European Union

B

2

Cohesion Fund

Another instrument for reducing economic differences between EU member states is the Cohesion Fund. The fund was established to transfer money to the poorer EU states to assist them in meeting the criteria for Economic and Monetary Union. As with the Regional Development Fund and the Social Fund, the majority of grants from the Cohesion Fund have gone to the poorer member states.

B

3

European Investment Bank (EIB)

The European Investment Bank (EIB) was established in 1957 under the Rome treaty that created the EEC. Its primary objective is to fund projects that promote European integration. It focuses mainly on industry, energy, and infrastructure. The member states contribute to its finances, but it raises most of its funds on international markets. Some 8 percent of its budget goes to projects outside the EU. The bank only offers loans, not grants, and its contribution must be matched by an equivalent outlay from other sources. The EIB is an autonomous body able to make its own decisions free of political direction, within the general legal framework of the EU. It has been one of the most successful EU bodies. Since 1993 its annual lending volume has exceeded that of the International Bank for Reconstruction and Development (the World Bank).

C

Stabilizing Currencies: The European Monetary System (EMS)

The European Monetary System (EMS) is the exchange rate structure of the EU. It was established in 1979 to stabilize exchange rates among members at a time when currencies were fluctuating dramatically because of the economic recession of the 1970s. The promotion of stable currencies, it was hoped, would provide the foundations for a future monetary union and a single currency among member states.

The core of the EMS and the engine of stabilization is the Exchange Rate Mechanism (ERM). This system was designed to reduce the amount that the currencies of member states could fluctuate against each other. By evening out exchange rate fluctuations and stabilizing currencies, the ERM was intended to stimulate trade and investment among EU members, and to help prevent inflation by linking weaker national currencies to the strong and stable German national currency, the deutsche mark.

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In addition to the ERM, the EMS introduced the European Currency Unit (ECU), which was used for accounting and for administrative purposes. The ECU was replaced by the euro when EMU went into effect on January 1, 1999.

The EMS was highly successful in the 1980s. It helped promote a sense of collective responsibility and discipline that contributed to a reduction of inflation and, after 1987, to a period of exchange rate stability. Its success led to the further push in the Maastricht Treaty toward full economic and monetary integration. However, once currency realignments under the ERM had been largely completed, the EMS became more rigid, and currencies were allowed to fluctuate against each other only by very small amounts. This rigidity prevented countries experiencing economic difficulties from simply adjusting their exchange rates as they might have done otherwise.

Exchange rate rigidity, coupled with differing economic and monetary conditions in the member states, made it difficult for the EMS to hold stronger and weaker currencies together when currency traders began to have doubts about the value of certain members’ currencies. Feeding such doubts were Germany’s reunification in 1990, which generated huge costs, followed by difficulties in ratifying the Maastricht Treaty. Waves of currency speculation in 1992 and 1993 forced several countries to devalue their currencies, and the United Kingdom and Italy had to leave the ERM. The EMS survived by increasing the amount that currencies could fluctuate against one another, but the increase was so great that members’ currencies could fluctuate almost at will. The EMS was held together only by the EU’s political will to create monetary union and a single currency.

The role of the EMS has remained essentially unchanged with the introduction of the euro. It regulates exchange rates between the euro and those EU states that did not join the single currency.

D

Economic and Monetary Union (EMU)

Economic and Monetary Union (EMU) is a step beyond a single market toward further integration. EMU requires an intense degree of economic coordination among its members. Participating nations must integrate their budgetary policies, establish common interest rates, and use a single currency. It is a logical step forward from the European Community’s customs union of 1968 and the decision in the 1987 Single European Act to move to a single market.

EMU first appeared on the EC agenda in the late 1960s, following the community’s economic success. At that time, concerns were growing that the post-World War II fixed exchange rate system was beginning to crumble. This system linked the major world currencies to the U.S. dollar, which was tied to the price of gold. However, in the mid-1960s the dollar began to weaken, and confidence in the system waned. What the EC wanted was a fixed exchange rate system that was less susceptible to the influence of the dollar. In 1969 EC leaders asked Pierre Werner, the premier of Luxembourg, to head a committee to devise a new system for the EC. In 1970 they accepted Werner’s recommendation for a movement to full EMU by 1980.

Poor economic conditions in the 1970s, however, forced postponement of the Werner Plan. In 1971 the United States uncoupled the U.S. dollar from gold, and subsequently, currencies that had been tied to the dollar became floating currencies with no fixed exchange rates. Then in 1973 oil prices quadrupled, producing a tumultuous economic climate in which governments were faced with both rising inflation and rising unemployment. EMU was more or less forgotten as the EC instead concentrated on trying to achieve a more modest structure of currency stability. After some initial difficulties, the result was the successful European Monetary System of 1979.

The seemingly positive effects of the EMS and the 1987 decision to form a single market led to a resurrection of the Werner Plan, with EMU to be implemented in three stages after 1990. In Madrid in June 1989 the European Council set up an intergovernmental conference (IGC) to flesh out the proposal. The IGC report was incorporated into the Maastricht Treaty in 1991. It was accepted that the first stage of EMU, the elimination of exchange controls and restrictions on the flow of capital, had already begun. The second stage was set for 1994, when member states would begin to coordinate their economies to reduce inflation and budget deficits. Full EMU, with the inauguration of a single currency under the direction of an EU central bank, would begin in 1999 at the latest. After pressure from Germany, which wanted the single currency to be as strong as the deutsche mark, the EU decided that countries entering the third stage would have to meet strict economic criteria on the size of government deficit, interest rate levels, inflation, and currency stability.

However, the currency speculation problems in 1992 and 1993 that caused Italy and the United Kingdom to leave the ERM, along with a general slide into economic recession, raised doubts about how many countries would meet the EMU criteria. Many governments struggled to control inflation and budget deficits through cuts in government spending and other austerity measures, but their efforts often led to higher unemployment and popular discontent. By 1998 many people within the EU believed that the qualification criteria would have to be relaxed for EMU to occur. Despite these worries, only Greece failed to meet the criteria. On January 1, 1999, the single currency, the euro, went into use. Greece was permitted to adopt the euro two years later, on January 1, 2001, after the Greek government succeeded in lowering inflation and budget deficits.

The economic success of EMU depends on whether the euro is accepted in the international markets as a stable and strong currency and the extent to which it leads to a greater convergence of national economies and greater mobility of production, goods, and services within the EU. There is still debate over whether EMU has a sufficiently firm foundation for these goals to be achieved. However, many EMU supporters find disagreements about the economic costs and benefits less important than the conviction that EMU, even if economically flawed, is an important step toward political integration.

EMU therefore supports the views of Robert Schuman and Jean Monnet that political union is best achieved through economic union. It has also reinforced the central role of France and Germany in the EU. The reunification of Germany reawakened French concerns of German dominance in Europe and energized France’s desire to influence German economic policy. At the same time, Germany wanted to allay fears of an ascendant militaristic German nationalism. Much the same as in 1950, when the European Coal and Steel Community was created, both governments believed that these political issues could be resolved through economic integration. These concerns underpinned a more widespread belief that long-term economic and political benefits outweighed the initial costs of switching to a single currency.

V

Relations with the Rest of the World

One of the major objectives of the European Union is to speak with one voice and to have a unified policy position on world issues. This has been easier to achieve in economics and trade than on political problems. Bilateral and multilateral trade agreements have been signed between the EU and most developing countries. Common political positions, however, have been hindered by conflicts between national interests, despite close collaboration among EU member states and the development of common foreign policy statements.

Such collaboration has not always resulted in common action. EU countries were divided over the 1991 Persian Gulf War, the post-1991 crises in the former Yugoslavia, and future relations with Russia and Eastern Europe. In each instance, differences arose between members over how and to what extent the EU should become involved in foreign policy problems, and what the results of any EU action would be for members’ economies and political relationships.

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