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International cooperation and institutional choice: the European Community's internal market

Published online by Cambridge University Press:  22 May 2009

Geoffrey Garrett
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The decision of the European Community (EC) members to complete their “internal market” by the end of 1992, as embodied in the 1987 Single European Act (SEA), may represent the most ambitious instance of multilateral cooperation since the construction of the post-World War II international order. The economic objective of internal market completion is the removal of a wide array of nontariff barriers to trade that elsewhere have proved politically intractable, including border controls, national standards, preferential procurement policies, and industrial subsidies. The institutional structures underpinning the internal market are more constraining on the behavior of sovereign states than has been the case for other international regimes. The SEA replaced unanimity voting (national vetoes) in the primary decision-making body of the EC, the Council of Ministers, with a system of majority voting over matters pertaining to the internal market. In addition, the internal market is buttressed by an elaborate and powerful legal system. EC law is considered to have supremacy over national laws and to have “direct effect” in domestic jurisdictions, regardless of whether it is explicitly incorporated through legislation.

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International Organization , Volume 46 , Issue 2 , Spring 1992 , pp. 533 - 560
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Copyright © The IO Foundation 1992

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References

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15. The average trade openness of the group of twelve economies now in the EC, expressed as a ratio of exports and imports to gross domestic product, rose from less than 40 percent in 1960 to over 60 percent by the early 1980s. See Organization for Economic Cooperation and Development (OECD), Economic Outlook: Historical Statistics, 1960–1985 (Paris: OECD, 1987)Google Scholar. Moreover, intragroup trade as a portion of the total trade of group members also grew in the same period from around 40 percent to almost 55 percent. See Harrop, Jeffrey, The Political Economy of Integration in the European Community (Aldershot, U.K.: Gower, 1989), p. 169Google Scholar.

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18. Japanese performance remained superior to European performance throughout the recovery period. U.S. growth in 1984 was 6.7 percent, compared with -2.5 percent in 1982, whereas growth rates for the EC had changed from significant negative figures in the early 1980s only to 2.4 percent by 1984. More important from a political standpoint was the fact that the disparity in unemployment performance was even larger. The U.S. rate declined from its zenith of 9.5 percent in 1982 to 7.1 percent in 1985, while EC unemployment continued to rise and exceeded 10 percent by 1985. See OECD, Economic Outlook: Historical Statistics, 1960–1985.

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21. See Axelrod, The Evolution of Cooperation.

22. Milgrom, North, and Weingast, “The Role of Institutions in the Revival of Trade.”

23. Garrett and Weingast, “Ideas, Interests and Institutions.”

24. For an empirically sensitive treatment of these issues, see Keohane, , After Hegemony, pp. 85–109Google Scholar.

25. Moe, Terry M., “The New Economics of Organization,” American Journal of Political Science 28 (11 1984), pp. 739–77CrossRefGoogle Scholar.

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27. For a detailed analysis of the effects of the international division of labor on domestic political economies, see Frieden, Jeffry, “Invested Interests: The Politics of National Economic Policies in a World of Global Finance,” International Organization 45 (Autumn 1991), pp. 425–51CrossRefGoogle Scholar. For a view that stresses the mediating effects of domestic institutions, see Garrett and Lange, “Political Responses to Interdependence.”

28. In many EC states, there were also significant restrictions on capital flows, which the SEA stipulated would be eliminated. The removal of capital controls and its consequences for the Economic and Monetary Union are beyond the scope of this article.

29. See “Business in Europe: On the Defensive,” The Economist, 8 06 1991, p. 10Google Scholar. Germany alone had over 20,000 different standards, and Britain—even after the Thatcher decade—had over 12,000.

30. See ibid., p. 9. In the late 1980s, only about 2 percent of public sector contracts in the EC were awarded to foreign firms.

31. See ibid., p. 10. Standard VAT rates ranged from 12 percent in Luxembourg and Spain to 23 percent in Ireland.

32. See ibid., p. 12.

33. The Financial Times and The Economist provided excellent descriptions of the bargaining positions of EC members over the SEA. For more analytic treatments, see Cameron, David, “The 1992 Initiative: Causes and Consequences,” in Sbragia, Alberta, ed, Europolitics (Washington, D.C.: Brookings Institution, forthcoming)Google Scholar; Moravcsik, Andrew, “Negotiating the Single European Act: National Interests and Conventional Statecraft in the European Community,” International Organization 45 (Winter 1991), pp. 19–56CrossRefGoogle Scholar; and Woolcock, Stephen et al. , Britain, Germany and 1992 (London: Pinter, 1991)Google Scholar.

34. Mutual recognition was the principle for EC trade enunciated by the European Court of Justice in Cassis de Dijon, a 1979 case.

35. In the years since the signing of the SEA, the Danish government has changed its orientation on certain issues and is now often opposed to the positions taken by Britain.

36. For an analysis of the German financial system and its implications for economic performance, see Soskice, David, “The Institutional Infrastructure for International Competitiveness: A Comparative Analysis of the United Kingdom and Germany,” in Atkinson, Anthony Barnes and Brunetta, Renato, eds., The Economics of the New Europe (London: Macmillan, forthcoming)Google Scholar.

37. See Cameron, “The 1992 Initiative”; and Moravcsik, “Negotiating the Single European Act.”

38. The level of economic development in Ireland is closer to that in Greece, Portugal, Spain, and southern Italy than it is to that in Germany or France. The interests of political actors in Italy cleave between north and south. The northern Italian economy is characterized by firms that are competitive in the world market, whereas the southern part of the country remains far less well developed. The Christian Democrat-dominated government, however, has always been careful to protect the interests of its political heartland in the south.

39. The Council of Ministers is an umbrella term covering the regular meetings attended by cabinet ministers from member states for the various jurisdictions of the EC. The exceptions to the qualified majority voting rule over the internal market are fiscal (primarily tax) issues, the movement of people, and the rights and interests of workers. The roles of the EC Commission and the European Parliament were also affected by the SEA. Relations between the council, the commission, and the parliament are discussed in the next section.

40. Moravcsik, , “Negotiating the Single European Act,” p. 32Google Scholar.

41. I am indebted to Helen Wallace for this point. It should also be noted that in the current voting system, the larger countries are still underrepresented in terms either of population or of economic output.

42. The British government did, however, win significant concessions in that both industrial relations and immigration issues were exempted from qualified majority voting.

43. Hirschman, Albert O., National Power and the Structure of Foreign Trade, expanded ed. (Berkeley: University of California Press, 1980)Google Scholar.

44. By 1993, these funds are projected to be equivalent to one-quarter of the EC budget ($11 billion), representing a significant side-payment. See Gary Marks, “Structural Policy in the European Community,” in Sbragia, Europolitics.

45. The British government's acceptance of the SEA was also made more likely by important French and German concessions over the EC budget and the Common Agricultural Policy. See Moravcsik, , “Negotiating the Single European Act,” pp. 34–38Google Scholar.

46. In the mid-1980s, French and German exports constituted over 40 percent of all intra-EC exports. See Cameron, “The 1992 Initiative.”

47. Moravcsik, , “Negotiating the Single European Act,” p. 38Google Scholar.

48. For a more general analysis of the effects of domestic politics on international bargaining, see Putnam, Robert, “Diplomacy and Domestic Politics: The Logic of Two-Level Games,” International Organization 42 (Summer 1988), pp. 427–60CrossRefGoogle Scholar.

49. In this context, it should be noted that EC issues, particularly with respect to the exchange rate mechanism of the EMS, played a significant role in the subsequent defeat of Thatcher and the elevation of John Major to Prime Minister late in 1990.

50. This argument does not depend on votes actually being taken in the Council of Ministers. In fact, most matters are resolved consensually in the council, without recourse to qualified majority voting. However, the specter of a vote, given its probable outcome, is sufficient to accord France and Germany significant influence on the content of the “consensus” position.

51. For details of these institutional procedures, see Dehousse, Renaud, “Completing the Internal Market: Institutional Constraints and Challenges,” in Bieber, Ronald et al. , eds., 1992: One Internal Market? (Baden-Baden, Germany: Verlagsgesellschaft, 1988)Google Scholar; and Nugent, Neil, The Government and Politics of the European Community (Durham, N.C.: Duke University Press, 1988), p. 247Google Scholar.

52. This rule pertains to the “second reading” of an EC Commission proposal—that is, the reading after the proposal has been passed by the Council of Ministers. The European Parliament also issues opinions on proposals at their “first reading,” before they are initially submitted by the commission to the council.

53. This holds true for any matter that is not specifically exempted from majority voting in the SEA.

54. The president of the EC Commission, Delors, has pressed for radical extensions of the scope of internal market regulation by the EC. Statements made by Delors betray a more general interest of bureaucrats in the commission to increase their own roles and power.

55. This holds true as long as there are no incentives for governments in the council to vote strategically—that is, to vote against commission proposals that they actually prefer to the status quo. The implications of strategic voting are analyzed later in this article.

56. It should also be noted that such an outcome might not represent a Pareto improvement for the EC, since it could be farther from the ideal point of Britain and Denmark than is the status quo.

57. See “Business in Europe,” p. 9.

58. The most important instance of this was Thatcher's decision not to reappoint Lord Arthur Cockfield as an EC commissioner in 1989 because he had been a prime mover behind many internal market initiatives that the British government disapproved.

59. See the following articles by Rubinstein, Ariel: “Perfect Equilibrium in a Bargaining Game,” Econometrica 50 (01 1982), pp. 97–109CrossRefGoogle Scholar; and “A Bargaining Model with Incomplete Information About Time Preferences,” Econometrica 53 (09 1985), pp. 1151–72CrossRefGoogle Scholar. The commission-council game is somewhat different from that analyzed by Rubinstein because only the commission can make proposals.

60. For analyses of the role of EC law in implementing the internal market, see Capalleti, Mauro et al. , eds., Integration Through Law, vol. 1 (New York: De Gruyter, 1986)CrossRefGoogle Scholar; Dehousse, Renaud and Weiler, Joseph, “The Legal Dimension,” in Wallace, William, ed., The Dynamics of European Integration (New York: Pinter, 1990), pp. 242–60Google Scholar; Garrett and Weingast, “Ideas, Interests and Institutions”; Martin Shapiro, “The Court of Justice,” in Sbragia, Europolitics; and Stein, “Lawyers, Judges and the Making of a Transnational Constitution.”

61. The United Kingdom and Denmark have the best records for legislation implementing internal market directives. The southern European states have tended to be laggards. This pattern is a result of the fact that most directives have dealt with the elimination of barriers to the free movement of goods and services, rather than with the creation of a more interventionist internal market.

62. The doctrine of direct effect was established in Van Gend, a 1963 case. Since individuals and other private actors do not have direct recourse to the European Court of Justice, the European court ruled that in order to protect their rights with respect to the Treaty of Rome, it was necessary for the treaty to have “direct effect” in domestic courts. In Van Duyn, a 1974 case, the European court extended this doctrine to directives passed by the Council of Ministers but not legislated into national law.

63. The number of preliminary judgments made by the European Court of Justice far exceeds the number of rulings made in cases brought directly before it. See Stein, , “Lawyers, Judges and the Making of a Transnational Constitution,” p. 6Google Scholar.

64. The supremacy of EC law was first asserted by the European Court of Justice in Costa v. ENEL, a 1964 case.

65. See Keohane, Robert and Hoffmann, Stanley, “Conclusions: Community Politics and Institutional Change,” in Wallace, , The Dynamics of Regional Integration, pp. 276–300Google Scholar.

66. See European Report, no. 1554, 13 01 1990Google Scholar; no. 1590, 30 May 1990; and no. 1597, 23 June 1990.

67. See The Financial Times, 21 March 1990, p. 2.

68. See “Fishing Boat Registration Rules Contravene EC Law,” The Financial Times, 14 August 1991, p. 11.

69. Stein, , “Lawyers, Judges and the Making of a Transnational Constitution,” p. 3Google Scholar.

70. See Kreps and Wilson, “Reputation and Imperfect Information”; and Milgrom, North, and Weingast, “The Role of Institutions in the Revival of Trade.”

71. Kreps, “Corporate Culture and Economic Theory.”

72. For a detailed analysis of incomplete contracting and the construction of the internal market, see Garrett and Weingast, “Ideas, Interests and Institutions.”

73. For recent analyses of judicial politics and public law, see Marks, Brian, “A Model of Judicial Influence on Congressional Policy Making,” working paper, Hoover Institution, Stanford, Calif., 1990Google Scholar; McCubbins, Matthew, Noll, Roger, and Weingast, Barry, “Positive and Normative Models of Due Process: An Integrative Approach to Administrative Procedures,” Journal of Law, Economics and Organization, vol. 6, 1990, pp. 307–22Google Scholar; and Spiller, Pablo and Gely, Rafel, “Congressional Control or Judicial Independence: The Determinants of US Supreme Court Labor Decisions, 1949–1987,” mimeograph, University of Illinois, Champaign, 1991Google Scholar.