European Union

H

Creation of the European Union

In the late 1980s, sweeping political changes led the EC once again to increase cooperation and integration. As Communism crumbled in Eastern Europe, many formerly Communist countries looked to the EC for political and economic assistance. The EC agreed to give aid to many of these countries, but decided not to allow them to join the EC immediately. An exception was made for East Germany, which was automatically incorporated into the EC after German reunification.

In the wake of the rapid political upheaval, West Germany and France proposed an intergovernmental conference (IGC) to pursue closer European unity. An IGC is a meeting between members that begins the formal process of changing or amending EC treaties. Another IGC had occurred earlier, in 1989, to prepare a timetable and structure for monetary union, in which members of the community would adopt a single currency. British prime minister Margaret Thatcher opposed calls for increased European unity, but in 1990 John Major became prime minister and adopted a more conciliatory approach. The IGCs began work on a series of agreements that would become the Treaty on European Union.

I

Treaty on European Union

The Treaty on European Union (often called the Maastricht Treaty) founded the EU and was intended to expand political, economic, and social integration among the member states. After lengthy negotiations, it was accepted by the European Council at Maastricht, Netherlands, in December 1991. Of particular significance, the treaty committed the EU to Economic and Monetary Union (EMU). Under EMU the member nations would unify their economies and adopt a single currency by 1999. The Maastricht Treaty also set strict criteria that member states had to meet before they could join EMU. In addition, the treaty created new structures designed to promote a more integrated foreign and security policy and to encourage greater cooperation on judicial and police matters. The member states granted the EU governing bodies more authority in several policy areas, including the environment, education, health, and consumer protection.

The new treaty aroused a good deal of popular opposition among EU member states. Much of the concern centered on EMU, which would replace national currencies with a single European currency. The United Kingdom refused to endorse some aspects of the treaty and gained exemptions from them, called opt-outs. These included not joining EMU and not participating in the Social Chapter, a section of the Maastricht Treaty outlining goals in social and employment policy, including a common code of worker rights. Danish voters rejected the treaty in a referendum, while French voters favored the treaty by only a slim majority. In Germany, a challenge to the treaty lodged with the country’s supreme court contended that membership in the EU violated the German constitution. In an emergency meeting of the European Council, Denmark gained substantial concessions and exemptions, including the right to opt out of EMU and any future common defense policy. Danish voters then approved the treaty in a subsequent referendum. Because of these difficulties, the EU was not formally inaugurated until November 1993.

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J

Amsterdam Treaty

Popular reactions against some elements of the Maastricht Treaty led to another intergovernmental conference among EU leaders that began in March 1996. This IGC produced the Amsterdam Treaty, which revised the Maastricht Treaty and other founding EU documents. The revisions were intended to make the EU more attractive and relevant to ordinary people.

The Amsterdam Treaty called on member nations to cooperate to create jobs throughout Europe, protect the environment, improve public health, and safeguard consumer rights. In addition, the treaty provided for the removal of barriers to travel and immigration among the EU member states except for the United Kingdom, Ireland, and Denmark, all of which retained their original border controls. The treaty included the potential for cooperation and integration with the Western European Union (WEU), an organization of Western European powers focused on defense. It also allowed the possibility of admitting countries from Eastern Europe to the EU. The Amsterdam Treaty was signed by EU members on October 2, 1997.

A document issued by the European Commission (the EU’s highest administrative body) in 1997, known as Agenda 2000, outlined a strategy for EU enlargement under the Amsterdam Treaty. The document called for wide-ranging reforms within the EU before any enlargement agreement could move forward. These included measures to increase economic growth, competitiveness, and employment; agricultural and structural reforms; and a new European financial framework.

K

Treaty of Nice

The theme of EU expansion was addressed again in 2000 in what became the Treaty of Nice. Signed in 2001, this treaty outlined a series of staged reforms to prepare the EU for enlargement. The treaty called for a reduction in the potential size of the European Commission, reforms to voting rules and processes in the Council of the European Union, and a reallocation of seats in the European Parliament to member states.

Unlike the Single European Act or the Amsterdam Treaty, the Treaty of Nice did not seek to broaden the authority of the EU. Rather, the role and powers of an enlarged EU were addressed elsewhere—in the Laeken Declaration of 2001 and by the Convention on the Future of Europe, convened in March 2002. By late 2002, all EU members had ratified the Treaty of Nice. However, Irish voters nearly forced a renegotiation of the treaty after rejecting it in a referendum in 2001; many Irish worried that EU enlargement would reduce financial benefits received by Ireland. Nevertheless, Ireland’s ratification was secured in a second referendum held the following year, putting the schedule for EU enlargement back on course.

L

Monetary Union

The EU’s attempts to establish a single European currency, as set out in the Maastricht Treaty, were controversial from the start. Some EU countries, including the United Kingdom, worried that a shared European currency would threaten their national identity and governmental authority. Despite such concerns, many EU member countries struggled to meet the economic requirements for participating in Economic and Monetary Union (EMU) and adopting a shared currency, which was named the euro.

These requirements were stringent: (1) a country’s rate of inflation could not be more than 1.5 percent higher than an average of the rate in the three countries with the lowest inflation; (2) a country’s budget deficit could not exceed 3 percent of gross domestic product (GDP), and its national debt could not exceed 60 percent of GDP; (3) a country’s long-term interest rate could not be more than 2 percent higher than an average of the rate in the three countries with the lowest interest rates; (4) a country could not have devalued its currency against any other member nation’s for at least two years prior to monetary union.

EMU participants also agreed to abide by the Stability and Growth Pact, a budgetary agreement designed to underpin the euro after its planned launch in 1999. The pact required countries to keep their annual budget deficits below 3 percent of GDP or else risk fines, and it directed countries to take measures to eliminate their budget deficits altogether.

Most countries found it difficult to meet the EMU requirements. Measures to reduce inflation and high interest rates contributed to increasing unemployment, while efforts to control government deficits often led to higher taxes. These consequences compounded the problems of economic recession that most countries were already experiencing.

As the deadline for EMU approached, misgivings arose from many quarters that the economic climate was not right, that levels of economic performance across the countries were still too disparate, and that several countries had not strictly met the Maastricht criteria. Despite these concerns, the EU officially agreed in May 1998 to adopt the euro for 11 of the 15 member countries beginning on January 1, 1999. This agreement also created the European Central Bank (ECB) to oversee the new currency and to take charge of the monetary policies of the EU. The countries to adopt the euro were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.

The United Kingdom, Sweden, and Denmark met the EMU criteria but decided not to participate. Greece had hoped to be included in the first wave of countries to adopt the euro but failed to meet the criteria. On January 1, 1999, the 11 nations participating in the so-called euro zone began to use the euro for accounting purposes and electronic money transfers; their national currencies remained in circulation for other uses. Greece adopted the euro in January 2001, becoming the 12th member of the euro zone. In 2002 the ECB began issuing euro-denominated coins and banknotes, and the currencies of countries within the euro zone ceased to be legal tender.

The ten members that joined the EU in 2004 have various timetables for adopting the euro, and adoption efforts have met with strong opposition in a number of countries. Some new members, such as Cyprus, Estonia, Lithuania, and Slovenia, announced that they would take immediate steps to adopt the euro, opening them for membership in the single currency as early as 2007. In order to adopt the euro, a new member must first meet the EMU criteria. It must then demonstrate that its currency can remain stable relative to the euro over a two-year period. Slovenia became the first of these members to meet the EMU criteria and adopted the euro on January 1, 2007.

After some initial troubles, the euro established itself as a viable currency in international money markets. Concern now shifted to the enforcement of a common monetary policy, under strict direction from the European Central Bank. Slowing growth and rising unemployment across the euro zone after 2000, however, led to higher budget deficits, and the European Commission soon had to warn Ireland and Germany to reduce their budgetary expenditures to conform to limits required by the Stability and Growth Pact. By 2002 there had emerged within the EU a broader concern about the continued feasibility of the Stability and Growth Pact. Many more countries seemed to be nearing, or in breach of, permissible budget deficits. At the same time, efforts to enforce the pact’s deficit ceiling were seen as inhibiting expenditures needed by national governments to promote social welfare and economic recovery.

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