in the EU. The central control of production, financial sector, interest rate etc. leads to loss of ability manipulate with market on national level. On the other hand, the principle of subsidiary is helpful and remains significant tool of national governments. I think (well, I am strongly convinced) the European Free Trade Association is better kind of organisation than the EU. The EFTA is a simple alternative to the EU with similar trade opportunities and with much more freedom and bigger scale of opportunities to influence the own economy. References: Abrams R. K., Cornelius P. K. (1990). The impact of the European Community s Internal Market on the Efta. International Monetary Fund, Occasional Paper. No 74. Avery, G. (2012). The European Economic Area revisited. European Policy Centre. omic_area_revisited.pdf. Baldwin, R., Wyplosz Ch. (2008). The Economics of European Integration. Grada Publishing, Prague, 2nd edition. ISBN Blanchet, T., Piipponen R., Westman-Clément M. (1994). The Agreement on the European Economic Area (EEA):A Guide to the Free Movement of Goods and Competition Rules. Oxford University Press, USA. ISBN INTERNATIONAL ECONOMICS LETTERS UNIVERSITY SERVICE PUBLISHING TRANSNATIONAL PRESS LONDON

9 KUČOVÁ Blouet, B.W. (2007). The EU and Neighbors. The Geography of Europe in the Modern World. Wiley, 1st edition. ISBN Efta official website of the European Free Trade Association. Fred Federal Reserve Bank of St. Louis. Economic data and tables European Economic Area. Available on: Haarde, G. H. (2006). The EEA Agreement: Taking stock and looking to the future. Reykjavík Available on: Harper, M. (2008). The European Economic Area a real heartbreaker. Available on: nomic_area_a_real_heartbreaker. Hodges, Ch. J. S. (1997). Pricing and reimbursement issues in the European Economic Area. McKenna & Co., London, England. oductfiles%2f8357%2fdiaj_12676%2epdf. Milne, I. (2011). Time to Say No: Alternatives to EU Membership. Civitas: Institute for the Study of Civil Society. Müller-Graff P., Selvig E. (2006). The European Economic Area Enlarged. Berliner Wissenschafts-Verlag. ISBN Pirker, B. (2013). Case E-18/11: Small steps towards a preliminary referenceprocedure for the EEA EFTA countries? European Law Blog. Van Randwyck, H. (2011). EFTA or the EU. The Bruges Group. Available on: Report on the measures taken by the Member States for the Transposition of the Directive 89/105 EEC, III 3747/91. In: Brussels: Commission of the European Communities. Sejersted, F. (2012). Outside and Inside: Norway's agreements with the European Union. Official Norwegian Reports NOU 2012: 2 Chapter 1. Report submitted to the Ministry of Foreign Affairs on 17 January EN_PDFS.pdf