UNIVERSITE DE PARIS 1 PANTHEON-SORBONNE

UFR 02 L2

EUROPEAN ECONOMY AND POLICIES

Academic year 2023-2024

Lecturer: Julieta Peveri

Teaching team:

Carlos Fogaça, Paul Jacob, Mathieu Lambert, Heddie Moreno, Julieta Peveri,
Pedram Pourabbasvafa, Nicolas Valot, Mira Zetoun

PART 1
Charte pédagogique

• Les étudiants sont tenus d’arriver à l’heure en cours et en TD.

• Conformément au règlement du contrôle des connaissances de l’Université,

trois absences sont tolérées. Mais elles doivent être justifiées. La quatrième
absence entraîne quel que soit le motif la défaillance dans la matière.

• Chaque étudiant (e) aura deux notes de Contrôle Continu : une note de
présentation en TD et une note d’activité (préparations des TD, participation
orale pertinente, assiduité, ponctualité, comportement en TD).

• Chaque groupe de deux ou trois étudiants devra présenter un des thèmes des
dossier (une présentation par groupe par semestre). La présentation sera de
15min par étudiant (30min si le groupe a 2 étudiants, et 45 s’il en a 3). La
présentation pourra être complétée avec des sources complémentaires choisi
par les étudiants.

• De plus, tous les étudiants sont tenus de préparer les dossiers de TD d’une
semaine à l’autre en répondant aux questions de la semaine correspondante
(max 2 pages). Les réponses aux questions seront ramassées de façon
aléatoire par le chargé ou la chargée de TD qui les notera. Les étudiants
devront aussi être capables d’intervenir pertinemment sur la présentation de
leurs camarades. Tout ceci comptera dans la note d’activité.

• Les dossiers sont organisés par semaine. Vous trouverez les documents à lire
(et à présenter) chaque semaine.

• Les étudiants doivent avoir un comportement respectueux vis-à-vis des

enseignants, et des autres étudiants (pas de téléphone portable pendant le
cours, pas de sortie intempestive, respect des horaires, pas de café et de
sandwich, interdiction de « surfer » sur internet etc.).

1
 EUROPEAN ECONOMY AND POLICIES
This course will introduce students to the main issues of economics and politics of European integration
from the treaty of Rome to the contemporary eurozone crisis by using an economic and a political economy
approach. The course addresses key economic questions that arise from the process of integration.

Reference books:
Benassy-Quéré A., Coeuré B. (2014), Economie de l‘euro, Paris: La découverte, coll. Repères.
De Grauwe P. (2018), Economics of Monetary Union, 12th Edition, Oxford University Press.
Baldwin R. and Wyploz C. (2012), The Economics of European integration, Mc Grw-Hill, 2012,
4th edition.
Websites
European Central bank http://www.ecb.int/
http://www.social-europe.eu/category/blogs/ (newsletter)

Alternatives économiques (http://www.alternatives-economiques.fr/)

Blog de l’OFCE (https://www.ofce.sciences-po.fr/blog/fr/)
European Central bank http://www.ecb.int/
Social Europe (un site sur toutes les questions économiques, sociales en politiques dansl’Union
Européenne) http://www.social-europe.eu/category/blogs/ (+ newsletter)

Autres sites & ressources pédagogiques

La finance pour tous : http://www.lafinancepourtous.com/
Dessine-moi l’économie (en partenariat avec le
Monde) : http://dessinemoileco.com/videos/
Facil’éco: http://www.economie.gouv.fr/facileco
France tv info (blog Classe éco) :
http://blog.francetvinfo.fr/classe-eco/
Econoclastes : http://econoclaste.org.free.fr/

Espace Pédagogique Interactif

« https://cours.univ-paris1.fr/course/view.php?id=31351
PPP of the courses
Dossiers de TD.
Other documents
News of the week (to be checked regularly).

2
CHAPTER 1

Content

WEEK 1: HISTORY AND EU INSTITUTIONS ...................................................... 4

Document 1 : West European Economic integration since 1950. ........................5
Document 2: The European Union Treaties .......................................................10
WEEK 2: EU institutions .............................................................................. 11
Document 3: The institutions and bodies of the European Union .....................12
WEEK 3: Single market and brexit ............................................................... 21
Document 4 : The economics of the single market. ...........................................22
Document 5 : Brexit..........................................................................................28

3
 WEEK 1: HISTORY AND EU INSTITUTIONS

Questions

1) What have been the main steps towards the economic integration of markets?
2) What are the main effects of the integration on trade and economic growth?
How can they be explained?

4
 Document 1 : West European Economic integration since 1950.

1. Introduction
At the end of the Second World War, it is unlikely that anybody envisaged the extent of
European economic integration over the next seventy years. The interwar period was notorious
for a backlash against globalization that entailed competitive devaluations, rampant
protectionism together with international rivalries that precluded effective economic
cooperation. By 2014, the European Union (EU) comprised 28 countries with a combined
population of about 500 million people, of which 18 shared a single currency.
This raises a number of obvious questions which this chapter addresses. These include
examining the chronology of economic integration and reviewing which countries participated
and what the reasons were for their different decisions. Beyond explaining how European
economic integration came about, it is also important to explore what were its economic effects
both on the growth of international trade and also to evaluate its implications for levels and
rates of growth of incomes.
Making such assessments is, of course, difficult. It requires prediction of the counterfactual,
i.e., what would have happened in the absence of integration (…)
The chapter proceeds as follows. In section 2, a brief history of the contours of post-war
European economic integration is provided while section 3 looks at the related issues of the
implications for trade costs and trade volumes and the reasons for the evolution of the
membership of the EU. Section 4 investigates the effects on income levels and growth rates
while in section 5 the history of the debate over the UK membership of the EU is reviewed.
Section 6 concludes.

2. Economic integration since 1950

The idea of European integration was, of course, not new at the end of the Second World
War. The nineteenth century saw important steps towards reductions of policy barriers to
trade with the unification of Germany and Italy and a proliferation of commercial treaties
(Pahre, 2008). In the interwar period, in the context of the tensions resulting from the First
World War and its peace settlement, there was considerable interest in greater political
integration of Europe which had its most notable manifestation in the Briand Plan for a ‘United
States of Europe’ put forward by the French government in May 1930 with a view to managing
the ‘German problem’ (Weigall and Stirk, 1992) but which was quickly overwhelmed by
events.
A successful approach to European economic integration after the Second World War had
to return to the question of how to manage the relationship between (West) Germany and the
rest of Western Europe to obtain the benefits of economic cooperation and, linked to this, also
to find a politically acceptable form of trade liberalization. The approach that developed was
pragmatic and recognized the continuing central role of the nation state, regulation of trade in
key areas like agriculture and the pursuit of industrial policies (Milward, 1992). The design of
the European Coal and Steel Community which became operational in 1952 provided an
institutional blueprint which could be adapted for wider use. American support for integration
as a bulwark against the spread of communism was made concrete through the provisions of
the Marshall Plan (Crafts, 2013).
Against this background, this section provides a brief descriptive outline of the process of
post-war European economic integration. As Sapir (2011) has reminded us, this can usefully be
approached using the ideas of Balassa (1961). Balassa distinguished between different degrees
of increasingly deep economic integration working up from free trade area to customs union,
5
in which there is also pooling of sovereignty in a common external trade policy, to common
market, within which factors of production can move freely, to economic union, in which some
economic policies are harmonized, to complete economic integration, where there is political
union with a supra-national authority. The last might be thought of as a ‘United States of
Europe’. A list of key dates is provided in Table 1.1.
In 1958 the EEC was formed by the original six countries following the signing of the Treaty
of Rome in 1957. The signatories pledged to lay the foundations of ‘ever closer union’ among
the peoples of Europe and Article 2 committed members to form a customs union, to establish
a common market and to harmonize policies. Article 3 spelt out what this would comprise
including a common external tariff, a common agricultural policy, the abolition of barriers to
trade and of obstacles to freedom of movement of capital and labour, a competition policy
regime, and the coordination of policies to avoid balance of payments disequilibria. In contrast,
the European Free Trade Association (EFTA) was set up in 1960 with the muchmore
limited aim of establishing a free trade area. The EEC customs union was achieved in 1968 but
the common market took much longer and awaited the Single European Act which addressed
non-tariff barriers to trade, liberalized trade in services and ended capital controls and was (less
than fully) implemented from 1992. The Maastricht Treaty of 1992 was a significant step
towards economic union and paved the way to a single currency which further reduced trade
costs as well as eliminating exchange rate instability; the euro started in 1999, initially with 11
countries. Complete economic integration is still out of reach.

Table 1.1 A chronology of economic integration of markets

1952 European Coal and Steel Community established
1958 European Economic Community starts with 6 members (Belgium, France, Italy,
Luxembourg, Netherlands, West Germany)
1958 European Payments Union discontinued
1960 European Free Trade Association starts with 7 members (Austria, Denmark, Norway,
Portugal, Sweden, Switzerland and the UK)
1962 Common Agricultural Policy begins
1968 EEC Customs Union completed and Common External Tariff established
1970 Iceland joins EFTA
1972 EEC-EFTA free trade agreements signed
1973 1st Enlargement: Denmark, Ireland and UK join EEC; Denmark and UK leave EFTA
1981 2nd Enlargement: Greece joins EEC
1986 3rd Enlargement: Portugal and Spain join EEC; Portugal leaves EFTA; Finland joins
EFTA
1987 Single European Act comes into effect
1990 German unification: former East German lands join EEC
1991 Liechtenstein joins EFTA
1992 EEC and EFTA establish European Economic Area
1993 Maastricht Treaty establishing European Union comes into effect
1995 4th Enlargement: Austria, Finland and Sweden join EU and leave EFTA
1999 Eurozone established with 11 member countries (Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain)

6
2001 Greece joins Eurozone
2004 5th Enlargement: 10 countries join EU (Czech Republic, Cyprus, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia)
2007 6th Enlargement: Bulgaria and Romania join EU
2007 Slovenia joins Eurozone
2008 Cyprus and Malta join Eurozone
2009 Slovakia joins Eurozone
2011 Estonia joins Eurozone
2013 7th Enlargement: Croatia joins EU as 28th member
2014 Latvia joins Eurozone
2015 Lithuania joins Eurozone as 19th member

Over time, the membership of the EEC/EU expanded considerably through successive
enlargements while that of EFTA has shrunk with defections to the EEC/EU. In 1973, the UK
and two of its close trading partners Denmark and Ireland joined the EU. In the 1980s, the newly
democratic Greece, Portugal and Spain acceded and in 1995, following the establishment of the
European Single Market, Austria, Finland and Sweden left EFTA to join the EU. In 2004, eight
former communist-bloc transition economies joined the EU together with Cyprus and Malta
followed by further transition economies’ accessions by Bulgaria and Romania in 2007 and
Croatia in 2013 while a number of these new members were admitted into the Eurozone soon
after accession. These southern and eastern enlargements of the EU, especially the latter,
considerably increased the range of income levels within the EU.

3. Implications for trade

European economic integration has had significant impacts on the extent and direction of
international trade. As these implications became apparent, this information influenced non-
members’ perceptions of the costs and benefits of membership of EFTA versus the EEC/EU.
The integration process involved reductions in trade costs and, of course, this was conducive to
increasing the volume of trade. However, regional trade agreements by their very nature
discriminate between members and outsiders rather than applying most-favoured-nation
principles to trade liberalization. The EEC and EFTA were acceptable under Article XXIV of
the GATT but involved both trade creation and trade diversion as barriers to trade were
unevenly reduced. In other words, while in most cases economic efficiency was increased
through the replacement of higher-cost by lower-cost producers, there would be some instances
where the opposite was true. This also implies the possibility that there wereexternal losers as
well as internal winners and that the overall economic outcome was a net sum of gains partly
offset by losses (…).
The volume of international trade increased very substantially between 1960 and 2000, as
is shown in Table 1.3. Overall, the trade of EU15 countries grew faster than world trade and
also trade between these countries grew faster than their trade with the rest of the world,
although this was not true for all 15 countries where Ireland notably stands out as an exception
to this generalization. This raises the question of how far the various components ofEuropean
economic integration contributed to these trade patterns compared with other factors such as
income growth or convergence in income levels (…).
7
 Table 1.3 Volume of exports in 2000 (1960 = 100)
Intra-EU15 Extra-EU15 Total
Austria 1395.6 1273.8 1346.3
Belgium-Luxembourg 1209.4 857.6 1088.3
Denmark 632.8 728.2 665.0
Finland 962.9 1268.2 1079.2
France 1766.1 843.1 1230.5
Germany 1002.2 874.7 942.1
Greece 1586.6 1946.3 1792.5
Ireland 3769.2 12587.6 5356.2
Italy 1820.2 1265.6 1520.0
Netherlands 1585.1 961.7 1389.2
Portugal 1043.2 197.4 555.1
Spain 2690.2 2009.2 2429.7
Sweden 811.2 1142.7 939.2
UK 1099.5 442.1 636.8
EU 15 1320.8 834.2 1075.6
World Trade 987.5
Sources: Badinger and Breuss (2004) and, for world trade, WTO website.

An analysis of the data in Table 1.3 using panel estimation of a gravity model by Badinger
and Breuss (2004) found that by far the largest reason for the growth of intra-EU trade between
1960 and 2000 was income growth which accounted for about 70 per cent while reduction of
tariff barriers accounted for 19 to 26 per cent depending on the specification. Since trade
increased massively overall, this means that the tariff reductions had a major impact. The results
appear somewhat different from those in Baier et al. (2008) who found that EU membership
raises trade between two countries by an average of 100 to 125 per cent after 15 years or an
average of 4.8 to 5.6 per cent per year; this implies that the reduction in trade barriers accounted
for about 50 to 55 per cent of total intra-EU trade growth.3 This suggests that EU membership
reduces trade costs by more than is captured by tariff reductions per se. Similarly, Baier et al.
(2008) compare EU membership with being in either EFTA or the European Economic Area
(EEA) and find that its effects were considerably larger. The EEA effect is only about 1/5th that
of the EU while the EFTA effect is similar to the EEA effect but less robust since in some
specifications it is approximately zero (…).

4. Implications for income levels and growth rates

Economic theory suggests various ways in which economic integration might increase
prosperity including both static and dynamic effects. Over time, the range of possibilities that
theory allows has increased considerably although most, if not all, of these were understood
informally even in the early days. The economic historian might also want to distinguish
between impacts that were only achieved through the formation of the European Economic
Community (or indeed EFTA) and those which would have accrued through alternative routes
to integration (Boltho and Eichengreen, 2008).
8
 In terms of short-run static effects, trade liberalization can improve allocative efficiency
and/or productive efficiency, i.e., given existing costs, factors of production are deployed
more efficiently or production costs are lowered. The former might result from greater
specialization along lines of comparative advantage and the latter from a new found ability to
realize economies of scale. Insofar as freer trade increases competition in product markets
(through actual or potential entry), it may have both effects as market power is reduced and
price-cost margins fall while managers of firms are pressured to reduce costs to the minimum
feasible (principal agent problems are reduced). If trade integration increases the number of
varieties that are available to consumers this may also be a source of welfare gains (…).
In terms of long-run dynamic effects, (…) if a larger market and/or more competition in
product markets ensues from economic integration this may raise the rate of innovation and
total factor productivity (TFP) growth (…).
These detailed studies of the impact of the original common market and the later Single
Market suggest each had similar useful but not spectacular impacts on the level of income.
Clearly, however, they do not encompass all the economic integration that has taken place and
they do not necessarily capture all the impact it has had – for example, they are noticeably silent
on dynamic effects. Alternative approaches which attempt to capture a wider range of impacts,
albeit without identifying these individually, rely on regression techniques to identifythe impact
of economic integration on income or changes in income. Three variants of this approach that
offer useful results are the following.
First, as noted by Boltho and Eichengreen (2008), the well-known paper by Frankel and
Romer (1999) can be used to postulate a relationship between the ratio of total trade exposure
(exports + imports)/GDP and the level of GDP. A conventional version of this might be to
project that an exogenous 1 percentage point increase in trade exposure would raise GDP by
0.6 per cent.10 Applying this to the EU in 2000 on the basis of the estimate by Baier et al.
(2008) that the EU ‘shock’ had raised intra-EU trade by 100 to 125 per cent, from a
counterfactual intra-EU trade exposure of 15.6 to 17.3 per cent of GDP to the actual intra-EU
trade exposure of 34.6 per cent, the estimated impact on EU GDP is an increase of 8.6 to 9.5
per cent.
Second, growth regressions can be used to estimate the effect of European integration on
income growth (…). The results of the regressions were that changes in integration were
positive for growth but that the level of integration had no effect and that changes in integration
had somewhere between half and three-quarters of their impact through investment with the
remainder coming from changes in TFP. Across the EU15 as a whole GDP was estimated to be
26 per cent higher than if there had been no economic integration after 1950 with a narrow
range from 21.6 per cent for Sweden to 28.9 per cent for Portugal (…).
Third, a new approach in the style of ‘with-without’ comparisons is available in thesynthetic
counterfactuals method of Campos et al. (2014). This compares growth in each post-EU
accession country with growth in a weighted combination of other countries which did not
accede and which are chosen to match the accession country before its entry to the EUas closely
as possible. Results for countries which joined the EU between 1973 and 1995 are reported in
Table 1.5. For these countries, the average impact of EU membership after 10 years is estimated
to have been a 6.4 per cent income gain but with a wide range between Portugal at +16.5 per
cent and Greece at -17.3 per cent.

9
Document 2: The European Union Treaties

The EU is founded on a series of legal treaties between its member states. The first treaty, which established
the European Economic Community (EEC), was signed in Rome in 1957. There have been five subsequent treaties
– the Single European Act (1986), the Treaty of Maastricht (1992), the Treaty of Amsterdam (1997), the Treaty
of Nice (2001) and the Treaty of Lisbon (2007). In 2003, the EU produced a draft Constitutional Treaty designed
to replace all the existing treaties as the sole legal document governing the operation of the EU. However,
following votes against it in referendums in France and the Netherlands in 2005, the Lisbon Treaty was drafted
as a replacement. The new treaty was controversial because of its similarity to the failed EU constitution, and as
such it was rejected at a referendum in Ireland in 2008. However, it was subsequently ratified following a second,
successful referendum in Ireland, and the Lisbon Treaty came into force in December 2009.

The Treaty of Rome (1957) The Treaty of Rome was the founding treaty of the European Economic Community, which
later became the EU. The Treaty established four institutions – a Commission, a Council of Ministers, a European
Parliament and a European Court of Justice. The Treaty focused overwhelmingly on economic co- operation. It tried
to create closer co-operation on a range of economic and trade issues from agriculture to overseas aid, commerce to
taxation, but it also set out a wider political vision for ‘an ever closer union’ to ‘eliminate
the barriers which divide Europe’.
The Single European Act (1986) was the first attempt made by member states to amend the arrangements made
under the Treaty of Rome. The SEA’s main effect was to set a deadline for the creation of a full single market by 1992.
The SEA swept away restrictive practices in a range of areas of private enterprise, as well as in the public sector. It
also pursued deeper integration by making it easier to pass laws, strengthening the EU Parliament and
laying the basis for a European foreign policy
The Treaty of Maastricht (1992) pushed forward two broad processes: the widening of the European Community’s
responsibilities and the deepening of integration. The Treaty amended the provisions of the Treaty of Rome while
hugely advancing the agenda set out under the Single European Act for deepening ‘European Political Union’ (EPU),
most notably in the areas of social policy and Economic and Monetary Union (EMU). It also introduced a new model
for the Community based around three ‘pillars’ which, broadly speaking, covered economic relations, foreign policy,
and justice and home affairs. It gave the EU Parliament greater influence in decision making through the co-decision
procedure, developed the concept of European citizenship, and established the principle of subsidiarity. It also
changed the organisation’s name to the ‘European Union’ (EU).
The Treaty of Amsterdam (1997) was largely an exercise in tying up the loose ends left over from the Maastricht
Treaty. The most symbolically important gesture of the Treaty of Amsterdam was the framework laid down for the
future accession of ten new member states, mainly from formerly communist Eastern Europe. It absorbed the
Schengen Convention into EU law, creating open borders between 12 of the member states, and expanded the role
of the Common Foreign and Security Policy (CFSP) by creating a High Representative to take overall responsibility for
EU foreign affairs. Most significantly, however, it changed decision making in the EU by expanding the number of
decisions covered by Qualified Majority Voting (QMV).
The Treaty of Maastricht Nice (2001) represented a further attempt to find a workable means of moving forward the
process of European integration. Much of the text of the Treaty was concerned with reforming the decision- making
of the EU. It extended QMV in the Council of the EU; changed the way in which the Commission President was to be
elected; gave the President the power to sack individual Commissioners, and set limits on the future numbers of
Commissioners and MEPs. Finally, it declared that another Inter-governmental Conference should be set
up to draft an EU constitution
The Treaty of Lisbon (2007) was drafted to replace the rejected EU Constitution. The Treaty clarified the role of
European bodies and institutions, made explicit the aims of the EU and strengthened measures to achieve these goals.
As such, it changed the way EU decisions are made and abolished the pillar structure set out in the MaastrichtTreaty.
It expanded the areas in which the Commission can propose legislation; made QMV the default voting method in the
Council, and created two high profile posts: a High Representative of the Union for Foreign Affairs and Security
Policy and a permanent EU President, whilst giving the EU greater legal independence to make new agreements. It
brought the Charter of Fundamental Rights (CFR) into European law, which fixed human rights standards for all EU
nations (Poland, the UK and the Czech Republic opted-out from the implications of the CFR). Ireland and the UK also
secured the right to opt in or out of any policies in the entire field of justice and homeaffairs. Following Ireland’s
rejection of the Lisbon Treaty in 2008, protocols were added to provide guarantees on Ireland’s military neutrality
and ethical issues. Lastly, the Treaty outlined a procedure for states to end their
membership of the EU for the first time.).

10
 WEEK 2: EU institutions

Questions:
1/ What is the role of the main EU-institutions?
2/ How do they work together?

11
 Document 3: The institutions and bodies of the European
Union
The development of the Community institutions and advisory bodies

Of the seven institutions of the European Union (EU) formally recognised as such since the Treaty of Lisbon
(European Parliament, European Council, Council, European Commission, Court of Justice of the EU, European
Central Bank, Court of Auditors), four have their origin in the founding treaties of the Communities. They are the
Commission, the Council, Parliament (originally known as the Assembly) and the Court of Justice. These four
basic institutions are, moreover, the only ones which have a general power of decision-making which determines
the development of all the Union’s activities. Often referred to as the ‘decision-making triangle’, the Commission,
the Council and Parliament adopt the Community’s legal acts.
The Court of Justice, the Community’s legal body, adopts judicial decisions (in particular, judgments andopinions)
which determine the development of the Community legal system.
The Community’s institutions have always been assisted by advisory bodies.

From its inception in 1952, the European Coal and Steel Community (ECSC) had four institutions — High Authority,
Special Council of Ministers, Common Assembly, Court of Justice — and an advisory body to assist the High
Authority, the ECSC Consultative Committee.
In 1957, the Rome Treaties establishing the European Economic Community (EEC) and the European Atomic
Energy Community (EAEC or Euratom) also made provision in parallel for four institutions — Commission, Council,
Assembly, Court of Justice — and an advisory body to assist the Commission, the Economic and Social Committee.
However, the Convention on certain institutions common to the European Communities came into force on 1
January 1958, the same date as the Rome Treaties to which it was annexed. The intention of this Convention was
to limit the number of institutions required to perform similar tasks in the three European Communities.
The three Communities henceforth shared four institutions: Commission, Council, Assembly and Court of
Justice.
Although the Preamble to the Merger Treaty regards the creation of single Community institutions as aprecursor
to the unification of the three Communities, and although the Treaty creates a single budget and a single
administration for the Communities, as well as uniform Staff Regulations for their officials and other servants,
this unification of the Communities was not to come about (it would subsequently do so, however, with the entry
into force of the Treaty of Lisbon; see below). Although merged administratively, each of the three Communities
continued to exist with its own legal personality. Moreover, in keeping with the functional separation of the three
organisations, the Community institutions retained their respective powers and responsibilities under each
Treaty.
After the merger of the executive bodies and until the date of expiry of the ECSC Treaty, the ECSC Consultative
Committee remained the only body specific to that Community. The activities of the Consultative Committee
were subsequently taken over by the Economic and Social Committee under the Treaty establishing the
European Community (EC).

The institutions and bodies of the European Union

The 1992 Treaty of Maastricht established the European Union, which was superimposed on the
Communities but did not have its own legal personality; however, this did not fundamentally alter the
institutional framework. Nevertheless, the role of the European Council as a political body was clarified, and a
new consultative body, the Committee of the Regions, was set up.
The Court of Auditors, established in 1977, also became an institution under the Treaty of Maastricht.
Provision was made for the Court as early as 1975, particularly after the financial contributions from the Member
States were replaced by the Community’s own resources in 1971. This institution for financial scrutiny was
thereby added, alongside an institution for legal scrutiny — the Court of Justice — to the three decision- making
institutions (Commission, Council and Parliament).
The 2007 Treaty of Lisbon merges the European Union and the Communities into a single European Union with
legal personality. Technically, the Union replaces and succeeds the Communities. Two new institutions are
formally recognised as such, the European Council and the European Central Bank, thereby bringing thenumber
of institutions to seven.
12
The European Commission: promoting the common interest
The Commission is independent of national
governments. Its job is to represent and
uphold the interests of the EU as a whole. It
drafts proposals for new European laws,
which it presents to the European Parliament
and the Council.
It is also the EU’s executive arm — in other
words, it is responsible for implementing the
decisions of Parliament and the Council. That
means managing the day-to-day business of
the European Union: implementing its policies,
running its programmes and spending
its funds.
Like the Parliament and Council, the
European Commission was set up in the
1950s under the EU’s founding treaties.
What is the Commission?
The term ‘Commission’ is used in two senses.
First, it refers to the team of men and
women — one from each EU country —
appointed to run the institution and take its
decisions. Secondly, the term ‘Commission’
refers to the institution itself and to its staff
The Commission remains politically accountable
to Parliament, which has the power to
dismiss the whole Commission by adopting a
motion of censure. Individual members of
the Commission must resign if asked to do so
by the President, provided the other commissioners
approve.
The Commission attends all the sessions of
Parliament, where it must clarify and justify
4. to represent the European Union on the
international stage, for example by negotiating
agreements
How is the Commission’s work
organised?
It is up to the Commission President to
decide which commissioner will be responsible
for which policy area, and to reshuffle
these responsibilities (if necessary) during
the Commission’s term of office.
Informally, the appointed Members of the
Commission are known as ‘commissioners’.
They have all held political positions in their
countries of origin and many have been government
ministers, but as Members of the
Commission they are committed to acting in
the interests of the Union as a whole and not
taking instructions from national governments.
A new Commission is appointed every five
years, within six months of the elections to
the European Parliament. The procedure is as
follows.
• The member state governments agree
together on who to designate as the new
Commission President.
• The Commission President-designate is
then approved by Parliament.
• The Commission President-designate, in
discussion with the member state governments,
chooses the other Members of the
Commission.
• The new Parliament then interviews each
Member and gives its opinion on the whole
team. Once it is approved, the new
Commission can officially start work.
What does the Commission do?
The European Commission has four main
roles:
1. to propose legislation to Parliament and
the Council;
2. to manage and implement EU policies and
the budget;
3. to enforce European law (jointly with the
Court of Justice);
The Commission meets once a week, usually
on Wednesdays in Brussels. Each item on the
agenda is presented by the commissioner
responsible for that policy area, and the
whole team then takes a collective decision
on it.
The Commission’s staff is organised in
departments, known as ‘Directorates-
General’ (DGs) and ‘services’ (such as the
Legal Service). Each DG is responsible for a
particular policy area and is headed by a
Director-General who is answerable to one
of the commissioners. Overall coordination is
provided by the Secretariat-General, which
13
The Council of the European Union: voice of the member states
The Council is the EU’s main decision-making
body. Like the European Parliament, the
Council was set up by the founding treaties
in the 1950s. It represents the member
states, and its meetings are attended by one
minister from each of the EU’s national governments.
Which ministers attend which meeting
depends on what subjects are on the agenda.
If, for example, the Council is to discuss
environmental issues, the meeting will be
attended by the environment minister from
each EU country and it will be known as the
‘Environment Council’.
The EU’s relations with the rest of the world
are dealt with by the ‘General Affairs and
External Relations Council’. But this Council
configuration also has wider responsibility
for general policy issues, so its meetings are
attended by whichever minister or state
secretary each government chooses.
What does the Council do?
The Council has six key responsibilities.
1. To pass European laws — jointly with the
European Parliament in many policy areas.
2. To coordinate the broad economic and
social policies of the member states.
3. To conclude international agreements
between the EU and other countries or
international organisations.
4. To approve the EU’s budget, jointly with
the European Parliament.
5. To develop the EU’s common foreign and
security policy (CFSP: for further details
see below), based on guidelines set by the
European Council.
6. To coordinate cooperation between the
national courts and police forces in criminal
matters (see the ‘Freedom, security and
justice’ section below).
1. Legislation
Much EU legislation is adopted jointly by the
Council and Parliament (see above: ‘The co-decision
procedure’).
As a rule, the Council only acts on a proposal
from the Commission, and the
Commission normally has responsibility for
ensuring that EU legislation, once adopted, is
correctly applied.
2. Coordinating the policies of member
states
The EU countries have decided that they
want an overall economic policy based on
close coordination between their national
economic policies. This coordination is carried
Altogether there are nine different Council
configurations.
• General Affairs and External Relations
• Economic and Financial Affairs (Ecofin)
• Justice and Home Affairs (JHA)
Employment, Social Policy, Health and
Consumer Affairs
• Competitiveness
• Transport, Telecommunications and
Energy
• Agriculture and Fisheries
• Environment
• Education, Youth and Culture
Each minister in the Council is empowered to
commit his or her government. In other
words, the minister’s signature is the signature
of the whole government. Moreover,
each minister in the Council is answerable to
his or her national parliament and to the citizens
that parliament represents. This ensures
the democratic legitimacy of the Council’s
decisions.
Most of these responsibilities relate to the
‘Community’ domain — i.e. areas of action
where the member states have decided to
pool their sovereignty and delegate decision-
making powers to the EU institutions.
This domain is the ‘first pillar’ of the
European Union.
However, the last two responsibilities relate
largely to areas in which the member states
have not delegated their powers but are simply
working together. This is called ‘intergovernmental
cooperation’ and it covers the
second and third ‘pillars’ of the European
Union.
3. Concluding international agreements
Each year the Council ‘concludes’ (i.e. officially
signs) a number of agreements
between the European Union and non-EU
countries, as well as with international
organisations. These agreements may cover
broad areas such as trade, cooperation and
development or they may deal with specific
subjects such as textiles, fisheries, science
and technology, transport, etc.
In addition, the Council may conclude conventions
between the EU member states in
fields such as taxation, company law or consular
protection. Conventions can also deal
with cooperation on issues of freedom, security
14
out by the economics and finance ministers,
who collectively form the Economic
and Financial Affairs (Ecofin) Council.
They also want to create more jobs and to
improve their education, health and social
protection systems. Although each EU country
is responsible for its own policy in these
areas, they can agree on common goals and
learn from each other’s experience of what
works best. This process is called the ‘open
method of coordination’, and it takes place
within the Council.
How many votes per country?
Decisions in the Council are taken by vote.
The bigger the country’s population, the
more votes it has, but the numbers are
weighted in favour of the less populous
countries:
Germany, France, Italy and
the United Kingdom 29
Spain and Poland 27
Netherlands 13
Belgium, Czech Republic, Greece,
Hungary and Portugal 12
Austria and Sweden 10
Denmark, Ireland, Lithuania, Slovakia
and Finland 7
Cyprus, Estonia, Latvia, Luxembourg
and Slovenia 4
Malta 3
Total 321
and justice (see below).
4. Approving the EU budget
The EU’s annual budget is decided jointly by the Council
and the European Parliament.
The Council Presidency
The Presidency of the Council rotates every
six months. In other words, each EU country
in turn takes charge of the Council agenda
and chairs all the meetings for a six-month
period, promoting legislative and political
decisions and brokering compromises
between the member states.
Qualified majority voting
In some particularly sensitive areas such as
common foreign and security policy, taxation,
asylum and immigration policy, Council
decisions have to be unanimous. In other
words, each member state has the power of
veto in these areas.
On most issues, however, the Council takes
decisions by ‘qualified majority voting’
(QMV).
The Treaty of Lisbon, which entered into force on 1
December 2009, established, from 1 November 2014,
the principle of dual majority (of the population and of
the number of Member States). The qualified majority
shall be defined as equal to at least 55 % of the Council
members (72 % when the proposal does not come from
the Commission or the High Representative), including
at least 15 of them and representing the Member States
that include at least 65 % of the population of the UE. As
regards the blocking minority, it must include at least 4
Council members
15
The European Parliament: voice of the people
The European Parliament (EP) is elected by the citizens
of the European Union to represent
their interests. Its origins go back to the 1950s and the
founding treaties, and since 1979 its
members have been directly elected by the people they
represent.
Elections are held every five years, and every EU citizen
who is registered as a voter is entitled
to vote. Parliament thus expresses the democratic will
of the Union’s citizens (more than 455
million people), and it represents their interests in
discussions with the other EU institutions.
The present parliament, elected in June 2004, has 732
members from all 25 EU countries.
Nearly one third of them are women.
Members of the European Parliament (MEPs) do not sit
in national blocks, but in seven Europewide
political groups. Between them, they represent all views
on European integration, from
the strongly pro-federalist to the openly Eurosceptic.

Where is Parliament based? 3. The power of the purse. Parliament shares

The European Parliament has three places of
work: Brussels (Belgium), Luxembourg and
Strasbourg (France).
Luxembourg is home to the administrative
offices (the ‘General Secretariat’). Meetings
of the whole Parliament, known as ‘plenary
sessions’, take place in Strasbourg and sometimes
in Brussels. Committee meetings are
also held in Brussels.
What does Parliament do?
Parliament has three main roles.
1. Passing European laws — jointly with the
Council in many policy areas. The fact that
the EP is directly elected by the citizens
helps guarantee the democratic legitimacy
of European law.
2. Parliament exercises democratic supervision
over the other EU institutions, and in
particular the Commission. It has the
power to approve or reject the nomination
of commissioners, and it has the right
to censure the Commission as a whole.
with the Council authority over the EU
budget and can therefore influence EU
spending. At the end of the procedure, it
adopts or rejects the budget in its entirety.
How is the Parliament’s work
organised?
Parliament’s work is divided into two main
stages.
• Preparing for the plenary session. This is
done by the MEPs in the various parliamentary
committees that specialise in particular
areas of EU activity. The issues for
debate are also discussed by the political
groups.
• The plenary session itself. Plenary sessions
are normally held in Strasbourg (one week
per month) and sometimes in Brussels (two
days only). At these sessions, Parliament
examines proposed legislation and votes
on amendments before coming to a decision
on the text as a whole.
Other items on the agenda may include
Council or Commission ‘communications’ or
questions about what is going on in the
European Union or the wider world.

16
The Court of Justice: upholding the law
The Court of Justice of the European
Communities (often referred to simply as
‘the Court’) was set up under the ECSC Treaty
in 1952. It is based in Luxembourg.
Its job is to make sure that EU legislation is
interpreted and applied in the same way in
all EU countries, so that the law is equal for
everyone. It ensures, for example, that
national courts do not give different rulings
on the same issue.
The Court also makes sure that EU member
states and institutions do what the law
requires. The Court has the power to settle
legal disputes between EU member states, EU
institutions, businesses and individuals.
The Court is composed of one judge per
member state, so that all 27 of the EU’s
national legal systems are represented.
The Court is assisted by eight ‘advocatesgeneral’.
Their role is to present reasoned
opinions on the cases brought before the
Court. They must do so publicly and
impartially.
To help the Court of Justice cope with the
large number of cases brought before it, and
to offer citizens better legal protection, a
Court of First Instance was created in 1989.
This Court (which is attached to the Court of
Justice) is responsible for giving rulings on
certain kinds of case, particularly actions
brought by private individuals, companies
and some organisations, and cases relating
to competition law.
The Court of Justice and the Court of First
Instance each have a President, chosen by
their fellow judges to serve for a renewable
term of three years. Vassilios Skouris, from
Greece, was elected President of the Court of
Justice in 2003. Bo Vesterdorf, from
Denmark, is President of the Court of First
Instance.
A new judicial body, the European Civil
Service Tribunal, has been set up to adjudicate
in disputes between the European
Union and its civil service. This tribunal is
composed of seven judges and is attached to
the Court of First Instance.
What does the Court do?
The Court gives rulings on cases brought
before it. The four most common types of
case are:
1. references for a preliminary ruling
This means that if a
national court is in any doubt about the
interpretation or validity of an EU law it may,
and sometimes must, ask the Court of Justice
for advice. This advice is given in the form of
a ‘preliminary ruling’.
2. actions for failure to fulfil an obligation;
The Commission can start these proceedings
if it has reason to believe that a member
state is failing to fulfil its obligations under
EU law. These proceedings may also be started
by another EU country.
If the Court finds that the member state has
not complied with its judgment, it may
impose a fine on that country.
3. actions for annulment
If any of the member states, the Council, the
Commission or (under certain conditions)
Parliament believes that a particular EU law
is illegal they may ask the Court to annul it.
These ‘actions for annulment’ can also be
used by private individuals.
If the Court finds that the law in question
was not correctly adopted or is not correctly
based on the treaties, it may declare the law
null and void.
4. actions for failure to act.
The Treaty requires the European Parliament,
the Council and the Commission to make
certain decisions under certain circumstances.
If they fail to do so, the member
states, the other Community institutions and
(under certain conditions) individuals or
companies can lodge a complaint with the
Court so as to have this failure to act officially
recorded.
17
The European Council: origins and development
The European Council was originally a political decision-
making body which grew out of the gradual
institutionalisation of the conferences of Heads of State
or Government of the Member States of the European
Communities.
Initially, the Treaties establishing the Communities did
not make any provision for summit meetings of Heads of
State or Government. Nevertheless, from 1961 on, the
practice of holding summit meetings outside the
institutional system of the European Communities
became established. At the summit held in Paris in
December 1974, in order to ensure the development
and overall consistency of Community activities and
political cooperation activities (the embryo of the future
CFSP), the Heads of State or Government decided to
meet, accompanied by their Ministers for Foreign
Affairs, three times a year and as often as necessary ‘as
the Council of the Community meeting in political
cooperation’ (Communiqué of the meeting of Heads of
Government of the Community, Paris, 9 and 10
December 1974).
The 1986 Single European Act institutionalised the
European Council, indicating that it should bring
together, at least twice a year, the Heads of State or
Government of the Member States and the President of
the Commission, assisted by the Ministers for Foreign
Affairs and a Member of the Commission. Yet the single
European Act did not define the role of the European
Council. It was the 1992 Treaty on European Union
which finally laid down its functions by stipulating that it
‘shall provide the Union with the necessary impetus for
its development and shall define its general political
guidelines’.
The European Central Bank and the European Investment Bank
Following the reform brought about by the Treaty of
Maastricht in 1992, the EC Treaty made provision for the
establishment of a European Central Bank (ECB)
charged with the definition and implementation of the
monetary policy of the European Community from the
moment of transition of its Member States to the third
and final stage of Economic and Monetary Union (EMU).
The Bank is therefore the successor to the European
Monetary Institute (EMI), which was concerned with the
coordination of Member States’ monetary policies
during the second stage of EMU. For countries
participating in the third stage, the ECB became a body
specifically concerned with the management of their
common monetary policy. It should be pointed out that
the ECB may adopt legal acts.
Unlike the institutions and bodies of the EU, the EIB and
the ECB have legal personality. Moreover, the 2007
Treaty of Lisbon gave the ECB the status of an
The entry into force of the Treaty of Lisbon on 1
December 2009 brought with it considerable changes.
First, the European Council officially became an
institution of the Union and was given a permanent
President, elected by a qualified majority for a period of
two and a half years (renewable once). Changes were
also made to the composition of the European Council.
In addition to its President, who may not hold a national
office, the European Council is composed of the Heads
of State or Government of the Member States and the
President of the Commission. The High Representative
of the Union for Foreign Affairs and Security Policy also
participates in its work. The Treaty of Lisbon eliminates
the systematic participation of
the Ministers for Foreign Affairs. They may only assist
their Head of State or Government if the agenda so
requires. Similarly, the President of the Commission can
only be assisted by a Commissioner — other than the
High Representative, who is also Vice-President of the
Commission — if the members of the European Council
give their agreement. The European Council now meets
four times a year, convened by its President.
The European Council therefore sits at the apex of the
institutional structure as a political body providing
impetus and guidance and setting the priorities of the
Union.
Since the Treaty of Lisbon, it may even take decisions of
an institutional nature or regarding the appointment of
senior officials, and its President plays an important role
in the external representation of the Union. The gradual
strengthening of its role as a political driving force, to
the detriment of that of the European Commission, has
drawn criticism from advocates of the ‘Community
method’ and the traditional ‘institutional balance’, since
they see in its involvement the risk of a return to the
‘intergovernmental method’.
institution.
The European Investment Bank (EIB), set up in 1957 by
the Treaty establishing the EEC, is a financial agency
intended to contribute to the attainment of the
objectives of the European Community. Initially
responsible for financing regional development projects,
the EIB has had a more clearly defined role since the
reform introduced in 1986 by the Single European Act
and the framing of an economic an social cohesion
policy, which the EIB particularly helps to implement.
Subsidiary bodies
Alongside the institutions and bodies created by the
Treaties, there is a plethora of bodies established by the
institutions themselves. European Environment Agency,
the European Centre for the Development of Vocational
Training and Europol
18
How the EU takes decisions?
Decision-making at European Union level
involves various European institutions, in
particular
• the European Commission,
• the European Parliament (EP),
• the Council of the European Union.
In general, it is the European Commission
that proposes new legislation, but it is the
Council and Parliament that pass the laws.
Other institutions also have roles to play.
The rules and procedures for EU decision making
are laid down in the treaties.
Every proposal for a new European law must be
based on a specific treaty article, referred to
as the ‘legal basis’ of the proposal. This
determines which legislative procedure must
be followed. The three main procedures are
‘consultation’, ‘assent’ and ‘co-decision’.
1. Consultation
Under the consultation procedure, the
Council consults Parliament as well as the
European Economic and Social Committee
(EESC) and the Committee of the Regions
(CoR).
Parliament can
• approve the Commission proposal,
• reject it,
• or ask for amendments.
If Parliament asks for amendments, the
Commission will consider all the changes
Parliament suggests. If it accepts any of
these suggestions it will send the Council an
amended proposal.
The Council examines the amended proposal
and either adopts it or amends it further. In
this procedure, as in all others, if the Council
amends a Commission proposal it must do so
unanimously.
2. Assent
The assent procedure means that the Council
has to obtain the European Parliament’s
assent before certain very important decisions
are taken.
The procedure is the same as in the case of
consultation, except that Parliament cannot
amend a proposal: it must either accept or
reject it. Acceptance (‘assent’) requires an
absolute majority of the vote cast.
3. Co-decision
This is the procedure now used for most EU
law-making. In the co-decision procedure,
Parliament does not merely give its opinion:
it shares legislative power equally with the
Council.
If Council and Parliament cannot agree on a
piece of proposed legislation, it is put before
a conciliation committee, composed of
equal numbers of Council and Parliament
representatives. Once this committee has
reached an agreement, the agreed text is
sent once again to Parliament and the
Council so that they can finally adopt it as
law.
The diagram on the next page shows the
procedure in greater detail.

Three ‘councils’: which is which?

It’s easy to become confused about which European body is which — especially when very
different bodies have very similar names, such as these three ‘councils’.
The European Council
This means the heads of state or government (i.e. presidents and/or prime ministers) of all the
EU countries, plus the President of the European Commission. The European Council meets, in
principle, four times a year to agree overall EU policy and to review progress. It is the highestlevel
policy-making body in the European Union, which is why its meetings are often called
‘summits’.
The Council of the European Union
Formerly known as the Council of Ministers, this institution consists of government ministers
from all the EU countries. The Council meets regularly to take detailed decisions and to pass
European laws. A fuller description of its work is given later in this booklet.
The Council of Europe
This is not an EU institution at all. It is an intergovernmental organisation which aims
(amongst other things) to protect human rights, to promote Europe’s cultural diversity and to
combat social problems such as racial prejudice and intolerance. It was set up in 1949 and one
of its early achievements was to draw up the European Convention on Human Rights. To
enable citizens to exercise their rights under that Convention it set up the European Court of
Human Rights. The Council of Europe now has 46 member countries, including the 25 European
Union countries, and its headquarters is the Palais de l’Europe in Strasbourg.

19
20
WEEK 3: Single market and Brexit

Questions:

1) What is meant by the terms “trade creation” and “trade diversion” within a custom
union? What are their distributional and welfare effects?
2) What are the other awaited consequences of the single market?
Try to analyse each of them.
3) What are for you the most important consequences of Brexit?

21
 Document 4 : The economics of the single market.

1. Background
The Treaty of Rome established the European Economic Community in 1957, and listed
measures to be taken to establish a common market. They included the free movement of goods,
persons, services and capital between member states, common policies of agriculture, transport
and competition, and common trade and commercial policies towards third countries. The
Treaty also set a maximum time limit of 15 years to implement the measures.
By the end of the 1960s, a customs union, with free trade in goods and a common external
trade policy, plus a common agricultural policy had been created. The rest of the so-called
four freedoms – free movement of persons, services and capital in addition to goods – plus
common transport and competition policies had to await the Single Market Program, a
Commission White Paper adopted in 1986 and listing 279 legislative measures needed to
complete the common market by the end of 1992. Nearly all of the measures were adopted
and about half were implemented in time. The Single Market Program:
•removed border controls (and the attendant delays) for goods transported on land and water,
•liberalized the provision of services across borders (although the most important measures
came later with the so-called Services Directive),
•established the principle of mutual recognition of national product regulations,
• removed controls on financial capital movements,
•removed discriminatory rules on direct investment from other member states,
•established freedom to reside and work in other member states,
•and established a common competition policy.
The Services Directive started to be implemented in 2009. It applies to the case when firms
(and also individuals) want to provide services from an establishment in another EU country,
either permanently or temporarily, and covers the construction industry, retailing, business
services, tourism, real estate services, and private education. Financial services,
telecommunication networks, transport and healthcare services are covered by separate
regulations.
The Single Market rules and freedoms also apply to Norway, Iceland and Lichtenstein, which
make up the European Economic Area (EEA) together with the member states of the EU, and
to Switzerland.
Even if the Single Market Program and the subsequently taken measures were quite
comprehensive, important obstacles remain to the free movement of goods, services, people
and capital. Spurred by the financial and economic crisis, in 2011 and 2012 the Commission
presented a package of legislative and other measures to be taken under the heading Single
Market Act I and II. They include measures to increase funding of small- and medium-size
firms, revise the system for recognition of professional qualifications, establish a uniform patent
protection, revise the European standardization system, adopt energy and transport
infrastructure legislation, regulate the implementation of the Services Directive, revise public
procurement directives, establish more integrated rail, maritime, air and energy transport
networks, and facilitate cross-border e-commerce. Apart from proposing new legislation and
other measures, the Commission continually reviews and revises directives, monitors the
adoption and implementation of Single Market directives at the national level, and takes action
against infringements.
Strictly speaking, the Single Market includes the customs union created in the 1960s as well
as the measures subsequently taken to establish free movement of goods, services, people

22
and capital within the EU. In the following, emphasis is put on the economics of the later
measures.5 The creation of the customs union undoubtedly had substantial effects at the time,
but they have presumably been eroded by subsequent global trade liberalization. However, it
should be understood that the removal of tariffs and quotas in principle had the same or similar
effects as the Single Market measures on trade, competition, regional development and
economic growth.
The structure and contents of this survey of the economics of the Single Market are largely
determined by what economic theory has to say about the effects of creating a common market
in goods, services, labor, and capital. A common market can both create and divert trade
(section 2). It will affect competition, economies of scale, product variety and industrial
structure (section 3), and the mobility of labor and capital (section 4). Economic activity may
become more or less concentrated (section 5), and economic growth increased temporarily or
permanently (section 6), two issues that were much in focus when the Single Market Program
was proposed.

2. Trade creation and trade diversion

Traditional analysis of the effects of economic integration is based on Jacob Viner’sanalysis
of customs unions. The creation of a customs union, with free trade between insiders and a
common tariff against outsiders, leads to “trade creation” and “trade diversion”. Trade creation
means that insiders specialize more according to comparative advantage and therefore reap
more gains from trade. The elimination of tariffs on internal trade will lower prices to consumers
and switch demand from outsiders to insiders. This is commonly labeled trade diversion, but
the term should be reserved for the case when the switch involvesreplacing lower-cost with
higher-cost suppliers, which represents a true welfare cost to the customs union. Switching from
outside to inside suppliers with the same costs only involves a redistribution of tariff income
from the government to consumers. Finally, terms-of-trade maychange in favor of the customs
union; the decrease in demand for imports from external suppliers may lower the price.7 Viner’s
analysis also describes the effects of the SingleMarket Program in product and service markets.
The elimination of trade costs in the form of administrative procedures at the border, or of
product regulations, removes distortions between domestic and international prices, and gives
rise to more trade and gains from specialization according to comparative advantage. The
difference is that the elimination of trade costs within the Single Market represents a social
economic gain, whereas the elimination of tariffs within the customs union represents
redistribution from governments to consumers.
To see the distributional and welfare effects more clearly in partial equilibrium, consider the
simplified example in Figure 4.1. Before 1992, the quantity xO is imported from a future outsider
– of the customs union - and the quantity x–xO from a future insider – a member stateof the
customs union. The two suppliers are Cournot-Nash competitors (they take the price as given),
they maximize profits by supplying an optimal quantity in the belief that the competitor holds
her supply fixed. They are assumed to have an equal constant marginalcost MC and to
carry the same constant trade cost T. Their market shares are therefore equal. After 1992, the
insider’s cost is reduced by the trade cost T. As a result, the insider finds it profitable to expand
its supply, while the outsider is induced to contract its supply.

23
 Total supply is increased to x’. The increase in supply leads to a fall in price from p to p’. The
outsider now supplies xO’ and the insider x’–xO’. More trade has been created between insiders,
namely x’– x and xO – xO’. Note, however, that this is not caused by increased specialization
according to comparative advantage, but is caused by more competition. Part of the increase
comes at the expense of the outsider. It is a form of trade diversion (although in this case, both
supplies have the same marginal cost).
The welfare consequences can also be described with the help of Figure 4.1. Consumer
surplus is increased by A+B+C+D, the insider loses producer surplus C to consumers, and gains
a producer surplus equal to E+G+H+I+J. The sum of producer and consumer surplus changes
for insider consumers and the insider producer is unambiguously positive. Theoutsider producer
unambiguously loses A+B in consumer surplus to consumers, and E in producer surplus to the
insider producer. The overall gain in welfare is equal to the saving of real resources, H+I, from
reducing trade costs, plus the increase in consumer and producer surplus on the increase in total
quantity, D+G+J. In general, insider countries are both importers-consumers and producers,
and therefore gain in terms of consumer as well as producer surplus (…).
In fact, contrary to the theoretical predictions of customs union theory, empirical research
on the effects of a great number of customs unions and other preferential trading areas shows
that they tend to promote instead of divert trade with outsiders (Acharya et al., 2011; Freund
and Ornelas, 2010; Magee, 2008). Moreover, empirical research on the trade effects of the
creation of the European monetary union, where eliminating different currencies within the
union can be seen as eliminating trade costs, shows that outsiders have increased their exports
to the monetary union as well, see e.g. Micco et al. (2003) and Flam and Nordström (2003).
This should come as no surprise; in many ways exporting to EU countries from the outside
has become less costly. Before 1992, external suppliers must also bear the costs of different
national product standards and other technical barriers to trade, and the administrative costs of
crossing national borders. The Single Market Program has made it more profitable to
concentrate sales and distribution facilities in one country in order to sell to all EU countries,
and has thereby made it more profitable to export to the EU (Ekholm et al., 2007).

24
 3. Competition, economies of scale, product variety and
industrial restructuring
The Single Market Program increased competition in several ways:
•it gave equal access to some markets, such as for public procurement, road transportation
and the production of telecommunications equipment and railroad stock, to suppliers from other
member states, where access had been severely restricted or denied,
•it eliminated border costs and the need to comply with different national technical standards,
and thereby made suppliers from other member states more competitive,
•it removed anti-competitive policies, practices and rules in many member states, in
particular against suppliers from other member states,
•all of which presumably made producers more efficient.
We will describe the effects by using simple examples.

3.1 Allowing market access

Increased competition in a market leads to increased output. Consider the extreme case
where a monopoly is replaced by a duopoly competing in Cournot-Nash fashion. The sales of
the monopoly are divided equally between the duopolists. They would think that their profits
could be raised by an increase in sales. More sales would depress the price and thereby offset
the positive effect on revenues, but half of the negative effect would be perceived to be borne
by the competitor. The new duopoly equilibrium would therefore see a lower price and a larger
quantity. There would be a net welfare gain consisting of the consumer and producer surplus
on the increase in quantity. Consumers would gain from the lower price, whileproducers would
lose from lower total profits. The case may seem particular but is quite general; a greater number
of sellers leads to more competition, gains for consumers and losses for producers, and gains for
the economy as a whole.

3.2 Removing trade costs

Removing trade costs in the form of administrative procedures and delays at national borders
does not only constitute a saving in terms of real resources, it is also likely to increase
competition (…).

3.3 Eliminating implicit and explicit import quotas

Before 1992, trade within the EU in some industries and sectors was subject to quotas.
This was the case for agricultural products, steel, cars, and air and road transportation. Lifting
a quota on imported goods or services tends to have a stronger pro-competitive effect than the
elimination of fiscal or administrative trade barriers. In fact, a pro-competitive effect will
emerge even if the quota does not restrict imports below the free trade level (…).

3.5 Increased economies of scale and product variety, and

industrial restructuring
The Single Market Program has served to foster competition in product and service markets,
which has resulted in lower prices due to lower price-cost margins and higher levels of
production and sales. This has, in turn, brought gains in producer and consumer surplus as
described. The expansion of production and sales is also likely to result in greater economies of
scale, and additional economic gains.

25
 Economies of scale can take different forms. One form arises when the total number of
producers and thereby the amount of resources spent on fixed costs of production, such as
research and development or production infrastructure, is reduced. For example, the Single
Market had the effect of replacing many producers of railroad engines in protected national
markets with, in effect, only two producers in a single market. The number of producers was
reduced drastically, but competition was increased, there were more economies of scale, and
savings were made in research and development and other fixed costs of production. Another
form of economies of scale arises when there are decreasing marginal costs. Most production
processes benefit from learning-by-doing, so that labor and other resources required to produce
an additional unit fall over time. With a larger scale of production in the Single Market, one
should expect more so-called dynamic economies of scale. Finally, the agglomeration of firms
within an industry in the same geographical location gives rise to economies of scale that are
internal to the industry but external to firms. These economies can be due to a larger pool of
specialized labor, informal or formal transmission of knowledge between firms, or an increased
variety of and more specialized inputs to the industry. One should, in principle, expect that the
Single Market Program served to reinforce existing and perhaps create new industrial clusters.

4. Free mobility of labor and capital

EU citizens have the right to work and reside in other member states, but relatively few have
exercised their right. The number of EU citizens working in another EU country increased from
about 6 to nearly 10 million from 2005 to 2012. As a percentage of the total number of EU
citizens of working age, the share increased from somewhat more than 2 percent in 2005 to
somewhat more than 3 percent in 2012. These numbers make it clear that the share of people
who lived and worked in other EU countries was quite low before the accession of ten new
members in 2004, and that the enlargements in 2004 and 2007 did little to increase the numbers,
despite the relatively large income differences between the old and new member states.
Apart from generic barriers to migration, such as language differences, differences inculture
and distance to family and friends, important institutional barriers to the free mobility of labor
still exist. One such barrier is the limited possibility to receive unemploymentbenefits while
searching for a job in another member state, another is the difference in pension systems across
countries. Moving to another member state may mean giving up earned pension rights,
especially in private pension schemes, or receiving a low pension in the new country of
residence until the minimum age for receiving a pension from the old country of residence has
been reached (…).
Free mobility for capital involves real as well as financial capital: foreign direct investment
(FDI), loans, credits and transfers via financial institutions, securities, such as stocks and bonds,
and real estate investments.
There is no empirical evidence that the Single Market Program has stimulated FDI between
EU countries more than FDI from outside countries. If anything, per capita flows into eleven
core EU countries in 1990–2010 tend to be lower than into a control group of eight outside
countries (Burrage, 2012).
The removal of barriers between national financial markets means that sellers/lenders and
buyers/borrowers should have larger and therefore more competitive and efficient markets at
their disposal, plus a greater variety of financial services and products. These expectations have
been fulfilled on some markets, but many remain fragmented along national borders.The
market for lending to small and medium-size firms is an example of this (ECB, 2012). Mortgage
rates converged among the initial euro area members in the 1990s, well ahead of

26
1999, and have not converged since, indicating that the Single Market had an
integrating effect, but not the introduction of the euro (Jappelli and Pagano, 2008). In
contrast, the market for equities shows clear signs of increased integration due to the
Single Market. Equity valuations at the industry level became more equal within
the EU in the 1990s, principallydue to EU membership and not to the monetary
union (Bekaert et al., 2013). Equity market integration has mainly occurred at the
global level, but EU membership has been an additional driving force whereas the
common currency has had little effect (Everaert and Pozzi, 2014).

5. Differences in regional development

Prior to 1992, there was a great deal of concern about the regional effects of the
Single Market Program, in particular that centrally located and larger countries would
gain at the expense of peripheral and smaller countries. In an influential paper,
Krugman and Venables (1990) demonstrated two opposing tendencies with increased
integration. Firms would, on the one hand, have an incentive to locate centrally, in
order to save on transportation costs and exploit economies of scale and, on the other
hand, have an incentive to locate in the periphery, to take advantage of lower wages.
Among policy makers, the concern was that the former tendency would dominate.
Their response was to double the budget of the so-called Structural Funds, which
mainly subsidize infrastructure, industry and agriculture in poorer regions, and to
create the so-called Cohesion Fund, which was initially aimed at co-financing
infrastructureprojects in Greece, Ireland, Portugal and Spain.
Krugman’s (1991) work on economic geography and trade started a great amount
oftheoretical and empirical research in economics on (differential) regional growth
and development. It is fair to conclude that there are no simple explanations for
differential ratesof regional growth in an integrated market, see for example Breinlich
et al. (2013), and no stylized empirical facts. This is not surprising. Theoretically, in
industries characterized by imperfect competition, trade costs, and intra- and inter-
industry linkages, several forces working for and against agglomeration are present.
The precise features of the industry – suchas the degree of economies of scale – and
the relative strength of the different forces will determine the outcome, as
demonstrated by Forslid et al. (2002). In the European context, the low level of labor
mobility across borders prevents concentration to the center (Head and Mayer, 2004).
The little empirical work that exists on the effect of the Single Market indicates
– if anything – less rather than more concentration of industry to the center in the
1990’s
(Aiginger and Pfaffermayr, 2004).
The experience of Greece, Ireland, Portugal and Spain post-1992 indicates that
national policy and institutions may matter much more than the centripetal and
centrifugal forces of regional economic models. At the extremes, Ireland has attracted
considerable flows of FDI, whereas Greece has received very little. Ireland has a
language advantage, but it also offered favorable tax treatment and relatively small
regulatory and bureaucratic hurdles to foreign investors.
27
 Srdjan Majstorovićhea Corina Stratrman Van Rompuy
g
Document 5 -

The never-ending
Brexit?1
Larissa Brunner – Policy Analyst at the European Policy Centre
Fabian Zuleeg – Chief Executive and Chief Economist at the European Policy Centre

MAIN RECOMMENDATION q Even after Brexit, the EU will have to deal with
immediate day-to-day issues i.e. the EU-UK trade negotiations and with more strategic
questions regarding the future relationship between the two.

WHAT TO DO:
q Ensure an orderly withdrawal, but not at any cost.
q Develop a vision for a close and stable future relationship that both sides can
live with.
q Engage in contingency planning for the worst-case scenario, i.e. no deal before or
after Brexit.

20

in the European integration

Even after the United Kingdom’s (UK) exit from the European
process, possibly based on refined
Union (EU), Brexit will not disappear from the Union’s agenda
or new models of differentiated
– if anything, it will become even more important. The EU
integration.
institutions and member states will not only have to deal
with immediate day-to-day issues such as the EU-UK trade
negotiations, but also with more strategic questions on the
future relationship between the EU and the UK and the broader
implications of the divorce for the Union’s role in the world and
its own future architecture.

In part, this is a damage-control exercise. The aim is to reach

the closest possible EU-UK relationship within the limitations
of dealing with a third country, not only in economic terms
but also on issues such as security. However, there is also the
broader question of how to integrate countries such as the UK
28
The aim is to reach the closest possible EU UK
relationship within the limitation s of dealing
with a third country, not only in economic
terms but also on issues such
as security.

29
Tactical successes, strategic
deficiencies
The outcome of the June 2016 Brexit
referendum has thrown the EU into less
disarray than many observers predicted at the
time. A domino effect triggering similar
membership votes in countries such as
France, Denmark or the Netherlands has
not materialised. On the contrary, polls have
shown growing popular support for EU
membership as it has become clear just how
difficult and costly it is to extricate a country
from the Union.
Perhaps even more remarkable has beenthe
unexpected unity of the EU27 in the Brexit
negotiations. Many predicted the UK
would speak with one voice, while the
EU27 would be in hopeless disarray unable
to manage their diverging interests and to
contain internal tensions. The opposite has
happened. This has strengthened the EU27’s
negotiating position, helping them to stand
by the Union’s red lines, such as thebackstop
for the Irish border, the financial settlement
and the sequencing of the Article 50 and
trade talks (which then-Brexit Secretary
David Davis predicted in 2017 would be the
“row of the summer”, before the UK
government quickly and quietlyfolded).
However, the tactical success of the first
phase of the negotiations cannot hide that
the EU has not yet fully engaged with Brexit
at a strategic level. There is no single,
coherent vision of what the long-term EU-
UK relationship should look like once the
dust of departure has settled. How close a
relationship should the two sides aim for
and how may it change over time? In which
areas is close political, economic, diplomatic
or security cooperation essential and where
is there greater scope for divergence? How
can the EU and the UK prevent a loss of
influence on the global stage? To what
extent will the EU-UK model be an example
for the EU’s relationship with other third
countries?
The EU’s overwhelming objective in the
Brexit negotiations is to maintain the
integrity of the single market and ensure
that the ultimate arrangement with the UK
does not threaten the long-term viability
and attractiveness of the Unionby setting a
precedent of cherry-picking or by
prioritising reaching a deal over a member
state’s vital interests. As long as that is
ensured, it is in the Union’s interest to
pursue a relationship that is as close as
possible to minimise the costs associated
with Brexit.2
However, if cherry-picking is ruled
out, developing a very close economic
relationship will be difficult since the
conditions for doing so violate the UK’s red
lines on free movement and an independent
trade policy. Barring a significant shift in
the UK domestic political context, a more
distanced (and for the EU suboptimal)
model such as Canada plus (i.e. a free trade
agreement in goods with some liberalisation
in services) appears more likely. This also
implies a separate solution for the Northern
Ireland border, most probably reverting to
the backstop. Given the political volatility
in the UK, the EU needs to plan for the
worst-case scenario: a break-down in the
relationship either at the end of the Article
50 or the transition period. 3 However, a
stable equilibrium is unlikely whatever the
outcome of the Brexit process. Debates
about the UK’s relationship with the EU are
likely to continue whether there is a deal, no
deal or the UK decides to remain after all,
and such debates could play a role in future
general elections or party leadership
contests.
30
Navigating these issues and developing a strategic view of Brexit,
taking into account the UK’s aspirations and limitations, will be
one of the key tasks for the EU institutions and the future EU
leadership in the years to come.

Regardless of Brexit,
future progress in
the EU will also
Painful losses ahead require a higher level
of differentiated
integration, for
Though the costs of Brexit will be asymmetrically distributed – example in areas
with the UK much more affected than the EU27 – neither side such as taxation or
will emerge unscathed. The UK remains an important player defence.
for a number of reasons and its departure will weaken the EU27
in various ways and change its position and role in the world.
Brexit might lead to
First, Brexit has direct economic consequences for the EU. They a more unified model,
can be divided into two categories: transition costs and long- creating a sharp
term costs. Any change to the status quo will impose transition distinction between
costs on EU firms, which may have to spend resources on (full) membership and
contingency planning and re-organising supply chains. In the
those outside the EU,
longer term, any additional friction caused by a UK departure
which would limit the
from the customs union and single market could impact trade
level of integration
flows and reduce economic growth.

However, it is not all bad from the EU’s perspective. There will
with third countries.
20
probably be a gain from firms relocating to the Union, and EU
companies could benefit from reduced competition if friction The EU should
caused by Brexit leads their UK rivals to abandon the EU market analyse the reasons
or puts them at a disadvantage, for example in public for the unexpected
procurement. and remarkable unity
of the EU27.
But the EU’s loss of economic weight also has an external
dimension. The UK’s economy was the fifth-largest in the world
in 2018, with a value of $2.94 trillion. 4 It was the second-largest From the EU’s
in the Union, surpassed only by Germany. If the UK leaves the perspective, the
EU’s customs union, the European Commission will no longer best version of a
be able to offer access to the UK market to third countries it relationship with a
negotiates trade deals with. This will reduce its leverage and third country is one
could make it more difficult to achieve favourable outcomes for that is as close as
the Union. possible but, at the
same time, shows very
Moreover, London is a powerful financial centre and arguably clearly the costs of
the only one in Europe that can compete with the likes of New
being outside
York, Hong Kong and Singapore. Brexit will almost certainly
the club.
reduce Europe’s weight. While London initially hoped to agree
on future access to the EU market for UK-based financial services
firms on the basis of mutual recognition, it has now accepted
Brussels’ position that financial services trade will be

31
 tough stance on Russia. It could shift the
based on the EU’s equivalence regime.5 The
balance of power in the EU towards those
UK government is still seeking to include
that are sceptical of some of the EU’s current
certain elements of mutual recognition but
foreign policy orientations.
these attempts are likely to be unsuccessful,
while the EU is likely to push for standard
Brexit could, for example, have negative
equivalence, not least to prevent regulatory
spill-over effects on the EU’s sanctions
arbitrage.6 Such an outcome would have
regimes vis-à-vis Russia. Without the UK,
implications for the financial services sector.
the EU’s determination to address
Equivalence does not apply to wholesale
Moscow’s actions in Ukraine and Crimea
banking and can be withdrawn unilaterally
could diminish. While this may not affect
by the EU with a 30-day notice, so it will
the EU’s current sanctions (the renewal of
not provide financial services firms with
three sets of sanctions against Russia every
the predictability they require. Cities in
six months has become a largely routine
remaining member states such as Paris
task), the Union may become less willing to
and Frankfurt could benefit somewhat as
introduce new measures to respond to fresh
banks relocate some staff, but it is not just
Russian aggressions for fear of upending the
a European competition. If European capital
fragile consensus among member states,
markets fragment further due to Brexit and
and might be less able to react to future
the financial competitiveness of the EU
foreign policy crises. At the same time, the
decreases, financial services firms could
EU’s loss of economic weight after Brexit
decide to abandon the EU altogether and
means that economic sanctions – unless
focus on the United States or Asia.
they are coordinated with the UK and other
major countries such as the US – will lose
Second, Brexit is set to weaken the EU
some of their bite. Similarly, as the EU
politically. A smaller EU that is not perceived
single market will be smaller after Brexit,
to be speaking for all major European
the prize of market access, which the EU can
countries will be a less powerful one. This
offer to third countries to promote certain
could make it harder for the Union to
values, may become less attractive. Both
defend its interests at a time when Russia
developments mean that the ability of the
is becoming more assertive, concerns are
EU to reward and punish third countries’
growing over China’s expanding political
behaviour will be diminished.
and economic reach and US politics are
increasingly unpredictable and unstable (see
Third, Brexit may undermine the EU’s
also contribution of Giovanni Grevi in this
security capacity. The UK and France are
volume).
the only global military powers in the EU.
The UK also plays a crucial role in NATO
In terms of international clout, the EU is
and was one of only six EU countries to hit
arguably losing one of its most powerful
NATO’s target of spending 2% of GDP on
member states. The UK is one of two
defence in 2018. 7 Brexit means that the UK
European countries with a permanent seat
cannot participate in EU initiatives such as
on the UN Security Council and continues
PESCO (though it could be argued that the
to derive considerable influence from its
momentum to agree PESCO probably
history, soft power and ties with non-
would not have been there if the UK had not
European countries (for example through
voted to leave, or that the UK would have
the Commonwealth). It has a highly
blocked the initiative) and that the EU
regarded diplomatic service and has played
could become less relevant as a security
a key role in shaping EU foreign policy, not
player. The loss may also be felt in
least by traditionally serving as a link to the
counterterrorism, where the UK has well-
US. Its departure will be a blow to advocates
regarded capabilities.
of a close transatlantic relationship and a

32
Brexit is closely linked to strategic concepts
about the future of the EU, including the
notion of differentiated integration and
ideas about an EU core and periphery.
After the UK’s exit, the EU’s centre of
gravity is likely to shift further towards
Germany and France, and the eurozone.
Non-eurozone countries and economically
liberal northern member states – long- time
allies of the UK – could lose influence as the
EU becomes more centralistic in its areas of
competence. Member states have already
started trying to fill the void. One
expression of the counterbalancing act
against a potential dominance of Berlin and
Paris is the creation of the New Hanseatic
League in 2018, which groups eight fiscally
conservative northern member states.
Regardless of Brexit, future progress in
the EU will also require a higher level of
differentiated integration, for example
in areas such as taxation or defence. This
could reinforce the shift of power towards
the EU’s ‘core’ around Berlin and Paris and
widen asymmetries between those regularly
participating and those abstaining.
At the same time, Brexit could provide
an impetus to extend the concept of
differentiated integration to non-EU
countries by tying these countries closer
to the Union beneath the level of full and
unlimited EU membership (see also the
contributions of Janis A. Emmanouilidis
and Julian Rappold in this volume). The UK
may wish to continue participating in parts
of the EU architecture such as Euratom,
without making concessions in other, more
politically sensitive areas.
However, this raises several difficulties. A
preference could emerge in the UK for
membership of the single market for goods,
services and capital but not for people,
while for the EU the indivisibility of the
four freedoms would be non-negotiable.
Applying the concept of differentiated
integration would also be complex in
legal, political and institutional terms,
especially if it fails to respect the exclusive
prerogatives of those who are member of
the ‘club’. The EU will, therefore, be wary
of setting a precedent if the UK’s deal is
perceived to be more attractive than full 20
EU membership. Politically speaking this
implies that certain proposals such as the
continental partnership8 or a ‘shared market’
between the UK and EU9 are unlikely to
gain much support at EU level, regardless
of their merits. Any form of differentiated
integration involving non-EU countries
is likely to be tightly restricted and come
with numerous conditions, such as financial
contributions without offering access to EU
institutions and to the Union’s decision-
making mechanisms. Brexit might lead to
a more unified model, creating a sharp
distinction between (full) membership and
those outside the EU, which would limit the
level of integration with third countries.
33
Key recommendations
What can the EU do to address the strategic
challenges posed by Brexit?
q First, it should focus on ensuring an
orderly withdrawal, but not at any cost.
Unlike for the UK, the mantra ‘no deal is
better than a bad deal’ rings true for the
EU. Any deal that would compromise its
core values, disadvantage member states
vis-à-vis a third country or undermine the
integrity of the single market would threaten
its long-term viability. Even though an
orderly withdrawal would avoid chaos and
create a feasible path towards the long- term
EU-UK relationship.
q Second, the EU should develop a vision
for a close and stable future relationship
that both sides can live with10, going beyond
mere economic ties. Close alignment and
cooperation on economic, political and
security issues would be an effective way for
both the EU and the UK to maintain as much
global influence as possible. To achieve this,
it is important that despite any frustration
with the day-to-day Brexit process, bridges
are not burnt and resentment on both sides
is minimised. However, it is hard to see
how this could be achieved in case of an
acrimonious divorce.
q Third, the EU should engage in
contingency planning for the worst-case
scenario, i.e. no deal before or after Brexit.
A breakdown in relations could see the
UK, no longer tied to EU rules, emerge as a
fierce competitor for foreign investment and
resources. The EU needs to be prepared in case
London shifts towards a more mercantilistic
model, lowering tax, social and environmental
standards to gain a competitive advantage.
Cooperation across all policy areas would
become much less likely.
But the significance of Brexit goes far
beyond the future UK-EU relationship. As
a starting point there are valuable lessons
that can be taken from the Brexit process.
The EU should analyse the reasons for the
unexpected and remarkable unity of the
EU27. These may include shared goals
during the first phase of the negotiations, a
sense of existential threat and the desire to
avoid setting a precedent of a member state
being abandoned by the Union in favour
of a (soon to be) third country. Identifying
the reasons for the EU’s remarkable unity
will enable the Union to apply the lessons
of Brexit to other policy areas and help to
‘Re-unite EUrope’ (see also contribution of
Janis A. Emmanouilidis).
Most importantly, the EU institutions and
member states must consider whether, and if
so to what extent, differentiated integration
could serve as a model for the EU’s
relationship with third countries, especially
in the Union’s direct neigh bourhood,
including the future EU-UK relationship.
This will have significant implications for
the future of European integration.
From the EU’s perspective, the best version
of a relationship with a third country is one
that is as close as possible but, at the same
time, shows very clearly the costs of being
outside the club. This poses a paradox:
it implies that those third countries that are
integrated most have to, de facto, become
members without rights, creating a
politically unstable and conflictual
situation, especially for countries that have
a significant political and economic weight
but are not willing to accept the terms and
conditions of membership.
This conflict can clearly be seen in the
negotiations with the UK and implies that
any deal that will now be reached will
probably evolve over time. If, for example,
the next phase of negotiations between the
EU and the UK would shift to a Norway
34
plus-style model (i.e. single market and customs union membership with close cooperation on many issues), the
UK would be facing major political issues, essentially becoming a rule-taker. But barring sucha shift, a Canada
plus model with deeper integration in certain policy areas, while politically feasible, would not deliver the
close integration that is desirable, in economic terms and for Europe’s role in the world.

This tension between economic and political benefits at the price of adhering toa common set of values and
rules will also play itself out within the EU. The current model of differentiated integration, which foresees that
some countries progress whileothers follow at a later point in time, is no longer functioning. Those who are not
part of the more integrated policy areas have a significant and broad disadvantages from being outside the inner
circle. But, at the same time, we have seen that these countries are simply not willing to join the euro, Schengen or
other forms of closer cooperation. On the contrary, they have used whatever powers they have to counter or even
block further steps of integration. We might have reached the limit of what can be achieved within the current model,
which could also explain why we have witnessed a number of (unsuccessful) initiatives outside the EU system.
Brexit is a stark reminder that we have to revisit and reform the current model of European integration and its reliance
on limited forms of differentiated integration.

35