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CHAPTER I.SHORTHYSTORY OF THE EUROPEAN UNION

The first concrete move for regional integration in Europe was made in 1947 with the

establishment of Economic Commission for Europe (ECE). Also, in 1948 the Organization

for European Economic Cooperation (OECC) was formed and was followed a year later by

the Council of Europe. These marked the beginning of the splitting of Western Europe into

two camps, with, on the one hand, the UK and some of the countries that later formed the

European Free Trade Association (EFTA), and, on the other, Belgium, France, West

Germany, Italy, Luxembourg and the Netherlands, usually referred to as the Original Six that

subsequently established the European Economic Community (EEC).

The next step in the economic and political unification of Western Europe was taken

in 1951, when the European Coal and Steel Community was created by the Six and marked

the parting of ways in post-war Western Europe. In June 1955, at Messina, Italy, at the

meeting of the foreign ministers of the Six was considered the memorandum proposed by

Belgium, Netherlands and Luxembourg regarding the establishment of a general common

market and specific measures in the fields of energy and transport. The governments of the

Six established that a general common market and an atomic energy pool should appear. In

the end, after three years of negotiations, the Six agreed that the drafting of two treaties, one

to create a general common market and another to establish an atomic energy community,

should begin. Treaties were subsequently signed in Rome on 25 March 1957. The EEC and

1Euratom came into being on 1 January 1958. Thus, in 1958 the Six belonged to three

separate entities: the ECSC2, EEC3 and Euratom. Later became convenient to consider the

three entities as branches of the same whole, with EEC becoming the dominant partner. The

whole structure was named European Communities, or European Community (EC), whose

main constitutional base was the Treaty of Rome, creating the EEC. The need of institutional

strengthening of EC become more clear by introduction of summit meetings which try to

bring national political leaders more closely into the EC affaires. In 1974 these were

formalized under the name of European Council. The 1969-1972 periods can be described as

one of great activity. In 1970 the Six reached a common position on the development of a

Common Fisheries Policy (CFP). At a Paris summit in 1973 an agreement was reached on the

1

European Atomic Energy Commission2 European Coal and Steel Community3 European Economic Community

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development of new policies in relation to industry and science and research. The summit

envisaged a more active role for the EC in the area of regional policy and decided that a

European Regional Development Fund (ERDF) should be created to channel EC resources

into the development of the backward EC regions.

New members, like Greece (1981), Spain (1986) and Portugal (1986) entered the EC.

On 1 July 1987 the Single European Act (SEA) became operative. The SEA contained policy

development which was based upon the intention of creating a true single market by the end

of 1992 with free movements of goods, services, capital and labour. Even more European

countries applied between 1989-1992. Among them we can name Austria, Finland, Sweden

and Switzerland and Norway shortly followed them. Cyprus and Malta applied in 1990.

Formal negotiations were opened in 1998 with those states most likely to succeed: the Czech

Republic, Estonia, Hungary, Poland and Slovenia. However the instability in Balkans and the

war in Kosovo showed the need to hasten the process and, at 4Helsinki, in December 1999, it

was agreed to open accession talks with Bulgaria, Latvia, Lithuania, Malta, Romania and

Slovakia.

Certainly, an organization with such a large and varied membership would be very

different from the original EEC of the Six. This is one reason why pursuing the questions of

enlargement was made consequent upon the finalizing of the 5Maastricht Treaty and

agreement upon new financial and budgetary arrangements for the existing member states.

The enlargement facing the EU today poses a unique challenge, since it is without

precedent in terms of scope and diversity: the number of candidates, the area (increase of

34%) and population (increase of 105 million), the wealth of different histories and cultures.

A single set of trade rules, a single tariff, and a single set of administrative procedures will

apply not only just across the existing Member States but across the Single Market of the

enlarged Union.

In order to assist the countries that have applied to become members of the European

Union to carry out the reforms required for membership and to equip themselves to benefit

from EU funds on accession, the Union provides financial assistance as part of its Pre-

Accession Strategy.

A new meeting of the European Council took place in December 1991, at Maastricht

and produced a new blueprint for the future. It tried to integrate the EC further through setting

out a time table for full economic and monetary unit (EMU), introducing institutional changes

4 Helsinki European Council; 10, 11 December 19995 Treaty on European Union, 7 February 1992

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and developing political competences, the whole being brought together in the Treaty on

European Union (Maastricht Treaty) of which the EC should form a part of a wider European

Union. The Amsterdam6 conference, which followed in 1997, updated aims and policies, tried

to clarify the position regarding foreign and defense policies and justice and home affaires,

and strengthened the social side. The treaty itself modified the existing treaties, notably those

on the EEC and on the Union, which can be considered together with the acquis communitaire

(legislation deriving from the treaties), as the constitution of the EU.

The Amsterdam treaty gives EU a more coherent structure, a modern statement of its

aims and policies, and brings some necessary improvements in the working of the institutions.

The EU after the Amsterdam treaty has broad objectives but these naturally interfere with

those in the Maastricht treaty. The classic aim is to develop an even closer union. It promotes

economic and social progress, meaning the abolition of internal frontiers, better economic and

social cohesion to assist the less-developed members to catch up with the EU average

(creation of the Cohesion Fund in 1993) and an economic and monetary unit, complete with a

single currency. It wants to create an international identity through a common security and

defense policy. It has introduced a formal citizenship and has also taken steps to strengthen

the commitment to democracy, to individual rights, to promote equality and to combat

discrimination. The treaty has also established the EU, as an area of free movement, security

and justice. Internally, the EU has general economic objectives relating to the single market,

agriculture and transport, the aim of economic and social cohesion and a new emphasis on

policy making in employment, social and environmental matters.

Another important step in the EU development was the Nice Treaty 7, which took place

on 11 December 2000. The treatys main concern was with EU enlargement, especially with

the institutional changes that would be needed to accommodate 12- 15 new members.

6 The Amsterdam Treaty, 2 October 19977 The Nice Treaty, 26 February 2001

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CHAPTER II. THE ECONOMICS OF EUROPEAN INTEGRATION

Fundamental Concepts

A. Purpose and progress of economic integration

The expression 'economic integration' covers a variety of notions. It may refer to the

absorption of a company in a larger concern. It may have a spatial aspect, for instance if it

refers to the integration of regional economies in a national one. In case of EU, economic

integration is always used with respect to international economic relations, to indicate the

combination of the economies of several sovereign states in one entity.

Economic integration is not an objective in itself, but serves higher objectives. The

immediate, economic, objective is to raise the prosperity of all cooperating units. The farther-

reaching objective is one of peace policy; namely, to lessen the chance of armed conflicts

among partners. Polacheck (1980), using data for 30 countries in the 1958-1967 period,

showed that doubling the trade between two countries leads to a 20 per cent decline in the

frequency of hostilities.

Used in a static sense, 'economic integration' represents a situation in which the national

components of a larger economy are no longer separated by economic frontiers but function

together as an entity. Used in a dynamic sense it indicates the gradual elimination of

economic frontiers among member states (that is to say, the abolition of national

discrimination), with the formerly separate national economic entities gradually merging into

a larger whole. Of course, the static meaning of the expression will apply in full once the

integration process has passed through its stages and reached its object.

Objects of integration

Economic integration is basically the integration of markets. Economists make a distinction

between markets of goods and services on the one hand, and markets of production factors

(labour, capital, entrepreneurship) on the other.

Free movement of goods and services is the basic principle of economic integration.As is well known from classical international trade theory the free exchange of goods

promises a positive effect on the prosperity of all concerned. It permits consumers to choose

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the cheapest good, generally widens the choice, and creates the conditions for further gain

through economies of scale, etc.

The obvious welfare gains from the liberalisation of product markets are a good economic

reason to start integration with that object. However, integration schemes tend to follow a

political logic rather than an economic one. The political reasons to begin integration at the

goods market are:

- lasting coalition between sectors demanding protection and sectors and consumers

demanding cheap imports is hard to accomplish;

- substitute instruments (such as industrial policy, non- tariff barriers, and administrative

procedures) can be used to intervene in the economic process;

- vital political issues like growth policy and income redistribution are guaranteed to remain

within national jurisdiction.

Free movement of production factors can be seen as another basic element ofeconomic integration. One argument for it is that it permits optimum allocation of labour and

capital. Sometimes, certain production factors are missing from the spot where otherwise

production would be most economical. To overcome that problem, entrepreneurs are apt to

shift their capital from places of low return to more promising places. The same is true of

labour: employees will migrate to regions where their labour is more needed and therefore

better rewarded. A second argument is that an enlarged market of production factors favours

new production possibilities which in turn permit new, more modern or more efficient uses of

production factors (new forms of credit, new occupations, etc.).

The choice of production factors as the object of the second stage in the integration process is

partly based on the economic advantages that spring from such integration. But here, too, we

have to consider the political logic. The integration of labour markets seems to be the obvious

choice in periods of a general shortage of labour A tangle of national regulations for wages,

social security, etc. seems to leave politicians sufficient opportunities for practical

intervention on the national level for them to accept general principles on the European level.

With capital-market integration the issue of direct investments seems straightforward; many

politicians may hope to attract new foreign investment in that way. For other capital

movements the willingness to integrate is less obvious because integration would imply

giving up the control of sensitive macroeconomic instruments.

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Policy approximation is the next stage of economic integration. In an economy which leaves

production and distribution entirely to the market, the elimination of obstacles to the

movement of goods and production factors among countries would suffice to achieve full

economic integration. Not so in modern economies, which are almost invariably of the mixed

type, the government frequently intervening in the economy. In economies of the mixed type,

integration cannot be achieved without harmonising the policies pursued by the governments

of the individual states. Policy making is on the whole more difficult to integrate than markets

for goods, services and production factors. Politicians are likely to be the more unwilling to

give up their intervention power, the more such elements are involved as employment policy

or budgetary policies (referring to expenditure on schools, subsidies, as well as revenues from

taxes).

Moreover, national civil servants tend to uphold their way of operating interventional schemes

as the most efficient, and since their very existence depends on complicated sets of rules, they

are hardly inclined, in general, to cooperate towards harmonised policy. Thus, the conditions

for a common currency or monetary integration will not readily be met. That is one reason

why currency integration is mostly introduced at a late stage of integration. Even later comes

the integration of points that touch the very heart of a nation's sovereignty, in particular the

acceptance of a common defence policy.

B. Positive and negative integration

With respect to modern mixed economies, Tinbergen (1954) distinguished negative

integration (that is, the elimination of obstacles), andpositive integration (that is, the creation

of equal conditions for the functioning of the integrated parts of the economy). The former's

demand on policy will be relatively simple (deregulation, liberalisation), but the latter will

always involve more complex forms of government policy (harmonisation, coordination). Let

us look somewhat closer at the differences.

Negative-integration measures are often of the simple 'Thou shalt not' type. They can be

clearly defined, and once negotiated and laid down in treaties, they are henceforth binding on

governments, companies and private persons. There is no need for permanent decision-

making machinery. Whether these measures are respected is for the courts to check, to which

individuals may appeal if infringements damage their interests.

Positive integration is more involved. It often takes the form of vaguely defined obligationsrequiring public institutions to take action. Such obligations leave ample room for

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interpretation as to scope and timing. They may, moreover, be reversed if the policy

environment changes. As a consequence, they hold much uncertainty for private economic

agents, who cannot derive any legal rights from them. Positive integration is the domain of

politics and bureaucracy rather than law. No wonder then that positive integration does not

present a built-in stimulus for progress. Because politicians are more likely to opt for positive

rather than negative integration, progress is likely to be slower, the higher the

stage of integration, that is the farther integration proceeds on the path towards a Full

Economic Union.

C. Stages of economic integration

As international trade and investment levels continue to rise, the level of economic integration

between various groups of nations is also deepening. The most obvious example of this is the

European Union, which has evolved from a collection of autarkical nations to become a fully

integrated economic unit. Although it is rare that relationships between countries follow so

precise a pattern, formal economic integration takes place in stages, beginning with the

lowering and removal of barriers to trade and culminating in the creation of an economic

union. These stages are summarized below.

A. FREE TRADE AGREEMENTS

The first level of formal economic integration is the establishment of free trade agreements

(FTAs) or preferential trade agreements (PTAs). FTAs eliminate import tariffs as well as

import quotas between signatory countries. These agreements can be limited to a few sectors

or can encompass all aspects of international trade. FTAs can also include formal

mechanisms to resolve trade disputes. The North American Free Trade Agreement (NAFTA)is an example of such an arrangement.

Aside from a commitment to a reciprocal trade liberalization schedule, FTAs place few

limitations on member states. Although FTAs may contain provisions in these areas if the

signatory countries agree to do so, no further harmonization of regulations, standards or

economic policies is required, nor is the free movement of capital and labour a necessary part

of a free trade agreement. FTA signatory countries also retain independent trade policy with

all countries outside the agreement.

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However, in order for an FTA to function properly, member countries must establish rules of

origin for all third-party goods entering the free trade area. Goods produced within the free

trade area (and subject to the agreement) may cross borders tariff-free, but rules of origin

requirements must be met to prove that the good was in fact produced in the exporting

country. In the absence of rules of origin, third-party countries seeking trade access to the

FTA area will choose the path of least resistance the country where they face the lowest

opposing tariff in order to gain effective entry to the entire FTA region.

B. CUSTOMS UNION

A customs union (CU) builds on a free trade area by, in addition to removing internal barriers

to trade, also requiring participating nations to harmonize their external trade policy. Thisincludes establishing a common external tariff (CET) and import quotas on products entering

the region from third-party countries, as well as possibly establishing common trade remedy

policies such as anti-dumping and countervail measures. A customs union may also preclude

the use of trade remedy mechanisms within the union. Members of a CU also typically

negotiate any multilateral trade initiative (such as at the World Trade Organization) as a

single bloc. Countries with an established customs union no longer require rules of origin,

since any product entering the CU area would be subject to the same tariff rates and/or import

quotas regardless of the point of entry.

The elimination of the need for rules of origin is the chief benefit of a customs union over a

free trade area. To maintain rules of origin requires extensive documentation by all FTA

member countries as well as enforcement of those rules at borders within the free trade area.

This is a costly process and can lead to disputes over interpretation of the rules as well as

other delays. A CU would result in significant administrative cost savings and efficiency

gains.

In order to gain the benefits of a customs union, member countries would have to surrender

some degree of policy freedom specifically the ability to set independent trade policy. By

extension, because of the increased importance of trade and economic measures as foreign

policy tools, customs unions place some limitations on independent foreign policy as well.

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C. COMMON MARKET

A common market represents a major step towards significant economic integration. In

addition to containing the provisions of a customs union, a common market (CM) removes all

barriers to the mobility of people, capital and other resources within the area in question, as

well as eliminating non-tariff barriers to trade, such as the regulatory treatment of product

standards.

Establishing a common market typically requires significant policy harmonization in a

number of areas. Free movement of labour, for example, necessitates agreement on worker

qualifications and certifications. A common market is also typically associated whether by

design or consequence with a broad convergence of fiscal and monetary policies due to theincreased economic interdependence within the region and the effect that one member

countrys policies can have on other member countries. This necessarily places more severe

limitations on member countries ability to pursue independent economic policies.

The principal advantage of establishing a common market is the expected gains in economic

efficiency. With unfettered mobility, labour and capital can more easily respond to economic

signals within the common market, resulting in a more efficient allocation of resources.

D. ECONOMIC UNION (AND MONETARY)

The deepest form of economic integration, an economic union adds to a common market the

need to harmonize a number of key policy areas. Most notably, economic unions require

formally coordinated monetary and fiscal policies as well as labour market, regional

development, transportation and industrial policies. Since all countries would essentially

share the same economic space, it would be counter-productive to operate divergent policies

in those areas.

An economic union frequently includes the use of a common currency and a unified monetary

policy. Eliminating exchange rate uncertainty improves the functioning of an economic union

by allowing trade to follow economically efficient paths without being unduly affected by

exchange rate considerations. The same is true of business location decisions.

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Supranational institutions would be required to regulate commerce within the union to ensure

uniform application of the rules. These laws would still be administered at the national level,

but countries would abdicate individual control in this area.

Basic Elements of the Stages of Economic Integration

Free Trade Agreement

(FTA)

Zero tariffs between member countries and reduced

non-tariff barriers

Customs Union (CU) FTA + common external tariff

Common Market (CM) CU + free movement of capital and labour, some policy

harmonization

Economic Union (EU) CM + common economic policies and institutions

Full economic union (FEU) implies the complete unification of the economies involved, and

a common policy for many important matters. The situation is then virtually the same as that

within one country. Given the many areas integrated, political integration (for example, in the

form of a confederacy) is often implied.

The transitions between the various stages of integration are fluent and cannot always be

clearly defined. The first stages, FTA, CU and CM, seem to refer to market integration in a

classical laissez-faire setting, the higher stages (EU, MU, FEU) to policy integration. In

practice, however, the former three stages are unlikely to stabilise without some form of

policy integration as well (for instance, safety regulations for a FTA, commercial policy for a

CU, or social and monetary policies for a CM (Pelkmans, 1980). between a customs union

and full integration, a variety of practical solutions for concrete integration problems are

likely to occur.

The stages of integration just sketched have two characteristics in common. They abolish

discrimination among actors from partner economies (internal goal). They may thereby

maintain or introduce some form of discrimination with respect to actors from economies of

third countries (external goal).

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D. Degrees of policy integration

Because countries are free to negotiate economic integration agreements as they see fit, in

practice, formal agreements rarely fall neatly into one of the four stages discussed above.

This can lead to some confusion of terminology and also confusion as to the state of economic

integration in some parts of the world. In the case of Canada, for example, the country is part

of a free trade area with the United States and Mexico. However, the North American Free

Trade Agreement also includes provisions that partially liberate the flow of labour and capital

in the region an element of a common market. In addition, Canada has in the past pushed to

curtail the use of trade remedy measures within North America. While this represents a desire

to advance one aspect of North American integration, the next formal step a customs union

does not appear to be a policy priority at this time.

All forms of integration described above require permanent agreements among participating

states with respect to procedures to arrive at resolutions and to the implementation of rules. In

other words, they call for partners to agree on the rules of the game. For an efficient policy

integration, common institutions (international organisations) are created. However, for the

higher forms of integration, such as a common market, the mere creation of an institution is

not sufficient: they require transfer of power from national to union institutions.

All forms of integration diminish the freedom of action of the member states' policy-makers.

The higher the form of integration, the greater the restrictions and loss of national

competences. The following hierarchy of policy cooperation is usually adopted:

- Information: partners agree to inform one another about the aims and instruments of the

policies they (intend to) pursue. This in-formation may be used by partners to change their

policy to achieve a more coherent set of policies., However, partners reserve full freedom to

act as they think fit, and the national competence is virtually unaltered.

- Consultation: partners agree that they are obliged not only to inform but also to seek the

opinion and advice of others about the policies they intend to execute. In mutual analysis and

discussion of proposals the coherence is actively promoted. Although formally the

sovereignty of national governments remains in-tact, in practice their competences are

affected.

- Co-ordination goes beyond this, because it commits partners to agreement on the (sets of)

actions needed to accomplish a coherent policy for the group. If common goals are fixed some

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authors prefer the term cooperation. Coordination often means the adaptation of regulation to

make sure that they are consistent internationally (for example, the social security rights of

migrant labour). It may involve the harmonisation (that is, the limitation of the diversity) of

national laws and administrative rules. It may lead to convergence of the target variables of

policy (for example, the reduction of the differences of national inflation rates). Although

agreements reached by coordination may not always be enforceable (no sanctions), they

nevertheless limit the scope and type of policy actions nations may undertake, and hence

imply limitation of national

competences.

- Unification: either the abolition of national instruments (and their replacement with union

instruments for the whole area) or the adoption of identical instruments for all partners. Here

the national competence to choose instruments is abolished.

E. Goods markets

Advantages

Fully integrated goods markets imply a situation of free trade among member states. People

aim for free trade because they expect economic advantages from it, namely:

- more production and more prosperity through better allocation of production factors, each

country specialising in the products for which they have a comparative advantage;

- more efficient production thanks to scale economies and keener competition;

- improved 'terms of trade' (price level of imported goods with respect to exported goods) for

the whole group in respect of the rest of the world.

Integration of goods markets implies first of all the removal of (all) impediments to free

internal goods trade. In modern mixed economies such negative integration is not sufficient,

however. For the market to function adequately there must be common rules for competition

on the internal market and for trade with third countries.

Obstacles to free trade

The free-trade area has been defined before as a situation where there are neither customs

duties or levies with similar effect, nor quantitative restrictions or indeed any factor impeding

the free internal movement of goods (the latter are often taken together under the heading of

non-tariff barriers, or NTB).

They can be described as follows:

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- Customs duties or import duties are sums levied on imports of goods, making the goods

more expensive on the internal market. Such levies may be based on value or quantity. They

may be indicated in percentages or vary according to the price level aspired to domestically;

- Levies of similar effect are import levies disguised as administrative costs, storage costs or

test costs imposed by the customs;

- Quantitative restrictions (QR) are ceilings put on the volume of imports of a certain good

allowed into a country in a certain period (quota), sometimes expressed in money values. A

special type is the so-called "tariff quota', which is the maximum quantity which may be

imported at a certain tariff, all quantities beyond that coming under a higher tariff;

- Currency restrictions mean that no foreign currency is made available to enable importers to

pay for goods bought abroad;

- Other non-tariff impediments are all those measures or situations (such as fiscal treatment,

legal regulations, safety norms, state monopolies, public tenders, etc.) which ensure a

country's own products' preferential treatment over foreign products on the domestic market.

Motives for obstacles

Obstacles to free trade are mostly meant to protect a country's own trade and industry against

competition from abroad, and therefore come under the heading of protection. Protection can

be combined with free trade. A customs union, for instance, prevents free trade with outside

countries by a common external tariff and/or other protectionist measures, while leaving

internal trade free.

Like individual countries, a customs union may-hope to benefit from protection against third

countries, that is, from import restrictions. From the extensive literature we have distilled the

following arguments in favour of such measures:

- Independence from other countries as far as strategic goods are concerned, a point much

stressed in the past and especially in times of war;

- The possibility of nurturing so-called "infant industries'. The idea is that young companies

and sectors which are not yet competitive should be sheltered in infancy in order to develop

into adult companies holding their own in international competition;

- Defence against dumping. The healthy industrial structure of an economy may be spoiled

when foreign goods are dumped on the market at prices below the cost in the country of

origin. Even if the action is temporary, the economy may be weakened beyond resilience;

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- Defence against social dumping. If wages in the exporting country remain below

productivity, the labour factor is said to be exploited; importation from such a country is held

by some to uphold such practices and is therefore not permissible;

- Employment boosting. If the production factors in the union are not fully occupied,

protection can turn the demand towards domestic goods, so that more labour is put to work

and social costs are avoided;

- Diversification of the economic structure. Countries specialised in one or a few products

tend to be very vulnerable; marketing problems of such products lead to instant loss of

virtually all income from abroad. That argument applies to small developing countries rather

than to large industrialised states;

- Shouldering-off balance-of-payment problems. Import restrictions reduce the amount to be

paid abroad, which helps to avoid adjustments of the industrial structure and accompanying

social costs and societal friction (caused by wage reduction and a restrictive policy, etc.).

Pleas for export restriction have also been heard. The underlying ideas vary considerably. The

arguments most frequently heard are the following:

- Some goods are strategically important and must not fall into the hands of other nations; that

is true not only of military goods (weapons) but also of incorporated knowledge (computers)

or systems;

- Exportation of raw materials means the consolidation of a colonial situation; a levy on

exports will hopefully increase people's inclination to process the materials themselves. If not,

then at any rate the revenues can be used to start other productions;

- If too much of a product is exported, the importing country may be induced to take

protective measures against a series of other products; rather than that, a nation may accept a

'voluntary' restriction of the exports of that one product.

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CHAPTER III. DECISION-MAKING IN THE EUROPEAN UNION

AFTER AMSTERDAM

1 THE DIFFERENT KINDS OF EUROPEAN UNION LAW

There are three different kinds of law in the European Union (EU):

i. Primary legislation, i.e. the Treaties (see Annex 1) and other agreements possessing similar

status;

ii. Secondary legislation, i.e. the regulations, directives, decisions, recommendations and

opinions based upon the Treaties (see below);

iii. Case law, i.e. judgements of the European Court of Justice and of the Court of First

Instance.

Collectively they are known as the Acquis communautaire .

Primary legislation is agreed on the basis of direct negotiations between Member States'

governments. Such agreements are drawn up in the form of treaties which are subject to

ratification in national parliaments (but not by the European Parliament!). The same is true of

any subsequent amendments to them. In some Member States, recourse may be had to a

referendum.

THE TREATIES

The European Union is based upon and governed in accordance with a number of Treaties

between the Member States. These Treaties are the most fundamental part of the acquis

communautaire and in every case have been the subject of (sometimes prolonged)

negotiations leading to unanimous agreement amongst governments and ratification by

national parliaments and, in some cases, by referendumtoo. The Treaties not only serve as the

Unions constitution but are also prescriptive in that several of them set objectives for the

future, usually accompanied by a deadline and sometimes by a precise timetable. Most of the

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Treaties contain provision for their own amendment and, with one exception, were concluded

for an unlimited period. In common with the rest of the acquis communautaire, the Treaties

must be accepted in their entirety by states wishing to join the Union.

The table below lists the main Treaties and Acts in chronological order, together with the date

of entry into force and a brief summary, where relevant, of how each relates to the others. The

first three Treaties, establishing three legally distinct Communities are sometimes referred to

as the founding Treaties.

Treaty In force Summary

European Coal and SteelCommunity(ECSC) Treaty (Treaty

of Paris, 1951)

1952 Concluded for 50 years amongst theSix on the basis of the Schuman Plan

European Economic Community

(EEC) Treaty (Treaty of Rome,

1957)

1958 Concluded on the model of the ECSC

Treaty but with a much broader range

of objectives; the most important of the

Treaties

European Atomic Energy

Community (EAEC or Euratom)

Treaty (also signed in Rome, 1957)

1958 A sector-specific Treaty of limited

application

Treaty establishing a Single Council

and a Single Commission of the

European Communities (Merger

Treaty, 1965)

July 1967 Amended the ECSC, EEC and

Euratom Treaties to create a Council

and a Commission serving all three

Communities

Treaty amending certain Budgetary

Provision of the Treaties establishing

the European Communities (and of

the Merger Treaty) (Treaty of

Luxembourg, 1970)

1971 Laid down a new procedure for settling

the Budget and introduced the system

of own resources

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Treaty amending certain Financial

Provisions of the Treaties

establishing the European

Communities (and of the Merger

Treaty) (1975)

1978 Refined the budgetary procedure to

give the European Parliament more

power and set up the Court of Auditors

Act concerning the election of the

representatives of the European

Parliament by direct universal

suffrage (European Elections Act,

1976)elections

1978 The basis for the first (1979) and

subsequent European elections

Single European Act (1986) July 1987 Amended and expanded the EEC

Treaty (most importantly by extending

the scope of qualified majority voting)

and laid down new procedures for

foreign policy co-operation

Treaty on European Union

(Maastricht Treaty, 1992)

November

1993

Established the European Union;

amended and expanded the EEC

Treaty; created the codecision

procedure; created pillars of

Common Foreign and Security Policy

(CFSP) and Co-operation in the Fields

of Justice and Home Affairs (JHA)

Treaty of Amsterdam (1997)

1999

Amended the Maastricht Treaty and

the EEC Treaty; extended co-decision;

added new provisions on social policy;

incorporated the Schengen acquis into

EEC Treaty; created constructive

abstention; strengthened transparency

Treaty of Nice (2001) 2003 Istitutional structure changes

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Acquis communautaire:a phrase used to cover all legislation in force including the Treaties in

their entirety, all Directives, Regulations, Decisions, Trade and Association Agreements as

well as the case law of the European Court of Justice and of the Court of First Instance.

Secondary legislation is drawn up using a variety of different procedures, depending upon the

Treaty article chosen by the Commission as the legal base for the proposal in question.

Case law results from judgements of the European Court of Justice and of the Court of First

Instance meeting Luxembourg, normally in response to referrals from national courts or as a

result of actions brought by the Commission in its capacity as the guardian of the Treaties.

The different types of secondary legislation are:

i. Regulations: binding and directly applicable in all Member States without any

implementing national legislation. Management of the day to day aspects of the Common

Agricultural Policy, for example, is by means of regulations.

ii. Directives: binding on the Member States with respect to the result to be achieved and with

respect to the deadline, but with the choice of method left to the Member States. Directives

have to be implemented in national legislation in accordance with each Member State's own

procedures. There can be a substantial delay between the approval of a directive in the

Council of Ministers and its implementation in the national law of the Member States.

Enforcement - by no means even - is normally the responsibility of the national authorities.

iii. Decisions: may be issued either by the Council or by the Commission and are binding

upon those to whom they are addressed, normally a Member State or a commercial enterprise.No national implementing legislation is required.

iv. Recommendations and Opinions: have no binding effect, and may be issued either by the

Council or by the Commission.

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2 THE INSTITUTIONS

2.1 The European Council

At least twice a year, the Heads of State or Government meet as the European Council to

provide the Union with overall direction and to reach decisions on the key issues. European

Council meetings (sometimes known as Summits) are also attended by Member States'

Foreign Ministers and by the President of the Commission and the President of the European

Parliament. European Council agreements have no legislative force, but must first be turned

into legislation on the basis of a proposal from the Commission in the normal way.

The European Council is an institution that stands over the three pillars of the EU, that links

them together and that takes on a central leadership role. If the Council of Ministers has

always been embodied in the European Treaty, the same does not apply for the European

Council. The European Council was established as a result of the summit meetings involving

Heads of State and Governments which have been taking place since 1969. These meetings

used to take place at irregular intervals; a resolution passed at the Paris Summit Conference in

1974 made them a permanent fixture in the shape of the European Council, yet they were not

embodied in the Treaty establishing the European Community. The European Council deals

with the central issues effecting the EU, in particular those connected with European Political

Cooperation (EPC) which is an institution founded in 1970 at intergovernmental level in an

attempt to coordinate foreign policy. Because of its composition, the European Council

developed into the highest decision-making authority - although this was not intended by the

treaties.

Its role was made more explicit with the Single European Act (SEA) in 1986/87. The Treaty

of Maastricht on European Union followed on from this, confirming the Council's function of

driving forward European union as a whole and locking together the different policy areas.

Article D of the Treaty establishing the European Union states: "The European Council shall

provide the Union with the necessary impetus for its development and shall define the general

political guidelines thereof". This applies in particular for the guidelines concerning Common

Foreign and Security Policy, with the Treaty of Amsterdam, which came into force on the 1st

of May 1999, even providing for policy-making power over the Western European Union.

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The European Council is also regularly engaged when the ministers of departments in the

Council of Ministers are unable to reach agreement and package deals which stretch across

policy areas become necessary.

There is no doubt that the European Council as the European Union's dedicated body for

reflecting the intergovernmental components of the Union has gained a great deal of influence

over the past few decades. Indeed, following the introduction of the new constitution, which,

since the "No" votes from the referendums in France and the Netherlands, has failed for the

time being, would have increased even more. Having said this, however, it would be wrong to

conclude that there was a general trend in the EU towards more intergovernmentalism.

2.2 The Council of Ministers

The Council is composed of the Ministerial representatives of the Member States. Ministers

of Agriculture attend Council meetings when agriculture is being discussed, Ministers of

Transport when transport matters are on the agenda, and so on.

The Council, which has its own secretariat of EU civil servants, is the supreme legislative

authority in the Union, although in an increasing number of areas its power is exercised

jointly with the European Parliament. The Council takes decisions: by unanimity, by simple

majority, by qualified majority, each Member State's vote being "weighted" in accordance

with its population.

Member States take turns to hold the Presidency of the Council for a period of six months.

Council meetings are prepared by a Committee of Member States' Permanent Representatives

(i.e. Ambassadors) known as COREPER.

Formally known as the Council of Ministers, the Council of the European Union is the central

decision-making authority in the EC. The Council is responsible for passing laws proposed by

the Commission and with the involvement of the European Parliament. This has been the

Community's fundamental decision-making procedure from the very beginning. The relative

weight of the three institutions involved, however, has changed. The capacity in which

members attend Council meetings changes according to the policy area being discussed for

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example the European Community of Agricultural Ministers or Environmental Ministers

might meet. Moreover, the respective member of the Commission is also present.

Work in the Council would take up a large proportion of the time available to ministers from

member states. Given that they can only spend short periods in Brussels, they need support.

The Committee of Permanent Representatives of the EC (COREPER) in Brussels plays and

important role here. It is made up of the permanent representatives from the member states in

Brussels and their deputies and meets up on a weekly basis. This Committee is responsible for

monitoring and coordinating the work of around 250 committees and working groups, which

are staffed by civil servants from the member states. These, in turn, are responsible for

preparing the dossiers for COREPER and the Council at a technical level. COREPER deals

with most of the decision-making preparations as far as content is concerned.

The Council's Secretariat encompasses a staff of around 2,500 working in six departments. Its

duties are primarily of an administrative nature, meaning that it is responsible for things such

as preparing the agenda for work to done, drawing up reports, translation services, looking

into legal questions etc. The illustration below offers an insight into the structure of the

Council.

All decisions were initially taken using a system of unanimous voting because of the

Luxemburg Compromise. Since the mid 1980s, however, and especially since the Treaty of

Maastricht and the Treaty of Amsterdam there has been an increasing move towards qualified

majority voting as the basis for decision making. This development has continued following

the Treaty of Nice. That being said, however, the expansion of qualified majority voting goes

hand-in-hand with a major obstacle to the ability to apply this procedure brought about by the

triple majority rule (a qualified majority of weighted votes, a majority of states and a qualified

majority of populations (62%), which was also set down in the Treaty of Nice. In addition to

this, the European Parliament's powers of co-decision have been consistently expanded.

2.3 The European Commission

It is currently composed of 25 members (November 2005), who are proposed by the

governments of the member states and appointed for a five-year term; it is now also subject to

a vote of appointment by the European Parliament before it can be sworn in. The

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commissioners are not appointed as negotiators for their respective states, but are supposed to

act completely independently in the best interests of the Community. They are supported by a

staff of around 20,000 officials - less than some large cities! which is split up into 24 so-

called directorates general (such as transport, agriculture, external relations, regional policy

etc.) and nine services, which, in turn, are also split up into directorates and departments.

The Commission's main tasks can be summarized under four headings.

Right of initiative: Every decision taken by Council has to be based on a proposal from the

Commission. The Commission's task is to act as an engine of integration drawing up

proposals for the development of Community policy. This right and authority to determine the

EU's agenda, to submit proposals at a particular juncture and to link differing initiativestogether gives the Commission considerable influence in the legislative procedure.

Guardian of treaties: The Commission is responsible for monitoring the application of treaty

provisions and decisions made by other EC institutions and can appeal to the European Court

of Justice when violations are identified.

Executive authority for the implementation of Community policy: This includes the

administration of finances as well as the implementation of EC policies. Of course, this does

not mean that the Commission is responsible for making sure that the countless number of

decrees and guidelines are implemented in individual member states. Bearing in mind the size

of the Commission's staff, this would be an impossible task. No, this is carried out by the

administrations in the member states or their regional sections. The main task of the

Commission, then, is to monitor and supervise the actions being taken by the member states.

External representation: The Commission represents the EU at the GATT negotiations and

international organisations; this sometimes takes place together with the member states and/or

the respective presidents.

The most important characteristics of the Commission are: Its distinct differentiation at a

functional level and the fact that it represents a multi-national bureaucracy using an extensive

system of committees (commitology) within which very close cooperation takes place both

with the administrations of member states and with national and European associations

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Under the Maastricht Treaty, the Commission's term of office was extended to five years to

coincide with the European Parliament's term. The appointment of the President and other

members of the Commission is subject to the approval of the Parliament.

2.4 The European Parliament

The European Parliament (EP) is our first institution at a supranational level that carries a

name familiar to us from national political systems.

While the EP might sound familiar, it is quite different from national parliaments. If the role

played by and the powers available to the EP in the Community have changed constantly ever

since the foundation of the ECSC, these changes have also steadily increased its influence

within the EU. Important milestones in this regard have been the extension of its budget

powers in (1975), the introduction of the first direct elections (1979), the introduction of the

cooperation procedure (1986) and the introduction of the codecision procedure (1992), as well

as considerable expansion of this codecision procedure into other areas of application since

the Treaty of Amsterdam. Other changes have also been introduced with the Treaty of Nice.

The role of the EP as a co-legislator together with the Council of Ministers were further

expanded and strengthened.

EP is composed of cross-national parties, such as the European People's Party and European

Democrats (EPP-ED), which with 279 MPs currently represents the most powerful grouping

in the Parliament, and the Party of European Socialists (SPE/E) with 199 MPs. This

illustration also shows you the number of MPs sent by each of the member states.

The Parliament's 20 standing committees are incredibly important for the work of the EP and

its influence During their 5 years in office, those members of the European Parliament who

are active in the committees are able to acquire a great deal of specialist knowledge. This

specialist knowledge not only enables them to follow the work being carried out by the

Directorates General, the Commission and the Council of Ministers, it also enables them to

bring more influence to bear than the official description of their responsibilities would

suggest. Another important aspect in this respect is their close cooperation with the respective

Commission departments and with transnational and national associations.

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The main characteristics of the EP can be summarized thus: The European Parliament is a

multi-national chamber undergoing constant change; it features ideological - differing

political groupings from across the member states - and national differences - nationality of

the MPs from the individual member states. As with the other institutions addressed so far, the

European Parliament also demonstrates significant functional differentiation. And, finally, the

incredibly close links and intensive cooperation with the Commission, often against the

Commission, should also be emphasized.

Making an assessment based on a comparison with national parliaments depends on how one

looks at it. From a statistical point of view taken today, it can be said that the importance of

the EP still lags behind that of national parliaments, but goes much further than anything

found in parliamentary chambers or committees in international organisations. View the

development of the European Parliament during the last two decades, however, and it is

strikingly clear that its importance compared to the other institutions has grown enormously:

Another important indication of the "supranationalization" of the EC.

The Parliament and the Council constitute the Union's joint budgetary authority. The

Parliament has to give its assent to any trade, co-operation, association or membership

agreement concluded between the Union and a non-member country.

Under the Maastricht Treaty, the Parliament was given the right to set up committees of

enquiry and to appoint an Ombudsman to investigate allegations of maladministration by the

institutions of the Union.

2.5 The European Court of Justice

The European Court of Justice (ECJ), just like the European Parliament, sounds familiar to

systems existing in national states. Indeed, its power of jurisdiction also corresponds to that

often found in national democratic political systems. The ECJ is responsible for making sure

Community law is upheld. It is responsible for ruling on legal disputes between member

states, on disputes between the EU and member states, on disputes between EU institutions

and authorities as well as on disputes between individual citizens and the Union. In addition

to this, judges in member states can turn to the Court of Justice to rule on pending cases

involving the interpretation of Community law.

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There is also a Court of First Instance that exists alongside the Court of Justice. The Court of

First Instance was established in 1989 to ease the Court of Justice's workload. Its jurisdiction

includes direct actions from citizens and companies against the actions or failure of EU bodies

to act, as well as action for damages against the EU.

Employment conflicts between the EU and its employees have been handled by the Civil

Service Tribunal since the autumn of 2005. There are two ways of calling in the ECJ. The first

is over the preliminary rulings procedure, which permits national courts to apply for an

interpretation of certain aspects of Community law to help these national courts to reach a

decision on a current case. The second way is over direct petitions.

But its actual influence only really becomes clear after taking a look at its work in individualareas. The European Court of Justice has been a major influencing factor in making the

constitution of the EU more supranational by laying down rules such as the principle of direct

effect - which means for every citizen without having to call in national states first - of EU

law and theprimacy of Community law over national law.

Moreover, the European Court of Justice has also had a large bearing on other areas of EU

policy. For example, in a revolutionary ruling it established the principle of mutual

recognition of standards in other member states, which put an end to the extremely slow and

time-consuming process of harmonising standards and, in turn, went a long way to making the

internal market project possible. One of the main reasons for the ECJ's influence came as a

result of a clever, targeted and successful strategy to incorporate the national courts into the

administration of EU justice.

Looking at this, it might be easy to get the impression that these landmark decisions were

made in the past and that they can no longer be taken to reflect the influence of the ECJ today.

A more recent judgement (November 2005), however, demonstrates that it would be quite

wrong to get this impression. This judgement might lead to the Commission gaining influence

in the area of criminal law and has led to heated discussions.

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The European Court of Justice, consisting of 25 judges and 8 Advocates-General, is based in

Luxembourg. So, it is responsible for arbitrating in disputes relating to the interpretation and

application of the Treaties and of legislation based upon them. Its judgements are binding

upon those to whom they are addressed and it has the power to levy fines on firms found to be

in breach of Union law. Under the Maastricht Treaty, the Court also has the power to impose

fines on Member States which fail to carry out their Treaty obligations.

2.6 The Court of First Instance

This Court was established by Article 11 of the 1987 Single European Act and first became

operational in 1989. It consists of 25 judges, one from each Member State. There are no

Advocates-General. It has jurisdiction over a number of fields but of particular importance to

business are its powers in competition and intellectual property law and over the

Commissions anti-dumping procedures.

2.7 The Court of Auditors

The Court of Auditors, composed of one Member from each Member State, is also based in

Luxembourg. It is responsible for overseeing all expenditure from the Budget of the Union.

Its findings are contained in an annual report submitted to the Council and the European

Parliament. The Court, which has no power of sanction, may also undertake special

investigations into particular sectors of the Budget.

2.8 The Economic and Social Committee (ECOSOC)

Set up in 1957 by the Treaty of Rome, members of ECOSOC appointed by the Council on therecommendation of Member States' governments and have a four-year term of office.

ECOSOC consists of representatives of employers (Group 1), workers (Group 2) and various

interest groups (Group 3). It covers areas such as agriculture and fisheries, industry and

commerce, financial and monetary questions, social and cultural affairs, transport and

communications, trade and development policy, nuclear questions and research, regional

development, environment and consumer affairs. On its own initiative it can offer opinions on

other subjects covered by the Treaties. The Treaty of Amsterdam allows the European

Parliament to consult ECOSOC.

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2.9 The Committee of the Regions

The Maastricht Treaty established a new European Union body, the Committee of the

Regions, which is based in Brussels. Composed of representatives of regional and local bodies

and appointed by the Council for a four-year term on a proposal from the Members States, the

Committee has advisory status along the same lines and across broadly the same range of

issues as the Economic and Social Committee. Its nationality composition is identical with

that of the Economic and Social Committee

3 THE LEGISLATIVE PROCESS

Legislation may be adopted under the Consultation Procedure, the Co-operation Procedure or

the Co-Decision Procedure. The choice of procedure depends upon the Treaty article which

the Commission has chosen as the legal base for its proposal.

Until the entry into force of the Single European Act in July 1987, all legislation was adopted

under the simplest of these procedures, known as the Consultation Procedure. This

procedure requires the Council to obtain the opinion of the European Parliament (and

sometimes also the opinions of ECOSOC and the Committee of the Regions) before adopting

legislation. However, neither the Council nor the Commission is obliged to accept the

amendments contained in the Parliaments opinions and it is only by refusing to give an

opinion that the Parliament can exert pressure. Once the Parliament has given its opinion, the

Council can adopt the proposal unamended, adopt it in an amended form, or be unable to

agree. In the last case the proposal remains "on the table".

The Co-operation Procedure, introduced in 1987, allows the Parliament two opportunities to

scrutinise and possibly amend the Commissions proposal. At the first stage, the Parliament,

ECOSOC and the Committee of the Regions give their opinions in the same way as under the

Consultation Procedure. Only the Parliament can propose amendments. The Commission

indicates which amendments it accepts before the proposal is forwarded to the Council, which

then draws up its "common position". Studies have shown that about 40 per cent of the

Parliaments amendments are accepted at this stage. The Councils common position is sent

back to the Parliament which may within three months approve it, reject it, or adopt

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amendments to it. The Council may then adopt the proposal in question, although it can do so

only by unanimous agreement :

i. when it wishes to amend a proposal on its own initiative;

ii. when it decides to take up amendments which have been proposed by the Parliament but

rejected by the Commission;

iii. when it decides to adopt a common position which the Parliament has rejected;

iv. when it wishes to override amendments which the Parliament has adopted by an absolute

majority (314 votes) at second reading and which are supported by the Commission.

The Maastricht Treaty (effective from November 1993) introduced the Co-Decision

Procedure in order to strengthen the Parliaments influence over legislation. Once the Treaty

of Amsterdam comes into effect, the Co-Decision Procedure will replace the Co-operation

Procedure in all but a very few areas and become the normal mode of Council-Parliament

involvement in legislation. The essential difference between the two procedures is that the

Co-Decision Procedure :

allows for the convening of a Conciliation Committee in which at the final stagedifferences between the Council and the Parliament may be resolved;

allows the Parliament, as a last resort, the right to reject the proposal outright by anabsolute majority.

Under the Co-Decision Procedure, the Council and the Parliament are jointly responsible for

the final adoption of legislation. It has been estimated that some 60 per cent of the

Parliaments amendments are incorporated into the legislation.

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5 THE INTER-GOVERNMENTAL PILLARS

The Maastricht Treaty created a European Union which rests upon three "pillars". The central

pillar is the European Community (EC) itself and the decision-making procedures described

here are those which apply to action within the EC pillar, normally known as the "first pillar".

The procedures in the other two pillars (the Common Foreign and Security Policy and Co-

operation in the fields of Justice and Home Affairs) are different, for although the Council of

Ministers plays much the same role, the legislative instruments are not the same. The

Commission is less influential and recourse cannot be had to the Court of Justice. Action in

these fields is essentially intergovernmental in character.

Under both pillars, provision exists for the European Parliament to be kept informed and

consulted. Members of the European Parliament are also entitled in the normal way to put

questions to the Council of Ministers. In so far as action is taken under either heading which

involves a charge to the Budget of the Union, the Parliament's powers with respect to the

Budget (see above) may be brought into play.

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CHAPTER IV. THE BUDGET OF EU

I. The expenses made from the budgetActions and projects funded by the EU budget reflect the priorities set by the EU countries at

a given time. These are grouped under broad spending categories (known as headings) and

thirty-one different policy areas.

The EU budget finances actions and projects in policy domains where all EU countries have

agreed to act at Union level. Such decisions are taken for very practical reasons. Joining

forces in these areas can yield greater results and costs less.

There are other policies, however, where the EU countries decided not to act at Union level.

For example, national social security, pension, health or education systems are all paid for by

national, regional or local governments. The 'subsidiarity principle' ensures that activities

best managed at national, regional or local level are funded at the most appropriate level and

that the Union does not intervene.

a. For growth and jobs

For the next seven years, the EU countries have decided to dedicate a considerable part of

their joint efforts and of the EU budget to creating more economic growth and jobs.

Sustainable growth has become one of the main priorities of the Union. The EU economy

needs to be more competitive and less prosperous regions need to catch up with the others.

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Over the period 200713, out of every euro spent from the EUs annual budget, eight cents

will go to make the EU more competitive.

Achieving long-term growth also depends on tapping and increasing the EUs growth

potential. This priority, known as 'Cohesion', calls for helping especially less advantaged

regions transform their economy to face global competition. Innovation and the knowledge

economy provide an unprecedented window of opportunity to trigger growth in these regions.

Out of every euro spent, 36 cents will go to such cohesion activities.

b. Natural resources

Thanks to their geographic and climatic diversity, the EU countries produce a large variety of

agricultural products, which European consumers can buy at reasonable prices. The EU

efforts in this field have two main goals. First, what is produced must correspond to what

consumers want, including high safety and quality for agricultural products. Second, on the

production side, the farming community should be able to plan and adapt production to

consumers demand while respecting the environment.

In addition, a successful management and protection of our natural resources must also

include direct measures to protect the environment, restructure and diversify the rural

economy and promote sustainable fishing. After all, animal infections, oil spills and air

pollution do not stop at national borders. Such threats require extensive action on many fronts

and in several countries. Over the period 200713, 43 cents out of every euro will be spent

from the EU budget each year in favour of our natural resources.

c. Fundamental freedoms, security and justice

Similarly, the fight against terrorism, organised crime and illegal immigration is much

more effective when EU countries share information and act together. The EU strives for a

better management of migration flows into the Union and extensive cooperation in criminal

and judicial matters as well as secure societies based on the rule of law. About one cent in

every euro from the EU budget will be spent to this end.

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d. Being European: Debate, dialogue and culture

More than 495 million of people live in the EU. They speak many different languages and

have different cultural backgrounds. Together they form the invaluable wealth of the

European Union: cultural diversity built on common values. The EU budget promotes and

protects this cultural heritage and richness, while encouraging active participation in social

debates around us. It also aims to protect public health and consumer interests. About one

cent in every euro will go to such activities under this heading known as Citizenship.

e. Global player

The impact of EU funds does not stop at our external borders. For many, the EU budget

delivers the most needed emergency aid in the aftermath of a natural disaster. For others, it is

a long-term assistance for prosperity, stability and security. About six cents in every euro go

to cooperation with countries about to join the Union, other neighbouring countries, and

indeed to poorer regions and countries around the world.

f. Administrative costs

Around six cents in every euro are spent on running the European Union. This covers the staff

and building costs of all EU institutions, including the European Parliament, Council of

Ministers, European Commission, European Court of Justice and European Court of Auditors.

II. The sources of money

The European Union has its 'own resources' to finance its expenditure. Legally, these

resources belong to the Union. Member States collect them on behalf of the EU and transfer

them to the EU budget.

Own resources are of three kinds (the figures below refer to the forecasts for 2007).

Traditional own resources (TOR) these mainly consist of duties that are chargedon imports of products coming from a non-EU state. They bring in approximately

EUR 3 billion or 15 % of the total revenue.

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Revenue flows into the budget in a way which is roughly proportionate to the wealth of the

Member States. The UK, the Netherlands, Germany, Austria and Sweden, however, benefit

from some adjustments when calculating their contributions.

On the other hand, EU funds flow out to the Member States in accordance with the priorities

that the Union has identified. Less prosperous Member States receive proportionately more

than the richer ones and most countries receive more than they pay in to the budget.

III. The decision procedure of the budget

The Commission, Parliament and Council of Ministers have different roles and powers in

deciding the budget.

As a first step, these three institutions conclude a binding agreement to ensure budgetary

discipline, long-term planning and to enhance cooperation in connection with annual budgets.

This interinstitutional agreement includes the multi-annual financial framework, which

establishes annual upper limits (known as ceilings) per heading. Annual budgets must

respect these ceilings.

The most recent financial frameworks cover the seven-year periods from 2000 to 2006 and

2007 to 2013. The budgetary procedure as established in the EU treaties lasts from 1

September to 31 December. In practice, it begins much earlier. For example, preparations for

the 2007 budget started before the end of 2005.

There are two types of budget expenditure: compulsory and non-compulsory expenditure.

Compulsory expenditure covers all expenditure resulting from international agreements and

the EU treaties. All other expenditure is classified as non-compulsory.

The Council of Ministers has the final word on compulsory expenditure and the European

Parliament on non-compulsory expenditure. The importance of this distinction has declined

with successive interinstitutional agreements as they collaborate closely at all stages.

Commissions preliminary draft budget

All EU institutions and bodies draw up their estimates for the preliminary draft budget

according to their internal procedures.

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The Commission consolidates these estimates and establishes the 'preliminary draft budget',

which takes into account the guidelines or priorities for the coming budget year. The

Commission submits the preliminary draft budget to the Council of the Union in April or

early May before the budget Council meets in July. The Council of Ministers and the

Parliament must work on the basis of this proposal from the Commission.

Council's first reading of the budget

After a conciliation meeting with the Parliament, the Council of Ministers adopts the draft

budget with amendments, if any, which is forwarded to the Parliament in September.

Parliaments first reading

At its first reading in October, the Parliament may decide to amend the Council's draft. It will

discuss controversial matters in 'trialogue' meetings with the Council Presidency and the

Commission beforehand. Parliament's first reading, along with its suggestions, is then referred

back to the Council.

Councils second reading

Before its second reading in November, the Council has a further conciliation meeting with

the Parliament and tries to reach an agreement on the whole of the budget. It then adopts its

second reading.

Parliament adopts or rejects the budget (second reading)

The Parliament may modify the Councils latest text before it votes on the final budget in

December. If approved, the President of the Parliament signs the budget into law. The

Parliament may also reject the budget.

Similar procedures apply to the adoption of letters of amendment to the preliminary draft

budget (presented when new information comes to light before the adoption of the budget)

and ofamending budgets (in the case of inevitable, exceptional or unforeseen circumstances

occurring after the budget has been adopted).

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IV. The structural funds

The Structural Funds are the primary source of European Union funding, with the exception

of support for agriculture. Some 90% of the European Union finance available for projects

goes to the Structural Funds.

Through the Structural Funds, the European Union aims to support those regions which are

less developed or in industrial decline, and to support training schemes for those seeking re-

entry into employment.

The present rules for Structural Funds apply from 2000 to the end of 2006. There are currently

four main Structural Funds. These are:

1. European Regional Development Fund (ERDF): ERDF concentrates on less-favoured regions. The main focus is on productive investment, infrastructure and SME

development. There are also considerable funds available to support infrastructure

development in SIP areas and community based regeneration.

2. European Social Fund (ESF): ESF supports human resource development measures(training and skills development). The main aim is to promote a high level of

employment and social protection, equality between men and women, sustainable

development, and economic and social cohesion.

3. European Agricultural Guidance and Guarantee Fund (EAGGF): The EAGGFfinances the Common Agricultural Policy and rural development.

4. Fisheries Instrument for Fisheries Guidance (FIFG): FIFG supports projectsrelated to fisheries restructuring and marketing.

Objective Programmes

The four Structural Funds combine to fund Objective Programmes. There are currently three

Objectives through which funding is allocated. The Objectives are:

Objective1

The Objective 1 Programme provides support for regions in Europe where development is

lagging behind.

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Objective2

The Objective 2 Programme provides support for areas undergoing economic and social

conversion

Objective3

The Objective 3 Programme provides support to tackle long-term unemployment and social

exclusion.

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CHAPTER V. MONETARY POLICY IN THE EU

1. Role and provisions of the European Monetary System

The European Monetary System is being considered as a first attempt at Economic and

Monetary Union, but it is really more like a mechanism devised for creating a zone of

monetary stability. The idea was floated by German Chancellor, Helmut Schmidt and French

President, Valery Giscard dEstating. The Council had adopted the idea, in the form of a

resolution on the establishment of the European Monetary System (EMS) and related

matters. The objectives were of stabilizing exchange rates, reducing inflation, and preparing

for monetary integration.

The provisions of the EMS were the following:

1. In terms of exchange rate management, the EMS will be at least as strict as the

snake.8 In the initial stages of its operation and for a limited period of time, member

countries currently not participating in the snake may opt for somewhat wider margins

around central rates. In principle, intervention will be in the currencies of participating

countries. Changes in central rates will be subject to mutual consent. Non-member countries

with particularly strong economic and financial ties with the Community may become

associate members of the system. The European Currency Unit9

(ECU) will be at the centre

of the system; it will be used as a means of settlement between European Economic

Communities monetary authorities.

2. An initial supply of ECUs (for use among Community central banks) will be created

against deposits of US dollars and gold on the one hand, and member currencies on the otherhand. The use of ECUs created against Member States currencies will be subject to conditions

varying with the amount and the maturity.

3. Participating countries will coordinate their exchange rates policies vis--vis third

countries. Ways to coordinate dollar interventions should be sought of, avoiding simultaneous

8In 1972, the six Member States-Belgium , France, West Germany, Italy, Luxembourg and Netherlands- set up a

snake in the tunnel mechanism to narrow the fluctuation margins between the Community currencies (thesnake), in relation to fluctuations against the US dollar (the tunnel).9

An abstract currency, a standard legal tender used to calculate the budgetary contributions of each MemberState; it represented a basket of currencies adjusted periodically, to reflect the relative economic power of eachMember State.

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reserve interventions. Central banks buying dollars will deposit a fraction and receive ECUs

in return; likewise, central banks selling dollars will receive a fraction against ECUs.

4. No later than 2 years after the start of the scheme, the existing arrangements and

instructions will be consolidated in a European Monetary Fund.

5. A system of closer monetary cooperation will only be successful if participating

countries pursue policies conductive to greater stability at home and abroad; this applies to

deficit and surplus countries alike.

In essence, the EMS is concerned with the creation of an EC currency zone within

which there is discipline in managing exchange rates. The discipline is known as the

exchange rate mechanism (ERM), which asks a member nation to intervene to reverse a

trend when 75% of the allowed exchange rate variation of 2.25% is reached. The EMS asks

neither for permanently and irrevocably fixed exchange rates between the member nations nor

for complete capital convertibility. Moreover, it does not mention the creation of a common

central bank to be put in charge of the member nations foreign exchange reserves and to be

vested with the appropriate powers. Hence, the EMS was not EMU, although it could be seen

as paving the way for one.

2. The Delors Report

By 1987 the EMS and the ERM within it appeared to have achieved considerable

success in stabilizing exchange rates. This coincided with the legislative progress towards

EMU and other fronts. The EC summit held in Hanover on 27 and 28 June 1988 decided that,

in adopting the Single Act, the EC Member States had confirmed the objective of progressive

realization of economic and monetary union. A committee composed of the central banks

governors and two other experts, chaired by Jaques Delors, was given the task of studying

and proposing concrete stages leading towards this union. The committee reported just before

the Madrid summit, the following year, and its report is referred to as the Delors Report on

EMU.

The committee was of the opinion that the creation of the EMU must be seen as a

single process, but in stages, progressively leading to the ultimate goal. Thus the decision to

enter upon the first stage should commit a Member State to the entire process. Emphasizing

that the creation of the EMU would necessitate a common monetary policy and require a high

degree of compatibility of economic policies and consistency in a number of other policy

areas, particularly in the fiscal field, the Report pointed out that the realization of the EMU

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would require new arrangements which could be established only on the basis of a change in

the Treaty of Rome and consequent changes in national legislations.

According to the Report, the first stage should be concerned with the initiation of the

process of creating the EMU. During this stage there would be a greater convergence of

economic performance through the strengthening of economic and monetary policy

consideration within the existing institutional framework. In the monetary field the emphasis

would be on the removal of all obstacles to financial integration and of the intensification of

cooperation and coordination of monetary policies. Realignment of exchange rates was seen

to be possible, but effort would be made by every Member State to make the functioning of

other adjustment mechanisms more effective. The committee was of the opinion that it would

be important to include all EC currencies in the exchange rate mechanism of the EMS during

this stage. The 1974 Council decision defining the mandate of central bank governors would

be replaced by a new decision indicating that the committee itself should formulate opinions

on the overall orientation of monetary and exchange rate policy.

In the second stage, which would commence only when the Treaty has been amended,

the basic organs and structure of the EMU would be set up. This stage should be seen as a

transition period leading to the final stage; it should constitute a training process leading to

collective decision-making, but the ultimate responsibility for policy decisions would remain

with national authorities during this stage. The procedure established during the first stage

would be further strengthened and extended on the basis of the amended Treaty, and policy

guidelines would be adopted on a majority basis.

In the monetary field, the most significant feature of this stage would be the

establishment of the European System of Central Banks (ESCB) to absorb the previous

institutional monetary arrangements. The ESCB would s

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