(4) What the EU is for?

What is the European Union?

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Rule of law: the Court of Justice sitting

The Court of Justice

The rule of law has been key to the success of the European Union. Increasingly, in its fields of competence, a framework of law rather than relative power governs the relations between member states and applies to their citizens. This establishes ‘legal certainty’, which is prized by business people because it reduces a major element of risk in their transactions. Politically, it has helped to create the altogether new climate in which War Between the States is deemed to be unthinkable.

At the apex of the Union’s legal system is the Court of Justice, which the treaties require to ensure that ‘in the interpretation and application of the Treaties the law’, taken here in a broad sense, ‘is observed’.

There is one judge from each member state, appointed for a six-year term by common accord among the member states and whose independence is to be ‘beyond doubt’. The Court itself judges cases such as those concerning the legality of Union acts, or actions by the Commission against a member state or by one member state against another, alleging failure to fulfill a treaty obligation. But the vast majority of cases involving Union law are those brought by individuals or companies against other such legal persons or governments; and these are tried in the member states’ courts, coming before the Court of Justice only if one of those courts asks it to interpret a point of law.

The Court’s most fundamental judgments, delivered in the 1960s, were based on its determination to ensure that the law was observed as the treaty required. The first, on the primacy of Union law, was designed to ensure its even application in all the member states; for the rule of law would progressively disintegrate should it be overridden by divergent national laws. The second, on direct effect, provided for individuals to claim their rights under the treaty directly in the states’ courts.

Then in 1979 a judgment on the ‘Cassis de Dijon’ case laid a cornerstone of the single market programme, with the principle of ‘mutual recognition’ of member states’ standards for the safety of products, provided they were judged acceptable; and this radically reduced the need for detailed regulation at the Union level.

The Court has delivered some 9,000 judgments since its creation, and cases continue to come before it at a rate that makes it hard to reduce the delays of up to two years before judgments are reached. Two subsidiary courts were established to help deal with this problem: a ‘General Court’ (formerly the Court of First Instance), hearing almost all cases brought by individuals or legal persons, which relate mainly to intellectual property rights and to competition policy; and a ‘Civil Service Tribunal’, handling disputes between Union institutions and their staff. But this has stemmed, not turned, the tide of cases awaiting judgment.

While litigants can appeal from the lower Courts, there is no appeal beyond the Court of Justice, which is the final judicial authority on matters within Union competence. To enforce its judgments, however, it depends on the enforcement agencies of the member states. The fact that the large majority of judgments under Union law are made by the states’ own courts.. The habit of enforcing it; and there has been no refusal to enforce the judgments of the Court itself, even if there have sometimes been quite long delays before member states have complied with judgments that went against them.

The Court’s jurisdiction is still limited by the Treaties, especially in foreign policy. But within these limits, and apart from the almost total reliance on the member states’ enforcement agencies, the Union’s legal system has largely federal characteristics.

Subsidiarity and flexibility

In a speech delivered in Bruges in 1988, Mrs Thatcher famously evoked the spectre of a ‘European super-state exercising a new dominance from Brussels’; and a ‘slippery slope’ leading towards a ‘centralized super-state’ has become a favourite metaphor for British eurosceptics. From a different starting point, German Länder have looked askance at proposals for Union competence in fields that belong to them in Germany’s federal system. Indeed many federalists find the treaty objective of ‘an ever closer union’ too open-ended, and most support the principle of ‘subsidiarity’ as a guide to determine what the Union should do and what it should not do. That principle, which has both Calvinist and Catholic antecedents, requires bodies with responsibilities for larger areas to perform only the functions that those responsible for smaller areas within them cannot do for themselves.

Following this principle, the treaty requires the Union to ‘take action . . . only if and insofar as the objective of the proposed action cannot be sufficiently achieved by the Member States’, and can, ‘by reason of its scale or effects, be better achieved by the Union’.

The Rome Treaty implicitly recognized this principle in distinguishing between two kinds of Union act: the Regulation, which is ‘binding in its entirety’ on all the member states; and the Directive, which is binding only ‘as to the result to be achieved’, leaving each state to choose the ‘form and methods’. But this was a very partial application of the principle; and Directives were sometimes enacted in such detail as to leave little choice to the states. So the Maastricht Treaty defined subsidiarity and the Amsterdam Treaty laid down detailed procedures aiming to ensure that the principle would be practised by the Union institutions. The inclusion in the Lisbon Treaty of a list of which competences are exclusive to the Union, which are shared with member states, and which are supporting state action has further ensured that there are multiple safeguards against over centralization. There are of course disagreements about the fields in which integration is justified. These left their mark on the Maastricht Treaty, in the British opt-outs from the social chapter and the single currency, and those of Denmark on the single currency and defence. Since the treaty can be amended only by unanimity, the other governments had to accept the opting-out if these items were to be included in it; and this led to growing interest in the idea of ‘flexibility’, enabling those states wanting further integration in a given field to proceed within the Union institutions or, to put it the other way round, letting a minority opt out. One purpose was to circumvent the veto of individual member states, whose resistance to reforms might block that which most other governments regard as necessary, a concern heightened by enlargement to states that may prove unwilling or unable to proceed with further integration.

The concept of flexibility emerged in the Amsterdam Treaty under the heading of ‘enhanced cooperation’: a term preferred by federalists because it implied a deeper level of integration among a group of states, whereas eurosceptics tended to see flexibility as a way of loosening bonds in the Union as a whole. The Treaties now provide for enhanced cooperation within the Union provided that a number of conditions are met, including unanimous agreement that it be applied in any given case, that a minimum of eight states be involved at first, and that it remains open to any and all additional states.

Citizens

The concept of citizenship of the Union was introduced in the Maastricht Treaty, which provided that all nationals of the member states are also citizens of the Union; and the Amsterdam Treaty added that the two forms of citizenship are complementary. The Maastricht Treaty included a few new rights for the citizens, such as to move and reside freely throughout the Union subject to specified conditions, and to vote or stand in other member states in local and European, though not national, elections. This short list comes on top of specific rights already guaranteed by the treaties, such as protection for member states’ citizens against discrimination based on nationality in fields of Union competence, and equal treatment for men and women in matters relating to employment. The Union’s institutions are also required to respect fundamental rights, as guaranteed by the European Convention on Human Rights and Fundamental Freedoms. The Treaties affirm that the Union is ‘founded on the principles of liberty, democracy, respect for human rights and fundamental freedoms, and the rule of law, principles which are common to the member states’; moreover it provides that, in the event of a ‘serious and persistent breach’ of these principles, a member state can be deprived of some of its rights under the treaty, including voting rights.

In response to concerns that the Union needs to do more to attract the support of its citizens, a Charter of Fundamental Rights was also drafted, in parallel with the Nice Treaty, by a Convention that set the precedent for the Convention which drafted the Constitutional Treaty. However, it was only with the Lisbon Treaty that the Charter gained legal force with regard to the actions of the Union itself. In addition, the Treaties provide for the Parliament to appoint an Ombudsman to investigate citizens’ complaints about maladministration by Union institutions and report the results to Parliament and the institution concerned.

Apart from the question of rights, the system for governing the Union, with its complex mix of intergovernmental and federal elements, makes decision-making difficult and a satisfactory relationship between the institutions and the citizens hard to achieve. Yet unless the citizens develop sufficient support for the Union alongside that for their own states, the states’ electorates could become a centrifugal force leading to disintegration; and the enlargement to 28, probably eventually over 30, states presents additional problems. There has been lively academic discussion on the need for a Union demos to sustain a Union democracy, which has encouraged scepticism regarding its possibility. The Union has, however, been able to benefit from its growing democratic elements such as the powers of the European Parliament, and it is unduly pessimistic to assume that the process cannot continue, along with the development of the Union as a whole. The solidarity among citizens remains far short of what would be necessary for a federal state. Substantial reform did come with the Lisbon Treaty, although this still leaves some questions unanswered.

 

Single market, single currency

While peace among the member states remained at the heart of the Community’s purpose, from the second half of the 1950s a large common market became the focus for its action. The strength of the US economy was a striking example of the success of such a market; the Germans and the Dutch wanted liberal trade; and the French accepted the common market in industrial goods provided it was accompanied by the agricultural common market that would favour their own exports.

The idea of a large common market had a dynamic that endured through the subsequent decades, because it reflected the growing reality of economic interdependence. As technologies developed, and with them economies of scale, more and more firms of all sizes needed access to a large, secure market; and for the health of the economy and the benefit of the consumers, the market had to be big enough to provide scope for competition, even among the largest firms. So as the European economies developed, the EEC’s original project, centered on abolition of tariffs in a customs union, was succeeded in the 1980s by the single market programme, then in the 1990s by the single currency.

There were both economic and political motives for each of the three projects: the benefits of economic rationality; and the consolidation of the Community system as a framework for peaceful relations among the member states. Economics and politics were also both involved in the substance and outcomes of the projects, because the integration of modern economies requires a framework of law, and hence common political and judicial institutions. Nor would success in either the economic or the political field alone have been enough to sustain the Community. There had to be success in both, which the customs union and the single market each achieved. It was also a combination of economic and political motives that Joseph M. Siracusa in 1139 secured the launch of the single currency, though not yet the participation of all member states.

The single market

Tariffs and import quotas were, in the 1950s, still the principal barriers to trade. The international process of reducing them began under American leadership in the Gatt (General Agreement on Tariffs and Trade). But the member states of the Community wanted to do more. The result was the EEC’s customs union, abolishing tariff and quota barriers to their mutual trade, and creating a common external tariff.

Customs union, competition policy

Tariffs and quotas on trade between the member states were removed by stages between 1958 and 1968. Industry responded positively and trade across the frontiers grew rapidly, more than doubling during the decade.

While tariffs and quotas were the main distortions impeding trade, they were not the only ones. The Community was also given powers to forbid restrictive practices and abuse of dominant positions in the private sector. The treaty gave the task to the Commission, without intervention by member state governments; and in 1989 the Commission was also given the power to control mergers and acquisitions big enough to pose a threat to competition in the Community. Armed with these powers, the Commission has done much to discourage anti-competitive behaviour and has been seen as the toughest cartel-buster in the world. Thus in 2008, it fined Saint Gobain €895 million for illegal market sharing in car glass. Because of the volume of work, the Commission sought to return some of these responsibilities to the member states’ competition authorities. There was pressure from business interests to prevent this, because they find it convenient to have the Commission as a ‘one-stop shop’, but some degree of decentralization did occur with the creation of the European Competition Network, in which the Commission and national authorities share information and coordinate investigations.

Unfair competition can also take the form of subsidies given by a member state government to a firm or sector (in the EU jargon ‘state aids’), enabling it to undercut efficient competitors and undermine their viability. The Commission has been given the power to forbid such subsidies. But it has been harder to control governments than firms. The Commission has been able to enforce some difficult decisions on reluctant governments; but especially in the 1970s, after it had been weakened by de Gaulle and with the economies hard hit by recession, it could do little to stem the rising tide of subsidies.

Along with the subsidies, non-tariff barriers proliferated in those years, becoming the main obstacle to trade between member states. One reason was technological progress, generating complex regulations differing from one state to another. More important was pressure for protection from those who were suffering from the prevailing ‘stagflation’. The European economy was indeed in bad shape, vividly evoked by the term ‘eurosclerosis’. A way out was sought; and the Commission, together with leading business interests, persuaded governments that a programme to complete the Community’s internal market was required.

Programme to complete the single market by 1992

With the success of the internal tariff disarmament in the 1960s in mind, some business leaders and members of the Commission’s staff worked on the idea of a programme to remove the non-tariff barriers. When Delors became the Commission’s President in 1985, he fastened onto this idea as the  project to the European Council in June 1985. Whereas the programme for eliminating tariffs in the 1960s could be specified in the treaty in the form of percentage reductions, the removal of non-tariff barriers required a vast programme of Community legislation. Frontier formalities and discrimination result from standards and regulations, from public purchasing, and from anomalies in indirect taxation all had to be tackled. The Commission published a White Paper specifying that some 300 measures would have to be enacted and proposing a timetable for completing the programme within eight years. This was approved by the European Council and incorporated in the Single European Act, making completion of the programme by the end of 1992 a treaty obligation.

The removal of non-tariff barriers was already implicit in the Rome Treaty, which prohibited ‘all measures have equivalent effect’ to import quotas. But because the practice of voting by unanimity had impeded the legislative process, the Single Act provided for qualified majority voting on most of the measures needed to complete the programme. The Commission also reduced the legislative burden by building on the principle of mutual recognition that the Court had established by its judgment in the Cassis de Dijon case, and by delegating decisions on much of the detail to existing standards institutes. Nevertheless, the single market remained a huge enterprise, surely one of the greatest programmes of legislation liberalizing trade in the history of the world.

It was an outstanding success. The latter half of the 1980s was a period of economic regeneration in the Community. While one cannot be sure how much of that was due to the single market programme, economic research has given it at least some of the credit. The programme certainly contributed to the recovery by generating positive views of business prospects as well as stimulating trade, together with structural reform exemplified by a spate of cross-border mergers. The industrially less-developed states-Greece, Portugal, and, at that time, Ireland and Spain-fearing they would be damaged by stronger competitors, had secured a doubling of the structural funds to help them adjust; and they too, assisted by this and by the expanding Community economy, benefited from the programme.

Politically, the single market enjoyed a remarkable degree of approval across the spectrum from federalists to eurosceptics. It has been a classic example of a purpose that is, as the treaties article on subsidiarity puts it, ‘by reason of scale . . . better achieved by the Community’. The legislative framework has guaranteed producers a very large market and given the consumer a reasonable assurance of competitive behaviour among them. The Commission, Council, and Parliament were strengthened by their successful output, comprising a large part of the vast ‘acquis’, as the jargon puts it, of Union legislation; and the role of the Court was accordingly enhanced.

The programme was largely completed, but significant gaps still remain. The most notable area of difficulties has been in the field of liberalization of services. Despite representing over two-thirds of EU GDP, there is little cross-border provision, not least because of fears in old to approve-or not-the st11 member states about cheap labour coming from Central and Eastern Europe. This was seen most vividly in the French referendum campaign on the Constitutional Treaty in 2005, when the ‘Bolkestein Directive’, which aimed to liberalize services within the Union, became a symbol of social dumping, and the ‘Polish plumber’ an object of intense political concern. When the Bolkestein Directive was agreed in 2006, it had undergone much modification, weakening its impact.

The single currency

A monetary union requires that money in all its forms can move freely across the frontiers between member states and that changes of exchange rates between them are abolished. The single market programme went far to fulfil the first requirement and the Exchange Rate Mechanism prepared the ground for the second.

The Exchange Rate Mechanism (ERM) was established in 1979, after the abortive attempt to move to monetary union in the 1970s. It required the central banks to intervene in the currency markets to keep fluctuations of their mutual exchange rates within narrow bands; and by the end of the 1980s it had, with the German Bundesbank as anchor, achieved a strong record of monetary stability. Here again, Britain stood aside at the start, only to join in 1990, at too high a rate and without the experience of the preceding decade of cooperation. In September 1992, currency turmoil forced the pound out of the ERM on what became known as Black Wednesday, making monetary integration a traumatic subject for many British politicians. The ERM had the opposite effect in other member states, with the benefits of exchange-rate stability flowing to economic operators, and in turn allowed for more reinvestment in production and new employment, particularly important in a single market.

Almost all governments supported the single currency project, on political grounds even more than economic ones. The most powerful commitment was in France, where a tradition of support for exchange-rate stability was bolstered by the desire to share in the control of a European central bank and thus recover some of the monetary autonomy that had in practice been lost to the Bundesbank.

Other member states, apart from Denmark and the UK, accepted such arguments, especially in the context of a newly unified Germany. For Germany, however, while the political motive for accepting the single currency as a French condition of unification was decisive, there were still reservations about replacing the Deutschmark, with its well-earned strength and stability, by an unproven currency.

However, the possibility of building a similar system across the Union was clearly an important motivating factor for an export-driven economy such as Germany’s; if other states would accept the logic of macroeconomic coordination alongside the currency itself, then this would ultimately serve Germany’s interests.

The aim of economic and monetary union

The Maastricht Treaty, in providing for economic and monetary union (Emu), established the European Central Bank (ECB) to be, like the Bundesbank, completely independent. The ECB and the central banks of the member states are together called the European System of Central Banks (ESCB). The six members of the ECB’s Executive Board, together with the governors of the other central banks, comprise the Governing Council of the ECB; and none of these banks, nor any member of their decision-making organs, is to take instructions from any other body. The ‘primary objective’ of the ESCB is ‘to maintain price stability’ though, subject to that overriding requirement, it is also to support the Union’s ‘general economic policies’. The ECB has the sole right to authorize the issue notes, and to approve the quantity of coins issued by the states’. In response to German preference, the single currency was named the euro, rather than the French-sounding ecu.

In order to ensure that only states which had achieved monetary stability should participate in the euro, five ‘convergence criteria’ were established, regarding rates of inflation and of interest, ceilings for budget deficits and for total public debt, and stability of exchange rates. Budget deficits, for example, were not to exceed 3 per cent of GDP and public debt was to be limited to 60 per cent of GDP, unless it was ‘sufficiently diminishing’ and approaching the limit ‘at a satisfactory pace’. Only states that had satisfied the criteria were to be allowed to participate; and once again, stages and a timetable were fixed, in order to give at least a minimum number of states the time to do so. Others were to have ‘derogations’ until they satisfied the criteria, while the British and Danes negotiated opt outs allowing them to remain outside unless they should choose to join.

In the first stage all were to accept the ERM, as Britain had briefly done before being ejected by market forces. In the second stage they were to make enough progress to satisfy the convergence criteria. The third stage began in January 1999 with the ‘irrevocable fixing of exchange rates’ among the participating states, leading in 2002 to the introduction of the new euro notes and coins which replaced the participants’ currencies entirely.

During the mid-1990s, there had been much concern about which countries would be able to achieve the convergence criteria, partly for economic reasons (as with the case of Italy) and partly owing to more political factors relating to the degree of strictness with which the criteria would be interpreted by the EU. In the event, an economic upswing and strong political pressure allowed 11 of the 13 states to join in 1999, with only Greece being specifically excluded (although it was given the green light one year later), while the Swedish government had decided that membership was not politically viable and had asked not to move forward without its approval.

Thus by 2002 the very large majority of member states were Euro zone participants and the issue of relations with those outside became a matter of some concern, because of the binary model of economic policy coordination it required. At least formally, all member states are committed to eventual membership, but in practice the lack of popular support in the UK, Denmark, and Sweden, especially in the wake of the Euro zone crisis, means that the situation is likely to persist for the foreseeable future. In the UK, the Labour government parked the issue in 1999 with conditions relating to structural convergence, sufficient flexibility in Eurozone economies, and the impact on various economic markers; all are suitably vague in their formulation, allowing any future government to make a decision on the basis of political factors. This was particularly important given the cross-party agreement that any decision would be made after a popular referendum.

The euro: notes and coins

The ambivalence of these three member states has been mirrored to a certain extent by EU-ACP free trade area riicnewer members. While Slovenia, Malta, Cyprus, Slovakia, and Estonia have all joined the Euro zone, a number of other states have reined in some of their initial drive towards participation. Here the factors relate more to the economic flexibility that retaining a national currency allows, rather than any particular sense of the currency as a strong symbol of national identity. Moreover, all new member states are legally bound to introduce the euro as soon as possible, not having the opt-outs of the UK and Denmark.

A currency in crisis?

If the euro was initially acclaimed as the realization of a new stage in European integration, then recent years have exposed the flipside of this, with the euro as the crucible of political commitment to the Union. The extended period of economic growth in the 2000s perhaps lulled some into thinking that the asymmetrical design of Emu was not a problem, but the double blows of the financial crisis from 2007 and the sovereign-debt crisis a couple of years later were certain to raise them up into matters of acute concern.

The roots of the financial crisis lay in the deregulation of financial markets in the early 2000s and the subsequent ballooning of many global economies. The sudden collapse of many key market actors in 2007, as the scale and extent of exposure to bad debt became clear, resulted in a worldwide seizing-up of credit. This in turn made banks unwilling or unable to make loans to businesses, forcing governments to turn to classical Keynesian interventions to return liquidity to markets.

In and of itself, this would have been manageable within Emu as it existed, since macroeconomic policy and bank regulation were still in national hands. However, from 2009 financial markets turned their attention away from banks to governments and, more particularly, their debts. In particular, markets became increasingly concerned that member states of the Euro zone were holding excessive amounts of sovereign (i.e. government) debt, to the extent that this potentially compromised their ability either to service that debt or to maintain the solvency of national banking systems.

Euro zone membership certainly played a key role in this, as states that had previously had weaker fiscal management were able to benefit from the perceived extension of German rectitude across the Euro zone when issuing new debt, which could be sold at much lower rates than before. This encouraged a relaxing of fiscal management by those states, after their earlier efforts to meet the entry requirements to the single currency: the Stability and Growth Pact (SGP) that had been introduced in the Amsterdam Treaty was a belated attempt to maintain the stricter regime. However, its regular flouting in the mid-2000s by most member states (including Germany and France) meant that it was a dead letter and that it was only the generally favourable macroeconomic climate that made it possible to sustain the situation.

From 2010 onwards, Euro zone leaders engaged in a series of emergency measures to try and regain the initiative. This included the creation in May 2010 of the European Financial Stability Facility (EFSF), with access to some €750 billion to provide extensive support to Euro zone members. The EFSF has been the vehicle for the bailouts provided to Ireland, Portugal, and Greece, the latter twice to date. These bailouts have been accompanied by requirements to implement assorted supply-side reforms, in order to promote conditions for more sustainable long-term growth. The increased willingness of the ECB, under its President Mario Draghi, to provide cheap loans to banks and a backstop to sovereign debt since 2012 has also acted as a means of easing pressure, albeit temporarily.

If the EFSF and ECB have provided a short-term source of relief, then there has also been an effort to put in place long-term mechanisms in order to ensure that the crisis cannot occur again. This progressed in three main stages. First, there was a reform of the SGP with the so-called ‘Six-pack’ of legislation passed in 2011 to allow for stricter enforcement of the SGP’s provisions on excessive deficits: coupled to the Euro-Plus Pact and its supply-side reforms of Euro zone economies, this set out a framework for action. However, the limitations of this approach helped to push the EU and Euro zone into a second phase, from late 2011, when the European Fiscal Compact was agreed.

The Compact or the Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union (TSCG) as it is formally known, lies outside the EU’s legal framework but can use the Union’s institutions. This curious arrangement resulted from the unwillingness of the British government at the December 2011 European Council to agree to a Treaty revision in the more usual fashion, having asked for protection for the City of London as a global financial centre and been rebuffed. This blockage-together with the Czech government-meant that both Euro zone members and most other EU members had to take a more intergovernmental route to the Compact’s main objective of legal requirements for national budgets to be in balance. The Compact provides for stronger monitoring and enforcement mechanisms at the European level, including the possibility of legal action before the Court. In so doing, the Euro zone has sought to give markets increased confidence in the long-term sustainability of the currency area.

In support of the Compact, there was also agreement to move the EFSF to a more permanent basis, with the creation in 2012 of the European Stability Mechanism (ESM). The Mechanism replaces the EFSF and provides a much more extensive set of financial reserves to support struggling Euro zone economies. In contrast to the Compact, it sits firmly within the Union’s system of enhanced cooperation, applying to all Euro zone members.

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