European Integration

Dr. Tatiana Romanova School of International

RelationsSt. Petersburg State

University Tallinn, March 2010

Day 4

Economic and Monetary Integration

Energy Policy of the EU

Justice and Home Affairs

Stages of Economic Integration

Free Trade Area

Custom Union

InternalMarket

Economic and Monetary

Union

Even those of us who laboured to complement the Single Market with a monetary union and to embody this transformation in a treaty held only that such a transformation was desirable and feasible, not that it was probable or much less inevitable.

How did the EMU Come About

1988 – Hanover – Delors Committee to study the prospects of EMU

Bicycle theory 1989 – plan:

clarity: To compete single market and economic union first (clear

priority over monetary union) Creation of the monetary union Common tax policy in the future Budgetary discipline3 stages

1989 – European council in Madrid: endorsed Delors report + start of the first stage as of 1.07.1990

Strasbourg December 1989 – IGC on II and III EMU stages

Maastricht and Convergence

Convergence Criteria (=conditions to get into the euro-zone) – German priority:

High level of price stability (inflation < 1,5% average inflation of the three most stable EMU economies)

Financial stability of the government: Budget deficit < 3% GNP Public debt < 60% GNP

Normal participation in the ERM for at least 2 years(no devaluation, fluctuation of 2,25%)

Approximation of long-term interest rates (< 2% average interest rate of 3 euro MS with the lowest inflation)

Independence of ECB Dates of stages – French priority Federal ECB system, charged with price stability +

independent CB minimised the loss of sovereignty

Rather politically

than economica

lly reasoned

Stages

1. Preparatory 01.07.1990-31.12.1993consolidation and eradication of all the barriers to the movement

of capital

2. Organisational - until 31.12.1998 Currency crisis but EMS survived because of the political

determination of the EU governments Creation of the EMI – Frankfurt Setting guidelines for economic policy Establishing single monetary policy IGC - Amsterdam

Stability and Growth Pact New Mechanism of ER Banknotes and coins as of 1 January 2002

25 03 1998 –analysis of the convergence criteria – 11 MS

Stages

2. Organisational - until 31.12.1998 (contd) 2.05.1998 – European Council

Irreversible fixation of the exchange rates exposed to speculative attacks + interest rates parity

Approval of the head of the ECB Fixation of euro MS:

timing is crucial (in 1992 it would have been only France and Luxembourg)

11+ Martinique, Guadalupe, Reunion, St. Pierre and Michelon

+ Monaco, Andorra, San-Marion and Vatican 2000 - Greece

Stages

1992 –1993 – serious financial crisis:Devaluation of Sp, Port, Irish currencies; UK and It left

the ERM3. Final:А: establishment of the Monetary Union

with critical mass of operations in euroNational currencies

В: as of 1 January 2002 Banknotes and coins are released to free circulation National currencies are withdrawn from the circulation All banks and enterprises use euro Euro is the only means of payment

Institutional Aspects Features of the Monetary Union

Explicit harmonisation of monetary policies Common pool of foreign exchange reserves A single central bank and monetary authority

12 MS Referendum in Sweden 5 tests of the UK (economic convergence, ability to withstand

the shock, influence on the city, influence on the enlargement) Denmark

+ Slovenia, Malta, Cyprus, Slovakia Council of Ministers:

Ecofin – general guidelines, international negotiations, exchange rate

Euro Council 16 – consultations + external representation together with the ECB

Mr. Euro

Stages of Economic Integration

Free Trade Area

Custom Union

Common Market

Economic and Monetary

UnionECONOMIC

COMPONENT

MONETARYCOMPONENT?

Economic and monetary union

Economic component Monetary component

InternalMarket

Coordination of economic policies

Economicpolicy

guidelines

Ban on certain operation

Budget deficitcontrol

Singlecurrency

Common monetary

policy

ESCB

ERM

SOFT RIGID

Necessity of economic coordination

National actions or policies may spill over directly into neighbouring countries (i.e. state aid)

Coordination should prevent or reduce the likelihood of free-rider behaviour by member states.

Policy coordination may be useful in deflecting criticism of unpopular but necessary policy action at the national level

Broad Economic Policy Guidelines – soft economic coordination

Framework for the definition of the overall policy objectives

Art 99 Are the framework that brings together:

The orientation of general fiscal policy (Excessive Deficit Procedure, SGP, multilateral surveillance)

The European Employment Strategy (the Luxembourg process)

The actions on structural reform (the Cardiff process) Monitors the reforms in the MSs to improve the functioning of

product and capital market Peer review exercise in itself

BEPG are fixed annually, builds on an annual cycle of policy discussion

Controlled through annual report on the implementation of the BEGP

Broad Economic Policy Guidelines – soft economic coordination

Involve: Monitoring policy process and outcome Providing general policy orientations,

benchmarking Publication of best practices Recommendations of the Council to a deviating

MS (can be made public on certain occasions) Soft because they

Do not have any direct legal impact on MS Do not involve any sanctions

Fiscal Policy Associated with sovereignty EU:

Did not initially addressed fiscal policy in the EU Treaty Painful because of the difference between MSs Later harmonised indirect taxation (VAT and specific duties) and

energy taxes In theory no fiscal harmonisation is needed for a

monetary union BUT Achieving the appropriate degree of and balance among the goals

for price stability, employment and growth is made more likely if there is a policy mix of fiscal and monetary measures

Cross-subsidisation Fiscal policy should be credible EMU with no fiscal unification creates the situation of fiscal

irresponsibility: Fiscal expansion inflationary pressure but low interest rates

profiting from free riding

Stability and Growth Pact

Excessive Deficit Procedure and Stability and Growth Pact have 2 features: A general orientation to ensure a policy that

is sustainable over the longer term Public debt

A constraint on short-term actions – the excessive deficits – to ensure that the process is not derailed on the way

each MS needs to be far enough from the 3% deficit ration limit that the normal sorts of adverse economic shocks will not drive them over that limit

Otherwise – contradictory fiscal steps

First Crisis of SGP 2003 - France – received an early warning 2003 - Port, It, Germany – went through initial early warnings but

finance minister rejected the Commission’s recommendations to sanction them

Court 2004: condemned finance ministers for not fulfilling obligations but used technical reading to uphold the rights of the national governments to ignore these recommendations

Prodi: SGP is stupid March 2005 – modification of SGP rules:

“costs of the reunification of Europe” special consideration will also be given to "policies to foster R&D and

innovation", "financial contributions to fostering international solidarity" and the rather vague "achieving European policy goals".

Countries are now given 2 years to correct the situation, it can be extended in case of unpredictable circumstances + 1 year to initiate = 5 year total

3% can be broken (temporarily if the deficit is close to 3%) Result: loosening the policy, departure from rules-based system

Second SGP Crisis 2008-2009 – financial and economic crisis

countries exceed the limits 20 out of 27 !!

April 2009: FR, ES, GR, IE, UK June 2009 – HU, LV, LI, MA, PL, RO October 2009 – DE, IT, AU, BE, CZ, NL, PT, SL, SV

Commission: measures, which take into account situation in the

country longer adjustment periods Temporary postponement to allow for some state

intervention to prevent the crisis, ended in 2009 Greece: specific situation (but also ES, IT, IE, PT)

PIIGS group of MSs Currently: ideas of a European Monetary Fund

Lisbon Agenda Lisbon 2000 goal:

to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion by 2010 to achieve a growth rate of 3%

Current reform: plans to 2020 Green growth Science and research Information technologies Fight against exclusion

Lisbon Process – OMC Peer group review under EU institutions

surveillance, including Fixing the guidelines with timetable Establishing quantitative and qualitative

indicators Translating these European guidelines into

national and regional policies Periodic monitoring, evaluation and peer review

Current reform:

No binding targets Same old instruments without any possibility to

sanctions MSs Loose implementation

EMU

Monetary union

Maastricht criteria

B F PE L OP A LG N I K Ca I Ys N a G

F PS L OG A LP N I K Ca I Ys N a G

EMPLOYMENT POLICYCOORDINATION

as aFLANKING MEASURE

Summary of the economic integration

No internal barriers for each other’s goods

Common external tariff and policy

No internal barriers and factor mobility

Common currency

Common economic policy

FTA +CU + +CM + + +MU + + + +EU + + + + +

Stages of Economic Integration

Free Trade Area

Custom Union

Common Market

Economic and Monetary

Union

A sum of A sum of economic economic

andandpolitical factorspolitical factors

as drivers of as drivers of integrationintegration

Energy Production EU-25, EU-30 (mln toe)

2005 2020

EU 25 EU 30 EU 25 EU 30

Hard fuel 203.1 226.8 124.1 147

Oil 164.1 338.3 102 233.2

Natural gas

196.7 254 147.6 255.2

Nuclear 237.8 250.9 213.7 226.4

Renewables

97.2 130.2 151.5 191.4

TOTAL 898.9 1200.1 738.9 1053.2

Energy Consumption EU-25, EU-30 (mln toe)

2005 2020

EU 25 EU 30 EU 25 EU 30

Hard fuel 302,7 341,8 252,3 294,6

Oil 634,3 701,0 677,7 769,9

Natural gas

376,2 411,5 598,0 673,7

Nuclear 237,8 250,9 213,7 226,4

Renewables

97 130 151,5 191,4

TOTAL 1650,2 1834,9 1895,0 2155,5Net importer of oil, natural gas and coal

Major Oil Suppliers to the EU: 2007

Net import: 577,7 Mtoe Russia – 32,6% Norway – 14,8% Libya – 9,8 % Saudi Arabia – 6,9% Others:

Iran Kazakhstan Iraq Nigeria

Much more diversified compared to natural gas supply ++ flexibility of supply

Oil import intensity

Channels of Gas Transportation25,3% (2007) from Norway

38,7% (2007) from Russia

16% (2007) from Algeria

Today’s EU Energy Policy

Competitiveness

Environment Security of Supply

Internal market, competition, networks,

investments, research and innovation (including clean

coal and nuclear energy)

RES, energy efficiency, nuclear energy,

innovations, climate change and emission

trading

International dialogues, EU resource management, reprocessing and storage, protection against natural and man-made disasters,

including terrorism

Competitiveness: Liberalisation of the EU’s markets

1980s: Oil and coal – ok Nuclear energy – specificity in every country Natural gas and electricity – need additional measures

Natural gas and electricity: 3 waves of liberalisation 1990s 2003 2008

Driving ideas:•Create an internal EU energy market instead of national markets•Put energy consumer in the centre of all the relations•Enable competition among various energy companies, which should bring more efficiency and decrease prices

Competitiveness: Liberalisation of the EU’s markets

Liberalisation unbundling

Liberalisation vs. external energy dependence in natural gas

an effort to externalise it by imposing similar demands on Russian energy sector

Gazprom clause Reciprocity claims

Did not lead to price decrease monopolization of external supply was blamed

upstream

transportation downstream

Share of Three Big Companies

Market-Making Liberalisation do away with regulation

distortion Leveling the regulatory playing field

Infrastructure? As of early 1990s Trans-European Networks (TEN) in

natural gas and electricity Why these sectors? Three levels of actions: isolated regions, EU MSs, EU

MSs and third countries Reforms: 1996, 2001-2003 – further liberalisation,

2007- further liberalisation + oil + enlargement + renewables

Priority Projects Electricity

Priority Projects: Natural Gas

Competitiveness: Research and Innovation

New sources of energy (renewables) 20% by 2020, 10% for biofuel Absolute vs. relative increase

Nuclear energy Growing popularity

Clean use of coal Including technologies of CO2 capture

CO2 storage technologies

Innovative ways for energy transportation (LNG, flexible tariffs)

Environment Climate change

EU’s environmental leadership

Energy is one of the key contributors

Currently – EU-15 collective obligation to decrease by 8% by 2012

Emission trading within the EU

Future: 20% by 2020 (30% if there is a global agreement to further advance)

RES Absolute vs. relative

achievements Varying ways of stimulation

(feed-in tariff, direct support, green certificates)

20% by 2020 10% of biofuel by 2020

Energy efficiency Non-binding targets 20% by 2020

•Importance of research to support policies in energy •Important to involve third parties

- Global competitiveness of the EU- Export of new technologies

•Important to reduce EU’s external dependence

Security of Supply

Growing external dependence Oil – relatively flexible Natural gas – “over-dependence on Russia” in the situation when

natural gas is of key importance to fulfill climate-related obligations Russia’s assertiveness is on the rise

Ways to Deal with Energy Dependence

French vs. American models Match supply and demand VS. provide for stable legal

conditions and market opening Shift from the French to the American model creates s

window of opportunity for the EU Problem: EU does not have competences Member-states have the right

to determine their energy mix to ensure their energy security

EU can use soft instruments (monitoring, recommendations,

exchange of best practices) Can use the principle of parallelism (impose liberalisation

and other aspects of its legislation on its partners) Growing securitisation of energy supply increased role of

the EU’s institutions Lisbon Treaty: minor change

Ways to Deal with Energy Dependence

Ways to guarantee energy security: On the supply side:

RES, nuclear, clean use of coal, Dialogues with producing countries Support of specific legal regime Support for national companies national

champions On the demand side:

Energy efficiency Energy saving 1970s crisis – tremendous impact on Europe

How Did it Start Why Cooperation?

Transnational markets Free movement of people free

movement for criminal activities Growing immigration need to divide the

burden Transnational marriages, divorces,

adoptions Intensified cooperation need to

approximate civil legislation “Laboratories” of cooperation

Council of Europe 1949 – TREVI Group 1975 – Police cooperation 1984 – Schengen 1985, 1995

Defined thekey areas ofcooperation

Maastricht

III Pillar – JHA Asylum External border control Immigration and policy towards third country

nationals Fight against drug-addicts, inetrnational forgery Cooperation in civil and criminal law and in custom

affairs Intergovernmental!

No Court of Justice, EP limited Conventions but no way to guarantee national

ratification Many recommendations, not binding

Member-States and Citizens

Three European

Communities

Common Foreign and

Security Policy and Common Defence

Cooperationin the field of Justice and Home

Affairs

Common institutes

(EU institutions), divergent competences of the EC, member-states

and institutions and interrelations between them, procedures

European Union as of 1992

Member-States and Citizens

Three European

Communities

Common Foreign and

Security Policy and Common Defence

Cooperationin the field of Justice and Home

Affairs

Common institutes

(EU institutions), divergent competences of the EC, member-states

and institutions and interrelations between them, procedures

Amsterdam Increased efficiency and transparency!

Immigration and Cooperation in Civil Law

Schengen

Free movement of people effort to eliminate internal boundaries

BeNeLux – 1960 – first effort: No control inside Common visa policy

5 MSs decide to go further announce in Fontainebleau Schengen 1 (1985)

Schengen Convention – 1990 Essence: simplify and harmonise visa procedures Intergovernmental BUT should not contradict obligations

under the EC Schengen information system Gradual enlargement 26 March 1995 – entered into force for 7 MSs

Member-States and Citizens

Three European

Communities

Common Foreign and

Security Policy and Common Defence

Cooperationin the field of Justice and Home

Affairs

Common institutes

(EU institutions), divergent competences of the EC, member-states

and institutions and interrelations between them, procedures

Amsterdam Schengen Acquis

Specific Cases

UK: island mentality + fear to surrender its borders’ control

Ireland

Denmark

Iceland and Norway

Cyprus

Amsterdam

Also changed procedures in the third pillar Framework directives and decisions Conventions enter into force when approved

by ½ of the MSs Commission – right to propose legislation

Why did it succeeded? Growth of criminal activities Coming enlargement Flexibility of the British government

Problem: split between two pillars Lack of clarity Tampere Milestones

1999

Area of Freedom, Security and Justice

Freedom Free movement and basic rights Third country nationals Security Enhanced access to courts and

justice Mutual recognition Legal approximation Justice Crime prevention Еuropol Eurojust European Police College Common definitions

Scoreboard (1999-2004)

The Hague Plan (2004-2009)

Emphasis on immigration

Stockholm Agenda

More on internal security special strategy

A NEW INTEGRATIONI PROGECT??