Realpolitik and the European Union: Chapter 7. Maastricht’s Unfinished Business.

Maastricht’s unfinished business.

The Maastricht Treaty marked the point when the project began to become German, rather than French, Maastricht was essentially a French strategy to corale Germany, to bind it into a European home. Germany played along for a while. The way things turned out, Maastricht corralled France. This development may be traced through the way that German doubts about its Latin neighbours played out; the first decade of the single currency; the deep contradictions embedded in the Lisbon Treaty; and the limbo of European law; and EU efforts create a regulatory state.

Germany deals with Gallic vision.

There was thus plenty of unfinished business from the years 1988 to 1992, when national positions on the project for monetary union were negotiated “in Europe’s name”. [1] In the Maastricht Treaty of 1992 Chancellor Kohl had given Germany’s “irrevocable commitment” to the EU’s boldest project to date, the creation of the Euro. But Germany suspected France of seeking to inveigle it into an inflationary regime, while France feared being absorbed in a stability oriented system run according to German preferences, not French interests.

From the start, German preferences prevailed: when monetary union was implemented in the years 1999-2002, its operations were fashioned by the difficulties which the Kohl governments in particular faced in selling an “irrevocable” commitment to the Bundesbank and the German people.

First, the Bundesbank’s deployed its structural power over the DM in financial markets to eject first the pound sterling and the lira in August 1992 from the exchange rate mechanism, and then had to come to terms with the French government to widen the exchange rate fluctuation bands to 15% either side of the central rates. That was the end in effect of Prime Minister’s Major’s efforts for the UK  to be “at the heart of Europe”.The pound sterling remained outside the exchange rate mechanism, and after the damage done to the domestic economy of trying to stay in it regardless of the cost, never  became a member of monetary union. Broad public support for monetary union had been trashed irrevocably. That was the moment in effect when a gulf opened up between Prime Minister Heath’s strategy to make the UK officially more supra-nationalist than the Pope, and what the British public would accept.

Second, German Finance Minister Waigel launched the idea of a “stability pact”, with the clear intent of preventing Italy’s re-entry: the assumption was that Italy would not be sufficiently continent in fiscal matters to qualify for monetary union. On the other hand, if Italy—at the end of the 1990s, the third major exporter in the world economy–remained outside the Euro, it would continue to be treat public finances as a trough, devalue, and seize market shares from German speaking producers. Better the calculation ran, to have Italy in the tent than outside. Italy’s Prime Minister, Romano Prodi, was rash enough to consider this an opportunity to join, on the grounds that it was realistic to think that the Italian state in Rome was amenable to reform.

Prodi presumably had not read a major study on Italian regional politics.[2] Little in the political culture of Italy, it concluded, has changed since the time that Dante Alighieri(1265-1321) wrote the Divine Comedy. The authors argue that “social capital” in Italy’s 20 regions is directly descended from its medieval roots. The concept is defined as  “networks and norms of civic engagement,” involving trust between members of a community. The authors found that northern Italy’s history of community, guilds, clubs, and choral societies (social capital) underpinned modern prosperity and a thriving civic culture. Conversely, the hierarchical order established in southern Italy created an autocratic system of governing, replicated in the Mafia’s organisation. These differences helped to explain differences of  civic involvement and greater economic prosperity many centuries later. Since publication, and despite surface political upheavals, little has changed. A film Quo Vado (2015) became Italy’s greatest ever box office hit. It depicted a middle aged Italian “fannulone”- do nothing- who would go to any lengths to defend his “posto fisso” – his job for life-in the administration. This depiction of do nothing Italian civil servants obviously touched a chord.

Third, over the decade German business became converted to monetary union as continued dollar unpredictability on global exchange markets threatened to undercut German export price competitiveness. World financial markets voted for the DM at the time of the Kobe earthquake of January 1995: the next day, spokespersons from the Wirtschaft declared their conversion to the benefits of membership in a fixed exchange rate mechanism. But rates were floating, and French spokespersons did everything to flatter the DM , thereby helping to bring the DM into the Euro about 20% over value, while France entered way below its purchasing power parity to the DM. This only added to the burden on Germany inherited from Kohl’s decision to export West German welfare provisions to eastern Germany, costed at an indefinite transfer of resources from west to east amounting to 5-6% gnp per annum.

When the Euro was launched as a whole sale currency in 1999, and then as a retail currency in January 2002, it supporters anticipated that crisis was inevitable. As Romani Prodi, EU Commissioner President, said at the time : “I am sure the Euro will oblige us to introduce a  new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.”

Prodi was right about the crisis, but not in his expectations about the response to it in Berlin. The critics of the single currency proved much closer to predicting what might happen. Their argument was simply that hitching disparate national economies together in a currency union, and without a fiscal federal budget, [3] was an extremely hazardous undertaking to say the least.[4] Had implementing the commitment to a single currency been first priority, all member states would have had to liberalize labour alongside product and capital markets, flanked by the creation of Europe-wide welfare and social policies. But the EU’s  Lisbon strategy, launched in 2000 to make the EU “the most competitive and dynamic knowledge-based economy in the world”, was not about liberalization so much as protecting national social and welfare policies against “social dumping”-in other words against freer labour markets.[5]

The reality in the EU, too,  has turned out closer to German than to French preferences. The EU has facilitated intra-EU labour mobility, but mobile workers represent 1.7% only of the EU labour force, well below US levels;[6] capital mobility was introduced as of 1990, and in the first decade of the Euro, funds headed southwards through Europe’s financial system as southern member states, particularly Spain, experienced rapid growth; labour markets in Euroland, notably in France, were not liberalized: an ECB Task Force on labour markets referred  to the “heterogeneity” of responses to the post-2010 crisis, and the “limited wage adjustments” that did occur(See Graph below with 2003 data)[7];  there was no question of sharing intra EU debt, as demonstrated by German insistence during the Maastricht Treaty negotiations on a no bailout provision; finally, member countries held to their idiosyncratic business cycles, not least because the impact of global competition differed on each one of their economies. To put it bluntly, Euroland member states entered the EU without being properly prepared. They have paid a heavy price.

Productivity, participation rates in EU member states

Source: EU statistics

As John Gillingham points out,[8] Delors’ trick could only have been realised if Europe had a government. It did not. All that Delors conjured was the expectation that it would. EU foreign policy soon descended into farce and tragedy with the implosion of Yugoslavia. The Single Market remained a glass half full. The EU’s Regional Fund became a slush fund; Delors’ Social Chapter was designed to negotiate Europe wide regulations which preserved the aquis national, and served to scapegoat Thatcherism, which applied to the Eurozone would have promoted liberal labour, capital, product and services markets, all of which are a pre-requisite for a successful single currency area; membership expanded eventually to 28, but the eastern Europeans were given a raw deal. Delors fostered EU citizenship to take precedence over that of the individual state, which it did not; and he campaigned for monetary union to be “irreversible”, which market speculation in the crisis since 2010 indicates it is. A year later, Delors admitted that  “Anglo-Saxons” “had a point” that a single central bank and currency without a single state would be inherently unstable. [9] 

One money, many labour markets.

Introducing the single currency was a revolutionary step, which required completion of a liberal market programme. But enthusiasm for liberalization petered out, particularly on labour markets, highly sensitive to national politics.  Competition between national labour markets rather than integration across them was the pattern. Labour market institutions and attitudes remained firmly national. This was particularly the case of Germany, where business ground down unit labour costs; the government and unions kept wage rises moderate; and  western German taxpayers transferred the equivalent of 6% of gdp to eastern Germany in fulfillment of Chancellor Kohl’s programme to export West Germany’s social market policies to the eastern Länder.  German taxpayers were not prepared to repeat the experience when France and the southern European countries began to talk about EU-wide fiscal transfers in 2009, as the Euro crisis gathered pace.[10]

Far from converging, the economies within the Euro diverged. Every indicator of competitiveness from unit labour costs, to innovation, investment in R&D, and market friendliness showed that the gap opening up between northern and southern Europe was wide and getting deeper. (See Graph above)France occupied an uncomfortable position in between. As late developers, and with their own specific histories and political cultures, the southern countries and France did not have the infrastructure of training; the density of small and medium businesses; the expanding technology hubs and the close ties between corporations, research institutes, national and local governments and banks that characterized Germany, The Netherlands, Finland, Austria as Euro members- and Sweden, outside it. The results showed up in the huge, and growing northern European current  surplus , equivalent to the total current account deficit of France and the Mediterranean countries.

Initially, under the Presidency of the Dutchman, Wim Duisenberg, the ECB raised its benchmark rate to just under 5%, with consumer prices at 3% or below. In November 2002, the Frenchman Jean-Claude Trichet took over as President. With France and Germany favouring expansionary policies, ECB interest rates were lowered significantly coinciding with a growth in EU cross-border banking. [11] By 2008, only Germany and Italy had primary net positive government balances. Here was another area where expectations had been flouted. The growth and stability pact, imposed by Germany in 1996 in the hope of keeping Italy out of the Euro, was flouted in spirit before the currency was a year old. Commissioner Prodi declared that the pact was “stupid”.[12] The Commission then lectured Ireland and Portugal, two small and peripheral member states, on allowing their deficits to exceed the 3% GDP rule. Ireland was let off the hook, but Portugal was obliged to cut its government deficit. Thereupon, Germany and France, in November 2003, suspended the EU’s budget rules by rebuffing a call by the Commission to bring their deficits back under the limit. Clearly, rules designed for Italy, and applicable to small countries, could not be applied to France and Germany.

Nonetheless, triumphalism was the tone of the Commission’s report of  May 2008 on Euro’s first ten years.[13] “The Euro”, it declared,”is a resounding success.”  The currency, it was noted,  enjoyed the support of a plurality of EU citizens.[14]  A single monetary policy combined with national but coordinated fiscal policies had fostered macroeconomic stability. In the Euro’s first decade, inflation was down to just over 2%, with nominal interest rates at around 5%, while real interest rates were down to levels not seen for several decades. Government deficits were low, culminating in an overall deficit for the Euro area of 0.6% in 2007, the lowest in several decades. Indeed ten out of the fifteen Euro-area countries either recorded a budget surplus in 2007 or were very close to balance. Growth over the period had been  2.1%, not far short of the U.S. 2.6%. A record of 16 million jobs had been created, while unemployment had fallen to about 7% of the labour force. Not least, the late developing countries of Spain and Portugal had managed to catch-up on, and Ireland to overtake, the Euro area’s average per capita income, while membership of the Euro continued to expand. Intra-Euro area trade and investment had grown. The decline in risk premia resulting from the creation of the Euro had also boosted capital formation, and labour productivity. Financial market integration had accelerated, while the creation of the Euro had made the Euro area a pole of stability, helping to shield the Euro-area economy against external shocks. On a global scale, the growing status of Europe as an actor on the world stage was seen as measurable in the increased international use of use of the Euro.

Meanwhile, northern gains in intra-Euro market share were financed by capital ouflows, with German Landesbanken in particular sourcing low cost funds in the Euro bond markets, and investing them in the U.S. mortgage market and in southern European construction and infrastructure projects.[15] The BIS calculated that German banks invested over 1 trillion Euros in non-German bonds of euro area countries since the fixing of exchange rates in 1996, yielding an estimated 200 billion Euros of profits sum equivalent to the total profits of German banks over the period.[16] Indeed, as had been expected, the creation of the Euro stimulated cross-border lending, the growth of 16 larger banking groups holding over 25% of their assets outside their home countries, and a boom in euro -denominated private-sector bonds, and to a lesser extent of equity markets. The result though was that banks from the core European countries, including France, were highly exposed to the economies of the periphery when the downturn hit in the winter and spring of 2008-09.

From European Constitution to Lisbon Treaty.

Negotiating Europe’s political union proved an even more arduous task than monetary union. Member states remained jealous of their powers, which the EU was designed to diminish. The Maastricht Treaty made provisions for its own revision, eventually achieved when the Amsterdam Treaty of 1997 came into force two years later. Unresolved problems were meant to be tidied up by the Treaty of Nice, which also yielded meagre results. This prompted the member states to produce a new, clearly supranational legal basis in the form of a Treaty Establishing a Union for Europe. Drawn up during the Constitutional Convention of 2003-2004, and presided by former French President, Giscard d’Estaing. the conference delivered a 400 page draft constitution for the EU.

The Convention’s tone was incontestably supranational. “The EU’s draft Constitutional treaty, one study on the Constitution stated, proposes the most radical reform of the institutions ever put forward”.[17] Majority voting was extended into at 45 policy areas in such sensitive areas as farm policy, regional funds and asylum. The powers of the European Parliament were enhanced. The EU now enjoyed three Presidents (Council, Commission, Parliament) alongside a High Representative of the Union for Foreign Affairs and Security Policy.  The subordination of national parliaments to EU institutions was made clear by the provision that if a third of national parliaments believed that a proposed EU law exceeded the Union’s powers, they could force the European Commission to reconsider, but not to block the measure. In the last resort, they could ask the European Court of Justice to adjudicate.

The widest expansion of EU powers was proposed in the field of law. The draft proposed giving the EU a legal personality; the right to represent member states when it wants; a sweeping, and legally binding Charter of Fundamental Liberties; and a supremacy clause actually giving the ECJ the powers to override national laws which it had claimed but never had sanctioned explicitly by Treaty. Article I-6 of the draft European Constitution stated that “The Constitution and law adopted by the institutions of the Union in exercising competences conferred on it shall have primacy over the law of the Member States.” [18]

The draft Constitution was not well received. Aware that EU popularity in the UK was less than lukewarm, Blair made a  pledge in New Labour’s manifesto for the 2005 general elections to submit the draft Constitution to referendum. Not to be outdone, President Chirac followed suit. But in May, the French voted Non, with a 55% of voters rejecting the Treaty in a turnout of 69%.  In June, the Dutch voted Nee by 61.6% in a turnout of 63% of the electorate. The Luxemburg and Spanish voted in favour, but six other planned referenda were cancelled. Voters objected to a shift on control over major policy issues to Brussels; with a European Muslim population at 23 million, there was worry about further EU responsibility for immigration and asylum; this was related to concern about a large influx of Muslims from Turkey, with whom accession talks were about to open; in France, the Non voters saw the EU as an agent of globalization, fast food stores, or EU-associated restrictions on the pleasures of hunting, shooting and fishing.

After a pause for reflection, the Constitutional draft was rejigged as the Lisbon Treaty. As Valéry Giscard d’Estaing wrote, “the institutional proposals of the constitutional treaty … are found complete in the Lisbon Treaty, only in a different order and inserted in former treaties.” [19]

The Irish eventually voted for the Treaty, and the Czeck Republic fell into line. In Germany, a case was brought before the Constitutional Court to the effect that the treaty was unconstitutional. In  its judgement, [20] the Court  confirmed that while the treaty was compatible with the Basic Law, the powers of the German Parliament to supervise how the German government votes in the  Union, were insufficient. Ratification of the Treaty would require stronger oversight powers. These were subsequently voted.

In its conclusion, the Court made the crucial statement that the EU remained “an association of sovereign national states” (Staatenverbund), and not a federal state (Bundestaat). If another intergovernmental conference were to be called to create a European democratic polity, Germany’s “accession to a European federal state would require the creation of a new constitution”. The (democratic) structure of German state authority was therefore protected. Such concern for the rights of British voters to sanction and supervise their lawmakers was not visible in the UK.

Further judgements confirmed this position. In its  judgement on the Greek bailout, the Court judged fiscal powers could not be shared, a position that was confirmed. [21] As Paul Kirchhof, a former constitutional judge, declared: “The European Union is a contract between sovereign states and as such a political space of secondary rank”. He added: “There never will be a European state as long as the German constitution has life”.[22]

The Court did not exclude the move to a federal European Union; it just pointed out that the bar of achieving it was very high. Handing fiscal powers to the EU as it was would  eviscerate national democracy-the accusation thrown at the EU leadership over the political de-fenestrations of the Greek and Italian premiers in late 2011. If the constitutional process were to be re-launched—the appetite for doing so in Brussels was absent, after the marathon of negotiations leading to the Lisbon Treaty- national budgetary powers could be handed, the Court implied, to EU institutions. But they, and their powers, were yet to be defined, and the mandate they received could only pass the democratic test if the peoples of Europe were to vote on a non-national basis, with all European citizens having an equal weighting as one citizen, one vote.

 A contested legal system.

The Lisbon Treaty settled for fudge, not clarity, with regard to EU law. The European Court of Justice claims supremacy over national Courts.[23] In practice, this is contested by the member states and by national courts, which reserve themselves the right to review the constitutionality of EU law under national constitutional law. Indeed, the fact that the Constitutional Convention draft was rejigged as a Treaty is as clear an indication as possible that the EU is, for Germany, and in the words of Judge Kirchof, “a political space of second order rank”. This was not the case for the UK: 1972 ECA Section 2 made absolutely clear that the EU was a political space of first order rank.

The dominant view in the UK about the role of international law is very different to that prevailing in Germany. In Germany, it may be paraphrased as stating that the obligations of Germany regarding international law can only be obligations of they are compatible with the Basic Law. The UK view, deriving from the work of Hersch Lauterpacht, is that international law is a moral project and that the interpretation of international law as a reflection of the interests of the states to pursue their own interests , is destructive of it. [24]

The two positions-German and British-differ in that the Constitutional Court is a strict interpreter of the Basic Law, and may be said to never miss an opportunity to place discussion about EU law in relation to the fundamental rights of German citizens. In the UK, the Act declared EU law to be supreme, which the Court considered to be the case at the time, but most definitely neither France not Germany did.

These differences came to the fore in the 1972 European Communities Act which gave parliamentary sanction to the supremacy of EU law. This has never been the position of the German Constitutional Court, as evident in its judgement on the Lisbon Treaty.

A Treaty is a document freely entered into by sovereign states, whereas a constitution writes the rules for a sovereign territory. Article I-6 of the Constitution, the clearest possible statement of the EU as a supranational entity, found its way into Annex 17  of the Lisbon Treaty: Annex 17 is entitled “Declaration Concerning Primacy”. This states: “It results from the case-law of the Court of Justice that primacy of EU law is a cornerstone principle of Union law. According to the Court, this principle is inherent to the specific nature of the European Community. At the time of the first judgment of this established case law (Costa/ENEL,15 July 1964, Case 6/641 there was no mention of primacy in the treaty. It is still the case today.(my italics) The fact that the principle of primacy will not be included in the future treaty shall not in any way change the existence of the principle and the existing case-law of the Court of Justice.” [25] In other words, the Court claims supremacy, but that supremacy is not recognized in any Treaty form. For the member states, it is a provisional convenience.

A provisional convenience is not a sound basis for extravagant claims by the European Court of Justice to over-ride national law. Following the German Constitutional Court’s judgment on Lisbon, Article 23 of the basic Law was modified to protect the inalienable rights of German citizens as laid down in the Basic Law. The article spells out in some detail that the evolution of the EU has to be “committed to democratic, social and federal principles, to the rule of law, and to the principle of subsidiarity, and that guarantees a level of protection of basic rights essentially comparable to that afforded by the Basic Law”. The Bundesrat and the Bundestag have a duty to hold the EU to account in these regards. In other words, no longer is the EU to be negotiated by selected élites behind closed doors; it has to cleave to the principles laid down in the Basic Law. It is a major step to ensure that if there be a European Union, it be in the semblance of Germany.

Not surprisingly, the European Court’s claims are as contested as are claims that the rule of law prevails in the EU. EU élites never cease to appeal to the rule of law. But, in effect, member states cherry-pick. [26] Rules  and laws are flouted;  monetary union rules are consistently bent by the EU’s own institutions; member states regularly fail to enforce EU rules; given the lack of legitimacy, ECJ rulings are not respected; despite the hype about “l’acquis communautaire”, member states all too often refuse to abide by previous agreements and commitments. The EU is in a half way house, what the Catholic Church used to call limbo between heaven and hell. In more secular terms, heaven, for supra-nationalists  is a federal Europe, and hell is the return of nationalism, and with it the balance of power. In 2017, though, there is no balance but imbalance, with Germany on top. What is more, Germany gives every sign of enjoying its primacy, and not regretting it as many commentators prefer to argue.

The EU regulatory state.

The EU labours valiantly to square the circle between filling the democratic deficit, and building the blocs of what has been called the regulatory state.[27] According to this view, the EU’s redistributive functions (budget, activities of the European Investment Bank-EIB) have little to do with regulation. What matters-in parallel to the boom in quangos in the UK- are the EU’s agencies, like the ECB, the European Environmental Agency, or the European Chemicals Agency. There are over 40 such agencies, divided into four different groups. The EU in effect   begets quangos like there is no tomorrow. The crisis of 2012-13 saw the creation of the Financial Stability Mechanism, and the Stability Treaty strengthening the powers of the supra-national bodies over national government finances. The 2015 immigration emergency saw the Commission rooting to strengthen the Frontex Agency, to  co-ordinate more with Europol and Eurojust, and to strengthen the European Asylum Support Office. In September 2016, the decision was taken to create a coastal and frontier guard. In other words, the way the EU works is to first create a “breakthrough” in terms of integration-say the free travel zone, or the single currency- and then deal with the implications on an ad hoc basis.

The EU is a Fabian paradise. Because the EU’s ambition is to create a super-state, and it still has a long way to go before achieving its objective, the EU policy process is forever widening the scope of its competences and policies.  Every new competence holds an infinity of sub-fields for future development, ie for progress; and the details in every particular field and sub-field are as grains of sand in the desert, which only experts can know about. According to, there are now more than 40,000 legal acts in the EU; 15,000 Court verdicts and 62,000 international standards. For example the EU chemical directive, REACH, came partly into force on 1 July 2009. It specified that no member state could ban a particular chemical on its own-a good example of mission creep at the expense of national parliaments. Only the Commission could propose a change to the legislation. Of the 267 chemicals that environmentalists wanted to ban, the Commission would only investigate seven of them. This suggests that the big chemicals corporations-BASF, Bayer, Shell, Air Liquide-were influential in the Commission’s choice.

The rationale for the development of this governance infrastructure is that policy is best made by experts with neutral views,  rather than insiders who run corporatist arrangements to recycle public funds to their members. This thesis came under attack in the 1990s, with enlargement of the EU to Sweden, for whom transparency in decision-making is a central virtue of constitutional democracy. Eventually a transparency register has been created so that organizations seeking access to the Commission or Parliament have to sign in, and provide information about their lobbying activities. But when the Volkswagen diesel emissions scandal broke in 2015, it was the US Environmental Protection Agency which blew the whistle. It thereby  exposed the emptiness of Brussels’ claim to serve as the world’s conscience on climate change and undermined its credibility as a regulator. The scandal reveals both that Brussels is an easy touch to large corporate interests, and in addition has become too much a Vorort of Berlin. It is just not credible that Volkswagen’s highly skilled workforce; their trade union representatives on the VW board; the board itself, the German auto industry and German government were in the dark about what was going on.

Since the Maastricht Treaty, there have been a flurry of intitiatives to strengthen the democratic component of EU decision-making: the European Parliament has been granted more co-decision powers with regard to the budget, law making and in international affairs, and to invest the President of the Commission and his co-Commissioners. As a result, in June 2014, the European Council confirmed Jean-Claude Juncker-the candidate of the largest party in the parliament, the essentially Christian Democrat and German-dominated Popular Party- as President of the Commission. Maastricht also  sanctioned  the idea of European citizenship, in complement to national citizenship. These include a list of rights: free circulation around the EU; right to vote in European and municipal elections; a red-backed passport and so on. In its efforts to bring policy “closer to the citizens”, the EU creates its own lobbies to lobby it for more EU initiatives. Not satisfied to wait on lobbies flocking to Brussels to support EU objectives, the EU now feeds its own expansion.

Nonetheless, turnout to the European elections has continued to fall . “Brussels” is deeply unpopular across the EU-and for reason.[28] The promises made on “Brussels” behalf have not come true. Monnet’s élites  lack the democratic legitimacy without which their ambitions are pure pie in the sky. They indulge in mission creep, invent new competences, cannot balance their budget and in 2012, raised their own pay and benefits in the midst of Europe’s deep crisis. As one French commentator observes, ruefully, the EU has failed “to promote the adherence of (Europe’s) peoples to the supranational political system which is the EU”. [29] The reason, she says, is the crisis of national democracy, not the “democratic institutions” of the EU. There is no suggestion here that member states powers have been hollowed out, or that some member states, to paraphrase George Orwell, are more equal than others.

The gap between the rhetoric of post modern politics and the grubby greed that characterises much of “Brussels” politics may be illustrated by reference to the EU budget. Notoriously, the fiercest battles in the EU are over who get what, when and how-one hard nosed definition of politics.[30]   The UK story is a case in point. When the UK joined the EEC, 90% of the budget went on farm expenditures, with France the prime beneficiary. Before the UK joined, the EEC Six rapped up the budgetary arrangements for farm spending, and also laid down the principles for fisheries, knowing full well that the UK would be the new source of funds to keep the CAP financed, and also would have to in effect wind down its fishing fleet by handing over  the largest expanse of waters to EEC governance. As Bertie Armstrong,Bertie Armstrong, chief executive of the Scottish Fisherman’s Federation told a House of lords Select Committee,  the flaws in the EU fishing policy had their roots in the politics of joining the European Community in 1973. “Fishing was considered expendable and British waters were given to the EC as part of the accession negotiations. It was a deliberate act but an act of folly. Now we have the opportunity to right it,” he said.[31]

The Labour government of Prime Minister Wilson obtained a regional fund, initially aimed to provide funding to the UK regions, as a visible sign that there would be some budgetary benefit to entry. The Regional Fund turned out to have a very different focus. In 1979, post-Franco Spain put in its candidacy for membership in the EEC. With 30% of the employed population still in agriculture, Spain would be a major recipient of EEC funds. That is one reason why Prime Minister Thatcher was more than justified in insisting that the formula for UK contributions, negotiated under Heath, should be revised, and it was also one very good reason for France to block Spain’s entry for fear of competition from Spain on its own farm product markets, and because France would be tapped as a net contributor. The turnaround in French policy came in 1983, since Mitterrand had decided to align the franc on the DM, and had to confront an alliance between Chancellor Kohl and Felipe Gonzalez, Prime Minister of Spain. Kohl promised he would do everything to bring Spain into the EEC, which for reasons of his Grand Strategy to contain Germany, had now become the main vehicle for his foreign policy. Similar calculations inspired the enlargements of the EEC to the Nordic countries, then to the central and eastern European member states in the 2000s. The Nordic states, Germany, Austria, Sweden,  the UK and France were all net donors by 2015, and the poorer countries of southern and eastern Europe were net recipients( See Graph)

Source. European Commission.

How tenaciously member states clung to their budget lines may be illustrated by the problems that the EU has faced in auditing its accounts. The Court of Auditors was created in 1975, largely at the best of Chancellor Schmidt who was extremely skeptical about the the EEC as an institution. His vision was always one of forging a close alliance with France.  In effect, the Court is a professional external investigatory audit agency, and  has acquired powers to bring actions before the ECJ. It submits an annual report to the European Parliament. In 1999, the Parliament refused to sign off the European Commission’s handling of the budget , prompting the resignation of the Commission, led by Jacques Santer, former Prime Minister of Luxembourg. The Court has a staff of approximately 800 auditors.   Inspections take place of both EU institutions and of member states, given that 90% of income and expenditure is managed by national authorities rather than the EU. Upon finding fault,  the Court informs OLAF which is the EU’s anti-fraud agency. In its annual report on the implementation of the 2009 EU Budget, the Court found that the two biggest areas of the EU budget, agriculture and regional spending, had not been signed off and remained “materially affected by error”. Nothing had changed since the dismissal of a Marta Andreasen in 2002. Andreasen was blocked in her new post as Chief Auditor from installing a professional system to vet the accounts. She was blocked by Director General Jean Maison from the Budget Directorate, and Pedro Laguna, Director General for Agriculture. As she pointedly remarks, the two “a Frenchman and a Spaniard.. came from the two countries which enjoyed by far and away the most generous portions of subsidies from the 100-billion Euro budget”. [32]

To summarise: The EU after the Maastricht Treaty became more of a German than a French project. The Euro was designed to give priority to price stability. The economic performance of member states remained divergent. The Lisbon Treaty expanded the EU’s joint competences, but did not amount to transforming the EU into a federal system, as Chancellor Kohl had proposed in the negotiations setting up the single currency. In the definition of the German Constitutional Court, the EU remained no more than an alliance of sovereign states. EU law, as interpreted by the ECJ, was implemented unevenly. The EU regulatory state expanded its reach, but turnout at European parliamentary elections continued to fall off. The EU faced major difficulties in implementing effective budgetary controls.

[1] Timothy Garton Ash, In Europe’s Name: Germany and the Divided Continent, Random House, 1993

[2] Robert Putnam, Robert Leonardi and Raffaella Y. Nanetti, Making Democracy Work: Civic Traditions in Modern Italy, Princeton University Press, 1994.

[3] MacDougall Committee [Study Group on the Role of Public Finance in European Integration] (1997), Report of the Study Group, Brussels, European Commission. The Commission’s own MacDougall Report of 1977 had proposed an EU budget of over 7% of European gdp in order to offset asymmetric shocks once monetary independence was lost. The EU budget in 2008 was about 1.4% of EU gdp.

[4] In One Money, One Market: An evaluation of the potential benefits and costs of forming an economic and monetary union, Commission of the European Communities, Directorate-General for economic and financial affairs, of the European Economy. 44. October 1990, the authors pointed out that, absent an EU federal budget poorer countries like Ireland, Spain, Portugal and Greece, would have to be wholly committed to the modernization of their economies, if they were to prosper.

[5] A much quoted article on major differences between European countries’ labour markets, is André Sapir, Globalization and the Reform of European Social Models. Journal of Common Market Studies, Vol. 44, No. 2, pp. 369-390, June 2006.

[6] Laszlo Andor, Commissioner for Employment, Social Affairs and Inclusion, Labour mobility in the EU, University of Ghent, Brussels, 25 September, 2014. European Commission Press Release.

[7] ECB: Euro system, Euro Area labour markets and the crisis, Occasional Papers Series, No 138, October 2012,

[8] John R. Gillingham, The EU: an Obituary, London, New York, Verso 2016. pp. 108-152.

[9] James Kirkup, Euro doomed from the start, Daily Telegraph, December 2, 2011.

[10] Charlemagne : European politics : « Germany: Europe’s fed-up sugar daddy, The Economist, May 20,2010.

[11] For a critical account of this policy of « breathing inflation » into the Euroland ecconomy, see Brendan Brown, Euro Crash : The exit route from monetary failure in Europe, Palgrave, MacMillan, 2012.

[12] Interview avec le President de la Commission, Romano Prodi, Le Monde, Octobre 17, 2002.

[13] European Commission, Directorate General of Economic and Financial Affairs, EMU@10: successes and failures of EMU, European Economy, /2008. Luxemburg, 2008. A sober assessment of the Euro is by Otmar Issing, a founding member of the Executive Board of the ECB, Otmar Issing, The Birth of the Euro, Cambridge University Press, 2008.

[14] Felix Roth, Lars Jonung, Felicitas Nowak-Lehmann D. The Enduring Popularity of the Euro throughout the Crisis. CEPS Working Document No.358/December 2011. The content belies the title: popular support  from autumn 2003 settled into an average range of around 41% right through until spring 2011.

[15] On the relation of politics to German local banks, see the study, by Oliver Vins, How Politics influence state-owned banks, The case of the German savings banks, Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting, No. 191 November 2008.

[16] Monetary and Economic Department, Detailed tables on preliminary locational and consolidated banking statistics at end-June 2011. Band of International Settlements, October 2011.

[17] Richard Bladwin, Mika Widgren, Decision-making and the Constitutional Treaty: Will the IGC discard Giscard? CEPS Policy Brief. No 37/August 2003.

[18] Treaty Establishing a Constitution for Europe, Rome, 29 October 2004.

[19] “Lisbon Treaty made to avoid referendum, Giscard”, EU Observer, October 29, 2007; the article was published in other European newspapers, especially Le Monde,October 26, 2007, a       s “La boîte à outils du traité de Lisbonne”.

[20] Federal Constitutional Court – Press office  Press release no. 72/2009 of 30 June 2009, Judgment of 30 June 2009 Act Approving the Treaty of Lisbon compatible with the Basic Law; accompanying law unconstitutional to the extent that legislative bodies have not been accorded sufficient rights of participation.

[21] Federal Constitutional Court – Press office -Press release no. 55/2011 of 7 September 2011. Judgment of 7 September 2011, Constitutional complaints lodged against aid measures for Greece and against the euro rescue package unsuccessful –No violation of the Bundestag’s budget autonomy.

[22] Joachim Jahn, « Vereinigte Staaten von Europa wird es nicht geben », Interview with Paul Kirchhof, Frankfurter Allgemeine Zeitung, June 30, 2009.

[23] Camille White, National Constitutional Courts and the EU: The Evolution of the Conseil Constitutionnel and the Bundesverfassungsgericht, Civitas: Institute for the Study of Civil Society, 2014; Martin Stiernstrom, The Relationship between Community Law and National Law, Jean Monnet/Robert Schuman Paper Series, Vol. 5 No.33. October 2005. University of Miami.

[24] See John T.Parry, What is the Grotian Tradition in International Law? University of Pennsylvania Journal of International Law, Volume 35, Issue 2.pp. 299-376.


[26] G. Falkner “Is the EU a Non-Compliance Community?” Les cahiers européennes de Sciences Po, 01 (2013), pp.1-58; “Is the European Losing its Credibility?” Journal of Common Market Studies, 51.pp.13-30

[27] Giandomenico Majone, Regulating Europe, Routledge, 1996.

[28] Bruce Stokes, “Euroskepticism beyond Brexit: Significant opposition in key European countries to an ever closer union”, Pew Research Center, June 7 2016.

[29] “Sabine Saurugger, « Crise de l’Union européenne ou crises de la democratie?” Politique Etrangère, Printemps 2017.pp. 23-35.

[30] Harold Lasswell, Politics: Who Gets What, When and How, Chicago University press, 1936. 

[31] “Brexit vote was a great relief for UK fishing industry, peers told“, The Guardian, September 7, 2016

[32] Marta Andreasen, Brussels Laid Bare: How the EU Treated its Chief Accountant when she refused to go along with fraud and waste”. St. Edwards Press, 2009. p.32


About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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