EUROPEAN UNION (EU)

The European Union (EU), formerly known as the European Community (EC), was formed in the 1950s to encourage and oversee political and economic cooperation between numerous European nations. In the nearly half-century since it was formed, the EU has gradually succeeded in becoming the dominant governing economic body in Europe, and it now affects every aspect of business in its member states.

HISTORY

After World War II, European leaders realized that drastic changes needed to be made to ensure that the armed conflicts that had plagued the continent for more than half a century would become a thing of the past. Leaders of the democratic European nations decided that some form of governing body was needed that would encourage cooperation on all levels and have the power to set economic policy for the entire region.

The first signs of cooperation came in 1948, when the United Kingdom, France, and three other countries formed the West European Union, which was primarily concerned with defense issues. Also in 1948, the Organization for European Economic Cooperation (OEEC) was formed by 16 nations that were not under the influence of the Soviet Union. The OEEC oversaw the implementation of the Marshall Plan, which was the plan created by the United States to get Europe back on its feet after World War II. The OEEC later became the Organization for Economic Cooperation and Development (OECD), which now also includes the United States and Japan.

In the 1950s, three important treaties were signed that signaled the actual birth of a European union. In 1951, the European Coal and Steel Community (ECSC) was created to oversee those industries. The treaty creating that organization is an important one, because it marked the first time that any European nations had allowed a supranational organization to control an important policy area. The ECSC sprang from the Schulman Plan, a 1950 proposal that coordinated steel and coal production between France and Germany. This plan signaled the re-entry of Germany into peacetime Europe and is considered to be the most important date in the history of European unification.

In 1957, a second treaty created the European Atomic Energy Community (Euratom), and in 1958, the European Economic Community (EEC) was brought into being by yet another treaty. These two treaties together are known as the Treaties of Rome, and the creation of the EEC was seen as the first step in creating a common economic market in Europe that would allow for free trade between members and the free movement of people, services, and capital. Official governing bodies were put into place for the first time, as an assembly was convened to oversee the ECSC and the first European Parliament was established. The parliament first met in March 1958 and initially included 142 members from all member states. It was intended that direct elections would be held in each nation to fill parliament seats, but various conflicts over how the system would work led to a 20-year delay in the election process, which was finally launched in January 1979. Prior to that time, members of the European Parliament were nominated by their national parliaments.

In 1967, the name European Community (EC) was used to describe the new, independent institution that was created to oversee the ECSC, EEC, and Euratom. The EC came into being as a result of the Merger Treaty, which was ratified in 1965. The term European Community was used as the main name for the organization for more than 25 years, before the current European Union was adopted in 1993.

The 1970s and 1980s were a period of growth for the EU. In 1973, Denmark, Ireland, and the United Kingdom joined for the first time, and the parliament expanded to 198 members. In 1981 Greece joined the union, and in 1986, Spain and Portugal did the same. The parliament—which had greatly expanded in 1979 to 410 members—grew again, this time to 518 members.

After the growth period ended in 1986, the union sought to strengthen its powers in the late 1980s and early 1990s. In 1986, the Single European Act (SEA) was passed, which targeted the end of 1992 as the date for the formation of a common market and also emphasized political cooperation in foreign policy. To aid unification, the parliament saw its powers increased, as participants had the power to vote on new members for the first time and also had an increased role in setting budgets.

The year 1992 would prove to be a watershed in the growth of the union. That year, the Maastricht Treaty was ratified, representing the most comprehensive treaty since the Treaties of Rome. The treaty also marked a distinct shift toward an emphasis on using economic policy as the main tool to increase European unification. The treaty, which went into effect in 1993, officially changed the name of the European Community to the European Union. In addition, it outlined a three-stage plan for conversion to a common market that included the establishment of a central bank and the creation of a common European currency.

In 1994, the EU combined with the seven-member European Free Trade Association (EFTA) to form the European Economic Area, a zone of 19 countries that formed a single market with no trade restrictions. As a result of that cooperative effort, EFTA members Austria, Finland, and Sweden joined the EU for the first time on January 1, 1995. This triggered a concurrent growth in the European Parliament, which expanded to 626 members. In 1997, the Treaty of Amsterdam was ratified, which cleared the way for the third stage of the plan proposed under the Maastricht Treaty.

STRUCTURE

The European Union is comprised of several governing bodies that oversee different aspects of the union's operations. In addition, each country in the union takes turn acting as chairman, with the position changing hands every six months. The European Commission (EC) is perhaps the most important of the governing bodies, as it proposes policies and is the only body that is allowed to propose legislation (besides the national governments of each state). It also oversees the day-to-day operations of the union and ensures that treaties are being carried out as intended. The commission is comprised of 20 commissioners, including a president, who are appointed by member states and approved by the parliament.

Once legislation is passed, it is administered by the European Council, which enforces legislation throughout the union and seeks to improve cooperation between governments. The council is comprised of ministers who represent the national governments of the 15 members of the union. Power in the council is based on the size of the member nations. Germany, France, Italy, and the UK have 10 votes each on the council; Spain has 8 votes; Belgium, Greece, the Netherlands, and Portugal have 5 each; Austria and Sweden have 4 each; Ireland, Denmark, and Finland have 2 each; and Luxembourg has 1 vote. Some issues, such as environmental items, require what is known as a qualified majority (62 votes) to pass. However, any items affecting nuclear policy must be passed unanimously.

Members of the European Parliament are directly elected by the people of each nation, and members serve five-year terms. While the parliament did gain some legislative power from the Maastricht Treaty, it mainly serves as the public forum of the EU, holding open debates on important issues and overseeing the activities of the council and the commission. Finally, the Court of Justice oversees EU laws and regulations and issues rulings when conflicts arise. All decisions issued by the court, which includes 15 judges and 9 advocates, are binding on member states.

HOW THE UNION AFFECTS BUSINESSES

Because one of the main roles of the union is to oversee economic cooperation between members, it plays a very large role in how business is conducted throughout Europe. It has established a single market trading system with low, or no, taxes and tariffs, and it encourages economic development.

The most important economic changes in the union have occurred in the last few decades. In 1979, the European Monetary System (EMS) was established to create greater price stability between the currencies of all union members. The core of the EMS was the Exchange Rate Mechanism (ERM), a voluntary system that fixed the price of currencies against each other; rates could be adjusted within a narrow range of prices. Every nation except England participated in the ERM when it was launched. England did eventually participate, beginning in 1990, but it joined Italy in pulling out of the ERM in 1992 on a day that is now remembered as "Black Wednesday."

The ratification of the Maastricht Treaty in 1992 launched the union's current economic policy by creating a timetable to enact a three-stage plan for implementing a single market economy across Europe. Stage 1 of the plan took effect when the treaty was ratified. It officially recognized that the goal of the European Union was to create an Economic and Monetary Union (EMU) of all member states in which members would strive to cooperate more closely than in the past in managing their economies.

Stage 2 of the Maastricht plan was launched in 1994 with the creation of the European Monetary Institute in Frankfurt, Germany. This was a central banking institution that was the forerunner of the European Central Bank (ECB), which now oversees the control of currencies throughout the union. The Central Bank is the hub of the centralized banking system that also includes 15 national Central Banks that serve as the main bank in each of the member states.

One year after stage 2 was completed, union members agreed that stage 3 would begin on January 1, 1999. On that day, the union officially began the move towards a single European currency unit, which is called the euro. Currency conversion rates in participating member states were fixed, and a single monetary policy and foreign exchange rate were implemented. A "euro zone" was created that included the following participating countries: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland; Greece agreed to participate, but did not become an active member until 2001. Noticeably absent were the United Kingdom, Denmark, and Sweden. As of 2001, those countries still had not joined the euro zone.

Between January 1, 1999 and 2001, countries in the euro zone began the conversion to the single currency. The euro was still a non-cash currency during that transition period, but it was used for almost all non-cash transactions, such as bank transfers, credit card payments, and check or money order payments. Dual pricing systems were set up, establishing prices in national currencies and in euro dollars. Changes were made in software, automatic teller machines, vending machines, and other components to prepare for the euro, and consumers were allowed to open euro bank accounts.

On January 1, 2002, the transition will be completed and the euro will become the official currency of the participating nations. For a two-month period, national currencies and the newly launched euro coins and paper bills will remain in circulation at the same time. At the end of that period, only the euro will be accepted for all financial transactions. Plans call for 12 billion euro banknotes and 50 billion euro coins to go into circulation initially. The full changeover to the new currency is expected to be completed no later than July 1, 2002. At that point, the European Union will have completed its greatest achievement. By converting to a single currency, union leaders hope to achieve benefits that include price stability, greater confidence among investors, a simpler single market economy, a reduction in transaction costs due to the absence of currency exchanges, and an integrated banking system. It is expected that international business and currency transactions will also become simpler and more efficient under the euro. The ultimate goal is a strong and stable Europe that features open markets.

FURTHER READING:

"A Brief History of the European Union." http://www.salford.ac.uk/economics/euro2/history.htm.

"Economic and Monetary Union. From Rome to Maastricht: A Brief History of EMU." http://europa.eu.int/scadplus/leg/en/lvb/125007.htm .

"The Euro in the Internal Market." http://europa.eu.int/business/en/advice/theeuro/index.html .

The European Union in the United States Web site: http://www.eurunion.org/states/home.htm.

Weidenfeld, Werner. Europe from A to Z: A Guide to European Integration. Office for Official Publications of the European Communities, 1997.