Trade
Customs Union The authors of the EC treaties recognized that the economic keystone of unity would be a customs union permitting the free movement of goods, services, capital, and people within member states. In 1958, the Community began the difficult process of eliminating all trade barriers among its members. Ten years later, all member-to-member duties were abolished, and a common external tariff of the Six was established. By 1977, this union was extended to include the new EC members--the United Kingdom, Denmark, and Ireland.
The common external tariff is key to the customs union. Each EC member charges the same duty on a given import from a non-member country. Agricultural imports are subject to the Common Agricultural Policy, which places variable levies on agricultural imports to raise their prices to those of EC-produced commodities.
Although tariffs have been eliminated within the Community, several kinds of non-tariff barriers still exist. Some member states maintain protectionist measures that the Community has not yet been able to eliminate entirely, such as limiting public works contracts and adopting unilateral technical or safety standards that restrict trade. Numerous health and safety barriers to agricultural trade still exist. Individual firms and governments can register trade restriction complaints with the Commission, which attempts to eliminate the barriers through binding judicial action.
In 1991, exports among Community members were $859 billion, while external exports were $522 billion, accounting for 17.1% of world commerce. This makes the EC the world's largest trading unit. EC imports from third countries in 1991 were $812 billion, mostly raw materials and unprocessed goods. Most EC exports are processed goods such as machinery and vehicles.
As provided for in Article 113 of the Treaty of Rome, all member states adhere to a common EC commercial policy. It provides for major decisions on trade policy to be taken by the Council of Ministers by majority vote and assigns to the Commission considerable executive and negotiating authority. The Community's trade policy is based on the General Agreement on Tariffs and Trade (GATT), to which all community members are contracting parties.
Single European Act and EC '92 The establishment of a customs union among the Six resulted in an expansion of trade which grew from $7 billion in 1958 to $60 billion in 1972. The enlargement of the Community to include Denmark, Ireland, and the United Kingdom in 1973 marked the beginning of a period of limited growth, inflation, and high unemployment. By the mid-1980s, the Community recognized that, despite progress in many areas, its aim of creating a true common market (the dismantling of all barriers within the Community restricting the free movement of people and trade) had not been realized. In March 1985, Jacques Delors, President of the EC Commission, outlined to the European Parliament the "single market" program, designed to chart a course for completion of an integrated market by the end of 1992. A Commission White Paper in June 1985 listed legislative measures needed to eliminate all physical, technical, and fiscal barriers to the completion of a unified economic area with free movement of persons, goods, services, and capital. By October 31, 1992, the Commission had tabled 282 proposals. Of these, 216 have been approved by the European Council and the European Parliament. However, only 68 have been implemented in all 12 EC member states.
On July 1, 1987, after ratification by member governments, the Single European Act (SEA) came into force. The act contained revisions in the treaties necessary to assure completion of the 1992 program. It extended the principle of qualified majority voting in the Council of Ministers (thus streamlining the decision-making process). It also gave the Community new responsibilities (in the areas of social policy, promotion of research and technological development, and improvement of the environment) and increased support for the least developed member states. Budgetary measures adopted in February 1988, which placed limits on the growth of agricultural spending and doubled the allocation for structural funds (resources targeted for regions that are underdeveloped or affected by industrial decline or unemployment), signaled the commitment of member states to implement these provisions.
In addition to defining an action program for achieving the single market, the SEA endorsed the objective of economic and monetary union, including a single currency. Institutional decisions in this area would continue to be subject to unanimity in the Council and ratification by member states. The SEA also formalized procedures for cooperation in foreign policy among member states and renewed support for the objective of European political union.
European Monetary System In 1970, the Werner Report (named after the Luxembourg Prime Minister) proposed a plan for economic and monetary union within the Community. As a first step in harmonizing policy, the currency "snake" (a set of upper and lower limits of exchange rates) was established in 1972. Central banks of participating countries pledged to intervene in the currency market to keep the value of their currencies within fixed limits.
In 1979, the European Monetary System (EMS) replaced the snake in an effort to reduce exchange rate fluctuations. The EMS provides for frequent discussions among central bankers and for intervention in foreign exchange markets to maintain the value of each currency within a narrow range (generally 2.25%) of the European Currency Unit (ecu). All Community members belong to the EMS, though not all participate in the system's exchange rate mechanism. In addition to currency swap arrangements for defense of currency parities, the EMS includes a reserve fund.
The EMS created the ecu in 1979. It is the Community's budget and accounting unit, created by member states depositing 20% of their gold and US dollar reserves with the European Monetary Cooperation Fund. It is a combination of differing proportions of 12 member currencies, reflecting the size of their economies.
Economic and Monetary Union The concept of economic and monetary union, characterized by irrevocably fixed exchange rates, a single currency, a single monetary authority, and a common monetary and exchange rate policy, was a natural corollary to the completion of the internal market. At the December 1991 summit in Maastricht, Netherlands, EC heads of government reached agreement on a draft treaty on European economic and monetary union (EMU). The EMU treaty provides a timetable for moving to full economic and monetary union.
Stage 1 (1990-93). Involves strengthening economic coordination, bringing all EC members' currencies into the exchange rate mechanism of the European Monetary System, and lifting restrictions on internal EC capital flows.
Stage 2 (1994-96). A transitional period, will involve increased economic convergence ( in terms of inflation, fiscal policy, interest rates, and exchange rate stability) and creation of a transitional European monetary authority.
Stage 3. In 1997, if a majority of EC members are politically willing and economically prepared for full EMU, exchange rates will be irrevocably fixed, monetary powers will be transferred from national central banks to a European central bank, and a single currency will be created. (If the move to Stage 3 does not occur in 1997, it will start definitely by January 1, 1999, for those countries which have met the treaty's economic convergence criteria.)
EMU will not go into effect until the Maastricht Treaty package is ratified by all 12 member states. As of January 1993, the ratification process was still underway.
Source: U.S. Department of State, Bureau of Public Affairs, April 1993.