Integration goals and tasks

The Community of States has succeeded in growing from a customs union to an economic and monetary union within a period of 40 years.

Integrated markets and the European currency area create excellent conditions for dynamic growth accompanied by stable prices. This potential, however, can only be fully exploited if market processes can

be developed and political decisions adapted to suit the requirements of the global economy.

The promotion of balanced economic development was only very vaguely addressed in the founding treaties and there was no talk of a possible distribution of income between member countries or regions.

Gradually, the EC introduced policies for political reasons in order to level out incomes between regions and countries (Bollen, 1997): in 1975 the Regional Development Fund, following the entry of Great Britain, Ireland and Denmark; in 1988 the structural funds were doubled with expansion to the south and the internal market programme; 1992 saw a further doubling: the creation of a cohesion fund in 1993 was one of the concessions set out in the Maastricht Treaty¹, made to Spain, Portugal, Ireland and Greece to facilitate their preparation for monetary union.

Finally, the strengthening of economic and social cohesion was explicitly taken up in the Maastricht Treaty as one of the goals of the EU.

The distribution of income between countries and regions via long-term transfer payments – as happened in the nation states – cannot and should not be achieved via the EU budget. They should neither take place in the form of an EU-wide levelling out of finances, as is repeatedly demanded on the occasion of the introduction of the euro, nor in the current form of the structural funds. The national budgets or the automatic stabilising mechanisms on the level of the member states already ensure at least the same degree of stabilisation as the US budget – an argument (e.g. see Giovannini, 1992) that is widely gaining acceptance.

The contribution that the structural funds make towards regional convergence has not yet been confirmed. It is not only the fact that comparable regions receiving comparable support sums are developing in completely different ways that gives rise to considerable doubt as to their effectiveness. Even the EU commission came to the conclusion during an evaluation of the internal market programme that the structural funds available make no significant contribution to the convergence of the regions (European Economy, 1996)². The numerous

1 The means available for structural funds were quadrupled over the course of 10 years: an increase from 6.4 million € in 1988 EU12 to 28.6 million € EU15; (statement of current prices; European Commission).

2 "...taking into account differences between Member States, the speed of

problems already conceptionally involved in the structural funds policies can be summarised as follows: the call for additionality that obliges the receiver countries to co-financing leads to a mainly undesirable increase in public debt and to a distortion of its structure³; the narrow fencing off of areas sometimes provokes absurd distortions in allocation; and a dominant role of the national or regional and local authorities renders a guarantee that the funds are being put to good use impossible (Hooge, 1996).

Besides, a subvention policy with no time limit has not yet helped any country to obtain more efficient structures. The distribution of income in the EU has always been justified by the fact that the adjusting of structurally disadvantaged countries or regions to suit the Community market is difficult and costly. Here the fact that the potential profit is the greatest for these countries is forgotten (see above).

Risk-sharing in order to overcome asymmetric shocks⁴ and financial assistance with a strict time limit for the putting into action of EU policies are tenable. In the case of long-term assistance for the sustaining of industrial branches that have lost their international competitiveness (e.g. steel) there is great danger that this assistance could hinder structural adjustment and present an obstacle to development in the medium term.

Many problems could be avoided – in the EU, at the expansion negotiations and on the side of the entry candidate countries – if the structural funds were to be replaced by credit (at market conditions) (if nothing else is possible with interest subsidies). This task could be taken over by the EIB, which has experience in financing investment projects.

convergence of the regions is broadly similar. The question here is to what extent convergence is due to the Single Market Programme or to structural funds support ... Econometric analysis shows that variances in structural fund spending per capita did not have a significant effect on regional growth variations" (European Economy, 1996, no. 4, p. 11).

3 The disadvantages involved in transfer of finances are known from the literature.

4 At any rate the probability of an asymmetric shock in European economic and monetary union is decreasing (European Economy, no. 44,1990 and no.

53, 1993).

The fact that the great increase of structural funds available is mainly politically-motivated becomes even clearer if we analyse the Agenda 2000 i.e. the EU’s response to the financial and political challenge of expansion. An unchanged framework of expenditure of 1.27% of the EU’s GDP has been established for the years 2000-2006 in order not to overtax the current EU member countries (also politically). A ceiling of 4% of the GDP per member country should limit the influx of structural funds available. The structural funds should continue to make up a good third of the EU budget (0.46% of the EU’s GDP). Leeway for expenditure on agriculture is restricted with these constraints. As the inclusion of the new member countries in the price support system of the CAP will automatically lead to an increase in income for the agricultural sector in the countries joining the EU, the new members will have to miss out on the direct payments. In the medium term it is also hoped on the side of the EU that, in harmony with the progress made at the WTO negotiations, intervention prices will sink further, direct payment will increase, that there will be altogether lower expenditure on agriculture and that at some point the reform will be successful enough to make a uniform conversion of the CAP possible in an extended EU.

The Agenda 2000 clearly shows that the basic economic principles of the cohesion policy the funds should be for the benefit of those regions with the lowest income – will be turned upside down if this is politically possible. The decisions arrived at in Berlin regarding the Agenda 2000 predict that the present member states will receive around five times as much in structural assistance between 2000 and 2006 as the new member states (213.010 billion € against 46.860 billion €, Official journal of the European Communities, 1999)⁵. In connection with Eastern Enlargement the EU is obviously only aiming at allocative goals because it does not consider a redistribution financially viable. The EU has admitted that its structural policy is full of contradictions and not economically justifiable. The Agenda 2000 is evidence that Eastern Enlargement brings about the necessity for long overdue reforms that should be taken much further from an economic point of view. A drastic

5 The financial forecasts go by the assumption that the first accessions will take place in 2002.

reduction of structural funds available is just as necessary as a radical reform of the CAP.

Through the dismantling of the CAP and the structural funds it would also become clearer to a wider public that the EU does not derive the justification for its existence from the distribution of income within the framework of the EU budget. The existence of a community justifies itself through a gain in prosperity, which ensures an integrated economic area, connected via a uniform legal framework with a supranational jurisdiction and the long-term goal of political integration.

In preparing itself for economic and monetary union the EU has turned more and more away from dirigiste market regulations. The historical burden of staunchly defended market regulations at the beginning of the EU should be, consequently, dismantled. The EU would emerge from this process stronger and less afflicted by internal conflict. A clearer definition and conversion of the integration goals of the EU could increase acceptance of the union, both inside and outside the Community.

These arguments will be clarified in figure 1. The vertical axis measures the costs and benefits of integration. It is assumed that the marginal costs will increase with the number of member countries, but the marginal utility will decrease after a certain number of members (see Gros/Steinherr, 1995, pp. 507-509, for a more detailed description). The optimal EU membership M* is smaller than Mº (the EU-15) regarding certain institutional tasks. This supposition that the EU-15 have already exceeded the optimal size for the Union is based on the fact that e.g.

some member countries either do not want to take part in monetary union (their cost-benefit analysis turned out negatively) or are not allowed to take part (the cost-benefit analysis of the Community turned out negatively). An additional enlargement can only be economically justified under these conditions if either the marginal benefits (MB) can be shifted upwards through reform or the marginal costs (MC) shifted downwards. Both require reforms in the entry candidate countries and the community.

Figure 1: