• Direct payment for bigger farms is cut ('digression') to generate additional finance for the new rural development policy.
• A mechanism for financial discipline will be introduced to ensure that the farm budget remains fixed until 2013.
• Countries, such as the UK, that wish to apply further radical reforms are allowed to do so.
The reforms entered into force in 2004-2005. [11, p.52]
2.2.7 The 2007-08 CAP Heath check
In May 2008 the European Commission produced a substantial set of proposals for change to the CAP. These proposals, which required three separate legislative measures in order to implement and was at least partly opposed by some Member States, reflect the outcome of consultation and the fast-changing global food market in which prices have been rising sharply.
Rising economic prosperity in India and China and a growing world population have contributed to a global shortage of food, notably cereals and rice. Between September 2006 and February 2008, for example, the prices of wheat rose 96 per cent and dairy products by 30 per cent. The first part of the EU’s May 2008 package dealt with immediate measures to tackle the shortage of supply (and the concomitant rise in food prices). These included lifting all tariffs on imported cereals, abandoning set aside for arable crops and the scrapping of milk quotas by 2015.
Rising food prices are an opportunity to move away from producer support to a more market orientated system as higher prices make subsidies unnecessary in many sectors. A strengthening of competition through the scrapping of things like milk quotas, the simplification of administration to reduce the bureaucratic burden on farmers and allowing Member States more flexibility in implementation would all help to reduce the regulatory impact of the CAP.
If adopted, further changes will mean a reduction in the number of very small farmers who receive subsidies; at present there are a large number who have less than a hectare of land and who receive a few hundred Euros each year in payments that cost more to administer than they are worth.
2.3 Economic and Monetary Union
2.3.1 European Monetary Union: reasons and history
For establishing an integrated competitive market which by common prices would lead to the optimal allocation of resources, increase welfare, and promote economic growth, the EU has adopted four fundamental principles:
· Free trade in goods
· Free trade in services
· Free mobility of capital
· Free mobility of labor
However, the existence of separate national currencies, which are subject to erratic exchange rate swings, causes unpredictable fluctuation in inter-country prices, which disturb the volume and direction of trade and therefore the process of market integration. It is also possible that recurrent currency misalignment could promote protectionist sentiments and undermine the single market. Therefore, from early European Monetary Union (EMU) was set as an objective component of European integration, necessary for establishing and maintaining monetary stability. Its realization became more urgent after completion of the Single Market, which made monetary integration necessary for setting up an environment of stabilizing competitiveness leading to attainment of its potential benefits. [12]
The Maastricht Treaty provided for the establishment of a European economic and monetary union in stages, culminating in the establishment on 1 January 1999 of a single currency, the euro, by the participating EU Member States. Thus on 1 March 2002, for twelve of fifteen countries the objective of monetary integration was realized by establishing a new currency, the euro (€), run by a new EU monetary authority, the ‘Euro system’, made up of the European Central Bank (ECB) and the European System of Central Banks (ESCB)of the member states. The main task of the Euro system is to ensure price stability as the means for minimizing distortions in the allocation of resources and fostering economic growth.
2.3.2 Benefits and costs
The economic reasons for monetary integration concern the benefits and costs of a single currency in an integrated market. The benefits are positively associated with the openness of a country and its volume of international trade and include:
· price transparency across borders, increasing the volume of trade, and enhancing competition and market integration;
· the efficiency of a single money as a unit of account and store of value;
· standardization and lowering of interest rates, including within a stable market;
· Increased policy credibility from elimination of devaluations.
But a single currency involves risk, which are negatively associated with the openness of a country to international trade. The members of a monetary union give up:
· the right to use their own monetary policy and the option to adjust their exchange rate (by devaluation/ revaluation) to counteract asymmetric shock by changes in relative prices;
· to use of seigniorage as a source of budgetary revenue;
· the independence of other national policies (e.g. budgetary policy), which are constrained by the common monetary policy.
But three EU Member States are outside the euro area. These are Denmark, Sweden and the United Kingdom. [11, p.55-56]
2.3.3. The UK case
The UK Government has set out five ‘economic’ tests, which must be met before any decision to join can be made. The five tests are:
· whether can be sustainable convergence between Britain and EMU economies;
· whether there is sufficient flexibility to cope with economic change;
· the effect on investment;
· the impact on the UK financial services industry;
· Whether it is good for employment. [14, p.343]
The results of these tests were announced on the 9th of June in 2003. Although four of five economic tests for adopting the euro as a national currency had not been met, there were obvious economic benefits to joining. In other words, Britain will inevitably join the euro but later. The details of the assessment are presented in the following:
1 The test of convergence with the euro zone had failed outright.
Although the UK business cycle converge more than several euro zone countries, and inflation, long-term interest rates, government deficit, and debt have all moved closer to that of the euro zone, the test has failed because there was not enough evidence to show that this convergence is sustainable. This is mainly because of some significant differences in the structure of the two economies, more especially in the UK’s housing market. The high level of UK mortgage debt and the dominance of variable rate mortgages make the UK particularly sensitive to changes in interest rate. The link between house prices and consumer spending is more pronounced in Britain than in the euro zone. Demand for housing is much higher than supply, partly because of the rigidity of planning regulations. Therefore, a common European interest rate could lead to instability in the UK housing market. There are also differences, described as medium-risk, in the UK’s pattern of financial market and investment linkages.
Another reason is high trade interdependence. The euro zone is Britain’s biggest market, and the surest and fastest way to speed the process of convergence is for the UK to join the EMU. In 2002, the fourteen members of the EU accounted for 52.5 per cent of British trade in goods. That is why EU enlargement and membership of the euro could lead to an increase in Britain’s trade with the euro zone by between 5 and 50 per cent over next thirty years with no trade diversion from trading partners in other parts of the world.
2. The test on labour flexibility also failed.
Britain's labour market has become more flexible since 1997 and already is the most flexible in Europe. But the euro zone economies are experiencing a lower growth rate than the UK. EU monetary policy would be inappropriate for the UK. The lack of a strong EU central budget mobilizing fiscal transfers, and the limited intra-EU labour mobility, imply that more reforms are necessary to make the British labour market more flexible, e.g. by regional wage settlements and a restructuring of housing benefits to remove the disincentive to move. The UK government would also like to see more flexibility on the EU side, e.g. in the stability and growth pact (SGP), to give member states more leeway to offset asymmetric swings in their economies.
3. The test on inward investment has failed.
The third test is concerned with the prospective effects of a decision to join on the amount of investments. On the one hand, higher investment is supposed to be a reward for joining the euro. Exchange rate risk wills no longer trouble businesses. “More trade and greater price transparency should mean more competition and thus higher productivity growth.” On the other hand, staying out means less investment. As a matter of fact, the share of foreign direct investment dramatically fell in the last year. However, a closer study found that this test should not be marked as passed since the full convergence was not met.
4. The only test to have been passed so far is the impact on financial services.
The City has continued to attract business since the launch of the euro four years ago. This proves that the City will remain a powerful financial centre whether inside or outside EMU. Nevertheless, joining the single currency might strengthen London's position as a financial centre because it would remove any unease about locating operations outside the euro zone. It may also improve the UK's ability to compete for business generated by EU enlargement and the continued development of euro financial markets. In retail financial services the benefits would include lower costs on euro-area transactions, better allocation of investment portfolios, and scale economies for investment funds. Joining the euro could encourage cross-border mergers and acquisitions involving UK companies, induce euro-area banks to locate to London, and strengthen the pre-eminence of the City.
5. Impact on jobs, stability, and growth failed—until convergence and flexibility criteria were satisfied.
Joining the euro could boost trade and thus national income, although the estimates are highly uncertain. But any gains could be outweighed by the costs of greater economic instability and higher unemployment in the EMU that can only be avoided by sustainable convergence between Britain and the euro zone and more flexibility. Interest rates are not likely to be significantly lower inside the euro than outside, and frequently they may not meet the needs of the British economy. [11, p.60-66]
2.3.4 Summary and conclusions
Joining the euro is not a policy but a strategy. It is not simply business as usual but with a different name for the currency. Many things will change as a result. It’s not a short-term fix but a medium-term programme to deliver long-term benefits.
Chapter 3. Politic integration the EU and the UK
3.1 Common foreign and security policy
3.1.1 Aims
The Common Foreign and Security Policy (CFSP) is a common, rather than a single, foreign and security policy i.e. Member states act collectively in those areas where they all agree. The CFSP aims:
· to safeguard the common values, fundamental interests, independence and integrity of the Union in conformity with the principles of the United Nations Charter;
· to strengthen the security of the Union in all ways;
· to preserve peace and strengthen international security, in accordance with the principles of the United Nations Charter, as well as the principles of the Helsinki Final Act and the objectives of the Paris Charter, including those on external borders;
· to promote international cooperation;
· to develop and consolidate democracy and the rule of law, and respect for human rights and fundamental freedoms.
It came into being when the Treaty on the European Union (the Treaty of Maastricht) entered into force on 1 November 1993. [10, p.20]
3.1.2 The Main Players in CFSP
· The European Council (a meeting of EU Heads of State or Government) sets the CFSP agenda.
· The General Affairs and External Relations Council (GAERC), the monthly meeting of Member States’ Foreign Ministers, is the main decision-making body. Other formations of Member States’ Ministers can sign off the least contentious of decisions.
· The High Representative for CFSP (currently Javier Solana) assists the GAERC by preparing and implementing policy discussions.
The 1997 Amsterdam Treaty created a new post of High Representative for the CFSP who would also be the Secretary General of the Council. Under the Treaty his sole authority is limited to "assisting" the Council and the Member State holding the Presidency, which remained (and remains) responsible for the management of the CFSP. [5]
· The Political and Security Committee (Brussels-based meeting at ambassadorial level) deals with the day-to-day running of CFSP.
The Commission has no decision-making role within CFSP, but takes part in discussions.
· The European Parliament has no decision-making role within CFSP, but is kept informed. [6]
3.1.3 Common Security & Defense Policy (CSDP)
Part of the CFSP is the European Security and Defence Policy (ESDP). This gives the EU military and civilian tools to contribute to international security by setting up missions in conflict and post-conflict areas. [5]
The aim of the CSDP is to give to the EU a politico-military capability for purely European operations where the US and/or NATO do not want to be involved, for example, for peacekeeping and other military and security tasks, without undermining the importance of NATO as the provider of territorial defense for most Member States. [12]
The Maastricht Treaty brought defense policy into the EU for the first time. However the arrangements for giving it effect (through the Western European Union) came rapidly to be seen as ineffectual. Recognizing this and chastened by the weak European military showing in the Balkans, at a bilateral summit at St Malo in 1998, the United Kingdom and France went a stage further. Their joint initiative was adopted by the European Council in Cologne in 1999 as the new European Security and Defense Policy (since renamed). Details were fleshed out at the Helsinki European Council in December 1999 and have been developed continuously ever since. They included ambitious force goals (a corps level - up to 60,000 troops - deployment capability by 2003, now postponed to 2010) and new command, control and politico-military structures (Military Committee, Military Staff, political control by the Political and Security Committee, see above). They also included ambitious capabilities on the civilian (civ-mil) side to win the peace in addition to military capabilities to win the war. As with NATO, there is no standing army, only national units voluntarily assigned on each occasion for joint operations.
The CSDP is still work in progress. The Lisbon Treaty makes no fundamental changes to EDSP except to provide an obligation on Member States to come to one another’s defense in the unlikely event of armed aggression against one of them - but this is an obligation on Member States and not on the EU. The Treaty also renames the EDSP the Common Security & Defense Policy (CSDP) [5].
3.1.4 Conclusion
The UK fully supports an effective EU foreign policy and is committed to playing an active role in the formulation of CFSP. When EU Member States are able to speak with one voice on international affairs, they can achieve more and exercise greater influence than any single Member State could alone. [6]
3.2 European constitution
A process of constitutional and institutional reform of the European Union (EU) led to the signing of the Treaty Establishing a Constitution for Europe (here referred to as the EU Constitution) in October 2004. The Treaty was abandoned following negative referendums on ratification in France and the Netherlands in 2005. There was much speculation in the media about the reasons for the French and Dutch rejection of the Constitution. Among those cited were the prospect of Turkish entry, the Polish plumber, the lack of social Europe, etc. [9, p.5-12]
A ‘reflection period’ was introduced, which was brought to an end in early 2007 by the German Presidency of the EU. Germany re-opened the Treaty reform debate during the first half of 2007 and in March 2007 the “Berlin Declaration” confirmed the aim of achieving a “renewed common foundation” for the EU before European Parliament elections in 2009. In June 2007 the German Presidency set out a ‘road map’ for reform and the European Council adopted a Mandate in which it stated.
The Treaty of Lisbon was concluded in Lisbon on 18 October 2007 and signed on 13 December 2007. The content of the Treaty, though not its structure, is similar in a great many respects to the EU Constitution. It is the sixth major Treaty amendment to the 1957 Treaty of Rome. [4, p.7-8]
3.2.1 The British Constitutional option: No constitution
This is a real option. The UK has never had a Constitution, but become one of the worlds leading parliamentary democracies.