The Economics of European Integration, Second Edition

The Economics of European Integration, Second Edition Miroslav N. Jovanovic Economic Affairs Officer, United Nations Economic Commission for Europe, Geneva,.. Switzerland and Lecturer, the Global Studies Institute of the University of Geneva, Switzerland '- Edward Elgar Cheltenham, UK Northampton, MA, USA

Full contents Note about supplementary figures and tables xvi List of abbreviations and acronyms xvii Preface and introduction xx Acknowledgements xxvii 1 Origin, evolution and prospects for the European Union 1 1.1 Introduction 1 1.2 The Marshall Plan 4 1.3 Unity of the West 6 1.4 European Coal and Steel Community 7 1.5 Political cooperation 11 1.6 European Economic Community 12 1.7 European Free Trade Association 15 1.8 European Economic Community and Britain 16 1.9 Merger Treaty and the Luxembourg Agreement 17 1.10 Thefirstenlargement 19 1.11 Eurosclerosis (1974-84) 23 1.12 The Single European Act: antidote against eurosclerosis 24 1.13 The Maastricht Treaty 27 1.14 Northern enlargement 33 1.15 Treaty of Amsterdam 35 1.16 Acquis communautaire 37 1.17 Agenda 2000 and the Lisbon Council (2000) 37 1.18 Treaty of Nice 40 1.19 Eastern enlargement. 42 1.20 Awkward times or a clumsy institution? 47 1.21 Common foreign and security policy 50 1.22 'Dark masters' of the art of European integration 65 1.23 Subsidiarity 67 1.24 A stronger federal future of Europe 69 1.25 The Lisbon Treaty: a pre-crisis treaty for the post-crisis European Union 76 1.26 Eurozone crisis in 2010 and beyond 84 1.27 Geopolitics 88 1.27.1 Franco-German integration engine 89

full contents vii 1.27.2 Britain and Europe 94 1.27.3 Germany and Russia : 99 1.27.4 Disintegration of countries within the European Union 107 1.28 The European Union's priorities for the future 110 1.29 Conclusions 114 1.29.1 Bad 124 1.29.2 Improvements, 125 3 1.29.3 Muddling through - ~- 126 Appendix 1A Institutions 144 2 Budget of the European Union 165 2.1 Introduction 165 2.2 Principles 166 2.3 Procedure 167 2.4 Expenditure.?' 168 2.5 Revenue 173 2.6 Challenges 174 2.7 Conclusion 180 3 Competition policy 183 3.1 Introduction 183 3.2 Background 184 3.2.1 Issues 184 3.2.2 Monopoly 189 3.2.3 The Microsoft case 193 3.2.4 Concept 197 3.2.5 Market structure 199 3.3 Innovation 201 3.3.1 Background 201 3.3.2 Innovator's rights 209 3.3.3 Concentration of innovation. 215 Values and culture 219 Politics and vested interests 224 Institutions 226 Cumulation, 229 Commercialisation of inventions 231 Size of the local market 234 3.4 Innovation in the European Union 235 3.5 Specialisation and returns to scale 239 3.5.1 Meaning 239 3.5.2 Barriers to enter and exit an industry 246

viii The economics of European integration, second edition 3.5.3 Predatory pricing 3.5.4 Standards 3.5.5 Intra-industry trade 3.6 European Union 3.6.1 Introduction 3.6.2 Restriction of competition (Article 101) 3.6.3 Mergers and acquisitions 3.6.4 Dominant position (Article 102) Innovation - Mergers and acquisitions Business practice Pricing choice Licence Recap European Union 3.6.5 State aid (Article 107) 3.7 Conclusions 4 Common Agricultural Policy 4.1 Introduction 4.2 Distinctiveness of agriculture 4.3 Objectives 4.4 Implementation 4.5 Operation and consequences 4.5.1 Protection of the internal market 4.5.2 Monetary compensatory amounts 4.5.3 European Agricultural Guarantee Fund 4.5.4 Structure of agricultural production 4.5.5 Subsidies 4.5.6 Self-sufficiency 4.5.7 Consequences for principal players Farmers Consumers External countries 4.6 Reforms 4.7 Food prices in the future 4.8 Conclusions Appendix 4A Common Fisheries Policy 5 Fiscal integration 5.1 Introduction 5.2 Fiscal Dolicv 248 250 255 265 265 270 279 289 289 290 290 290 290 291 291 293 304 318 318 319 322 325 327 327 330 333 333 336 338 340 340 342 344 348 355 357 363 369 369 370

Full contents ix 5.2.1 Introduction 5.2.2 Taxation principles 5.2.3 Fiscal federalism 5.3 A bit of history 5.3.1 Switzerland 5.3.2 Germany 5.3.3 United States 5.3.4 Britain 5.3.5 A recap. _... 5.4 European Union 5.4.1 Direct taxes 5.4.2 Corporate taxes 5.4.3 Tax competition 5.4.4 Taxes in the European Union Corporate taxes The Arbitration Convention Personal income tax Indirect taxes Principles of destination and origin ' Sales and turnover taxes Cumulative multistage cascade method Value-added tax Excise duties 5.5 Future challenges 5.6 Conclusions 6 European monetary integration 6.1 Introduction 6.2 Background 6.3 The Maastricht Treaty ^ 6.4 Deflation 6.5 Eurozone 6.5.1 Introduction 6.5^2 Stability and Growth Pact 6.5.3 Global credit crunch (2007-09) 6.6 Is the eurozone founded on a Titanic-type blueprint? 6.6.1 Background 6.6.2 Deficits and debt 6.6.3 Deficits: conflicting policy advice 6.6.4 Expanding or breaking up the eurozone 6.6.5 The eurozone country crises Greece 370 373 376 379 379 383 386 388 389 389 390 390 397 410 410 415 416 419 419 423 423 423 428 430 434 443 443 444 446 448 450 450 452 457 460 460 461 468 470 472 472

x The economics of European integration, second edition Ireland 479 Spain 481 Italy 483 6.6.6 Muddling through crises with no 'resolution' in sight 485 6.7 Britain and the euro 497 6.8 Conclusions 500 7 Industrial policy in manufacturing and services 510 7.1 Introduction. 510 7.2 European Union " 512 7.2.1 Rationale 512 7.2.2 Evolution 515 7.2.3 REACH 527 7.2.4 Corrosive subsidies 528 7.2.5 A glimpse into the future 529 7.2.6 Technology policy 533 7.2.7 Challenges and outlook 542 7.3 Services f 552 7.3.1 Issues 552 7.3.2 European Union 558 7.3.3 Single market in services 566 7.3.4 Challenges. 568 7.4 Conclusions 572 8 Trade policy and international economic cooperation 580 8.1 Introduction 580 8.2 Theory of customs unions 581 8.2.1 Introduction 581 8.2.2 Types 582 8.3 Why do countries integrate? 584 8.4 World Trade Organization and international trade 590 8.4.1 International trade negotiations 590 8.4.2 The Uruguay Round 593 8.4.3 The Doha Round 601 8.4.4 Recap 611 8.5 Non-tariffbarriers 615 8.5.1 8.5.2 8.5.3 8.5.4 8.5.5 Introduction Antidumping Public procurement Technical standards Red tape 615 618 621 623 628

Full contents xi S.6 1.7 8.5.6 8.5.7 8.5.8 8.5.9 8.5.10 8.5.11 Japanese cars Coordinating Committee on Multilateral Export Controls Preventive and precautionary principles Preventive (reactive) principle Precautionary principle Rules of origin Trade-related investment measures Impact of non-tariff barriers on the European Union Trade policy making The European Union in world trade 8.7.1 Introduction 8.7.2 Overview ' 8.7.3 Foreign direct investment Principal partners in trade -?"' 8.8.1 United States Introduction and data Problems and opportunities - Conclusions 8.8.2 China Introduction and data Problems and opportunities Rare earth elements Conclusions 8.8.3 Russia Introduction and data Relations Conclusions 8.8.4 Japan 8.8.5 > European Free Trade Association European Economic Area Free movement of goods Free movement of persons Free movement of services Free movement of capital Institutions Switzerland Conclusions 8.8.6 Developing countries Introduction From colonies to Yaounde 628 629 630 630 630 631 640 640 642 644 644 645 650 652 652 652 652 662 664 664 665 666 669 669 669 669 672 673 675 675 677 677 678 678 679 679 680 681 681 681

xii The economics of European integration, second edition Lome agreements Introduction Provisions and impact Controversies of financial aid Cotonou Agreement Economic partnership agreements Trade in bananas Have the Lome and Cotonou conventions s benefited the ACP_countries? 8.9 Generalised System of Preferences 8.10 Economic relations with other developing countries 8.11 Developing countries: a recap 8.12 Preferred partners 8.13 Conclusions 9 Regional policy 9.1 Introduction 9.2 European Union 9.2.1 Introduction 9.2.2 Regional discrepancies 9.2.3 Evolution 9.2.4 Action 9.2.5 1988 reform 9.2.6 1999 reform 9.2.7 Regional policy (2007-13) Convergence Regional competitiveness and employment European territorial cooperation 9.2.8 Assessment 9.2.9 Challenges 9.3 Case study: Mezzogiorno 9.4 Conclusions Appendix 9A Selected clusters in Italy and Germany 10 Social policy 10.1 Introduction 10.2 Social policy issues 10.3 Social models 10.4 Unemployment 10.5 European Union 10.5.1 Legal base 10.5.2 Evolution 683 683 683 685 688 689 690 694 696 699 701 703 704 717 717 717 717 72'0 722 723 725 726 728 729 729 729 730 734 740 742 750 752 752 754 757 760 764 764 765

Full contents 10.5.3 Education 769 10.5.4 The European Social Charter 773 10.6 Conclusions 776 11 Mobility of labour 781 11.1 Introduction 781 11.2 Country of origin 782 11.3 Country of destination 785 11.4 European Union _- 792 11.4.1 Legal framework 792 11.4.2 Migration waves 793 11.4.3 Consequences 794 11.4.4 Facts and figures ^ 795 11.4.5 Policy challenges 802 11.4.6 Response 805 11.5 Conclusions ^' - 810 12 Energy policy 815 12.1 Introduction 815 12.2 Humble beginnings 815 12.3 Data, 819 12.4 Energy policy 826 12.5 Nabucco gas pipeline 831 12.6 Nord and South Stream gas pipelines 836 12.7 Security of supply - 839 12.8 Energy Charter Treaty 841 12.9 Conclusions 843 13 Transport policy 849 13.1 Introduction 849 13.2 European Union 851 13.2.1 Legal base. 851 13.2.2 Significance 851 13.2.3 Delayed launch 853 13.2.4 Evolution, 854 13.2.5 Airtransport. 856 13.3 Outlook 857 13.3.1 Limits and prospects 857 13.3.2 Major new infrastructure 859 13.3.3 Road safety 860 13.3.4 Galileo 861 13.3.5 Environment protection and congestion 863

xiv The economics of European integration, second edition 13.3.6 Quality of service and passenger rights 864 13.3.7 Transport by water 864 13.3.8 Sustainable transport 865 13.4 Conclusions r 867 14 Environment policy 870 14.1 Introduction 870 14.2 Issues 871 14.3 European Union 877 14.3.1 Foundations 877 14.3.2 Principles 879 14.3.3 Common Agricultural Policy and the environment 880 14.3.4 Genetically modified organisms 882 14.3.5 Policy initiatives 888 14.3.6 The Kyoto Protocol 891 14.3.7 Assessment and steps ahead 896 14.4 Conclusions 896 15 Enlargement 901 15.1 Introduction " ' 901 15.2 Economic structure of the accession and waiting-room countries and territories 902 15.3 Regional discrepancies. 904 15.4 Entry conditions 905 15.5 1950 obstacles to joining the European Union 909 15.6 Costs and benefits 912 15.6.1 Economic gains for the new member countries 912 15.6.2 Structural aid 913 15.6.3 Economic and monetary union 915 15.6.4 Agriculture 916 15.6.5 European Union gains 917 15.7 Cost of the 2004 eastern enlargement for the European Union 918 15.8 Future enlargements 920 15.9 The Balkan 'black hole' where the big powers always settle their accounts 922 15.10 Turkey in the European Union: euthanasia or the rejuvenation of Europe? 932 15.10.1 Occupied part of Cyprus 935 15.10.2 Armenian genocide 935 15.10.3 Expansionism 936 15.10.4 Turkish-speaking countries 937

Full contents XV 15.11 15.12 15.13 15.10.5 Culture and religion 15.10.6 Jobs 15.10.7 Human, democratic and minority rights 15.10.8 Frontiers Doubts or opportunities? Which membership circle to join in the European Union? Conclusions 938 939 939 940 941 944 945 16 Conclusions 955 Bibliography 964 Index 1001