European Integration
A Deeper, Wider Union?

Speakers at a lunchtime panel discussion on 16 December considered the implications of the agreements reached at Maastricht and recent events in the East for the future economic and political integration of Europe as a whole. The meeting formed part of the Centre's research programme on Economic Transformation in Eastern Europe, supported by the Commission of the European Communities under its SPES and ACE programmes and by the Ford Foundation. The views expressed by the speakers were their own, however, not those of the above organizations nor of CEPR, which takes no institutional policy positions.
Alberto Giovannini (Columbia University and CEPR) maintained that the `deepening versus widening' controversy draws out the main weaknesses and challenges involved in European monetary and political union (EMU/EPU). The project's most obvious weakness is the EC12's lack of a political identity: the EC12 has neither a historical precursor nor a sense of a common heritage; and the lack of a common cultural background inevitably weakens its political cohesion.
Nevertheless, political support for EMU/EPU has been strong, except perhaps from the UK. Different countries have supported the Community idea for very different reasons, however; France and Germany to eliminate any risk of renewing their historic political rivalry; Greece, Italy and possibly Portugal to modernize their battered and outdated public administrations; and Spain to underpin its relatively recent democratization. Giovannini maintained that similar levels of political support may come from the East European countries, which view participation in the Community and eventual membership as a guarantee of resources and free markets. In the EFTA countries, however, political support is less clear and the desire for EC membership seems to be dictated mostly by a calculus of economic costs and benefits.
Giovannini concluded by focusing on whether the Community can achieve its enlargement without being watered down, which depends on the proper choice of sequencing. The Community must prove that it can complete the single market and monetary union before it expands; the outcome of this process will tell us whether the project of goods market and monetary integration without fiscal integration is viable.
Manfred J M Neumann (Universität Bonn) proposed two models for Europe's future: a confederation of nation states, which he called the `British model'; and a federal union `the Franco-German model'. The merits and drawbacks of the British model need no further discussion, since it is clear from the Maastricht agreements that it is definitely off the agenda. These agreements are impressive with respect to monetary union but relatively poor at least from a German viewpoint on progress towards political union. Nevertheless, governments on the Continent have basically accepted the Franco-German goal of a federal union (despite the cosmetic elimination of the word `federal'), which aims to achieve a single market, currency, foreign policy, army and citizenship. Should this vision come true early in the next century it will change the world drastically. This union will be the world's strongest power; and any European country that remains outside will nevertheless be totally dependent on it.
We cannot know now whether this end state will come about nor whether national governments will really be prepared to transfer most of their sovereignty to European bodies. But at Maastricht they embarked on a process of gradual denationalization which, if continued, will lead to the point where national sovereignty is restricted to little more than cultural affairs and public education. The political process towards such a union may be delayed in various ways; and any country can simply opt out if its parliament rejects ratification. It is unrealistic to believe that the agreed automaticity will be binding; but it seems most unlikely on economic grounds that any of the smaller EC member countries will want to opt out.
Neumann argued that France now holds the key to building such a union: if its political class changes its mind to favour a confederation of nation states, this will call the whole integration process into question. If France is unwilling to join in the German dream of EPU, Germany will not sacrifice the Deutschmark for EMU, since a purely economic union promises no net benefits to Germany. Indeed, the single European currency will probably compare unfavourably with the Deutschmark, a European economic policy will be increasingly interventionist and protectionist, and transfer payments from Germany to the rest of the Community will increase.
Jacques Mélitz (Institut National de la Statistique et des Etudes Economiques, Paris, and CEPR) began by stressing that the evolution and philosophy of the European Community argue for its enlargement in the coming decades. Nevertheless, admitting early all countries that wish to join would be incompatible with its commitments to reducing intra-EC income differentials and to the free mobility of labour; so the Community must carefully consider both the order and pace of admission of new members. The applications that will cause most difficulties are those of the new market economies of Eastern Europe the former allies and constituent republics of the Soviet Union.
Mélitz focused on why many of these countries will wish to join the EC and, more pointedly, why they might wish to do so quickly. The attraction of a common currency cannot explain this desire: they all need to adopt a hard currency option to avert rising inflation and possible hyperinflation, but they clearly cannot afford either the extra disruption or the disinflation that complete freedom of capital movements and keeping up with Europe's hardest currencies would entail.
Mélitz proposed that the greatest appeal of Community membership for East Europeans may derive from the Common Agricultural Policy, since membership would give them access to the Community's vast agricultural market. One of the major benefits of phasing out the CAP (apart from eliminating the greatest drain on the Community's budget and improving trading relations with the US) would be the East Europeans' greater patience over EC membership. Reducing the scale of the CAP would also provide East Europeans with the best form of economic assistance the Community can give: the ability to sell into Western Europe in the sectors in which they enjoy a comparative advantage. Mélitz also noted that East European countries' may also wish to join the Community to help preserve their internal cohesion and social peace. For example, Czechoslovakia is now holding together, despite sharp divisions between the Czech and Slovak areas, in part because of the prospect of their joint admission into the Community. Mélitz proposed in conclusion that the best response may be to offer membership on a progressive basis, for example by allowing them associate status (with voting rights) on specific programmes, as the Community is already doing for Czechoslovakia, Hungary and Poland.
Richard Portes (CEPR and Birkbeck College, London) argued that Maastricht had set the Community on a road that is very likely to lead to the monetary union of most if not all of its member states by the end of the decade, moved the Community's structure towards multi-tier membership, and also demonstrated its ability to deal with internal problems. The summit paid no attention, however, to Central and Eastern Europe in any of the treaty amendments, protocols or declarations.
The association agreements, which the Community signed with Czechoslovakia, Hungary and Poland on the day of the panel meeting, recognize their final objective of EC membership of the Community and aim to provide a framework for their gradual integration into the Community. But they speak of `fulfilling the necessary conditions' without specifying them, nor what might be sufficient. These agreements and the provisions for market access are much better than was expected six months previously, but they are certainly not enough. While the Community has focused its attention on its internal development, the Soviet Union and Yugoslavia, Eastern Europe's transformation has run into deep trouble: the expected J-curve now looks like an L-curve. The success or otherwise of these economies' transformation will determine their prospects of accession to the Community. Deepening need not slow widening: it depends the entry requirements imposed on the new members, which should not include conditions that any existing member does not fulfil now.
Portes also noted two serious problems: first, the new association agreements still contain wide-ranging anti-dumping and safeguard procedures and special restrictive provisions to ensure a gradual transition in sensitive sectors (textiles and clothing, iron and steel, and agricultural and food products). These are misguided and dangerous: in the short run, Eastern Europe will need to expand these exports further; while in the long run they are unlikely to be a major source of export growth. Second, there will be substantial pressure for East-West migration, which will be inversely related to the success of the transformation process in the East.
Portes concluded with two strong recommendations for the Community. First, it should offer membership to all European states that satisfy the following conditions: market economy and political democracy; approximation of national and Community laws; a rise in per capita income to a level near to that of the poorest EC regions; and substantial integration with the Community in trade, finance and investment. Second, it should build on the association agreements to provide the greatest possible market access; and trade should be accompanied by more aid in the form of debt reduction and grants, including a major Community contribution to a social fund to support workers who become unemployed in the restructuring process.