Unit 2 / Learning environment 3

Essential reading

European economic integration

as an example for the world

Index

1 The new international economic order in the european context

2 The path to a regional integration process

3 European institutions

Key words: european union, european institutions, economic and monetary union, common single market, schengen
area, supranationalism, economic integration process.
1. The new international economic order in the european context
In the post-war a new international economic order was introduced, based on new commercial and
financial order, that although did not solve the urgent problems of payment balance nor helped the
countries to raise again immediately, it gave new and clear playing rules according to the economic
environment. It had the power to determine the way relevant aspects like trade, capital movements
and foreign payments should operate. In fact, decisions like Bretton Woods set a horizon in the
direction of trade and exchange policies, that still remains fully in force except or a few changes.

In the case of Europe, according to Vries:

44 countries accepted to give up part of their freedom in monetary matters, then in July 1944, agreed
to take part in the establishment of such multilateral institutions as the International Monetary Fund
(IMF) and the International Bank for Reconstruction and Development (IBRD). The institutions and
rules established by the agreements have been hailed as some of the most important economic and
even political accomplishments of the Cold War era. As a noted historian wrote, “Bretton Woods is
the most revered name in international monetary history, perhaps in economic history” (Vries, 1996,
p.128).

Then, the Bretton Woods Agreement involved the creation of three new supranational institutions:

Table 1. Supranational institutions from Bretton Woods

OIC-GATT-WTO The International Trade Organization

At the begining it was called International Trade Organization (OIC), later General Agreement on Tariffs Trade (GATT)
and now World Trade Organization (WTO).
WB The World Bank
Monetary and Financial Conference
IMF The International Monetary Fund
The centerpiece
Source: own elaboration.

It is important to notice that despite of the difference between the principles and priorities of the
founders, Keynes and White, they were able to compromise themselves. Both knew and were
convinced that cooperation on international economics would give a new foundation of hope for a
world too prone to violence.

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2. The path to a regional integration process
Nowadays, circulating between countries of the European Union is somewhat easy, but how has this
integration process been? To practically erase boarders has been one of the greatest achievements of
the EU. This goal had been discussed since the Treaty of Rome, which founded the European Economy
Community in 1957, when the creation of a common market was officially proposed.

The idea was to take a new step of integration, and allow a free movement of goods, capital and people.
The common market was created under these fundamental freedoms by six founding members: Belgium,
Germany, France, Italy, Luxembourg and the Netherlands.

The basis of the new Europe was constituted by a set of treaties that established the European
Community. These treaties are ECSC, EEC and EURATOM. It is important to indicate that since 1967,
with the merger of those three treaties, there are common institutions, like the Parliament, the Council,
the Commission and the Court of Justice, as well as the Economic and Social Committee.

The first notable advance was made on the 1st of July 1968, when the customs duties on goods that
circulated between the states were eliminated. But the single market only consolidated in 1985.

The single market was a response to a prolonged crisis that caused great inflation, as well as the increase
in prices and a huge level of unemployment. The European Commission introduced a response led by
Jacques Delors. Then the community made the decision to complete the construction of the internal
market by stages, to finally have it in 1993.

The internal barriers and borders were destined to disappear progressively within the countries belonging
to the European Community. For this to happen there had to be around 290 laws to create the common
market.

In 1992, in Maastricht, 12 member states surpassed the initial economic objective, after another crisis and
the fall of the Berlin Wall: A Monetary Union was scheduled. Ten years later, the euro currency came into
force, despite the opposition of the United Kingdom, that presented a proposal to create a system that
today is called “opt out”, thus United Kingdom and Denmark did not participate (European Parliament,
2012).

Finally, by the 1st of January 1993, the borders between the countries of the European Union disappeared,
and the European Single Market was stablished, creating more than 2.5 million jobs and offering a market
that covers almost 500 million consumers. However, the market continued to grow; other states started
to join and new competitive situations increased. Within this context arises the need to establish an
economic governance and a political union, for which, 20 years later, the single market made changes.

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 2.1. The international trade and European Supranationalism

International trade was one of the first areas in which EU states agreed to cede their sovereignty.
They conferred to the European Commission the responsibility to deal with trade issues on their
behalf, as well as negotiations, both bilateral and multilateral international trade agreements.

Throughout the decades of European integration, the process has been evolving in a complex
system, which includes more and more supranational elements. This can be seen when venturing into
successive treaties that have been shaped from its origins to the present by the process of European
integration.

In sum...
The European Union (EU) is a single customs union with a single trade
policy and tariff. It has had a comprehensive process of regional economic
integration of more than 60 years. This process has led to establish itself
as the world's largest economy. The EU, to become what it is today, has
developed different agreements that had let to its countries to cede their
sovereignty and allow institutions to make the decisions.

2.2. European Free Trade Association (EFTA)

The EFTA is a group of countries, including England and the Scandinavian nations, that disagreed with
the creation of a customs union and decided to opt for a simpler form of integration: a free trade zone.

Figure 1. European Free Trade Association stamp.

Source: Wikimedia Commons Contributors (2017).

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Thus, in 1960, seven countries, England, Sweden, Norway, Denmark, Switzerland, Austria and
Portugal, agreed by the Stockholm Convention to constitute the European Free Trade Association
(EFTA). Later, in 1961, Finland joined the group as a partner country status, and, in 1969, Iceland as a
full member (Muns, 2016).

This association was purely commercial; it was a program to release in 10 years, which included
eliminating tariffs and levies automatically and linearly for reciprocal trade in industrial products, with
some exceptions, and eliminate quantitative restrictions.

The extension contemplated by the Treaty of Rome for the extension of the agreements to new
countries was approved unanimously. The success of the six founding states, and the comparative
failure of the European Free Trade Association (EFTA), forced the UK, Norway and Denmark to
request admission to the European Community. After a double veto of General de Gaulle in 1961
and 1967, the United Kingdom finally joined the EEC in 1973, accompanied by Denmark and Ireland.
Norway, following the negative outcome in a referendum, did not complete the process.

2.3. European Economic Area (EEA)

In developing the idea of creating a close approach between EFTA and the EEC, after a series of
negotiations initiated by the parties, on June 18 1979, in Porto (Portugal), representatives of the
European Community and EFTA countries signed the Treaty of the European Area (EEA).

This instrument provides free movement of goods, persons, services and capital. In addition, it
features the basis for applying the rules already established in the EEC on social policy, research
and development, environment, consumer protection and recognition of degrees and diplomas. This
treaty left several national regulations in force, such as Swiss banking secrecy and fishing in Norway
and Iceland. Moreover, the EFTA countries did not link to the specific commitment to the EEC,
such as the common external tariff, the common agricultural policy CAP, VAT harmonization and the
imposition of certain provisions about the free movement of people.

As a result of the entry of several member countries of the EFTA to the European Economic Community,
the first was reduced in its composition to Norway, Iceland, Switzerland and Liechtenstein.

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 2.4. Common market

When the Economic European Community (EEC) was stablished, the members ceded power and
acquired various commitments which include:

• Elimination of customs duties at the borders between EU members.

• Rights of common customs on imports from outside the EU.

• Removal of obstacles to the free movement of people between members, services and
capital.

• Establishment of a joint policy in agriculture and transport.

• Elimination of unfair competition within the common market.

• Application of rules to prevent any imbalance in the balance of payments.

• Creation of a European Social Fund, to improve the chances of employment of workers and
help to improve their standard of living (European Commission, 2018).

2.5. The schengen area

This is a space established in the Schengen agreement in 1995. It was created to overpower the
common borders between the members and to establish common controls at the external borders
of those countries. In practice, the Schengen area functions in migratory terms as a single country.
(European Commission, 2018).

On the other hand, although most of the Schengen countries are in the EU, the Schengen Area
should not be confused with the EU. There are 5 members of the EU that aren’t part of the
Schengen Area: the United Kingdom, Ireland, Romania, Bulgaria and Cyprus. And there are 4 states
that are part of Schengen and do not belong to the EU, in fact 3 of them are part of the European
Economic Area and one is not: Norway, Iceland and Liechtenstein.

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3. European institutions
The EU institutions promote and defend European values, objectives and interests of its members
and citizens, furthermore it “contributes to ensuring the coherence, effectiveness and continuity of
EU policies and actions”(EUR-Lex, 2018).

These are the 7 institutions contemplated on Article 13 of the treaty on the EU:

An increase in monetary
system in Europe.

European Parliament
An increase in labor supply,
due to the expulsion of
peasants from their lands.
Represents the citizens.
Elaborates and debates legislation.
Oversees the governance process.
An increase in monetary
system in Europe.
Council of the
European Council European Commission
European Union
Represents the government
Coordinates policies for the members. Represents the EU internationally.
of member states.
Meets in 10 configurations Propose the legislation
Approves economic policies.
the relevant ministers and monitors its fulfillment.
Sign agreements
from EU countries. Manages and allocates funds.
and foreign policy.

Conducts monetary policy

Controls the EU budget.
Responsible for enforcing the laws. in the Euro area.
Submits budget reports
Preliminary questions. Maintains price stability.
to parliament and council.
Safeguards the value of the Euro.

Court of Justice
Court of Auditors European Central Bank
of the European Union

Figure 2: Main Institutions of the EU.

Source: own elaboration.

Like a state, the EU has a legislative branch (Parliament and Council), executive branch
(Commission) and independent judiciary (Court of Justice). These institutions are responsible for
making policy and taking decisions (European Commission, 2018).

3.1. Maastricht treaty

The Maastricht Treaty brings together in one entity, the EU, the three communities (EURATOM,
ECSC, and EEC). This Treaty created the Economic and Monetary Union, it established new
Community policies (education, culture, development cooperation, cohesion) and developed the
functions of the European Parliament.

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The Maastricht Treaty, amending the Treaty of Rome, the Single Act and all previous revisions of the
founding texts, revolved around two axes:

»» The culmination of the economic area without borders, with the introduction of a single
currency building an economic and monetary union.

»» Establishing bases of political union with more democracy, more effectiveness and more
solidarity, both internally and with other organizations.

3.2. Economic and Monetary Union (EMU)

The Economic and Monetary Union (EMU) is an instrument “to further the objectives of the
European Union and improve the lives of citizens in EU countries” (European Union, 2017). It Is one
of the biggest steps the EU has taken in terms of integration, given that implies the coordination of
fiscal and economic policies established by several institutions such as the European Central Bank
and the different members.

Figure 3. Single Currency Euro.

Source: kstudio (2018).

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Economic integration carries different benefits such as internal efficiency, greater robustness,
opportunities for stability, growth and employment. On the other hand, a single currency like the
euro supports the European single market more effectively, which helps citizens and businesses.

1 Coordination of economic policy-making between members.

Coordination of fiscal policies, notably through limits on

2 government debt and deficit

An independent monetary policy run by the European

3 Central Bank.

Single rules and supervision of financial institutions

4 within the Euro area.

5 The single currency and the euro area.

Figure 5v. Economic and Monetary Union (EMU)

Source: own elaboration.

3.3. Integration and Consolidation

The EU currently consists of 28 members, nevertheless, the EMU and the euro has been adopted
only by some of these countries and others that do not belong to the EU.

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 Table 2. Who’s already in?

Members of the EU (Year of Entry) Euro Area Members

Austria (1995) Austria
Belgium (1958) Belgium
Bulgaria (2007) Cyprus
Croatia (2013) Estonia
Cyprus (2004) Finland
Czech Republic (2004) France
Denmark (1973) Germany
Estonia (2004) Greece
Finland (1995) Ireland
France (1958) Italy
Germany (1958) Latvia
Greece (1981) Lithuania
Hungary (2004) Luxembourg
Ireland (1973) Malta
Italy (1958) Netherlands
Latvia (2004) Portugal
Lithuania (2004) Slovakia
Luxembourg (1958) Slovenia
Malta (2004) Spain
Netherlands (1958)
Poland (2004)
Portugal (1986)
Romania (2007)
Slovakia (2004)
Slovenia (2004)
Spain (1986)
Sweden (1995)
United Kingdom (1969)
Non-euro Area Members Members with an Opt-Out
Bulgaria Denmark
Croatia United Kingdom
Czech Republic
Hungary
Poland
Romania
Sweden
Source: European commission (2018).

In summary, in 2019 there are 28 countries in the EU, 19 countries in eurozone, 7 countries as
non-Euro area and 2 members with an opt-out. One of the countries with an opt-out is the United
Kingdom, and is currently in negotiations to implement Brexit, the process of leaving the EU.

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References
EUR-Lex. (2018). European institutions. Eur-Lex. Retrieved from https://eur-lex.europa.eu/
summary/glossary/eu_institutions.html?locale=en

European Commission. (2018). History of the EU Customs Union. European Commission. Retrieved
from https://ec.europa.eu/taxation_customs/history-eu-customs-union_en

European Commission. (2018). What is the euro area?. European Commission. Retrieved from
https://ec.europa.eu/info/business-economy-euro/euro-area/what-euro-area_en

European Parliament. (July 28 2012). History: European Single Market. European Parliament.
Retrieved from https://multimedia.europarl.europa.eu/en/history-european-single-market_V001-
0021_ev

European Union. (2017). The EU and Economic and Monetary Union. Retrieved from http://
publications.europa.eu/webpub/com/factsheets/emu/en/

Muns, J. (2016). Lecturas de integración económica. Barcelona: i Ediciones. Retrieved from http://
www.publicacions.ub.es/refs/indices/06488.pdf

Vries, M. (1996). Bretton Woods Fifty Years Later: A View from the International Monetary Fund. The
Bretton Woods-GATT System: Retrospect and Prospect after Fifty Years. Armonk, N.Y.: M.E. Sharpe, p.
128.

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Figure references
Kstudio (2018). Various Euros Background [Photography]. Retrieved from https://www.freepik.com/
premium-photo/various-euros-background_1467642.htm

Wikimedia Commons Contributors. (2017). Stamp 1985 [Photography]. Retrieved from https://
commons.wikimedia.org/wiki/File:Stamp_1985_-_EFTA_25_years_-_Finnish_stamp.jpg

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 TECHNICAL INFORMATION

Module: Cultura y Economía Regional de Europa

Unit 2: Processes of the economic integration of Europe
Learning environment 3: European economic integration as
an example for the world

Author: Andrea Carolina Ramírez Ruiz

Pedagogical Advisor: Alexandra Bolaños

Graphic Designer: Andrés Felipe Figueroa
Assistant: Laura Delgado

This material belongs to Politécnico Grancolombiano

Its partial or total reproduction is prohibited

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