EU Single Market Program and Monetary Union - Case Study Example

The EU Single Market Programme and Monetary Union :Defying the Holdup Problem Introduction When two individuals try to come up with an agreement, it is expected that the process to reach a successful negotiation will be riddled with problems due to conflict of interests. This is due to the fact that every individual has his own interests to pursue which may conflict with some or the entirety of the terms in the negotiation. So much more for international agreements where nations comprised of different interest groups attempt to find a common ground for the benefit of all those involved. One can just imagine the range of interests that members of the negotiation are trying to reconcile. This case has been of much interest in economics and one of the concepts that were studied is the hold-up problem. In more precise terms, the hold up problem is a term used in economics to describe a situation where two parties (such as a supplier and a manufacturer) may be able to work most efficiently by cooperating, but refrain from doing so due to concerns that they may give the other party increased bargaining power, and thereby reduce their own profits1. In the case of the European Union (EU), it was previously expected that the regional integration would be beset by problems with regards to policy formulation and implementation. The EU is composed of countries that have been in constant race towards domination in economic and military terms. Germany and France, for example, have been known to apply stringent protectionist policies with regards to their industries to ensure that their economy will be robust and competitive. If only to emphasize the point that there are conflicting interests among the EU member states, it will be mentioned that both of the world wars started in the European theatre. However, the implementation of Single Market Programme and the Monetary Union seems to defy our idea that it is inevitable that hold up problems occur in the European Union policies except in the case of UK opting out of the single currency. The Single Market Programme (1987-1992) involved the market integration of European Union member countries primarily to create an upsurge in foreign direct investment. The integration was based on the following premises: 1) the increase in the size of the market due to regional integration results to larger scale investment that would not have been profitable in member states' national markets and 2) regional integration is can lead to an increased economic growth rate and foreign direct investment2. The EU monetary union is an agreement of its member countries to share a single currency among them - the Euro. This currency is currently used by Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Monaco, San Marino, and the Vatican City are licensed to issue and use the euro3. With such diversity and differing interests of the member nations, how did such a venture succeeded in achieving its goals In the first place, how did it become possible that such an agreement was made What are the factors that held stalemates/hold up problems from occurring These questions must be answered as this paper is interested in determining if holdup problems are indeed inevitable in negotiations. Chapter 1: Benefits and Concessions The key to a successful negotiation is that all stakeholders benefit from the agreement without too many concessions. That is, the number of benefits that the stakeholder is entitled to generally determines the willingness of the stakeholder to come to terms. As Putnam puts it, 'the larger the win sets, the greater will the probability that an agreement will be reached'4. Note that number of benefits is a function of the number of concessions made. In the Single Market Programme and Monetary union, what was offered as benefits for all the member state was the increase in foreign direct investment and other improvements in the economy. Mechanisms were placed such that everyone equally benefited from the venture. This however came with a price that everybody was willing to pay. Policy instruments which Member States had previously employed to manage their economies were no longer available to the EU members as per agreement. These policies were previously designed to protect the local market and include import controls, export subsidies, devaluation of national currencies to regional and sectoral subsidies and the strategic use of public procurement and the employment buffers of public-service industries5. The free movement of goods, services, capital and labour which resulted from the Single Market Programme meant that the member state would be constrained from imposing increases in taxes and regulation which would surely reduce benefits due to increase domestic production costs6. But the important thing is they were all willing to make these concessions. The Economic and Monetary Union (EMU) treaty signed at Maastricht did not require that Euro land would become a zone of German style monetary rectitude. Membership was not limited to countries that mimicked the German commitment to price stability nor that plausibly constitute an optimal currency area in Europe. National representatives can outvote inflation-averse members of the Executive Board of the European Central Bank in monetary policy decisions. The Council of Ministers has the power to set exchange rate policy vis--vis third currencies. The treaty did not provide binding constraints against fiscal profligacy in member states; neither does the subsequent Growth and Stability Pact. The German government agreed to this suboptimal outcome because, in the wake of the demise of the Soviet Union and German unification, it had broader political interests in maintaining the pace of European integration-through the creation of the euro7. (Eichengreen, 2001, 110) Chapter 2: Veto Player Considerations The Veto Player theory states that any change in the status quo requires "that a certain number of individual or collective actors have to agree to the proposed change". They are called the Veto Players. The two-level game theory of Putnam emphasizes that negotiations are not limited to the negotiators themselves but must also include the consultation of the domestic 'veto players'8. The players act as brakes: the more actors have to concur with a political reform, the more they are divided on ideological grounds and the more the respective groups of actors are cohesive, the more likely is the persistence of the status quo9. However, Scharpf argues negotiations can be facilitated by taking into considerations 'the preferences of veto players, the position of the status quo, and the identity of the agenda setter -the sequence of moves of the different actors'10. In the formulation of the EU's Single Market Programme and Monetary Union, the Commission responsible conducted extensive consultations with the veto players -interest groups, national officials and independent experts - enabling them to identify relevant issues that need to be taken into consideration. This approach enabled them to come up with the best solutions which made the programs successful11 The consultations, however, were not of the 'lets talk right now' kind of approach but were designed from numerous studies and analysis that took into consideration all the economic and social conditions of every country. The basic question addressed was 'what appealed to the majority of the veto players' and if ever there are changes introduced, 'how can the integration affect the EU member countries in general'. In all consultations, the discussion revolved around the topics such as elimination of frontier controls and delays, free circulation of capital and the liberalization of financial services - all welcome developments to the countries. The offers were sufficiently backed up by scientific data regarding projections and integration requirements especially in the finance sector. Chapter 3: The Central Body Approach The concept of veto players states that one must take into consideration all the concerns of these people. What is important to know is how to approach the process of formulation of the terms. That is, will the approach 'all channels' negotiation be more appropriate than the centralized approach Friend and Jessop (1969) and Scharpf (1997) forwarded an interesting concept of the permutations of bilateral examinations regarding the formulation and impacts of policies. According to the two, if all channel negotiations among N veto players each with S concerns governs the way solutions are formulated, there would be N*(N-1)*S2 examinations to be undertaken to come up with a policy acceptable to all concerned. If, however, instead of an all channel negotiations, there exist a single, central agent that serves as the central body which will be the one responsible in conducting consultations with all the stakeholders and formulating policies that can be acceptable to all, the permutation reduces to N*S examinations12. Doing basic mathematics, if we have 10 veto players and each of them has 10 concerns, then an all channel negotiation would need 90,000 examinations but a central body would undertake only 100 examinations to develop a win-win solution that is acceptable to all veto players. From the foregoing, it can be seen that the complexity of negotiations can be greatly reduced just by establishing a neutral and an all-encompassing body. One of the factors that made the EU Single Market Programme and Monetary Union venture successful was the establishment of a commission that undertook consultations and formulated the policies13. The analogy follows that of a community trying to agree on a project. If every member of the community takes upon themselves the task of consulting with other members of the community to come with a consensus, it is expected that confusion and conflicts rather than consensus will be the result. But if you have a governing body- the town officials- conducting consultations, then it becomes easier to come up with a policy acceptable to the community (note that this only applies in a democratic and informed setting). One may argue that even though a 'mediator' is established, it does not guarantee that conflicts of interest will be resolved that easily. Even communities with designated officials tend to experience breakdowns in negotiations or consensus build-up. This possibility can be minimized if the governing body is recognized and respected by all- which was particularly enjoyed by the Commission. Recognition and respect, however, were not the only necessary ingredients to make the governing body effective. There is a need to imbue it with sufficient legal power to formulate regulations and to impose sanctions on non-abiding sectors. The Commission was empowered to conduct studies and come up with plans regarding the SMP. Not only that, it was also entitled to pursue any belligerent states by opening formal infringement procedures against them. With the powers invested upon the Commission, the negotiations were concluded successfully because they knew that the body was impartial (i.e. non-biased) and was legally able to hinder the other negotiator from reneging from its promises14. Conclusion The European Union has given us the opportunity to determine whether hold up problems are inevitable in negotiations. The conclusion that can be made from the discussion is that the occurrence of holdup problems can be eliminated if the following mechanisms are present: Comprehensive consultation with all the stakeholders Willingness to make concessions to ensure equal benefits for all Central agency that has the confidence of all the stakeholders From the applications of these three key points, one can be assured that every stakeholder will fully cooperate to make the venture successful. The second bulleted requirement is particularly important because only when countries or any other entities are willing to sacrifice some of their interests can negotiations progress. But if stubbornness does take place, then it is better not to include that particular entity in the negotiations. This is what happened to the United Kingdom which was so adamant about the implementation of the Monetary Union. Nevertheless, even if the UK opted out of the policy, the venture was still successful implying that no single veto player should be allowed to stall the whole process. Lastly, it must be said that all of these are operational only in a diplomatic setting where economic and military powers are not used to force negotiations. References 1. Eichengreen, Barry. (2001) The Political Economy of European Monetary Unification: Westview Press: Boulder, CO, p110-113 2. European Parliament and Council (1996) Summary: THE IMPACT AND EFFECTIVENESS OF THE SINGLE MARKET . Communication from the Commission to the European Parliament and Council. Retrieved Nov. 20,2006 from www.dti.gov.uk 3. Friend, J.K. and Jessop, W.N. (1969) Local Government and Strategic Choice. An Operational Research Approach to the Processes of Public Planning (London: Tavistock). Retrieved from www.jstor.com 4. Milner, Helen V. 1997. Interests, Institutions, and Information: Domestic Politics and International Relations. Princeton, N.J.: Princeton University Press. 5. Milner, Helen V., and B. Peter Rosendorff. 1996. Trade Negotiations, Information, and Domestic Politics. Economics and Politics 8 (1): 145-89. 6. Putnam, R. (1988): 'Diplomacy and domestic politics: the logic of two-level games,' International Organization 42 (3): 427-60. Retrieved Nov. 20,2006 from www.jstor.com 7. Scharpf, F.W. (2006): 'The joint-decision trap revisited', European Institute Working Paper 1/2006. Retrieved Nov. 20, 2006 from www.jstor.com 8. Sinn, H-W. and Ochel, W. (2003) 'Social Union, Convergence and Migration'. Journal of Common Market Studies, Vol. 41, No. 5, pp. 869-96. Retrieved form www.jstor.com 9. Sutton, John. 1986. "Non-cooperative Bargaining Theory: An Introduction," 52 Review of Economic Studies 790-824 Retrieved Nov. 20,2006 from www.economics.about.com/library/glossary/bldef-hold-up-problem.htm 10. Tsebelis, G. (2002): Veto Players - How Political Institutions Work. Princeton University Press, chs.2, 6, 8, 11. [JF51 T88 Course Coll.]. Retrieved Nov. 20, 2006 from www.jstor.com 11. UK Department of Trade and Industry(2006). WORKING WITH THE EUROPEAN UNION A practical guide to the EU. London: DTI. Retrieved Nov. 20,2006 from ww.dti.gov.uk Read More