Governing the European Union, by Michele Boselli

6. The relationship between regulation and the market in the development of an European economic space

In this short essay we aim first of all to briefly re-illustrate the different models of governance described in the previous one, as a basis to develop a discourse explaining what has been the relationship between regulation and the market in the development of an European-wide economic space. On one hand the Anglo-American, free-market model emphasises that the market regulates itself and the state should limit its intervention to a minimum. On the other hand, the Franco-German, regulatory model accept a heavier intervention of the state and other actors besides those purely in the market, mainly for reasons of social consensus building.

These different models of governance explain the paths that the national economies of the member states of the European Union have followed before founding or joining it. During the last five decades, and raise the issue of integrating these economies through the changes that they inevitably must undergo to become a single economy.

European unity has already been achieved in creating a single market and a single currency (British and Danish electorates will probably change their opinion in a few years time if the euro proves itself successful), but diversity remains in the fiscal and social policies of the member states. It is difficult to manage an EU monetary policy in an economic environment where there are so many differences in the business cycles and financial market structures of member states. Perhaps diversity in taxation would be beneficial to be kept as the last major national instruments left to adjust to specific needs in a context where interest rates are the same for all, set by the European Central Bank (ECB), but on the other hand “the many linkages between monetary and fiscal policy may require member states to pool their fiscal policy capacity more at the EU level, thus leading to more co-ordinated and even common EU policies on taxation and public expenditure” (Dent, 2001).

The ECB, based in Frankfurt, is today the place where the main source of authority of economic decision-making in Europe has recently been relocated, but with little practical effect on what is feared by nationalists as a move toward a political union. Actually, the ECB is no different from the Bank of England and other national banks in being an independent body, and indeed Europe has witnessed in the past 25 years a move from a regulatory order toward a market order. This may seem a paradox considering that the above-mentioned Bank is a regulating body, but paradoxes abound in European economy and particularly in the case of the euro.

The new European currency has been in almost continuous decline against other currencies since its launch in January 1999, plummeting from about US$ 1.20 to somewhere sometimes lower than 85 cents. But in spite of that, a surprisingly large proportion of financial assets is now held in euros: more than a third of all international bond and note issues were denominated in euros in 2000, and the euro gained further ground in the first quarter of 2001, accounting for more than 47% of all such debt issues.

So why has the euro been so weak? The ECB is often blamed for not paying enough attention to the currency's external value, and for sending out confusing signals about its intentions to the markets. But the irritation at the ECB apparent failure to worry more about the euro's value reflects a basic misunderstanding about its mandate, which is meant to be more focused on inflation rather than exchange rates. Price stability within the euro area is not only the ECB's main responsibility but an objective which contributes to global economic stability. Of course, the euro's exchange rate is an important factor of euro-area inflation, but it is only one of several.

Looking at the euro issue in a wider international context, just because an economy accounts for a significant proportion of global output does not mean that its currency will have an important international role: the British pound remained an important reserve currency well into the 1970s, long after Britain's economic power had faded, and it is widely traded today along "minor" currencies such as the Swiss franc. The British experience carries a warning for those who want to see the euro take on a bigger international role. A reserve currency might bring greater international influence, but it can also bring obligations that are sometimes uncomfortable. The sterling decline from 1967 onwards created considerable resentment, even anger, on the part of holders of sterling, who saw the value of their asset fall and switched their currency reserves into American dollars. For the euro there is a lesson in the sterling's history: the bigger the international role, the greater the potential for volatility, and the more complex the implications for domestic policy making.

A unique experiment in economic governance, the euro will also have a major impact on international relations in setting an example for other common markets (Asean, Mercosur, Nafta) to follow, as the contiuos trad wars with the US demonstrate. Although there is no centralised body to legislate for international economic governance, states co-operate with one another because there are benefits from doing so. In order to facilitate such co-operation, states establish institutions and agree principles to guide their collective decision making.

Heir of the GATT part of the Bretton Woods institutions (BWI), the World Trade Organisation (WTO) is a body which, far from being elected, in not in any meaningful way accountable to the public and in every opportunity during its six-years existence has sacrificed the public interest on the altar of corporate gain. So far the WTO has ruled against the EU's ban on imports of potentially health-threatening hormone-treated beef and the EU's banana importing regime, designed to give preferential access to bananas produced by small farmers in the Caribbean. in these two cases, the WTO authorised the imposion of sanctions of US$ 128m and US$ 190m respectively.

Given that, it is now necessary to take a brief step back to the timid beginning of global economic governance. The BWI were set up among the avanced capitalist countries after the Second World War in order to play a major role in the governance of international trade and monetary relations. These institutions consist of the so-called World Bank (IBRI, International Bank for Reconstruction and Development), to support investment in countries underdeveloped or recovering from war; the IMF, focusing on matters of monetary and financial policy; and the General Agreement on Tariffs and Trade (GATT), which was later to become the WTO. Over the years these institutions, developing simultaneously to the EU, set precedents which acquired the force of law. In fact, despite differences and conflicts over both the appropriate institutions and the principles by which they should operate, "international economic governance within the EU and the wider Bretton Woods system operates in a framework of law" (Bromley 2001).

This consolidation of international economic governance as law and its authority developed much further in the EU, in the framework of the community pillar, than it has in the other global institutions governing trade (the WTO) and money (the International Monetary Fund, IMF). This is what distingueshes the EU as a system of international economic governance: a very high level of shared sovereignty under a common legal order for its trade and monetary affairs. Here we get to the point of the relation between market and regulation: should the law serve the interests of the market and its actors as supported in neo-liberal terms (the de facto vision), or authorities have the right to impo, de jure, non-market outcomes? Both elements can be found in the EU framework, but the main protagonists of international law are the member states, albeit the broadening of legal rights for othe economic actors.

In conclusion, the relationship between regulation and the market in the development of an European economic space has been a very complex and articulated one. It involved, and still involves, merging different economic traditions deeply rooted since a long time in member states, and thus it is a very delicate matter because shifting the regulatory power to a supranational body generates fears of losing national identity. But the cost of renouncing to national sovereignty over economic matters to transfer it at EU-level authorities has proved to pay in terms of the benefits of the more coherent approach required to manage the economy in a globalised context.