1EffectsofEconomicIntegration

The Institute for Domestic and International Affairs

European Union

Effects of Economic Integration

Rutgers Model United Nations

16-19 November 2006

Director: Marina Shuty

© 2006 Institute for Domestic & International Affairs, Inc. (IDIA)

This document is solely for use in preparation for Rutgers Model

United Nations 2006. Use for other purposes is not permitted without the express written consent of IDIA. For more

information, please write us at [email protected]

Introduction _________________________________________________________________ 1

Background _________________________________________________________________ 2

Current Status ______________________________________________________________ 13

Key Positions _______________________________________________________________ 16 States That Have Adopted Euro ____________________________________________________ 16

Austria________________________________________________________________________________16 Belgium_______________________________________________________________________________16 Finland _______________________________________________________________________________16 France ________________________________________________________________________________17 Greece ________________________________________________________________________________17 Germany ______________________________________________________________________________17 Ireland ________________________________________________________________________________18 Italy __________________________________________________________________________________19 Luxembourg ___________________________________________________________________________19 Portugal_______________________________________________________________________________19 Spain _________________________________________________________________________________19 The Netherlands ________________________________________________________________________20

States with Euro as de facto Currency _______________________________________________ 20 States in the Process of Adopting the Euro ___________________________________________ 20

Central/Eastern European and Baltic States ___________________________________________________20 States That Have Not Adopted the Euro _____________________________________________ 21

Denmark ______________________________________________________________________________21 Sweden _______________________________________________________________________________21 United Kingdom ________________________________________________________________________22

Summary___________________________________________________________________ 23

Discussion Questions _________________________________________________________ 24

Works Cited ________________________________________________________________ 25

Rutgers Model United Nations 2006 1

Introduction In recent times, there has been discussion all over the world regarding economic

integration. Many Asian states have put forth plans to assimilate their economies and

adopt a common currency. Europe and member states of the European Union are no

exception to such plans. For the past two centuries, European states have adopted various

plans to unite, whether it be politically, socially, or economically, in order to become a

stronger and more united competitor in the international arena.

The control of currency and use of monetary systems have not been uncommon in

European history. From the time of the

gold standard through the creation of the

Euro in 1999, states have been working

with each other to stabilize exchange

rates, tariffs and taxes, and create a

stable financial environment in Europe.

This has been done through several

methods such as the establishment of

various monetary unions including the

Latin Monetary Union, as well as treaties

and agreements include the Bretton

Woods Agreement. There have also

been various transitional organizations

that have laid the foundation for the

creation of the European Monetary Union.

With the impact of outside factors such as the First and Second World War, the

economy was not always easy to control. Eventually, the majority of the monetary

unions in existence, as well as the standing agreements based on treaties established were

dissolved, in hopes that more effective systems would develop. These new agreements

included the Maastricht Treaty, signed in 1992, which established a new monetary system

Gold Standard: The gold-standard system was largely abandoned during WWI. Up to that time many countries kept gold reserves large enough to meet all likely demands on their currencies by exports and well as backings on the issuing of bank notes. The high cost of WWI as well as the 1930s Depression forced countries to abandon the gold standard since their reserves weren't enough to keep in step with demands. Imbalance in payments between countries is financed by transfers of gold or foreign exchange. Source: www.embassy.org.nz/encycl/g3encyc.htm Bretton Woods System: The global financial and monetary system established in 1944 at the New Hampshire resort of Bretton Woods. It created the World Bank (qv) and the International Monetary Fund (qv), as well as a fixed link between the United States dollar and gold at US$35 per troy ounce. The system collapsed in 1971, when the link between the dollar and gold was broken, but the institutions survive. Source: www.photius.com/countries/germany/glossary/


in Europe, seeking to integrate monetary systems between states, stabilize them, and

establish a new currency, which would be strong enough to compete in the global market.

Since the mid-1990s, the European Union has come together in order to create

harmonized policy and has developed itself as an important international player in both

economic and political circles. There are twenty-five states which hold membership in

the European Union. The original members include Belgium, France, Germany, Italy,

Luxembourg, and the Netherlands. The United Kingdom, Ireland, and Denmark joined in

1973. In the 1980s, Greece, Portugal and Spain all became members, and in 1995

Austria, Finland, and Sweden joined as well. In 2004, Cyprus, the Czech Republic,

Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia became

members of the European Union. Currently, Bulgaria and Romania are scheduled to join

in 2007, while Croatia and Turkey are considered likely candidates and have pending

applications.1 Other states which are located in Europe but are not included in the

European Union are Albania, Andorra, Belarus, Bosnia-Herzegovina, Iceland,

Lichtenstein, Moldova, Monaco, Montenegro, Norway, Russia, San Marino, Serbia,

Switzerland, Ukraine and Vatican City.2 One of the goals of the European Union has

been to integrate the economies of its member states in order to succeed economically.

The objectives of economic integration in Europe are multi-faceted, including the goals

of maintaining price stability, while maintaining a “high level of employment” and

“sustainable and non-inflationary growth.”3 The European Union has also stated that it

hopes to become the “world’s most competitive economy” by the year 2010.4

Background Until the 19th Century, the drive of economic and political integration in Europe

was the rise of “centralized sovereign states” which were gaining dominance in trade and

other economic markets. It was difficult for states to integrate and coordinate their

1 Kenneth Jost, “Future of the European Union.” CQ Researcher, 15, 2005. Pg. 4 2 “European Member States.” http://europa.eu/abc/governments/index_en.htm Pg. 1 3 “Objective of monetary policy.” www.ecb.int/mopo/intro/objective.en.html Pg. 1 4 Stephen R. Epstein, “History Matters: Lessons from the Marketplace.” Society, 2006. Pg. 6


Scandinavian Monetary Union: The Scandinavian Monetary Union was a monetary union formed by Sweden and Denmark on May 5, 1873 by fixing their currencies against gold at par to each other. Norway, which was in union with Sweden, however with full inner autonomy, entered the union two years later, in 1875 by pegging its currency to gold at the same level as Denmark and Sweden (.403 grams). Source: en.wikipedia.org/wiki/Scandinavian_Monetary_Union

markets and economies because of various legal and fiscal infrastructures, coupled with a

series of historical tensions that drove many European states apart.5 While these

problems existed over a century ago, some plague the EU today.

In European history, various states have participated in monetary unions to ensure

their financial security, including the Latin Monetary Union and the Scandinavian

Monetary Union, both of which disintegrated after the First World War.6 In 1865, the

Latin Monetary Union was

established with membership from

France, Belgium, Switzerland,

Italy, and later Greece and

Romania. The purpose of this

union and its membership was to

create coins based on a single standard. Initially based on the silver standard, it later

became based on gold.7 The Scandinavian Monetary Union was comprised of Denmark

and Sweden. The two states almost joined the Latin Monetary Union, but as a result of

tensions during the Franco-Prussian War, chose to form their own monetary union

instead, later including Norway. This was one of the most stable monetary unions

because of its integration of economic priorities, politics, and other policies. While the

Latin Monetary Union and Scandinavian Monetary Union did not work together, they did

share a common metal standard (gold), and a dedication to fiscal conservatism and small

balanced budgets.8 The Latin Monetary Union was intact until the First World War, and

Scandinavian Monetary Union disintegrated in the early 1920s. The end of both unions

came as a result of the suspension of the gold standard and increasingly unstable

exchange rates.9

5 Ibid 6 Michael D. Bordo and Lars Jonung, “The Future of the EMU: What does the history of Monetary Unions tell us?” National Bureau of Economic Research. http://www.nber.org/papers/w7365, September 1999. Pg. 3 7 Gerard Lyons, “History Shows EMU’s success may depend on political union.” www.euro-know.org/articles/rmu.html Pg. 2 8 Ibid 9 Ibid


In 1867, an International Monetary Conference was held with the goal of creating

a single monetary standard within Europe. Various ideas were proposed, and as a result,

the gold standard was adopted. The British Pound Sterling (GBP) was based on the gold

standard, and after Germany adopted it in the 1870s, the GBP became the universal

currency.10 Although many states continued to utilize paper banknotes, the value of this

currency had to be supported in gold reserves. As a result, the Bank of England became

the primary bank of Europe, managing interest rates for currency and the gold standard,

and it stands to reason that the Bank of England was one of the precursors to the

European Central Bank.

After the First World War, the GBP was no longer useable as a universal currency

as there was not enough gold stored in banks to accommodate the amount of currency

necessary for modern economies. This led to unstable rates of inflation, and as a result,

the gold standard was deemed too difficult to sustain.11 In addition, because the U.K.

became economically weak after the First World War, it became a challenge for the Bank

of England to manage an international financial system when it had little control over its

own economy.12 The GBP continued to decline in power in the 1930s, lead to reductions

in international trade, and an expansion of protectionist policies. Finally, when the

Second World War broke out, a great amount of forgery of bank notes occurred, and the

GBP was weakened further.13

As the GBP weakened, it was reduced to a reserve currency, while the American

Dollar grew in power. In 1925 the coal industry in Europe had financially collapsed as a

result of the war.14 The economic conditions that existed after the end of the Second

World War, led many states throughout the world to start looking for solutions to rebuild

their economies, leading to several conferences around the world, one of which took 10 Kit Dawnay, “A history of sterling.” www.telegraph.co.uk/news/main.jhtml?xml=news/campaigns/eunion/cesterling.xml Pg. 3 11 Brian Taylor, “A History of Universal Currencies.” Global Financial Data. www.globalfinancialdata.com/articles/Eurohist.pdf Pg 10 12 Kit Dawnay, “A history of sterling.” www.telegraph.co.uk/news/main.jhtml?xml=news/campaigns/eunion/cesterling.xml Pg. 3 13 Ibid 4 14 Ibid 4


place in Bretton Woods, New Hampshire in 1944.15 This conference established what

was known as the Bretton Woods Agreement, an economic system geared to develop a

stable economy in Europe. At the Bretton Woods conference, members discussed the

difficulties of exchanging currencies, and established a policy in which each delegation

would maintain its currency exchange rate within one per cent of what it was at the time.

The Bretton Woods Agreement also established the International Bank for

Reconstruction and Development (IBRD), and the International Monetary Fund (IMF).16

The agreement provided the IMF with the power to work to close any gaps in imbalances

of payments. The Bretton Woods Agreement was particularly significant in European

economic history because it was an important predecessor to an economic regime that

sought to stabilize financial flow in order to achieve economic success.17 As a result of

this system, global trade became based in dollars providing the U.S. with significant

control over the economies of states throughout the world. As the American Federal

Reserve established domestic fiscal policy, effects were felt the world over.18 Since the

Bretton Woods agreement based the currency on the Dollar, Germany began to maintain

its currency, the Deutsche Mark (DM), at a fixed rate with the Dollar, establishing the

Mark as a global currency, although second in popularity.19 The DM also had a strong

anti-inflation policy, which led to its popularity and widespread use as a global currency,

until it was transitioned into the Euro.

In 1950, Europe began its first phases of integration. One of the primary goals at

this point was to create stable currency conversion. Another was to integrate the coal and

steel community. In 1950, the Organization for European Economic Co-operation

established the European Payments Union (EPU), the purpose of which was to provide a

foundation for conversion of currency by establishing an “automatic mechanism for the

15 Benjamin J. Cohen, “Bretton Woods System.” www.polisci.ucsb.edu/faculty/cohen/impress/bretton.html Pg. 1 16 Ibid 2-3. 17 Ibid 9. 18 Robert L. Hetzel, “German Monetary History in the Second Half of the Twentieth Century: From the Deutsche Mark to the Euro.” Economic Quarterly, 88, 2002. Pg. 31 19 Ibid 38


settlement of net surpluses and deficits of its members.”20 In addition, after the Second

World War, Germany was left in a weakened economic state, and France hoped to gain

access to the coal-rich Ruhr region in Germany. The Treaty of Paris of 1951 established

the European Coal and Steel Community (ECSC), in 1952, and made up of France, West

Germany, Italy, Belgium, Luxembourg and the Netherlands.21 The ECSC provided a

common market with set prices, and removed any taxes on coal and steel imports and

exports. It also provided a period of economic transition, to allow states to adjust to the

realities of the post-war system.

In 1955, European states continued to look for integration opportunities. A

conference was held in 1955 in Italy which led to the signing of the Treaty of Rome in

1957.22 This treaty was signed by France, Italy, Belgium, Luxembourg, the Netherlands,

and West Germany, and established the European Economic Community (EEC) “to allow

free movement of people, goods, services, and labor within member states.”23 At the

same time, France also pressured European states for a common agricultural policy which

would provide farmers with subsidies.24 In 1959, the EEC grew, and economies were

integrated as the original six members removed all customs duties on each other’s

exports, and established a common tariff on imports from other states.25 Since the U.K.

chose not to participate in the EEC, it instead formed a trading bloc with other non-EEC

states like Denmark, Norway, Sweden, Austria, Switzerland and Portugal, in effect

rivaling the EEC. Together, they established the European Free Trade Association

(EFTA).26 In 1961, the United Kingdom felt that it was not gaining financially from

EFTA membership and applied for EEC membership, being denied entry until 1973

20 “The Euro: Our Currency.” http://ec.europa.eu/economy_finance/euro/origins/origins_1_en.htm Pg. 1 21 Kenneth Jost, “Future of the European Union.” CQ Researcher, 15, 2005. Pg. 13 22 Ibid 23 “Treaty of Rome” http://news.bbc.co.uk/1/hi/in_depth/europe/euro-glossary/1054640.stm, April 2001. Pg. 1 24 Kenneth Jost, “Future of the European Union.” CQ Researcher, 15, 2005. Pg. 14 25 Mary H. Cooper, “Europe 1992.” CQ Researcher, 1, 1991. Pg. 8 26 Kenneth Jost, “Future of the European Union.” CQ Researcher, 15, 2005. Pg. 14


along with Denmark and Sweden.27 Norway was also invited to join, however it rejected

membership through a referendum.

In the late 1950s, the Organization for European Economic Co-operation created

yet another monetary system, the European Monetary Agreement, devised to “foster

general convertibility of European currencies and the achievement of multilateral trade.”

This agreement was discontinued in 1972.28 Prior to the dissolution, in 1970, the Werner

report was issued, proposing a plan with three stages designed to establish an economic

and monetary within a ten-year period. The goals of this union would be to eventually

gain control over member states’ national budgets, establish community institutions, and

form the European Parliament and a Committee of Central Bank Governors. The three

stages that aimed to achieve the goals included the “reduction of the fluctuation margins

between member state’s currencies,” integration of financial markets and banking

systems, and fixing of exchange rates in order to converge economic policies.29 In 1971,

the EEC adopted the Common Agricultural Policy (CAP), which allowed easier trade of

agricultural goods among participating states, and allowed states to protect the

agricultural market from foreign competition.30

The collapse of the Bretton Woods system also occurred in 1971, as a result of the

U.S. announcement that it would no longer back the U.S. Dollar in gold.31 Instead of

maintaining the gold standard, the U.S. would allow the value of its currency to be

determined by an open market, allowing its value to fluctuate.32 Due to the collapse of

the Bretton Woods system, there was a lack of an institution able to moderate volatile

currencies. In 1979, the European Monetary System (EMS) was established, and was

established after an initiative by France and Germany that sought to stabilize exchange

rates, reduce inflation, and continue towards economic integration.33 With the

27 Ibid 28 “The Euro: Our Currency.” http://ec.europa.eu/economy_finance/euro/origins/origins_1_en.htm Pg. 1 29 Ibid. 30 Mary H. Cooper, “Europe 1992.” CQ Researcher, 1, 1991. Pg. 8 31 “The Euro: Our Currency.” http://ec.europa.eu/economy_finance/euro/origins/origins_3_en.htm Pg. 1 32 Peter Gwin, “A Brief History of the Dollar.” Europe, 369, 1997. Pg. 2 33 “The Euro: Our Currency.” http://ec.europa.eu/economy_finance/euro/origins/origins_3_en.htm Pg. 1


establishment of the EMS, the European Currency Unit (ECU) was introduced.34 This

was a predecessor to the Euro, and helped ease differences in value of currency. In

addition, the European Exchange Rate Mechanism (ERM) was introduced through the

European Monetary System to moderate exchange rates between states.35 The purpose of

this system was to stabilize the overall economy of Europe, and as a result, eventually

lead to a single currency.

The EEC expanded when Greece, Spain, and Portugal joined in the 1980s,

becoming known simply as the European Community and leading to a significant boost

in the European economy.36 Trade statistics show that between 1958 and 1972, internal

trade within the EC grew from USD $6.8 billion to USD $60 billion.37 The strength of the

European economy was not permanent however, as in the early 1980s, the economy yet

again suffered from inflation and high unemployment, making it difficult for Europe to

compete with the U.S. and Asian markets.38 As a result, in 1985 the EC began efforts to

remove the physical, technical, and fiscal barriers it determined were making internal

trade difficult. The physical barriers consisted of customs and immigration controls. The

technical barriers included technical guidelines for consumer products, and the fiscal

barriers were attributed to widely varying tax rates among European states.39 Members

wanted to end “fragmentation of the community market”, which they believe obscured

Europe’s ability to be a competitor in the international marketplace, leading them to pass

the Single European Act, which aimed to allow free movement of goods between states.40

The purpose of the Single European Act, enacted in 1987, was to create a truly common

market in Europe, one which would eliminate non-tariff barriers between member states.

It also transfered complete oversight of the economic system to the EC.41

34 Ibid 35 Ibid 36 Kenneth Jost, “Future of the European Union.” CQ Researcher, 15, 2005. Pg. 14 37 Pg. 8 Mary H. Cooper, “Europe 1992.” CQ Researcher, 1, 1991. 38 Ibid 39 Ibid 9 40 “The Euro: Our Currency.” http://ec.europa.eu/economy_finance/euro/origins/origins_3_en.htm Pg. 1 41 Kenneth Jost, “Future of the European Union.” CQ Researcher, 15, 2005. Pg. 14


Following the introduction of this act, the European Monetary Union (EMU) was

introduced and the European System of Central Banks (ESCB) was established. The

ESCB would be responsible for formulating, implementing, and managing a monetary

policy throughout Europe, much like the Federal Reserve in the United States. The three

stages which developed the EMU included increasing cooperation between banks of each

state, establishing the ESCB and implementing its policies, and establishing an exchange

rate in order to use a single European currency. This process culminated in the

foundation for the 1992 Maastricht Treaty.42

At this point, states from all of Europe converged to make progress in unifying

their various systems and expanding their role as an international leader, resulting in the

Maastricht Treaty, also known as the Treaty on European Union (TEU). This treaty was

born as a result of growing European concern about the high inflation rate, exchange rate,

and interest rates, and also resulted in a change of name from the EC to what is now

known as the European Union (EU). The EU was divided into three pillars, with

integration of economic, foreign and security, and justice and home affairs policies. The

Treaty also established the European Monetary Union (EMU).

The Maastricht Treaty was ratified in 1992, and provided a set of five convergence

criteria in order to gain membership into the EMU. The first required the inflation rate of

a state to be within 1.5 per cent of the three best-performing EU states. The second

criterion is an annual budget deficit of no higher than three per cent of the gross domestic

product (GDP). The third criterion was a stable exchange rate for two years. Long term

interest rates within two per cent of the states with the lowest interest rates make up the

fourth criterion, and no more than sixty per cent of GDP in public debt is the fifth.43 As

states first entered the EMU, it was clear that some, such as Germany and Italy, were not

truly eligible to join, however a loophole based upon decreasing debt loads granted them

the opportunity to join.44

42 “The Euro: Our Currency.” http://ec.europa.eu/economy_finance/euro/origins/origins_4_en.htm Pg. 1 43 Mary Cooper, “European Monetary Union.” CQ Researcher, 8, 1998. Pg. 6 44 Ibid 8


When economic integration was discussed, many arguments were made both in

favor and in opposition this change in Europe, although most agreed that one of the keys

to economic integration would be a single currency. Those in favor argued that adoption

of such a currency and participation in a monetary union would allow prices to stabilize.

In addition, it was believed that integration would also prevent trading against “swings in

currency values,” meaning that the cost of trade would be reduced both internally and

externally. Other benefits include fair prices for consumers regardless of where in

Europe they reside, and the promotion of competition within European businesses. In

addition, borrowing costs for businesses and consumers would become lower, and there

would no longer be a need to trade currency at entry of each state, minimizing exchange

rate risk.45

There were also several arguments which opposed economic integration through

the form of a union and a single currency. Spain and Italy feared that they would be

required to implement significant budget cuts or increases in takes, especially if inflation

was not kept in line. Unlike in the past where they could make sovereign decisions

regarding their own economies, participation in the EU and EMU would require them to

take specific actions. In addition, because many European states have extensive welfare

programs, states feared being forced to cut public spending, thereby reducing welfare,

pension, and other social programs. Another negative aspect of integration was the loss

of sovereignty. If a single currency was adopted, states would no longer have the power

to mint money, and therefore would lose control over its value. In the case that a specific

state would face an economic recession, there would be nothing it could do with interest

rates to moderate the economy.46

A three-step system was also introduced, which would unify the European states

economically and politically. The first stage of enforcing this treaty began in 1990,

which began to “complete the liberalization of the movement of capital within the EU.”47

45 Mary Cooper, “European Monetary Union.” CQ Researcher, 8, 1998. Pg. 4 46 Ibid 47 Olufemi A. Babarinde, “Europe Holds Its Breath Over the Euro.” USA Today, 2564, 1999. Pg. 1


Under pressure from future Prime Minister John Major, the United Kingdom joined the

European Exchange Rate Mechanism, bringing its currency officially in line with the

Deutsche Mark. The U.K., suffering from high inflation at the time, would be required to

intervene if its currency fell more than 6 per cent relative to the DM. In an arbitrage

process that involved currencies from the U.K., Italy, and Germany, currency speculators

were able to borrow GBP and Italian Lira, and sell them in exchange for DM,

anticipating that the DM would devalue over a short period. Seeking to reverse this

trend, the British government raised its interested rate in hopes that these speculators

would begin purchasing GBP, however that would not come to be. Speculators

continued to sell the GBP, further depressing its value, thereby forcing the British

government to intervene in efforts of propping it up. In what became known as “Black

Wednesday,” there was, in effect, a tremendous transfer of wealth between the British

government and currency speculators able to beat the market. In the short term, the

British economy sunk into a quick and deep recession, only able to recover over time.48

Given that the U.K. economy has grown significantly faster than the Eurozone, may

economists have begun calling “Black Wednesday” a more beneficial “White

Wednesday.”

The second stage of integration established the European Monetary Institute (EMI)

in 1994, which was later, replaced European Central Bank (ECB) in 1998. The third

stage took place in 1999, and resulted in the introduction of the Euro into consumer

markets in 2001. 49

At the European Summit in 1997, the European Council of Heads of Government

and State established the Stability and Growth Pact (SGP). First and foremost, the SGP

makes a commitment for all those involved including member states and the Council to

fully implement oversight of the budget process in a timely matter. It establishes a solid

framework that prohibits states from budget deficits in excess of three per cent.50 The

48 “The Euro: Our Currency.” http://ec.europa.eu/economy_finance/euro/origins/origins_4_en.htm Pg. 1 49 Olufemi A. Babarinde, “Europe Holds Its Breath Over the Euro.” USA Today, 2564, 1999. Pg. 2 50 “The Stability and Growth Pact.” http://ec.europa.eu/economy_finance/about/activities/sgp/sgp_en.htm Pg. 2


purpose of the SGP was to avert decadent spending by governments, which in turn,

weakens the power and usefulness of the Euro.

The European Central Bank System (ECB) was created in 1998, and is based out

of Frankfurt, Germany, and it became a substitute for the European Monetary System,

which was discontinued 1998.51 Its primary purpose is to manage the Euro as a whole, as

well as all things related to the supply of money, interest rates, and taxation within the

Eurozone. The ECB also established the European System of Central Banks (ESCB),

which is primarily responsible for “managing the official foreign reserves.” In 1998, the

ESCB announced that its chief goal was to stabilize prices throughout Europe.52 In

addition to these two fiscal systems, the EU Council of Ministers for Finance was also

established in order to monitor the overall fiscal policies of member states. The primary

goal of the EU Councils of Ministers for Finance is to ensure that economies grow at a

stable rate in each state, in order to maintain growth throughout Europe.53 In order to

guarantee the cooperation and participation of all members and to prepare for the launch

of the Euro the following year, the ECB and participating members of the European

Union adopted Council Regulation Legislation, which would “preserve terms and

obligations of existing contracts.”54

In 1999, the Euro was finally implemented as a single European currency.

Although banknotes were not officially issued until 2002, states were required to begin

converting and utilizing the Euro in 1999 in banking and government transactions. Other

forms of the Euro initially included items such as traveler’s checks, banking notes, and

other electronic and technical methods of money transfer. While at this point national

currencies continued to exist, their exchange rates were locked relative to the value of the

Euro.

51 Scheller, Hanspeter K. “The European Central Bank: History, Role and Functions.” European Central Bank, 2004. Pg. 41 52 Olufemi A. Babarinde, “Europe Holds Its Breath Over the Euro.” USA Today, 2564, 1999. Pg. 2 53 Ibid 54 Ibid.


Current Status The most visible aspect of economic integration in Europe has been the adoption

of a single currency, the Euro. States that have done so are part of the Eurozone. Other

forms of economic integration that are currently being discussed include a European

Constitution. In terms of economic policy, it has been stated that effects of a constitution

could include a variety of negative factors. States such as France, the U.K., and many

Central European ctates have stated their opposition to the constitution because a

constitution covering a variety of economic aspects ranging from healthcare to

transportation echoes what some believe to be socialist principles. In order for the

constitution to be enacted, it must be signed and ratified by every member state, and

states are continually holding referendums, forums, and votes on this, with no final

decision to date.

In 2006, economic growth of states that use the Euro has reached 0.6 per cent

overall, significantly above the stagnating economies in prior years. Newer states using

the Euro have benefited the most in 2006, with a growth of 2.7 per cent, and an increase

in investments, imports, and domestic consumption.55 As a whole, states that have

integrated economically have experienced growth in 2006, after slow progress since the

adoption of the Euro. The currency has grown by 3.6 per cent, faster than the U.S.

Dollar.56 Adoption of the Euro has contributed to economic stability in Europe, with

unemployment rates and budget deficits slowly being reduced.57 The integration of

financial markets in Europe has had success in some areas, particularly in wholesale

trade, such as commercial and industrial retail. However the impact on retail sale, which

includes bank accounts, payments, mortgages, insurance policies, and personal

investments, has not been as successful.58

55 Aoife White, “Euro economy growth doubles to .06 per cent , fueling possible June rate rise.” Associated Press Worldstream, 2006. Pg. 1 56 John Templeman, “The Euro Zone: Sunshine or Twilight?” BusinessWeek Online, 2006. Pg. 1 57 Gunnar Lund, “Article on the referendum for Public Service Review: Nordic States.” Government Offices of Sweden. www.sweden.gov.se/sb/d/1370/a/4553 Pg. 3 58 “A Blurred Euro-vision.” Economist, 375, 2005. Pg. 1


The states that have adopted the Euro have not experienced the economic growth

expected from the lowering of trade barriers. In 2005, the Eurozone trade balance was a

surplus of USD $104.5 billion, but has fallen to a surplus of just USD $58.1 billion.

Exports have grown, however imports have increased faster as a result of high oil

prices.59 Foreign investment in the Eurozone has dropped immensely, and these states

are spending more on foreign trade than in the past.60 The Eurozone is also currently

running a public-sector deficit of 0.4 per cent of GDP.61

The current fiscal policy of the EMU is primarily focused on closing budget

deficits among states, and then allowing them to stabilize as the market would naturally

allow them.62 States have been impacted by economic integration in several ways, with

bigger players such as Germany bringing about economic malaise, while other smaller

states such as Luxembourg have been flourishing under the economy.63 This

phenomenon represents a confluence of factors, including population growth, and

specific national economic policies. Other factors include what aspects drive the

economy in terms of the private and public sector. Since the launch of the Euro, France

and Spain have both experienced growth, which has been driven by private

consumption.64 Germany and Italy have suffered financially. Exports from Germany

have remained strong, however domestic consumption has slowed. In addition,

Germany, as well as Finland and Austria all maintained a below-average inflation rate at

the start of the EMU, and have remained this way since.

Meanwhile, the three states that have not fully economically integrated, the U.K.,

Sweden, and Denmark have gained almost as much in trade as those that did integrate.65

In fact, the economies of these states, particularly Sweden and Denmark have been

59 Natascha Gewaltig, “The Eurozone’s homegrown deficit Woes.” BusinessWeek Online, 2006. Pg. 1 60 Ibid 61 Ibid 62 Marco Buti and Paul Van den Noord, “Fiscal policy in the EU: Rules, discretion, and political initiatives.” European Economy: European Commission. July 2004. Pg. 3 63 “Economic Forecasts, Spring 2006.” European Commission, 2006 Pg. 78-79 64 Ibid 65 “The Euro and Trade” Economist, 379, 2006. Pg. 1


flourishing. Since their economies are growing, in addition to their initial reservations of

adopting the Euro, they are not expected to join the Euro.

In May 2004, several new states became members of the European Union,

including Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta,

Poland, Slovakia, and Slovenia. While these states have joined the European Union, in

order to join the European Monetary Union and to integrate financially, these new states

would first need to become members for the Exchange Rate Mechanism for a period of

two years in order to stabilize their economies with that of the Eurozone. In 2005, the

ECB raised interest rates for the first time since the Euro had been introduced. Members

of the EU became concerned at this point, due to fears that this would have on already

struggling economies.66

The economies of Central and Eastern Europe, including the Baltic States have

performed very well, and are predicted to continue to do so. Generally speaking, these

states represent newly capitalist systems, participating in the global marketplace for the

first time in more than sixty years. Domestic demand has grown and exports have gained

momentum as a result of an integrated economy in the neighboring Eurozone. Inflation

is low, however, because the budget deficit of many states in the area is still high.67 The

Baltic states, Estonia, Latvia, and Lithuania, have all enjoyed a boost in their economies

in recent times. Estonia has been most successful of the three, as a result of an

“investment-friendly market system,” and low taxes. However both Latvia and Lithuania

have also experienced growth in GDP, both as a result of flourishing maritime

industries.68

Although the economies of Central and Eastern European states have been

flourishing, their economic integration into the Eurozone may lead to unwanted

consequences. More specifically, the European Central Bank’s current interest rate is at

three per cent. Meanwhile, states such as Latvia and Slovakia have a 4.5 per cent interest 66 Aoife White, “Euro economy growth doubles to .06 per cent , fueling possible June rate rise.” Associated Press Worldstream, 2006. Pg. 2 67 “Eastern European Outlook.” Hugin AS, Comtex News Network, 2006. Pg. 1 68 Nadine Bos, “Special Report-Baltic States.” Lloyd’s List, 2006. Pg. 10


rate. Admittance of these states into the EMU could significantly raise the inflation of

other member states, and consequently cause changes in the Eurozone interest and

inflation rates.69

Key Positions States That Have Adopted Euro Austria

Austria’s GDP has accelerated slowly, by 0.5 percent.70 Although the Austrian

economy has been growing, it has been doing so at a slower place. The state has passed

tax cuts and has seen a growth of personal consumption, with economic activity expected

to accelerate in 2006 and slow down in 2007. Inflation is predicted to stay below two per

cent, and the unemployment rate has increased since the adoption of the Euro.71

Belgium Although Belgium experienced a weak economy in early 2005, it has since

stabilized and become stronger. The GDP has grown 1.2 per cent , leading to an increase

in investment. As a result, both business and consumer confidence has improved.

Unemployment has slowly decreased since the implementation of the Euro, and is

predicted to decrease by one per cent for 2006 and 2007.72

Finland The Finnish economy slowed in 2005; however this was as a result of a production

stoppage in the paper industry, and not the impact of economic integration. GDP growth

in the state is expected to rebound to about three per cent in 2006 and 2007. The

unemployment rate in the state has also decreased.73

69 Robin Shepherd, “Analysis: Eastern Europe ready for euro.” UPI, 2006. Pg. 1. 70 “Economic Performance: Switzerland versus Austria.” Austria Today, 2006. Pg. 1. 71 Ibid., Pg. 86-87. 72 Ibid., Pg. 48-49. 73 Ibid., Pg. 97.


France France has become the second-largest economy in all of Europe,74 however, it has

become increasingly unable to finance the large public sector in the state.75 The GDP of

France has been growing at a much slower rate, with a 1.4 per cent increase in 2005, in

comparison to the 2.4 per cent increase in 2004. The GDP is primarily driven by

domestic demand and private consumption. In addition, despite the spike in oil prices in

2005, inflation has remained stable in France. On the contrary, the unemployment rate

has increased in France since the adoption of the Euro.76

Greece Although Greece’s economy was booming since its adoption of the Euro, it has

slowed down in more recent times. Overall, the Greek economy has not been successful

since economic integration. Some believe that this may be an indicator not to allow new

states to integrate so quickly. The GDP growth for the year was 3.6%, and the public

consumption increased my more than three per cent. The GDP should continue to grow

at the same rate for the 2006 and 2007 fiscal years. Wages in Greece have been

moderate, and unemployment has decreased since the Euro became the main currency.77

Germany Although throughout the 1990s Germany was powerful in terms of economic

growth, since the adoption of the Euro and implementation of the new economic system,

Germany has become known as “the sick man of Europe.” When it agreed to enforce a

single European currency in 1992, Germany felt that this was an opportunity for it to

“lock in its competitive advantages.”78 It was Germany that insisted that all states stay

within the three per cent budget deficit range required by the SGP. Notably, Germany is

currently outside of this range, and therefore in violation of Eurozone policies. One of

the causes that leads to Germany’s economic lag is that when Germany adopted the Euro, 74 John Templeman, “The Euro Zone: Sunshine or Twilight?” BusinessWeek Online, 2006. 75 Edward Lucas, “Slow Death of Old Europe.” Daily Mail, 2006. Pg. 14 76 “Economic Forecasts, Spring 2006.” European Commission, 2006. Pg. 64-66 77 Ibid., Pg. 50 78 “Europe’s heavyweight weakening”. Economist, 3827, 2003. Pg. 1


it did so at an “uncompetitive rate,” making German products more expensive to

purchase.79 In addition, the German interest is now being “threaten[ed] by deflation,”

according to the International Monetary Fund.80 As a result of all these financial

setbacks, the German government is forced to cut back on spending, instead of increasing

it, during an economic recession.81 More recently, Germany has experienced a

significant boost in tax revenue.82 It has also experienced a boost in the automotive and

construction industries, as well as retail sales. High oil prices have remained a problem,

and may continue to hinder economic growth.83 Since its adoption of the Euro, Germany

has moderated wages. As a result, the corporate sector and German businesses have

boosted their profits, and have gained a competitive edge against others in the

Eurozone.84

Ireland The GDP of Ireland has consistently grown, showing the positive impact of the

Euro on the state. However, Ireland experienced something that was known as the

‘Celtic Tiger.’ When this occurred, the economy boomed, and many investors jumped at

the opportunity to invest in the Irish economy. As a result the economy became

unstable.85 Moreover, Ireland was once the poorest member of the European Union,

qualifying it for significant investment in its infrastructure from the EU. The Irish

economy has consistently been the strongest in Europe, and is expected to continue its

growth trends. As Ireland has benefited from European investment, it remains to be seen

79 “Europe’s heavyweight weakening”. Economist, 3827, 2003. Pg. 1 80 Ibid 81 Ibid 82 John Templeman, “The Euro Zone: Sunshine or Twilight?” BusinessWeek Online, 2006. Pg. 1 83 Ross Westgate, “German Economic Analysis.” Analyst Wire, 2006. Pg. 1 84 Paul De Grauwe, “Germany’s pay policy points to a eurozone design flaw.” Financial Times London, 2006. Pg. 17 85 Michael Henningan, “Irish Economy 2006 and Future of the Celtic Tiger: Putting a brass knocker on a barn door!” FinFacts Ireland, 2006. Pg. 1


what will happen when development support moves to new EU members in Eastern

Europe.86

Italy Italy is the Eurozone’s third largest economy, and many are growing concerned

that that floundering Italian economy could hinder overall European growth. Since the

inception of the Euro, Italy’s economy has grown at the slowest rates. In addition, its

budget deficit and national debt increased significantly. These financial conditions drove

down Italy’s credit rating, resulting in belabored industrial investment.87

Luxembourg The economy of Luxembourg performed well in 2005, however GDP growth of

4.5 per cent for the years 2004 and 2005 are below the state’s average for the past ten

years. In addition, although unemployment in Luxembourg is low according to EU

standards, it is higher than Luxemburg usually averages, leading to low consumer

confidence. State deficit is predicted to improve by 1.75 per cent of the GDP by the end

of 2006.88

Portugal In 2005, the Portuguese economy grew a mere 0.3 per cent, demonstrating its frail

economic state. The external deficit also grew, along with the unemployment rate.

Nevertheless, inflation is at its lowest rate since 1997, prior to the adoption of the Euro.89

Spain Spain’s domestic economy has remained rather stable, however its external deficit

has worsened in recent years. GDP grew 3.5 per cent in 2005, higher than previous

years. Moreover, because a uniform monetary system eased financial matters, private

86 “Ireland’s Economy – Outlook bright for 2006” http://www.accountancyireland.ie/dsp_articles.cfm/goto/1195/page/Irelands_Economy__-_Outlook_Bright_for_2006.htm Pg. 1 87 “The decline and fall of Europe – and that includes Great Britain” Sunday Business Group, 2006. Pg. 1 88 “Economic Forecasts, Spring 2006.” European Commission, 2006. Pg. 78-79 89 Ibid 91-92 “


consumption and job creation have both remained high. Wages are predicted to continue

growing, however the GDP is expected to decrease slightly at the end of 2006.90

The Netherlands The economy of the Netherlands was slowing when the Euro was initially

introduced, but has begun to recover. Nevertheless, in 2005 the GDP growth was just 1.1

per cent suggesting that it is not free from economic malaise. In 2003, the budget deficit

in the Netherlands peaked, but has continued to decline since this time.91

States with Euro as de facto Currency Several states do not participate in the European Exchange Rate Mechanism, but

still utilize the Euro as their primary currency, including Andorra, Kosovo, and

Montenegro.92 In addition, the Vatican City, Monaco, and San Marino have been granted

permission to issue the Euro in addition to their own national currencies.93

States in the Process of Adopting the Euro Central/Eastern European and Baltic States

The three newest members to join the European Exchange Rate Mechanism, the

interim phase which allows states to adjust to economic requirements before adopting the

Euro, are Latvia, Malta, and Cyprus.94 These three states joined the ERM at the end of

April 2006, and are expected to fully adopt the Euro by 2008. Other Baltic states such as

Estonia, Lithuania, and Slovenia are expected to become a part of the Eurozone as early

as 2007. While the ECB has granted Slovenia admission into the Eurozone, it has denied

entry to Lithuania due to higher than acceptable inflation.95 Lithuanian officials have

argued that the economy is one of the best performing in the EU, with the state debt very

low at eighteen per cent of GDP, and a low public deficit of 0.5 per cent of the GDP.96

90 Ibid 61 91 Ibid 84-85 92 “The Euro: Our Currency” http://ec.europa.eu/economy_finance/euro/world/world_4_en.htm Pg. 1 93 Ibid., Pg. 1 94 “Big Deficits Could force new E.U. States to Delay Euro.” Liquid Africa, 2005. Pg. 2 95 Lucia Kubosova, “Slovenia to join eurozone in 2007.” EUOberver.com, 2006. Pg. 1 96 Arturas Racas, “Lithuania braces for eurozone ‘no’” Agence France Presse – English, 2006. Pg. 1


States That Have Not Adopted the Euro Denmark

Denmark held a referendum regarding the adoption of the Euro in 2000, but

declined entry into the Eurozone by an overwhelming margin.97 The turnout for vote in

the referendum was over ninety per cent, with fifty-three per cent opposing adoption of

the Euro. Nevertheless, the Danish currency, the Krone, is currently pegged to the Euro

through the Exchange Rate Mechanism, which essentially means that they have adopted

the Euro system.98 The Danish economy is continuing to grow, with inflation declining

by approximately two per cent.99

Sweden In 2003 Sweden held a referendum on whether or not to adopt the Euro or to

remain using its currency, the Krona. Approximately eighty-three per cent of eligible

voters participated, with fifty six per cent voting against the adoption of the Euro, forty-

two per cent in favor, and two per cent voting otherwise.100 The central reasoning for

voting down the Euro was fear of experiencing the economic hardships of Germany since

integration. In addition, voters felt threatened that they would be forced to reduce taxes

and welfare services, thus minimizing the effects of the public sector to which they have

become accustomed.101 Some Swedish officials remain concerned over Sweden’s

rejection of economic integration because of the political consequences it may face in the

future. More specifically, some fear this will provide less power for Sweden in the EU,

as well as no vote on the proceedings of the ECB.102 The Swedish economy has grown

97 Lars Jonung, “Benefits and costs of monetary unification as perceived by voters in the Swedish euro referendum 2003.”European Economy: European Commission, June 2004. Pg. 17 98 “Where the Euro is Used.” www.wilkiecollins.demon.co.uk/euro/eurocounties.htm Pg. 1 99 “Danish economy continues to be in top form.” Copenhagen Capacity . www.copcap.com/composite-9616.htm?templateid=78 Pg. 1 100 Lars Jonung, “Benefits and costs of monetary unification as perceived by voters in the Swedish euro referendum 2003.”European Economy: European Commission, June 2004. Pg. 4 101 Ibid 8 102 Gunnar Lund, “Article on the referendum for Public Service Review: Nordic States.” Government Offices of Sweden. www.sweden.gov.se/sb/d/1370/a/4553 Pg. 1


by 5.5 percent in 2005. It is believed that this growth is a result of increased household

consumption, and an increase in imports and exports.103

United Kingdom The U.K. has thus far rejected the adoption of the Euro, and in 2003, the U.K.’s

treasury stated the British economy was not prepared to converge.104 The Bank of

England has held interest rates at a steady 4.5 percent, but inflation has increased

throughout 2006.105 The U.K. GDP has slowed over all, but the economy is still expected

to expand into 2007. The state has high profitability and low cost of capital, but

nevertheless, business investments are expected to decrease at the close of 2006. The

budget deficit is also expected to improve, while the unemployment rate has decreased

since 2003.106

103 “Swedish GDP sees biggest hike in 6 years.” BusinessWeek Online, 2006. Pg. 1 104 “The Euro and Trade” Economist, 379, 2006. Pg. 1 105 Ross Westgate, “European Economic Analysis.” Analyst Wire, 2006. Pg. 1 106 “Economic Forecasts, Spring 2006.” European Commission, 2006. Pg. 101-103


Summary Economic integration has taken on many forms in the history of Europe. Ranging

from a steel and coal community that was developed in the 1950s, the monetary system in

Europe as it stands today was built on several foundations throughout many decades.

Member states of the European Union felt it was necessary to integrate on a social,

political, and economic level. The goal of this integration is to be able to dominate as a

world power not only in the political arena, but also in the economic sense.

Many steps have been taken in order to integrate and to produce the single

currency, including the stabilization of inflation, exchange rates, and convergence of

various national currencies. While the European Monetary Union has sought to maintain

stable growth rates for the economy of each state, the rates and impact from state to state

have varied, leading to a question of the success and impact of the Euro. States with

powerful economies and currencies in the past such as Germany and Italy have wavered

from their strong positions, as they have largely suffered since the implementation of the

Euro in 1999. Nevertheless, smaller states which were unable to succeed in the past have

been able to use an integrated economy to their advantage, and some have caught up to

the bigger players in Europe. Businesses have also been impacted in a more positive

light because of easier transactions from company to company as a result of one currency

and a uniform system. Even so, the power of the Euro is yet to be seen in comparison to

the Dollar and other dominant currencies. Problems within the European monetary

system still remain and need to be resolved in order to persuade new states to join the

system.


Discussion Questions

• Has your state participated in economic integration? Why or why not? How?

• How has economic integration impacted the economy of your state? Has it become or stronger or weaker?

• Is your state currently a part of the Exchange Rate Mechanism? What impact has this had? Has your state adopted the Euro? Why or why not?

• If your state has adopted the Euro, what kind of an impact has it had on the state’s economy? Explain. If your state has not adopted the Euro, has your state benefited from the rejection of the currency or not? How?

• What flaws do you see in the Euro and how can they be fixed?

• How do you propose the EMU should improve the economies of states struggling to grow?

• What do you propose should be done in order to persuade other states to integrate economically?

• How do you believe the EMU should alter the exchange and interest rates of the monies being used from state to state?

• What systems utilized in the past do you deem have been effective, and which ineffective? Why?

• How do you believe the Euro compares to the Dollar? What can be done to strengthen it?

• What do you think will be the impact of bringing new, poorer members into the EU? Will the European economy be able to sustain these newly liberalized economies?


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