The European Parliament, which as of 2012 has 754 members, is directly elected by the populations of the member-states. The parliament, which meets in Strasbourg, France, is primarily a consultative rather than legislative body. It debates legislation proposed by the commission and forwarded to it by the council. It can propose amendments to that legislation, which the commission and ultimately the council are not obliged to take up but often will. The power of the parliament recently has been increasing, although not by as much as parliamentarians would like. The European Parliament now has the right to vote on the appointment of commissioners as well as veto some laws (such as the EU budget and single-market legislation).
Elected EU body that consults on issues proposed by European Commission.
One major debate waged in Europe during the past few years is whether the council or the parliament should ultimately be the most powerful body in the EU. Some in Europe expressed concern over the democratic accountability of the EU bureaucracy. One side argued that the answer to this apparent democratic deficit lay in increasing the power of the parliament, while others think that true democratic legitimacy lies with elected governments, acting through the Council of the European Union.10 After significant debate, in December 2007 the member-states signed a new treaty, the Treaty of Lisbon, under which the power of the European Parliament is increased. When it took effect in December 2009, for the first time in history the European Parliament was the co-equal legislator for almost all European laws.11 The Treaty of Lisbon also creates a new position, a president of the European Council, who serves a 30-month term and represents the nation-states that make up the EU.
Treaty of Lisbon
Treaty signed in 2007 that made the European Parliament the co-equal legislator for almost all European laws and also created the position of the president of the European Council.
The Court of Justice, which is comprised of one judge from each country, is the supreme appeals court for EU law. Like commissioners, the judges are required to act as independent officials, rather than as representatives of national interests. The commission or a member-country can bring other members to the court for failing to meet treaty obligations. Similarly, member-countries, companies, or institutions can bring the commission or council to the court for failure to act according to an EU treaty.
Court of Justice
Supreme appeals court for EU law.
THE SINGLE EUROPEAN ACT
The Single European Act was born of a frustration among members that the community was not living up to its promise. By the early 1980s, it was clear that the EC had fallen short of its objectives to remove barriers to the free flow of trade and investment among member-countries and to harmonize the wide range of technical and legal standards for doing business. Against this background, many of the EC’s prominent businesspeople mounted an energetic campaign in the early 1980s to end the EC’s economic divisions. The EC responded by creating the Delors Commission. Under the chairmanship of Jacques Delors, the commission proposed that all impediments to the formation of a single market be eliminated by December 31, 1992. The result was the Single European Act, which was independently ratified by the parliaments of each member-country and became EC law in 1987.
The Objectives of the Act
The purpose of the Single European Act was to have one market in place by December 31, 1992. The act proposed the following changes:12
• Remove all frontier controls among EC countries, thereby abolishing delays and reducing the resources required for complying with trade bureaucracy.
• Apply the principle of “mutual recognition” to product standards. A standard developed in one EC country should be accepted in another, provided it meets basic requirements in such matters as health and safety.
• Institute open public procurement to nonnational suppliers, reducing costs directly by allowing lower-cost suppliers into national economies and indirectly by forcing national suppliers to compete.
• Lift barriers to competition in the retail banking and insurance businesses, which should drive down the costs of financial services, including borrowing, throughout the EC.
• Remove all restrictions on foreign exchange transactions between member-countries by the end of 1992.
• Abolish restrictions on cabotage—the right of foreign truckers to pick up and deliver goods within another member-state’s borders—by the end of 1992. Estimates suggested this would reduce the cost of haulage within the EC by 10 to 15 percent.
All those changes were expected to lower the costs of doing business in the EC, but the single-market program was also expected to have more complicated supply-side effects. For example, the expanded market was predicted to give EC firms greater opportunities to exploit economies of scale. In addition, it was thought that the increase in competitive intensity brought about by removing internal barriers to trade and investment would force EC firms to become more efficient. To signify the importance of the Single European Act, the European Community also decided to change its name to the European Union once the act took effect.
COUNTRY FOCUS Creating a Single Market in Financial Services
The European Union in 1999 embarked upon an ambitious action plan to create a single market in financial services by January 1, 2005. Launched a few months after the euro, the EU’s single currency, the goal was to dismantle barriers to cross-border activity in financial services, creating a continentwide market for banking service, insurance services, and investment products. In this vision of a single Europe, a citizen of France might use a German firm for basic banking services, borrow a home mortgage from an Italian institution, buy auto insurance from a Dutch enterprise, and keep her savings in mutual funds managed by a British company. Similarly, an Italian firm might raise capital from investors across Europe, using a German firm as its lead underwriter to issue stock for sale through stock exchanges in London and Frankfurt.
One main benefit of a single market, according to its advocates, would be greater competition for financial services, which would give consumers more choices, lower prices, and require financial service firms in the EU to become more efficient, thereby increasing their global competitiveness. Another major benefit would be the creation of a single European capital market. The increased liquidity of a larger capital market would make it easier for firms to borrow funds, lowering their cost of capital (the price of money) and stimulating business investment in Europe, which would create more jobs. A European Commission study suggested that the creation of a single market in financial services would increase the EU’s gross domestic product by 1.1 percent a year, creating an additional 130 billion euros (€) in wealth over a decade. Total business investment would increase by 6 percent annually in the long run, private consumption by 0.8 percent, and total employment by 0.5 percent a year.
Creating a single market has been anything but easy. The financial markets of different EU member-states have historically been segmented from each other, and each has its own regulatory framework. In the past, EU financial services firms rarely did business across national borders because of a host of different national regulations with regard to taxation, oversight, accounting information, cross-border takeovers, and the like—all of which had to be harmonized. To complicate matters, longstanding cultural and linguistic barriers complicated the move toward a single market. While in theory an Italian might benefit by being able to purchase homeowners’ insurance from a British company, in practice he might be predisposed to purchase it from a local enterprise, even if the price were higher.
By 2012, the EU had made significant progress. More than 40 measures designed to create a single market in financial services had become EU law and others were in the pipeline. The new rules embraced issues as diverse as the conduct of business by investment firms, stock exchanges, and banks; disclosure standards for listing companies on public exchanges; and the harmonization of accounting standards across nations. However, there had also been some significant setbacks. Most notably, legislation designed to make it easier for firms to make hostile cross-border acquisitions was defeated, primarily due to opposition from German members of the European Parliament, making it more difficult for financial service firms to build pan-European operations. In addition, national governments have still reserved the right to block even friendly cross-border mergers between financial service firms.
The critical issue now is enforcement of the rules that have been put in place. Some believe that it will be at least another decade before the benefits of the new regulations become apparent. In the meantime, the changes may impose significant costs on financial institutions as they attempt to deal with the new raft of regulations.
Sources: C. Randzio-Plath, “Europe Prepares for a Single Financial Market,” Intereconomic, May–June 2004, pp. 142–46; T. Buck, D. Hargreaves, and P. Norman, “Europe’s Single Financial Market,” Financial Times, January 18, 2005, p. 17; “The Gate-keeper,” The Economist, February 19, 2005, p. 79; P. Hofheinz, “A Capital Idea: The European Union Has a Grand Plan to Make Its Financial Markets More Efficient,” The Wall Street Journal, October 14, 2002, p. R4; and “Banking on McCreevy: Europe’s Single Market,” The Economist, November 26, 2005, p. 91.
The Single European Act has had a significant impact on the EU economy.13 The act provided the impetus for the restructuring of substantial sections of European industry. Many firms have shifted from national to pan-European production and distribution systems in an attempt to realize scale economies and better compete in a single market. The results have included faster economic growth than would otherwise have been the case.
However, 20 years after the formation of a single market, the reality still falls short of the ideal. In the opening case, for example, we saw how until 2011 sports organizations such as soccer’s Premier League had still been able to segment the EU into different national markets for auctioning off broadcast rights. Another example is given in the accompanying Country Focus, which describes the slow progress toward establishing a fully functioning single market for financial services in the EU. Thus, although the EU is undoubtedly moving toward a single marketplace, established legal, cultural, and language differences among nations mean that implementation has been uneven.