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The European Union

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Cambridge University Press978-0-521-69727-9 - The European Union: Economics and Policies, Eighth EditionEdited by Ali M. El-AgraaFrontmatterMore information

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Edited by

Ali M. El-Agraa

The European UnionEconomics and Policies

EIGHTHEDITION






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To all those who believe in and actively support

an ever closer unity for Europe.

Lest it be forgotten, the European Union stands

for the harmonized integration of some of the

oldest countries in the world with very diverse

cultures, languages and economic and political

systems. The European Union is about unity

within diversity.






List of figures page xiList of tables xiiiList of contributors xviPreface xviiA guide for users xixList of abbreviations xx

1 General introduction: the EU within theglobal context of regional integration 1Ali El-Agraa

1.1 What is economic integration? 11.2 Economic integration and WTO

rules 31.3 The global experience 41.4 The EU 151.5 The possible gains from economic

integration 161.6 Areas of enquiry 171.7 About this book 18Appendix 1.1: WTO’s Article XXIV 18

Part I EU history, institutions, legal dimensionand basic statistics

2 A history of European integration and evolution of the EU 23Ali El-Agraa

2.1 A short history of European unity 232.2 The evolution of the EU 312.3 Conclusion 41

3 EU institutions 42Ali El-Agraa

3.1 The Commission 433.2 The Council 473.3 The European Parliament 503.4 The courts 53

3.5 The Ombudsman 563.6 The European Economic and Social

Committee (EESC) 573.7 The Committee of the Regions

(CoR) 583.8 The European Central Bank

(ECB) 593.9 The European Investment Bank

(EIB) 593.10 Institutional reform 60

4 The legal dimension in EU integration 62Damian Chalmers and Luke Haasbeek

4.1 Actor-interest-based approaches 634.2 The structuring of EU integration

through EU law 754.3 Law as the cipher for the legitimacy

of the EU 794.4 Actor-network theories 804.5 Conclusion 81

5 The basic statistics 84Ali El-Agraa

5.1 Area and population concerns 845.2 GNI per capita and GDP 875.3 Demand 875.4 Price indices and real interest and

exchange rates 885.5 Direction of trade 885.6 Income/consumption distribution 885.7 The statistical tables 89

Part II EU market integration: theory and practice

6 The theory of economic integration 109Ali El-Agraa

vii

Contents






6.1 The customs union aspects 1096.2 Customs unions versus free trade

areas 1246.3 Economic unions 1256.4 Macroeconomics of integration 1266.5 Economic integration in developing

countries 1276.6 Economic integration among

communist countries 1276.7 New theoretical developments 1276.8 Conclusions 128

7 The economics of the single market 130Brian Ardy and Ali El-Agraa

7.1 Introduction 1307.2 Why ‘the single market’? 1307.3 The economics of non-tariff

barriers 1337.4 An evolving programme 1357.5 Assessment of the single market 1387.6 Conclusion 142

8 Factor mobility 144David Mayes and Juha Kilponen

8.1 Single market 1468.2 Capital movements 1488.3 On the determinants of direct

investment 1498.4 Capital movements in Europe 1538.5 Labour movements 1578.6 Labour flows in the EU 1588.7 Capital and labour movements

combined 161

9 Measuring the impact of economic integration 165Nigel Grimwade

9.1 Introduction 1659.2 The effects of economic

integration 1659.3 Estimating the trade effects – different

approaches 1689.4 The nature of European

specialization 1819.5 Estimating the income effects 1839.6 Economic growth 1869.7 Conclusion 188

Part III EU monetary integration

10 The theory of monetary integration 193Ali El-Agraa

10.1 Disentangling the concepts 19310.2 What is monetary integration? 19410.3 The gains and losses 19610.4 A ‘popular’ cost approach 20510.5 A concluding remark 207

11 The development of EU economic and monetary integration 208David Mayes and Ali El-Agraa

11.1 The Werner Report 20811.2 The EMS 20911.3 The Delors Report and the

Maastricht Treaty 21211.4 The transition to EMU 21611.5 The decision over membership

of EMU 22111.6 Conclusions 224

12 The operation of EMU 227David Mayes

12.1 The Eurosystem and the euro 227

12.2 The coordination of fiscal and other macroeconomic policies 230

12.3 Completing EMU 236

Part IV The single European market: policyintegration

13 Competition policy 241Wolf Sauter and Jurian Langer

13.1 Introduction 24113.2 The rationale for EU competition

policy 24113.3 General overview of the legal

framework 24413.4 The substantive norms 24713.5 Enforcement 25113.6 The public turn 25413.7 Rationalization 25613.8 Modernization 25713.9 Conclusion 259

viii Contents






14 Industrial and competitiveness policy: theLisbon Strategy 261Brian Ardy

14.1 Introduction 26114.2 What is industrial and competitiveness

policy? 26114.3 Industrial and competitiveness

policy: theory and evidence 26214.4 The control of state aid 26714.5 Research and technology policy 27014.6 EU economic reform and

competitiveness 27414.7 Conclusion 279

15 Tax harmonization 281Brian Ardy and Ali El-Agraa

15.1 Why is tax harmonization necessary? 281

15.2 The principles of tax harmonization 282

15.3 The EU’s experience of tax harmonization 282

15.4 Tax harmonization today 28515.5 Conclusion 296

16 Transport policy 298Kenneth Button

16.1 Introduction 29816.2 The European transport system 29916.3 The initial development of a

CTP 30016.4 The CTP and other aspects of

policy from the 1990s 30416.5 The 2004 enlargement 31016.6 Conclusions 313

17 Energy policy and energy markets 314Stephen Martin and Ali El-Agraa

17.1 Introduction 31417.2 The golden years (mostly) 31517.3 Oil shocks and afterwards 31617.4 Demand and supply: the status

quo 31817.5 Current energy agenda: single

market, environment, security 31917.6 Conclusion 328

18 Environmental policy 330Alan Marin

18.1 Background 33018.2 Economic (or economists’) assessment

of environmental policies 33218.3 Further implications for EU

policies 34218.4 Conclusions 346

Part V EU budget and structural policies

19 The general budget 353Brian Ardy and Ali El-Agraa

19.1 The economic theory of the state 35419.2 Fiscal federalism 35519.3 The EU and fiscal federalism 35619.4 Budget rules and procedure 35819.5 EU budget revenue 35919.6 EU budget expenditure 36219.7 Net contributions to the EU

budget 36619.8 The EU budget and EMU 36819.9 The EU budget and

enlargement 36919.10 Conclusion 371

20 The Common Agricultural Policy 373Ulrich Koester and Ali El-Agraa

20.1 General background 37320.2 The problems of agriculture 37420.3 Objectives of the CAP 38020.4 The birth of the CAP and the

institutional setting 38120.5 The market organizations of

the CAP 38920.6 Rural development policy 40320.7 The future of the CAP 40620.8 Conclusion 408

21 The Common Fisheries Policy 411Brian Ardy and Ali El-Agraa

21.1 Introduction 41121.2 Background 41221.3 Policy objectives 41421.4 Policy process 41621.5 Reform of the CFP? 41721.6 Conclusion 419

Contents ix






22 Regional policy 421Harvey Armstrong

22.1 The case for an EU regional policy 42122.2 The effects of integration on EU

regional disparities 42422.3 The current and future EU regional

policy 43022.4 Some key issues for the future 437

23 Social policies: the employment dimension 441Brian Ardy and Ali El-Agraa

23.1 Introduction 44123.2 The Treaty of Rome 44223.3 The Single European Act and the

Social Charter 44323.4 The development of social policy 44423.5 The Treaty of Union and its

perspectives 44523.6 Employment policy 44623.7 The development of the European

Employment Strategy 44723.8 Employment performance:

economic theory and evidence 44923.9 The European Employment

Strategy 45323.10 The EES and EU employment

performance 45823.11 Conclusion 468

Part VI EU external relations

24 External trade policy 473Marius Brülhart and Alan Matthews

24.1 EU trade and specialization patterns 474

24.2 The Common Commercial Policy (CCP) 479

24.3 Trade relations with the main partners 484

24.4 Trade policy in a globalizing world 487

24.5 Conclusions 491

25 The EU and the developing world 494Alan Matthews

25.1 Trade policy 49625.2 Development co-operation 50425.3 Conclusions 514

Part VII The enlargement, success and future ofthe EU

26 Enlargement 519David Mayes

26.1 The process of enlargement 52126.2 Deciding on a wider

membership 52426.3 Coping with a larger Union 52726.4 Coping without enlargement 53226.5 Concluding remarks 533

27 Has the EU been successful? 535Ali El-Agraa

27.1 The aims set for 1969 53527.2 The aims set for the period from

1969 to the early 1980s 53627.3 The aims set for the period from

the mid-1980s to the present 54027.4 Conclusion 541

28 The future of the EU 542Ali El-Agraa

28.1 The vision of the founding fathers 542

28.2 The vision of contemporary politicians 543

28.3 Conclusion 551

References 552Author index 584Subject index 591

x Contents






3.1 The co-decision procedure page 515.1 Female life expectancy at birth,

1960–2004 855.2 Male life expectancy at birth,

1960–2004 865.3 Average life expectancy at birth,

1960–2004 866.1 Trade creation and trade diversion 1106.2 Marginal ‘degree of preference’ for

industrial production 1136.3 General equilibrium of the Cooper–

Massell argument 1156.4 Internal economies of scale 1166.5 Social costs and economies of scale:

(a) the home country; (b) the partner country 117

6.6 Customs unions and the terms of trade 118

6.7 UTR versus customs unions 1206.8 Vindicating the Cooper–Massell

criticism when dominant W has no tariffs/transport costs 122

6.9 Dominant W has no tariffs/transport costs – non-discriminatory tariffs by H/P and a CET consistent with WTO rules: case I 123

6.10 Dominant W has no tariffs/transport costs – non-discriminatory tariffs by H/P and a CET consistent with WTO rules: case II 124

6.11 Capital mobility: (a) the home country; (b) the partner country 126

7.1 The effects of tariffs and non-tariff barriers 133

7.2 Average transposition deficit 1357.3 Price dispersion in the EU 1387.4 Intra- and extra-EU15 imports share

of GVA 139

10.1 The Fleming–Corden analysis of monetary integration 199

10.2 The expectations-augmented Phillips curve 200

10.3 Monetary integration with expectations-augmented Phillips curves 201

10.4 Shifts in EMU partners’ aggregate supply and demand 203

10.5 Krugman’s (1990) cost–benefits of EMU 206

14.1 State aid decisions, 1970–2004 26817.1 Indices of EC6 GDP, primary energy

consumption; and coal consumption,1953–1979 (1953 � 100) 315

17.2 EU energy balances, 1966–2004 (millions of tonnes of oil equivalent) 317

17.3 EU energy demand indicators, 1966–2004 317

17.4 Share of net energy imports in total primary energy supply, 1966–2004 318

18.1 Social and private costs of pollution 333

18.2 Costs and benefits of pollution abatement 334

18.3 Pollution threshold 33419.1 The distribution of GDP per capita in

the EU and GSP per capita in the US, 2004 357

19.2 EU budgetary revenue resources, 1971–2004 360

19.3 EU25 ‘own resource’ contributions and GNI per head, 2004 362

19.4 Real EU expenditure, 1965–2004 36219.5 EU15 CAP and structural expenditure,

2003–2004 36419.6 Net contribution to the EU budget and

GNI per head, 2004 367

xi

Figures






20.1 The welfare effects of the suboptimal use of land 377

20.2 The decision-making process: a stylized model 383

20.3 Development of EU and world marketprices for agricultural products 386

20.4 The development of the EU trading situation 389

20.5 The impact of variable levies on domestic prices 390

20.6 The effect of variable levies or fixed tariff rates 392

20.7 The impact of preferential access to EU markets 394

20.8 The impact of subsidized export constraints 394

20.9 The importance of intervention prices 395

20.10 The effect of export subsidies on domestic prices 396

20.11 Price cuts and direct payments: the case of grains 396

20.12 Support levels in the OECD and member countries, % PSE 397

20.13 Average costs in milk production and milk prices 399

20.14 Budget effects of EU demand for domestic consumption as compared to export subsidization 400

20.15 Welfare effects of consumer subsidies 401

20.16 The effect of price support on productivity 408

22.1 Regional gross domestic product per head, at purchasing power parities, 2003 425

22.2 Regional unemployment rates (males plusfemales), 2004 426

22.3 Structural funds (2000–6): eligible regions under priority objectives 1 and 2, together with regions eligible for transitional assistance 433

22.4 Structural funds (2007–13): eligible regions under priority objectives 1 and 2, together with ‘phasing-in’ and ‘phasing-out’ regions 434

23.1 Unemployment in EU15 and US, 1960–2005 448

23.2 EU15 total employment rates, 1994–2005 459

23.3 New member states total employment rates, 2000–5 459

23.4 EU15 female employment rates, 1994–2005 460

23.5 New member states female employment rates, 2000–4 460

23.6 EU15 employment rates of older workers, 1994–2005 461

23.7 New member states employment rates of older workers, 2000–4 461

23.8 EU15 unemployment rates, 1994–2005 464

23.9 New member states unemployment rates, 1992–2005 464

23.10 EU15 youth unemployment rates, 1994–2005 465

23.11 New member states youth unemployment rates, 2000–5 466

23.12 EU15 long-term unemployment, 1994–2005 466

23.13 New member states long-term unemployment rates, 2000–5 467

25.1 EU development assistance instruments under the 2007–13 Financial Perspective 509

xii List of figures






1.1 Schematic presentation of economic integration schemes page 2

1.2 Economic integration in Europe 51.3 Economic integration in Africa 81.4 Economic integration in the Americas 101.5 Economic integration in Asia–Pacific

and the Middle East 142.1 Results of the referendums on EU

membership 392.2 The state of play on the Constitutional

Treaty 403.1 The Commissions 443.2 EU Directorates General and services 463.3 Committees of the European

Parliament 523.4 Members of the European Parliament

elected in June 2004 545.1a Area, population and life expectancy 905.1b Life expectancy at birth, selected

countries 915.2 Health expenditure, mortality and

fertility 925.3 Labour force, employment and

unemployment rates, 2005 935.4 Employment by basic economic

sector, 2000–4 945.5 Gross national income and gross

national product, 2004 955.6 Average annual percentage growth of

GDP and its components 965.7 Percentage distribution of GDP, 2004 975.8 Central government finances (% of GDP),

2004 985.9 Merchandise exports/imports, current

account, reserves, ODA and FDI, 2004 995.10 Consumer/wholesale price indices and

real interest/exchange rates 1005.11 Exports to EU countries 101

5.12 Imports from EU countries 1025.13 Distribution of income or

consumption 103II.1 Beef 106II.2 Butter 106II.3 Beef 106II.4 Butter 1067.1 Measures of protection by country

and industry 1348.1 Direct investment flows of EU

countries, 1987–2005 1508.2 US direct investment in the EU,

1980–2005 1558.3 Mergers and acquisitions involving

EU firms 1568.4 Labour force by nationality in EU

member states, 1990, 1995 and 2001 1609.1 Changes in ex-post income elasticities

of import demand in the EC 1729.2 Estimated annual effects of European

integration on trade flows in manufacturedproducts, $ billion 173

9.3 Estimated impact of the single market on market shares 179

9.4 Changes in trade patterns in manufacturing resulting from the single market – an ex-ante simulation by the EU Commission and CEPR 180

9.5 Changes in trade patterns in manufactures resulting from the single market – an ex-post simulation by the EU Commission 181

9.6 A summary of the results of attempts to estimate trade creation and trade diversion in the EC, $ billion 182

9.7 Representative ratios of trade balances for ninety-one product groups for EEC member states, 1958–1970 183

xiii

Tables






9.8 Estimates of intra-industry trade for EC member states, 1970–1985 183

9.9 Share of inter-industry and intra-industry trade in intra-EC trade 1987–1994 184

9.10 Changes in GDP and welfare resulting from trade creation and trade diversion in the single market 186

9.11 The effects of economic integration on the growth rate of member states, 1961–72 and 1974–81 187

11.1 EU member states’ performance with regard to the convergence criteria 217

14.1 Productivity and employment in the EU15 and the US, 2004 274

14.2 Growth of real purchasing power parity GDP 277

15.1 EU25 tax structure, 2004 28615.2 VAT in EU member states 28715.3 Cigarette taxation in EU member states,

2006 29015.4 Alcohol taxation in EU member states,

2006 (per litre) 29115.5 Taxes on petrol and diesel fuel, 2006 29215.6 EU25 corporation tax, 2006 29416.1 Summary of the policy of EC9 30217.1 Composition of primary energy supply

(millions of tonnes of oil equivalent), EU15, 2004 319

17.2 Projected oil and gas consumption, share of imported energy in EU energy consumption, 1998–2030 319

17.3 World proven crude oil reserves, production by region, 2005 325

17.4 World proven natural gas reserves and marketed production, by region, 2005326

17.5 Natural gas imports, by pipeline, of selected EU member states from the Russian Federation, 2006 (billion cubic metres) 327

18.1 Greenhouse gas emission changes from 1990 to 2010 340

19.1 Expenditure at different levels ofgovernment in federal states (% of GDP),2003 356

19.2 Federal government expenditure by main function (% of GDP), 2003 357

19.3 Tax revenue of different levels of

government in federal states (% of GDP), 2003 359

19.4 Tax systems: federal states and the EU (% of GDP), 2003 360

19.5 Sources of EU revenue, 2003 and 2004 361

19.6 EU expenditure, 2003 and 2004 36319.7 EU financial perspective for

2007–2013 37020.1 Measures under the RDR, by

category 40420.2 Actual and planned performance

indicators of supported farms in Schleswig-Holstein in the target year(fourth year after investment) 405

20.3 Most probable implementation of EU25 member states of the policy options approved by the Luxembourg compromise 407

21.1 EU fish catch, 1993 and 2004 41221.2 Fish catches outside ‘safe biological

limits’ 42022.1 Priority objectives for the 2000–2006 and

2007–2013 structural funds 43222.2 Regional policy in 2007–2013: indicative

allocations (€ million, 2004 prices) 43623.1 EU15 employment and GDP growth,

1980–2005 46223.2 Non-accelerating wage rate of

unemployment, 1991–2005 46824.1 The EU in world merchandise trade,

2004 47424.2 EU merchandise trade by area, 2004 47524.3 Commodity composition of EU trade with

major trading groups, 2004 47524.4 Extra-EU trade in selected technology-

intensive products, 1980 and 2004 47724.5 Import-weighted average applied MFN

tariff rates in selected countries, 2004 48024.6 The EU’s network of preferential trade

agreements, 2005 48325.1 Growth of real per capita GDP by region,

1971–2015 49525.2 EU external assistance, 2001–2005,

€ billion 50625.3 Overview of expenditure within heading

‘EU as a global partner in the 2007–2013 Financial Perspective’ 509

xiv List of tables






25.4 EDF global commitments by programmingand financial instrument, € million 511

26.1 Basic data for applicant CEECs and EUmember states, 1998 526

26.2 Financial framework, 2007–13 52826.3 Structural indicators in the new member

states, 2005 530

27.1 EC intra-area tariff reductions 53627.2 The establishment of the CET 53727.3 New members’ intra-tariff

reductions 53927.4 New members’ adjustment to the

CET 539

List of tables xv






Brian Ardy is Reader in Economics and Head ofthe European Institute, the Business School atLondon South Bank University, UK.

Harvey W. Armstrong is Professor of EconomicGeography, Department of Geography, Universityof Sheffield, UK.

Marius Brülhart is Professor of Economics,Départment d’économétrie et économiepolitique, École des HEC, University of Lausanne,Switzerland.

Kenneth Button is University Professor of PublicPolicy, School of Public Policy, George MasonUniversity, USA, and is also director of both theUniversity’s Aerospace Research Center and theCenter for Transportation, Policy, Operations andLogistics.

Damian Chalmers is Professor of European Law,London School of Economics and PoliticalScience, University of London, UK.

Nigel Grimwade is Principal Lecturer inEconomics and Head of Economics, the BusinessSchool at London South Bank University, UK.

Luke Haasbeek used to be a Junior LegalAdviser at the Directorate for Legal Affairs(International), the Ministry of Housing, SpatialPlanning and the Environment, theNetherlands. She is now studying for herdoctorate at the Law Department, College ofEurope, Bruges, Belgium.

Juha Kilponen is Research Supervisor with theResearch Department of the Bank of Finland.

Ulrich Koester is Professor at the Institute ofAgricultural Economics, University of Kiel,Germany.

Jurian Langer is a solicitor with Stek Amsterdamwhere he practises economic law. He alsolectures on European Law at the University ofAmsterdam. In 2006, he defended his PhD on theAntitrust Economics of Tying and Building at theEuropean University Institute in Florence, Italy.

Alan Marin is Senior Lecturer in Economics,London School of Economics and PoliticalScience, University of London, UK.

Stephen Martin is Professor of Economics andFaculty Director of the Technology TransferInitiative at the Krannert School of Management,Purdue University, USA, and is co-ManagingEditor of the International Journal of IndustrialOrganization.

Alan Matthews is Jean Monnet Professor ofEuropean Agricultural Policy in the Departmentof Economics, Trinity College Dublin, Ireland.

David G. Mayes is Adviser to the Board of theBank of Finland and Adjunct Professor in theNational Centre for Research on Europe at theUniversity of Canterbury, New Zealand. In 2006/7,he was Visiting Professor at the University ofAuckland, New Zealand.

Wolf Sauter is with the Financial MarketsDirectorate, Ministry of Finance, theNetherlands, and was National Expert with theEU’s Directorate General for Competition, PolicyAdviser to the Independent Authority forTelecommunications and Posts (OPTA), TheHague, and Professor of Economic Law,Groningen University, the Netherlands.

xvi

Contributors






Since the first edition of this book, The Economicsof the European Community, in 1980, it has under-gone many changes. This is not the place to gothrough all of them, but three warrant particularmention. First, new policy areas have been added,either because they were non-existent at thebeginning or have become prominent since then.Second, new contributors have joined my team,some replacing those who, for one reason oranother, could no longer be with me. Third, sincethe fifth edition in 1998, a new title has beenadopted to reflect the changes that have takenplace within the Community itself, as well as inthe general nature and contents of the book, andfor the sixth edition in 2001 the subtitle wasamended.

In this eighth edition there are no new areas tocover and no need to change the name of the book,which I should stress is not just about economics.As far as new contributors are concerned, we havebeen joined by Jurian Langer, a practising solici-tor, lecturer in EU law and active researcher in hisfield, who has co-authored chapter 13 on EU com-petition policy with Wolf Sauter. Also with us forthe first time is Luke Haasbeek, a rising star whowas a Junior Legal Advisor at the Ministry ofHousing, Spatial Planning and the Environmentin the Netherlands, and is now studying for herdoctorate at the Law Department, College ofEurope, Bruges, Belgium; she has co-authoredchapter 4 on the legal dimension in EU integra-tion with Damian Chalmers. New with us is BrianArdy, who in addition to continuing his jointefforts with me on EU tax harmonization and thegeneral budget (chapters 15 and 19 respectively), isalso doing likewise on the Single European Market(replacing Iain Begg in chapter 7) and theCommon Fisheries Policy (substituting for Ella

Ritchie in chapter 21). He has also contributedchapters 14 and, with me, 23 on industrial policyand the Lisbon Strategy, respectively (replacingVictoria Curzon Price), and social policies (replac-ing Doreen Collins and Robert Salais). I welcomethe three of them and thank them for their excel-lent contributions.

It follows from the above that Professors IainBegg, Victoria Curzon Price, Ella Ritchie andRobert Salais as well as Dr Doreen Collins have leftus. Begg has found himself overstretched in hispure research capacity at the LSE, securing moreprojects than he can physically cope with. Ritchiehas assumed the heavy responsibility of Pro-Vice-Chancellor for Teaching and Learning at theUniversity of Newcastle. Dr Doreen Collins, whohas been with me since the first edition, has foundthat she is unable to devote so much time to EUmatters now that she has settled in New Zealand.Given the dramatic changes in EU industrial andsocial policies and Ardy’s increasing commitmentto these areas, both Professors Victoria CurzonPrice (also a long-standing collaborator here andin other works) and Robert Salais have welcomedthe relief. I am deeply grateful to them all for theirexcellent contributions over the years and bidthem farewell.

Although there is no change in either the book’stitle or subtitle, the chapters have been rearrangedin a more logical fashion and now come underseven parts. The first covers EU history, institu-tions, legal dimension and basic statistics (fourchapters); hence sets the general background tothe book. Part II deals with the theory and practiceof EU market integration (also four chapters,including the Single European Market). Part III isdevoted to EU monetary integration (three chap-ters). Part IV tackles the policy integration aspects

xvii

Preface






of the Single European Market (six chapters). PartV is about the EU budget and structural policies(four chapters). Part VI is on EU external relations(two chapters). And the final part is on EU enlarge-ment and the success and future of the EU (threechapters). I am particularly grateful to Brian Ardyfor recommending the rearrangement, but mustadd that there will never be a perfect sequencingof all the chapters, given the nature of the book,the width of policies considered and the fact thatevery chapter can be read on its own – but seebelow for suggestions on how to use selected chap-ters for different purposes.

Simply updating the book when so muchchange is taking place is enough justification fora new edition. The book has been thoroughlyupdated, dealing with the EU of twenty-seven, towhich Bulgaria and Romania have only justacceded. But this edition also includes majorchanges in the contents of some of the chapters,especially those devoted to EMU, and competition,industrial and social policies. We have also

made innovations, using case studies whereverappropriate.

Again, let me thank all my contributors, notonly for their excellent chapters but also for work-ing with me under the very strict conditions (seethe guide to users which follows), and bid farewellto departed members. Also, many thanks to allthose who continue to use the book and send mecomments on it, and to the many professionalreviewers solicited by Cambridge University Presswho read the seventh edition thoroughly beforejudging it and making recommendations forimprovement. Last, but by no means least, I wishto express my deepest appreciation to ChrisHarrison, Publishing Director for the SocialSciences with Cambridge University Press, for hisencouragement, support and guidance and to allhis production teams for their excellent work.

Ali M. El-AgraaFukuoka University, Japan

October 2006

xviii Preface






The book is written in such a way that pure theoryand measurement techniques are confined to sepa-rate chapters. This means that the policy chaptersshould be accessible to all readers. However, it alsomeans that those who seek a rigorous, yet brief,background on international economic integra-tion can find it handily in the same book. Moreover,as my contributors will no doubt attest, my editingstyle has been to ensure that the book reads as acomplete whole, not as a collection of independentarticles, each contributed for its own sake. This hasbeen ensured through thorough editing and con-sultation with the contributors, cross-referencing,allowing repetition only where absolutely neces-sary, logical sequencing and a setting which beginswith an introductory chapter and finishes with twoon the success and future of the EU. In the process,I have tried my best not to distract from any con-tributor’s own writing style. Therefore the readerhas a unique product which offers a truly singleentity, yet is authored by several acknowledgedauthorities in the various fields.

Those truly interested in the EU as a whole willof course have to read the entire book if they reallywant to understand it as a most successful schemeof international economic integration, with aspi-rations going beyond that. However, those who aresimply interested in the EU itself without theglobal context can skip chapters 6, 9 and 10, sincethese are devoted to theoretical and measurement

considerations which pertain to all schemes.Those interested in only the EU policy areas candrop chapters 2–6 and 9, although chapter 2 isimportant for a proper understanding. Thoseinterested in only the EU economic policies candrop chapters 2–4 and 23 and, if not interested inthe future of the EU, can also drop chapter 28.Those interested in only the EMU and the euro canconfine themselves to chapters 7, 8 and 10–12, butare advised to read chapters 2 and 28 for a properunderstanding; those interested in this area withemphasis on the UK will find my 2002 book TheEuro and Britain: Implications of Moving into EMUmore appropriate. Also various combinations ofchapters can be made, depending on what thereader has in mind. For example, those interestedin a very basic understanding of the EU can usechapters 2, 3, 5, 27 and 28.

Finally, the entire book is written with thosewho want to pursue further study in mind. Thuswithin every chapter the reader is referred to themost relevant research publications in the fieldand these are fully set out in the References at theend of the book. This means that there are noguides to further reading at the end of each chap-ter and certainly no guides to other texts, since itis not our task to supply them, especially whenthis book is a pioneer in its field and it coversmore than one field of study; it is not confined toeconomics.

xix

A guide for users






AAMS Association of African andMalagasy States

AAU Arab–African UnionACC Arab Cooperation CouncilACM Arab Common MarketACP African, Caribbean and Pacific

countries party to the LoméConvention (now theContonou Agreement)

ADAPT Community initiativeconcerning the adaptation ofthe workforce to industrialchange

AEC Arab Economic CouncilAIM advanced informatics in

medicineAL Arab LeagueALADI Association for Latin

American IntegrationAltener specific actions to promote

greater penetration ofrenewable energy sources

AMU Arab Maghreb UnionANZCERTA Australia and New Zealand

Closer Economic Relations andTrade Agreement (also CER)

ARION programme of study visits fordecision-makers in education

ASEAN Association of South-EastAsian Nations

ASEM Asia–Europe meetingAU African UnionBAP biotechnology action

programmeBATNEEC best available technology not

entailing excessive costBC-NET Business Cooperation

Network

BCR Community Bureau ofReferences

BENELUX Belgium, the Netherlands andLuxembourg Economic Union

BEP biomolecular engineeringprogramme

BEST Business EnvironmentSimplification Task Force

BLEU Belgium–LuxembourgEconomic Union

BRAIN basic research in adaptiveintelligence andneurocomputing

BRIDGE Biotechnological Research forInnovation, Development andGrowth in Europe

BRITE/EURAM basic research in industrialtechnologies for Europe/rawmaterials and advancedmaterials

BSE bovine spongiformencephalopathy

BU Benin UnionCAA Civil Aviation AuthorityCACM Central American Common

MarketCADDIA cooperation in automation

of data and documentationfor imports/exports andagriculture

CAEU Council for Arab EconomicUnity

CAP Common Agricultural PolicyCARICOM Caribbean CommunityCARIFTA Caribbean Free Trade

AssociationCCP Common Commercial PolicyCCT Common Customs Tariff

xx

Abbreviations






CEAO Communauté Économique del’Afrique de l’Ouest

CEC Commission of the EuropeanCommunities

CEDB component event data bankCEDEFOP European Centre for

Development of VocationalTraining

CEEC Countries of Central andEastern Europe

CEEP European Centre forPopulation Studies

CEN European Committee forStandardization

CENELEC European Committee forElectrotechnicalStandardization

CEP common energy policyCEPGL Economic Community of the

Countries of the Great LakesCER closer economic relationsCERN European Organization for

Nuclear ResearchCET common external tariffCFP Common Fisheries PolicyCFSP Common Foreign and

Security PolicyCI Community initiativeCIS Commonwealth of

Independent StatesCM Common MarketCMEA Council for Mutual Economic

AssistanceCN combined nomenclatureCODEST Committee for the European

Development of Science andTechnology

COMECON see CMEACOMETT Community programme in

education and training fortechnology

CORDIS Community research anddevelopment information -service

COREPER Committee of PermanentRepresentatives

CORINE Coordination of informationon the environment in Europe

COSINE Cooperation for open systemsinterconnection networkingin Europe

COST European cooperation onscientific and technicalresearch

CREST Scientific and TechnicalResearch Committee

CRS computerized reservationsystem

CSCE Conference on Security andCooperation in Europe

CSF Community supportframework

CSTID Committee for Scientific andTechnical Information andDocumentation

CTP Common Transport PolicyCTS conformance testing

servicesCU customs unionDAC Development Assistance

Committee (OECD)DDR German Democratic Republic

(now part of Germany)DELTA developing European learning

through technologicaladvance

DG IV Directorate General FourDI divergence indicatorDRIVE dedicated road infrastructure

for vehicle safety in EuropeDV dummy variableEAC East African CommunityEAGGF European Agricultural

Guidance and GuaranteeFund

EBA ‘Everything But Arms’EBRD European Bank for

Reconstruction andDevelopment

EC European CommunityECB European Central BankECHO European Community

Humanitarian OfficeECIP European Community

Investment PartnersECJ European Court of Justice

List of abbreviations xxi






ECLAIR European collaborativelinkage of agriculture andindustry through research

ECMT European Conference ofMinisters of Transport

ECOFIN European Council ofMinisters for Financial Affairs

ECOSOC Economic and SocialCommittee (also ESC)

ECOWAS Economic Community ofWest African States

ECPE European Centre of PublicEnterprises

ECSC European Coal and SteelCommunity

ECU European currency unitEDC European Defence

CommunityEDF European Development

FundEDIFACT electronic data interchange

for administration, commerceand transport

EEA European Economic AreaEEC European Economic

CommunityEEZ Exclusive Economic ZoneEFTA European Free Trade

AssociationEGE European Group on Ethics in

Science and NewTechnologies

EIB European Investment BankEIF European Investment FundEMCF European Monetary

Cooperation FundEMF European Monetary FundEMI European Monetary InstituteEMS European Monetary SystemEMU European monetary union or

economic and monetaryunion

EP European ParliamentEPC European political

cooperationEPOCH European programme on

climatology and naturalhazards

EQS Environmental qualitystandard

Erasmus European Community actionscheme for the mobility ofuniversity students

ERDF European RegionalDevelopment Fund

ERM exchange-rate mechanismESA European Space AgencyESCB European System of Central

BanksESF European Social FundESI electricity supply industryESPRIT European strategic

programme for research anddevelopment in informationtechnology

ETUC European Trade UnionConfederation

EU European UnionEUA European Unit of AccountEuratom European Atomic Energy

CommissionEureka European Research

Coordinating AgencyEURES European Employment

ServicesEUROCONTROL European organization

for the safety of air navigation

EURONET-DIANE direct information accessnetwork for Europe

EUROSTAT statistical office of the EC/EU

EVCA European Venture CapitalAssociation

FADN EEC farm accountancy datanetwork

FAO Food and AgricultureOrganization of the UnitedNations

FAST forecasting and assessmentin the field of science andtechnology

FCO Foreign and CommonwealthOffice

FEER Fundamental EquilibriumExchange Rate

xxii List of abbreviations






FEOGA European AgriculturalGuidance and GuaranteeFund

FIFG Financial Instrument forFisheries Guidance

FLAIR food-linked agro-industrialresearch

FSAP Financial Services Action PlanFSU Former Soviet UnionFTA free trade areaGATS General Agreement on Trade

in ServicesGATT General Agreement on Tariffs

and Trade (UN)GCC Gulf Cooperation CouncilGDP gross domestic productGFCM General Fisheries Council for

the MediterraneanGNI gross national incomeGNP gross national productGSP generalized system of

preferencesHDTV high-definition televisionHELIOS action programme to

promote social andeconomic integration andan independent way of lifefor disabled people

HS Harmonized CommodityDescription and CodingSystem

IAEA International Atomic EnergyAgency (UN)

IATA International Air TransportAssociation

IBRD International Bank forReconstruction andDevelopment (World Bank)(UN)

ICES International Council for theExploration of the Seas

ICONE comparative index ofnational and Europeanstandards

IDA International DevelopmentAssociation (UN)

IDB Inter-American DevelopmentBank

IDO integrated developmentoperation

IEA International Energy Agency(OECD)

IEM internal energy marketIGC intergovernmental

conferenceIIT intra-industry tradeILO International Labour

OrganizationIMF International Monetary Fund

(UN)IMP integrated Mediterranean

programmeIMPACT information market policy

actionsINSIS inter-institutional system of

integrated servicesINTERREG Community initiative

concerning border areasIPR intellectual property rightsIRCC International Radio

Consultative CommitteeIRIS network of demonstration

projects on vocationaltraining for women

IRTE integrated road transportenvironment

ISIS integrated standardsinformation system

ISPA instrument for structuralpolicies for pre-accession

ITA information technologyagreement

ITER international thermonuclearexperimental reactor

JESSI Joint European SubmicronSilicon Initiative

JET Joint European TorusJHA judicial and home affairsJOP joint venture programme

PHARE-TACISJOULE joint opportunities for

unconventional or long-termenergy supply

JRC Joint Research CentreKALEIDOSCOPE programme to support

artistic and cultural

List of abbreviations xxiii






activities having a Europeandimension

LAFTA Latin American Free TradeArea

LDC less-developed countryLEDA local employment

development actionprogramme

LIFE Financial Instrument for theEnvironment

M&A mergers and acquisitionsMAGP multi-annual guidance

programmeMARIE mass transit rail initiative for

EuropeMAST marine science and

technologyMB marginal benefitMC marginal costMCA monetary compensatory

amountMEDIA measures to encourage the

development of the audio-visual industry

MEP Member of the EuropeanParliament

MERCUSOR Southern Cone CommonMarket

MERM multilateral exchange ratemodel

MFA Multifibre Arrangement(arrangement regardinginternational trade intextiles)

MFN most-favoured nationMFP multi-annual framework

programmeMFT Multilateral free tradeMISEP mutual information

system on employmentpolicies

MNE multinational enterpriseMONITOR research programme on

strategic analysis, forecastingand assessment in researchand technology

MP marginal productivityMRU Mano River Union

NAFTA North Atlantic Free TradeAgreement; New ZealandAustralia Free Trade Area

NAIRU non-accelerating inflationrate of unemployment

NATO North Atlantic TreatyOrganization

NCB National Central BankNCI new Community

instrumentNEAFC North-East Atlantic Fisheries

CommissionNET Next European TorusNETT network for environmental

technology transferNGO non-governmental

organizationNIC newly industrializing countryNIE newly industrializing

economyNIEO New International Economic

OrderNIESR National Institute of

Economic and Social ResearchNiGEM National Institute Global

Econometric ModelNIS Newly Independent States (of

the former USSR)NMS new member statesNOHA Network on Humanitarian

AssistanceNPCI national programme of

Community interestNPT Treaty on Non-proliferation of

Nuclear WeaponsNTB non-tariff barrierNTM non-tariff measureNUTS Nomenclature of Territorial

Units for StatisticsOAPEC Organization of Arab

Petroleum ExportingCountries

OAU Organization for AfricanUnity

OCTs overseas countries andterritories

ODA overseas development aidOECD Organization for Economic

xxiv List of abbreviations






Cooperation andDevelopment

OEEC Organization for EuropeanEconomic Cooperation

OPEC Organization of PetroleumExporting Countries

OSCE Organization for Security andCooperation in Europe

OSI open systemsinterconnection

PAFTAD Pacific Trade andDevelopment Conference

PBEC Pacific Basin EconomicCouncil

PECC Pacific Economic CooperationConference

PEDIP programme to modernizePortuguese industry

PETRA action programme forthe vocational training ofyoung people and theirpreparation for adult andworking life

PHARE programme of communityaid for Central and EasternEuropean countries

PO producer organizationPOSEIDOM programme of options

specific to the remote andinsular nature of the overseasdepartments

PPP polluter pays principlePTA preferential trade areaPTC Pacific Telecommunications

ConferencePTT Posts, Telegraphs and

TelecommunicationsQMV qualified majority votingRACE research and development in

advanced communicationtechnologies for Europe

RARE réseaux associés pour larecherche européenne

R&TD research and technologicaldevelopment

RCD Regional Cooperation forDevelopment

REGIS Community initiative

concerning the most remoteregions

REIMEP regular Europeaninterlaboratorymeasurements evaluationprogramme

RENAVAL programme to assist theconversion of shipbuildingareas

REPAs regional economicpartnership agreements

RESIDER programme to assist theconversion of steel areas

RIA regional impact assessmentROO rules of originRTA regional trade agreementRTD research and technological

developmentSACU Southern African Customs

UnionSAP social action programmeSAST strategic analysis in the

field of science andtechnology

SAVE Specific Actions for VigorousEnergy Efficiency

SCENT system for a customsenforcement network

SCIENCE plan to stimulate theinternational cooperationand interchange necessary forEuropean researchers

SDR special drawing rightsSEA Single European ActSEDOC inter-state notification of job

vacanciesSEM Single European MarketSEM 2000 sound and efficient

managementSFOR multinational stabilization

forceSLIM simpler legislation for the

internal marketSMEs small- and medium-sized

enterprisesSPD single programme

documentsSPEAR support programme for a

List of abbreviations xxv






European assessment ofresearch

SPES stimulation plan foreconomic science

SPRINT strategic programme forinnovation and technologytransfer

SPS WTO’s agreement on theapplication of sanitary andphytosanitary measures

STABEX system for the stabilizationof ACP and OCT exportearnings

STAR Community programmefor the development ofcertain less-favoured regionsof the Community byimproving access toadvanced telecommuni-cations services

STEP science and technology forenvironmental protection

SVER structural vector autoreg-ression

SYNERGY multinational programmeto promote internationalcooperation in the energysector

SYSMIN special financing facility forACP and OCT mining products

TAC total allowable catchTACIS Technical Aid to the

Commonwealth ofIndependent States

TARIC integrated Community tariffTBT WTO’s agreement on

technical barriers to tradeTEDIS trade electronic data

interchange systemsTELEMAN research and training

programme on remotehandling in nuclearhazardous and disorderedenvironments

TEMPUS trans-European cooperationscheme for higher education

TENs trans-European networksTESS modernization of the

exchange of informationbetween national socialsecurity institutions

TEU Treaty on European UnionTRIPs trade-related aspects of

intellectual property rightsTSEs transmissible spongiform

encephalopathiest/t terms of tradeTUC Trades Union CongressTVA taxe à la valeur ajoutéeUDEAC Union Douanière et

Économique de l’AfriqueCentrale

UEMOA West African Economic andMonetary Union

UES uniform emission standardsUN United NationsUNCLOS United Nations Conference on

the Law of the SeaUNCTAD United Nations Conference on

Trade and DevelopmentUNECA United Nations Economic

Commission for AfricaUNEP United Nations Environment

ProgrammeUNESCO United Nations Educational,

Scientific and CulturalOrganization

UNHCR United Nations HighCommissioner for Refugees

UNICE Union of Industries of theEuropean Community

UNIDO United Nations IndustrialDevelopment Organization

UNRWA United Nations Relief andWorks Agency for PalestineRefugees in the Near East

URAA Uruguay Round Agreementon Agriculture

URBAN Community initiative forurban areas

UTR unilateral tariff reductionVALOREN Community programme for

the development of certainless-favoured regions of theCommunity by exploitingendogenous energy potential

xxvi List of abbreviations






VALUE programme for thedissemination and utilizationof research results

VAT value added taxVER voluntary export restraintVSTF very short-term financing

facilityWEU Western European Union

WFC World Food Council (UN)WFP World Food Programme (UN)WIPO World Intellectual Property

Organization (UN)WTO World Trade OrganizationYES ‘Youth for Europe’

programme (youth exchangescheme)

List of abbreviations xxvii






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