ECON339EURO339

January 2012

Historical and Political Integration in Europe,

1945-2012

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The EU in 2012

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Early Post War Period: the Climate for Radical Change

Death toll The Economic Set-Back: Pre-war year when GDP equalled that of 1945

Austria 525,000 1886 Belgium 82,750 1924 Denmark 4,250 1936 Finland 79,000 1938 France 505,750 1891 Germany 6,363,000 1908 Italy 355,500 1909 Netherlands 250,000 1912 Norway 10,250 1937 Sweden 0 GDP grew during WWII Switzerland 0 GDP grew during WWII UK 325,000 GDP grew during WWII

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London 1940 East London, 1940

Early Post War Period: the Climate for Radical Change

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Rotterdam, 1940

Early Post War Period: the Climate for Radical Change

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Reichstag, 1945Frankfurter Allee, 1945

Early Post War Period: the Climate for Radical Change

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Brandenburg Gate

Early Post War Period: the Climate for Radical Change

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Unter der Linden, 1945 Unter der Linden, 1997

Early Post War Period: the Climate for Radical Change

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Berlin Cathedral, 1945 Berlin Cathedral, 1997

Early Post War Period: the Climate for Radical Change

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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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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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Emergence of a divided Europe

Germany, Austria & Berlin divided into four zones

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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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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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The Iron Curtain

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The Iron Curtain

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East German Guard Towers

The Iron Curtain

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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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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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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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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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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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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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1960-1973, two non-overlapping circles

E GR

IRL

FIN

IS

EFTA-7

EEC-6

N

S

PCH

A

UK

B

I

D

F

L

NL

DK

EEC-6

EEC GDP 2x > EFTA and growing faster

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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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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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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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Two concentric circles

E GR

I

D

F

BL

NLIRL

P

UK

CHA

FINN

S

IS

DK

EEC-9

EFTA-7

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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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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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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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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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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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4th enlargement

1994, Austria, Finland, Norway and Sweden admitted (Norwegians again vote no) Cyprus

Malta

1958

1973

1994

2004

19731981

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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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Mathias Rust (19), May 28, 1987

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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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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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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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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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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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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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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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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