What is the history of the EU?

The Treaty of Rome of 25 March 1957, which established the EEC, set up institutions and decision-making mechanisms through which both national interests and a Community view could find their expression. From that time onwards, the European Community was the major axis round which the movement for a united Europe turned.

Between 1958 and 1970, the abolition of customs duties had spectacular effects: trade within the Community increased six fold while EEC trade with the rest of the world went up by a factor of three. Average gross national product in the EEC over the same period went up by 70%. Following the pattern set by the major markets operating on a continental scale, such as that of the United States, economic interests in Europe took advantage of the invigorating effects of opening up Europe's frontiers. Consumers became used to seeing an ever-increasing variety of imported goods in the shops. The European dimension had become a reality. The signing of the Single Act in 1986 meant that Europe was able to sweep away the other regulatory and fiscal restrictions which were still delaying the establishment of a genuine, completely unified internal market.

On 28 November 1995, the 15 European Union countries and 12 countries with seaboards on the southern Mediterranean established a partnership which should eventually lead to the setting up of a free-trade area, flanked by agreements for cooperation in the social, cultural and human spheres.

Step by step, the Union is using its economic power as a means of developing its political influence and speaking with a single voice. The 1992 Treaty on European Union sets the objective and lays down the procedures for a common foreign and security policy (CFSP), stipulating that it will eventually lead to a common defence policy. But the nations of Europe still have a lot of work to do if they are to harmonize their diplomatic efforts and their security policies. This presupposes genuine political will on the part of the Member States, and is the price the Union must pay if it is to defend its interests and help ensure peace and justice in the world.

Growing from six to nine to twelve, and then to its current 15 members, the European Community has won increasing influence and prestige. It must keep its decision-making system efficient and capable of managing the common interest for the benefit of all its members, while at the same time preserving the national and regional identities and special characteristics which are its major asset. The greatest challenge Europe's peoples now face is that of welcoming the applicant countries in Central Europe, the Balkans, the Mediterranean and the Baltic area over the next few years. Where are we to find the resources needed to help them rise to the economic and structural levels of EU countries in the shortest possible time? How are we to adapt the institutions so that they can continue to perform their tasks in the best interests of a Union with more than 25 members? These are the historic tasks now facing the Union's Member States.

What are the four key institutions of the EU?

1. European Parliament

Elected every five years by direct universal suffrage, the European Parliament is the expression of the democratic will of the Union's 374 million citizens. Brought together within pan-European political groups, the major political parties operating in the Member States are represented.

Parliament has three essential functions:

It shares with the Council the power to legislate, i.e. to adopt European laws (directives, regulations, decisions). Its involvement in the legislative process helps to guarantee the democratic legitimacy of the texts adopted;
It shares budgetary authority with the Council, and can therefore influence EU spending. At the end of the procedure, it adopts the budget in its entirety;
It exercises democratic supervision over the Commission. It approves the nomination of Commissioners and has the right to censure the Commission. It also exercises political supervision over all the institutions.

2. Council of the European Union

The Council is the EU' s main decision-making body. It is the amalgamation of the Member States, whose representatives it brings together regularly at ministerial level.

According to the matters on the agenda, the Council meets to discuss different issues : foreign affairs, finance, education, telecommunications, etc.

The Council has a number of key responsibilities:

It is the Union's legislative body; for a wide range of EU issues, it exercises that legislative power in tandem with the European Parliament;
It coordinates the broad economic policies of the Member States;
It concludes, on behalf of the EU, international agreements with one or more States or international organisations;
It shares budgetary power with Parliament;
It takes the decisions necessary for framing and ...

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According to the matters on the agenda, the Council meets to discuss different issues : foreign affairs, finance, education, telecommunications, etc.

The Council has a number of key responsibilities:

It is the Union's legislative body; for a wide range of EU issues, it exercises that legislative power in tandem with the European Parliament;
It coordinates the broad economic policies of the Member States;
It concludes, on behalf of the EU, international agreements with one or more States or international organisations;
It shares budgetary power with Parliament;
It takes the decisions necessary for framing and implementing the common foreign and security policy, on the basis of general guidelines established by the European Council;
It coordinates the activities of Member States and adopts measures in the field of police and court collaboration in criminal matters.

3. European Commission

The European Commission embodies and upholds the general interest of the Union. The President and Members of the Commission are appointed by the Member States after they have been approved by the European Parliament.

The Commission is the driving force in the Union's institutional system:

Presents proposals (legislative) to Parliament and the Council;
As the Union's executive body, it is responsible for implementing the European legislation (directives, regulations, decisions), budget and programmes adopted by Parliament and the Council;
It acts as protector of the Treaties and, together with the Court of Justice, ensures that Community law is properly applied;
It represents the Union on the international stage and negotiates international agreements, chiefly in the field of trade and cooperation

4. Court of Justice

The Court of Justice ensures that Community law is uniformly interpreted and effectively applied. It has control in disputes involving Member States, EU institutions, businesses and individuals. A Court of First Instance has been attached to it since 1989.

How does the EU compare with other trading blocs in the world economy?

What is the main difference between a customs union and a free trade area?

A free-trade area (FTA) is created when countries wish to bring their economies closer, without integrating them or transforming them into a single entity. The objective is to completely eliminate customs duties and trade restrictions between the countries which form the free-trade area. Each member country keeps its own customs tariffs and its own commercial policies with respect to the outside world.

A customs union aims for economic connection without restriction within the borders of the union (different sales taxes can impede this process). All the customs union's members apply a common customs tariff and a common commercial policy with respect to goods from third countries.

What exactly is meant by the term Single European Market?

Single European Market was:

intended to create "an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured";
accompanied by changes in the Community legislative system, designed to encourage adoption of the measures needed for its completion.

What is Economic and Monetary Union?

Economic and Monetary Union (EMU), ongoing process with the aim of establishing a single currency and a single monetary authority in the European Union (EU). The EMU is a fundamental aspect of the project of European political and economic integration.

The idea of EMU was first clearly articulated in the Werner Report (1970), which proposed monetary integration by 1980. Further progress was halted by the oil shocks and worldwide inflation of the mid-1970s and the almost inevitable divergence of exchange rates in response to these developments.

What are the five tests that the UK has set itself to pass in order to press ahead with possible entry to the ‘Eurozone’?

1.Convergence

The Treasury sees the first test, the need for the UK economy to come together with the eurozone economy, as the "touchstone" towards a successful single currency.

And it says it must converge in a "sustainable and durable" way.

It says that to be passed, the UK economy must:

have converged with Europe
be shown to have converged
show convergence capable of being sustained
have sufficient flexibility to adapt to change and unexpected economic events

2.Flexibility

The Treasury says the success or otherwise of the euro depends on business and the workforce being flexible.

The economy, it says, must have "the ability to adjust to change".

It says this is because of the "inevitable loss of domestic control over monetary policy" and the risk of future economic turbulence.

Firms would need to be flexible in terms of pricing and margins, and in their business strategy.

Wage bargaining in the labour market must be "realistic and take account of developments in productivity".

Employees would need to increase their skills in order to adapt to change in the job market.

3.Investment

The Treasury believes that a successful single currency would:

create an attractive area - with low inflation and stability - for firms to invest
be a complement to the Single Market, boosting competition and providing new opportunities for companies

The Treasury says the euro could, if successful, help to reduce the risk of poor investment performance by reducing instability.

Investment could be boosted by the reduction of transaction costs and exchange rate uncertainty, it says.

And more transparent pricing - with companies able to compare prices between countries much more easily - could also encourage investment.

But the Treasury says entering the single currency before the UK economy has sufficiently converged with the eurozone would discourage investment

4.Financial services

The Treasury says joining the euro would affect the financial services industry "more profoundly and more immediately" than other sectors of the economy.

It says whether the UK joins the euro or not, the City of London's strengths "should help it to thrive".

The test centres on whether the introduction of the euro would be advantageous for the sector and whether the sector is fully prepared for the introduction of the single currency in the UK.

5.Employment and growth

This is the "fundamental" test, says the Treasury.

Joining the euro could "enhance both growth and employment prospects".

But without sufficient convergence and flexibility, "the resulting turbulence could considerably damage them".

The Treasury will have to decide as it assesses the tests the potential effect on jobs and growth from joining the euro.

What are the main arguments for and against adopting the single currency?

For

In recent decades many EU countries such as Germany have proved to be remarkably successful at controlling inflation, consistently succeeding in maintaining lower levels than Britain. The powerful influence of the German economic model across the eurozone will result in lower inflation throughout the region, vital for achieving long term economic growth. Since participating countries have been (and will continue to be) required to follow disciplined economic policies in order to meet the euro convergence criteria (limits on national debt and annual budget deficits, and the achievement of inflation and interest rates within an acceptable range) the conditions exist to ensure the best chance of maintaining stability and long-term growth across the entire eurozone. This will benefit all of the participating countries since a more prosperous region will result in larger potential markets for all.
Although countries will lose the ability to unilaterally adjust interest rates to control the effects of over-heating or recession in their economies, it can be argued that this freedom has too often been abused in the past. Decisions have been made to suit the short-term political goals of the political party in power rather than the long-term health of the national economy. By handing control of economic policy to economic experts in the European Central Bank who will have the interests of the entire region at heart, there is far more chance that policies will be followed which will lead to more long-term growth and prosperity. In any case, because of the requirements of countries to meet the convergence criteria before joining, a uniformly disciplined approach to economic management has been applied in all of the eurozone countries which will tend to harmonise their economies.

Too much is made of the power which countries possess to control their economies through the setting of interest rates. Lowering interest rates to bring about short-term relief often leads only to higher inflation further down the road and the upholding of the boom & bust cycle. In any case, most of the influences dictating the economic conditions in any country are beyond its control. Far better, through membership of the euro, to be part of a larger, more stable economy which is less vulnerable to suffering shocks from the outside.

Against

Britain is currently enjoying a period of sustained economic growth and stability which has been achieved by being able to adopt the economic policies appropriate to her circumstances. In particular, the setting of interest rates to a level appropriate to each phase of the economic cycle have imposed the necessary brake or impetus to keep the economy on track. By joining the single currency Britain would lose the ability to set her own interest rates and in future could have to endure rates quite inappropriate to her phase in the economic cycle (too high in times of recession or too low in times of boom). The constraints placed on eurozone countries by the ‘one-size-fits-all’ interest rate policy and the requirement of complying with the stability and growth pact will remove their freedom to react to changes in economic circumstances at a national level. Participating countries may be congratulating themselves now on the relatively smooth introduction of euro notes and coins but the real test of the currency will come when the economies of two or more countries diverge significantly.

Since the responsibility for setting interest rates in the UK now rests in the hand of the Bank of England and not the government, the setting of rates is now dictated by long-term economic goals, and not for political gain.

The strength of the euro was supposed to be guaranteed by ensuring that the economies of all the participating countries were in a healthy state and had significantly converged at the time of joining by insisting that they met strict entrance criteria. In reality most of the countries failed to meet the fixed targets (especially in respect to achieving the required budget deficit figure of 3% of GDP) but with the exception of Greece (initially), were allowed to join anyway due to the avoidance of the union criteria. Giving up the pound for the euro could only damage Britain's current economic strength.

There are inbuilt differences between the British and eurozone economies which suggest that closer integration with other euro countries is neither advisable nor practicable. For example:
- The British economy is invariably out of phase with other European countries, entering recession and recovery at different times to that of most of her EU partners.
- The British economy has a higher sensitivity to interest rate changes because of Britain's high proportion of mortgage owners, in particular those with variable rate mortgages.
- Britain's rates of unemployment, public sector spending and taxation levels are markedly lower than most euro countries.
- Britain's high overseas investment levels are evidence of the economic ties which she enjoys with the world beyond Europe .
- High levels of pension fund assets mean that Britain is less exposed to the high levels of pension liabilities which face many other EU countries in the years to come.

What are the costs and benefits of EU membership for the UK?

Advantages:

1. A single currency should end currency instability in the participating countries and reduce it outside them. The Euro would have the enhanced credibility of being used in a large currency zone, it would be more stable against speculation than individual currencies are now. An end to internal currency instability and a reduction of external currency instability would enable exporters to project future markets with greater certainty. This will lead to a greater potential for growth.

2. Consumers would not have to change money when travelling and would encounter less ‘red tape’ when transferring large sums of money across borders. It was estimated that a traveller visiting all twelve member states of the (then) EC would lose 40% of the value of his money in transaction charges alone. Once in a lifetime a family might make one large purchase or transaction across a European border such as buying a holiday home or a piece of furniture. A single currency would help that transaction pass smoothly.

3. Likewise, businesses would no longer have to pay hedging costs which they do today in order to insure themselves against the threat of currency fluctuations. Businesses, involved in commercial transactions in different member states, would no longer have to face administrative costs of accounting for the changes of currencies, plus the time involved. It is estimated that the currency cost of exports to small companies is 10 times the cost to the multi-nationals, who balance sales against purchases and can command the best rates.

4. A single currency should result in lower interest rates as all European countries would be locking into German monetary credibility. The ’stability pact’ (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which will enhance the Euro’s international credibility. Leading to more investment, more jobs and lower mortgages.

Disadvantages:

1. Fifteen separate countries with widely differing economic performances and different languages have never before attempted to form a monetary union. It works in the United States because the labour market is mobile, helped by the common language and portability of pensions etc. across a large geographical area. Language in Europe is a huge barrier to labour force mobility. This may lead to pockets of deeply depressed areas in which people cannot find work and areas where the economy flourishes and wages increase. While the cohesion funds attempt to address this, there are still great differences across the EU in economic performance.

2. If governments were obliged through a stability pact to keep to the ‘Maastricht’ criteria for eternity, no matter what their individual economic circumstances dictate, some countries may find that they are unable to combat recession by loosening their fiscal stance. They would be unable to devalue to boost exports, to borrow more to boost job creation or cut taxes when they see fit because of the public deficit criterion. In the United States, Texas could not avoid a recession in the wake of the 1986 oil price fall, whereas demand for Sterling changed in the light of the new oil price, adjusting the exchange rate downwards.

3. All the EU countries have different cycles or are at different stages in their cycles. The UK is growing reasonably well, Germany is having problems. This is the reverse of the position in 1990. Since the war the UK economy has tended to have an economic cycle closer to the US than the EU. It has changed because interest rates are set in each country at the appropriate level for it. One central bank cannot set inflation at the appropriate level for each member state.

4. Loss of national sovereignty is the most often mentioned disadvantage of monetary union. The transfer of money and fiscal competencies from national to community level, would mean economically strong and stable countries would have to co-operate in the field of economic policy with other, weaker, countries, which are more tolerant to higher inflation.

5. The one off cost of introducing the single currency will be significant. The British Retailing Consortium estimates that British retailers will have to pay between £1.7 billion and £3.5 billion to make the changes necessary. Such changes include educating customers, changing labels, training staff, changing computer software and adjusting tills.