THE development of the European Economic Community will pose many and serious problems in the next 12 or 15 years--both within the market area and in its relations with the outside world. But before examining these we must first analyze a few of the essential provisions of the treaty, in order to define clearly its scope and to remove certain misconceptions which have already begun to creep into public discussions of it. For this purpose, the most important points which need to be brought out are the following:

1. The step-by-step process by which the customs union will be created cannot be revoked. A certain flexibility has been provided in the measures for eliminating duties and quotas, but under none of these measures can the transition period be extended beyond 15 years, even by unanimous agreement. A certain number of escape clauses have been provided, but their operation is subordinated to the same general principle. Moreover, they cannot be invoked except with the approval of the governing bodies of the Community.

2. The common external tariff for most items is henceforth fixed, and these rates will not exceed the arithmetical mean of duties collected by the member countries before the customs union was formed. Of course, the treaty includes a list of items for which tariffs have yet to be negotiated, but they are few in number and will not affect the over-all tariff level. The principle of the arithmetical mean has undergone some strain, but the exceptions which have permitted the lowering of tariffs are at least as important as those by which tariffs have been set above the mean. Of particular interest to outside countries are the tariff ceilings on many raw materials and semi-manufactured products which have been set at 3 percent and 10 percent respectively.

3. Agriculture is not excluded from the Common Market; customs duties and quotas will be progressively abolished for agricultural products just as they will be for industrial goods. A special escape clause has been provided which for a time permits a given country to restore import quotas if the price of a product falls below a certain level. This level is determined by the importing country, but at the beginning of the third stage at the latest (eight to ten years after the treaty takes force), governments will be obliged to adhere to the majority decisions of the Community if it should judge the minimum price to be too high. The Community will also endeavor to coördinate governmental measures influencing each national market. Majority decisions can be taken in this matter.

4. The association of overseas countries and territories with the Common Market constitutes a virtual free trade zone, uniting these countries and territories to the Common Market itself. They retain the option of maintaining customs duties on goods coming from the six countries, whenever necessary to protect their developing industries. However, such tariffs must not discriminate in favor of the European country to which they are politically tied. It is evident that this provision was conceived solely in the interest of the underdeveloped countries associated with the Community. Although in several of its most important aspects the association has been worked out for a projected period of only five years, the member countries fully intend to bring about a complete and permanent association. This is shown by the fact that reduction of tariffs will in any event be pursued until they are totally eliminated, with the exception noted above.

5. The European Economic Community is more than a customs union; it is a real economic union, in which conditions of production and trade will be progressively equalized. Trade as well as agricultural policy will be gradually unified; by the end of the transition period at the latest, the Six will be as one in their relations with other countries. By majority decision of the Council of Ministers, the Community will be able to require member countries to modify their legislation or their administrative regulations when it appears that a disparity in the laws or regulations of the various countries destroys true competitive conditions. Not only will the movement of goods and services be facilitated, but also the movement of labor and capital--subject to certain rules. These are designed to channel workers toward available employment and to avoid purely speculative movements of capital. The gradual elimination of other restrictions will eventually make it possible for nationals of any member state to establish a domicile in any other member state.

The creation of a European Investment Bank and of a European Social Fund are further evidence of the intention of the six countries to establish something considerably more than the classic customs union. They stopped short of the point at which a more fundamental fusion of economic policies and institutions would have required the creation of common political institutions, that is to say, of a new state. Each country retains its sovereignty in matters of currency, credit, budget and investments. But enough has been merged to oblige all members, even in those areas reserved to them, to consult one another and to follow policies which are at least parallel.

In the course of things, the creation of the European Economic Community will stimulate an effort to modernize and rationalize each industry, to seek agreement on areas of concentration and specialization within each country, and to establish international, business contacts with a view to making European-wide agreements of a similar nature. In fact, there are a number of indications that this is already happening.

Clearly, the Common Market treaty will profoundly modify the European economy in the next few years. It is not an exaggeration to speak of a metamorphosis when it is considered that in so brief a time the obstacles to the circulation of goods, services, persons and capital will be abolished and that the six countries will in effect constitute a single economic unit. A considerable effort of the imagination is necessary to conceive what Western Europe will be like in ten years or so. The transformation to come appears even more astounding if one considers the implications of the association of Africa with the Common Market.

II

What are the most serious problems which the establishment of the Common Market will create? It is not very likely that they will be exactly the ones we imagine today; economic circumstances change rapidly. An attempt to anticipate them is nevertheless useful in order to clarify ideas, provided that we constantly reëxamine the conclusions drawn. Let us first consider the difficulties which might arise within the Community.

The danger most feared by French industrialists is competition by Germany and, to a lesser extent, other countries. Similar fears naturally exist for the other members. It is on this problem that negotiators have worked the hardest, trying to ease the shock caused by the freeing of trade, to bring the over-all levels of economic activity in the various countries closer together, and to provide escape clauses in cases of danger. Even without this effort, which can have appreciable results, it does not seem probable that there will be serious trouble on this score so long as general economic activity remains high and industry operates at full capacity. The experience of Benelux shows that two essentially competing economies, with quite unequal production costs, can be joined together without danger but with a considerable development of two-way trade.

The preceding remarks are completely valid for sizable concerns--those already engaged in mass production, having at their disposal a modern plant, enjoying relatively easy access to bank credit and capital markets, and having a highly qualified management with technical and financial experience in specialized operations. They may be less valid for family businesses of small and medium size which are not in such a favorable position. However, we must not confuse size and efficiency, nor underestimate the trend in all the countries of the Community towards modernization of these enterprises and their adjustment to international competition. The fact remains that France faces a real problem in this regard, since small and medium-sized enterprises occupy a relatively important place in her industrial economy.

To some extent, this problem is related to that of the underdeveloped regions of France and Italy. Won't the Common Market increase the attraction of centers which are already highly industrialized--the Rhine Valley in particular--at the expense of the less developed regions? And won't the result be an unbalanced growth, to the advantage of Germany and Benelux, and to the detriment of France and perhaps of Italy (although the latter has the advantage of relatively low production costs)? This question and that of the modernization of small and medium-sized firms have played an important part in the ratification debate in the French parliament.

The problem is real, but it seems certain that the circumstances which led to a concentration of industry in the northwestern part of the Community are already changing. It is essentially the location of coal deposits which is responsible for this concentration. The diversification of sources of energy has already altered this situation and will change it even more in the future. The United States has experienced this with the rapid industrialization of the South and West, made possible primarily by water power. Similarly, in France the industrialization in progress in the southeast is based on hydroelectric power, and soon there will be rapid growth in the southwest based on the natural gas of that region. The development of atomic energy, which Euratom is designed to accelerate, will further free industry from the need to be near coal deposits.

It is not unreasonable to suppose that in the future labor resources will be at least as important a factor in the location of industry as energy supply. This tendency will become increasingly marked as we see more clearly the disadvantages of excessive industrial concentration, such as are found in the Ruhr or around Paris: severe housing shortages, increasingly hopeless traffic problems and rising costs of all kinds.

It remains true, however, that the placement of industry within the Community cannot be left entirely to the chances of market forces. In France and especially in Italy it will be necessary to have a deliberate policy of encouraging decentralization and providing a variety of incentives to induce an important proportion of new and expanding concerns to locate in unindustrialized regions rich in labor force. Likewise, government intervention will frequently be necessary in order to help small and medium-sized businesses, wherever they may be situated, to modernize. These functions are precisely those which the Common Market treaty assigns to the European Investment Bank and to the European Social Fund. It will be noted, moreover, that nothing in the treaty limits the right of members to develop by their own efforts those areas and industries which may be initially handicapped. The only proviso is that their action must not create unreal market conditions affecting competition within the Common Market.

The multiple adjustments that will be necessary will be greatly aided by the vitality which the European economy has shown since the end of the war and more particularly since 1950 or 1951. Its rate of growth has been measurably higher than that of the American economy; this is true not only of Germany but also of the other countries of the Community, especially France. In a general expansion of this nature, the choice facing an enterprise is usually not between survival and disappearance but among various degrees of development.

The problem would become much more difficult if, before the Common Market became a going concern, Europe were to go through a prolonged period of economic depression. Although this possibility cannot be entirely excluded, the real danger in Europe, as in the rest of the world, is a continuation and perhaps an acceleration of the present inflation; the inevitable periods of recession will probably be brief and will not affect the fundamental trend of our times toward an expansion as rapid as, or even more rapid than, the circumstances permit.

It is this tendency towards inflation which will probably be the source of the most serious difficulties for the Common Market. If prices rise more rapidly in some countries than in others, there will be difficulties in the balance of payments. France is already suffering from a considerable deficit, which must be eliminated before she can play her proper rôle in the Community. The prolonged imbalance of payments in favor of Germany is equally serious. Even if these imbalances are corrected, there is no guarantee that new ones will not appear to threaten the implementation of the Common Market. There is no remedy to this danger other than a close collaboration of the six governments in the field of financial and monetary policies and a certain moderation on the part of employers and labor unions in their price and wage policies.

At worst, the realization of the Common Market could be effectually blocked if one or more countries let themselves be involved in repeated inflationary movements. This possibility exists regardless of the strictness with which provisions of the treaty are applied. The danger would not be less if the application of its provisions were absolute and included no escape clause. The very existence of the Common Market will exert a constant pressure on the various participating parties to moderate their demands and on the governments to hold down their expenditures; it is impossible to say more today.

But the development of the Common Market will not depend entirely on the conduct of individual governments nor on the play of economic forces in each country. It will depend very much on the effectiveness of the governing bodies provided for in the treaty. No important decision can be taken without agreement between the European Commission, which decrees by simple majority, and the Council of Ministers, which follows various procedures depending on the nature of the problem and the stage in the transition. One can easily imagine circumstances in which these bodies would be incapable of reaching a decision. This would have particularly serious consequences in areas where the treaty is written only in very general terms and where the elaboration of precise regulations has been postponed until later: common agricultural policy, transportation policy, rules of competition, etc. A certain amount of understanding and good will will certainly be required. On one hand, the Council of Ministers must recognize the European Commission as a real partner and, on the other, the Commission must refrain from imposing its will on the member governments, especially when several legitimate solutions of the same problem are presented; the rôle of the Commission should be rather that of a catalyst, whereby its authority is used to bring the governments to make decisions which are consistent with the interests of the Community as a whole.

One further problem that may arise within the Market area stems from the fact that the Common Market will increase the attractiveness of great industrial concentration and the temptation to make agreements among industries. This problem is both economic and political. The provisions of the treaty concerning monopolies and cartels are very general; they will have to be considerably clarified by the governing bodies. Experience will show whether they should not also be reinforced some day by unanimous agreement of the six countries.

III

An enterprise of the magnitude of the Common Market will profoundly affect the relations of the member countries not only with one another but also with the rest of the world. It is natural that third countries should anxiously ask what may be the consequences for them of this new economic organization, possessing a population comparable to that of the United States and second only to it in buying power.

The first consequence of the Common Market, even before it goes into effect, will probably be the formation of a free trade area which will include as full or partial members the other countries of the O.E.E.C. This considerable extension of the geographic area within which goods will circulate freely will increase even more the impact of European economic integration on the rest of the world.

Negotiations on the free trade zone, which are now going on, owe their existence to the initiative of the six countries. The project would not yet have seen the light of day if these countries had not gone ahead with the Common Market treaty. This does not mean that England is not eager to participate in the freeing of European trade, or that her interest is simply a reaction to the decision of the six countries. An ever more important part of enlightened opinion in the United Kingdom is convinced that such an undertaking is good in itself and feels the historic necessity of an increasingly closer union of the European countries. But the determination of the six countries to create a Common Market and the fear of seeing British goods subject to discrimination on the Continent has crystallized her desire to coöperate and has given it the broad political support without which nothing could be done.

The fundamental problem raised by the projected free trade zone is to reconcile England's position as a member of this zone with her position at the center of the Commonwealth, which is so essential to her. It is her conflicting obligations that have created problems which the current negotiations are trying to resolve.

Some of these difficulties exist in the very nature of a free trade zone, which, unlike a customs union, does not imply a common commercial policy or a common tariff on goods entering the zone. Consequently, there arise a whole set of problems which do not exist for the Common Market--notably the problem of determining the origin of a product which may have been processed in several countries, and how can foreign products entering the zone through a country which levies either no tariffs or very low ones be prevented from spreading through the rest of the zone? It must be remembered that although history has seen the formation of several important customs unions, the idea of a free trade area--at least among countries with a comparable degree of economic development and with modern transportation facilities--has never been tested by experience.

Other difficulties arise from the limitations which the British Government wants to impose on the free trade zone, particularly the exclusion of agriculture. As we have seen, agriculture is an integral part of the Common Market, although it enjoys special dispensation. The Market has achieved a balance of obligations and rights which the six countries judge to be satisfactory and in which commerce in agricultural products occupies an important place. In the free trade zone it is unavoidable that agriculture be given a special position, which takes into account Britain's distinctive relationship with the Commonwealth, but most of the other European countries cannot accept the complete exclusion of agriculture.

If I have emphasized the most important difficulties which the negotiations on the free trade zone have encountered, it is in order to show the road which remains to be travelled in order to reach an agreement. But I have no doubt that, in a still unforeseeable form, agreement will be reached. For the desire of the Continent to see England associate itself closely with an integrated Europe is matched by Britain's desire not to remain outside an undertaking which cannot fail to affect her future profoundly.

IV

Faced with the formation of the Common Market and its possible extension in the form of a still larger free trade zone, many countries outside of Europe are naturally led to ask themselves two basic questions: Will the Common Market lessen trade between Europe and the rest of the world? And will it dry up the flow of European capital to Asia and South America, diverting it to the Community itself and to the African countries and territories associated with it?

There is no single, easy answer to these questions. Inevitably, a customs union or a free trade zone, whatever the precautions taken to protect the interests of outside countries, gives preference to goods originating in the member countries. But it cannot be concluded from this that the importation of agricultural products into Europe will be more restricted than it is today; indeed, the contrary is probable. The Common Market has been created in order to accelerate the economic development of the countries of which it is composed. Given the trade structure of Western Europe, the greater vitality of production and internal trade will require increased imports of raw materials, foodstuffs, equipment and, ultimately, industrial consumer goods.

Most outside countries are interested principally in European imports of raw materials and of foodstuffs. The possible increase of the production of these goods within the Community and even in the associated countries is limited. More important, a prime interest of the Community is to avoid developing its internal sources of supply so far, behind protective barriers, that its capacity to compete in the world market would be badly hurt.

Even a rapid reading of the treaty will show that this is indeed the spirit which has animated its drafters. A whole group of provisions is designed precisely to avoid any protectionist abuse. The system of tariff quotas and the possibilities which it presents deserve a careful examination on the part of outside countries.

All these considerations might appear rather theoretical if they were not supported by the concrete experience of the O.E.E.C. As with a customs union, the first effect was to create a system of preferences among the participating countries and to stimulate trade among them. But as they increased their productivity and their competitive capacity, imports from the rest of the world also increased markedly, and there was a progressive liberation of trade with third countries.

About the second question, which concerns the developing countries of Asia and South America, very little can be said except that there exists neither proof nor grounds for thinking that the Common Market will reduce the investments needed for their expansion. These are generally dictated by commercial considerations which will not be any less controlling after implementation of the Common Market. The capital needs of the six countries will certainly increase but their total resources and their lending capacity will increase also.

V

Much of the foregoing applies to the relations of the Common Market with the United States. But these relations are of particular importance for the Community, not only because the United States is the giant of the world and because the slightest of its movements always has important consequences, but also because it has played a considerable rôle in the genesis of the Common Market. Without Marshall Plan aid and the encouragement which the United States has unceasingly given to the idea of European integration since the war, it is doubtful that the Community would have been achieved--at least as rapidly as it has been. For the future, it is essential that the Common Market grow in close harmony with America. Many obstacles can thus be more easily overcome. Above all, this harmony is the guarantee that the building of Europe will be part of the building of a united and strong free world.

It is reasonable to suppose that in the long run American exports to the Common Market countries will develop more rapidly because of their union. The rise in Europe's standard of living will particularly stimulate the demand for imports of equipment and durable consumer goods. There is room for a considerable increase in European production of machinery, refrigerators, television sets, etc. and, at the same time, increased imports of these same goods.

This expansion of trade between Europe and America would be considerably facilitated by a reduction of tariffs both in the United States and in the Common Market. The six governments have declared that they are anxious to contribute to the gradual removal of restrictions on international trade, and they would never oppose negotiations, within the framework of GATT, seeking a substantial lowering of tariff barriers in all the free world. France has already suggested a plan for a general reduction of customs duties by 30 percent, to be undertaken in stages.

The balance of payments situation in the United States will play a decisive rôle in the progressive elimination of quotas, which still hamper the entrance of American goods into Europe. If the gold and dollar reserves outside the United States continue their generally upward trend, trade may be freed further. If, on the other hand, the reversal of the past year should become permanent, European countries would experience serious difficulties in maintaining the degree of liberation already attained.

The Common Market will stimulate American private investment in Europe. A market of 161 million people disposing of an annual revenue of 125 billion dollars is more attractive than six markets having the same total capacity but separated from one another by tariff barriers which, though more or less easily penetrated, can be raised at any moment. It is therefore not unreasonable to count on a flow of American private capital which will ease the present shortage and help to achieve an equilibrium in its balance of payments. The United States will thereby contribute to the development of the European economy and to the realization of the objectives of the Common Market. It will be necessary, however, to guard against situations which would compromise the development of the Community, as, for example, such heavy concentration of American capital in certain industries as to give it control, for all practical purposes. National sensitivity is always close to the surface in the modern world, even though our fears are generally theoretical, and it is better not to irritate it if this can be helped. With this reservation, a considerable increase in American private investment in Europe is one of the most important perspectives which the Common Market opens up.

If the problems created by the Common Market are many and important, there is none that cannot be solved with intelligence and good will. It is in the interest of all other free countries that Europe unite economically and develop its productive capacity rapidly; it is in the interest of Europe to build this unity and to assure this development in a prosperous free world enjoying a growth of international trade. Given this harmony of interests, there is no difficulty which cannot be overcome.

Whether economic Europe is the harbinger of a political Europe it is impossible to say. One can imagine a Common Market functioning satisfactorily without institutions other than those provided for in the treaty; there is no logical necessity which obliges the member countries to pursue the undertaking beyond the limits presently established. It is possible to imagine, however, that when economic unification is well advanced, the most serious obstacles to political integration will have vanished, and that there will have been forged a great number of bonds-- visible and invisible--which will lead to common political institutions.

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  • ROBERT MARJOLIN, Professor of Economics, University of Nancy; Assistant High Commissioner, Modernization and Equipment Plan, 1946; Secretary-General of O.E.E.C., 1948-55; author of "Europe and the United States in the World Economy" and other works
  • More By Robert Marjolin