All Together Now: The European Union and the Country Clubs
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CHAPTER 3
All Together Now:
The European Union and the Country Clubs
3.1 INTRODUCTION Individuals may or may not apply and be accepted
to be members of a country club that offers use of
The project that was originally formulated in the a golf course, a swimming pool, or other enjoyable
aftermath of World War II and developed into the facilities as well as the pleasant company and support
European Union is not just a set of intergovernmental of selected and well-behaved fellow members. These
treaties and agencies. Like the citizens of traditional clubs may or may not work well, depending on what
nations, its Member Countries abide by a set of they are meant to provide, and how their members
constraints, enjoy common policy facilities, and are are selected and disciplined. Similarly, European
bound into an entity with a legal personality. Like a states may or may not apply to join the Union, may or
federal state, this supranational body rules over its may not be accepted as members, and (as in Brexit)
citizens directly, who are all entitled to a uniform set may give up their membership. To ensure that the
of rights upheld by the European Court of Justice, Union functions smoothly, it is necessary to decide
including the freedom to carry out economic activities which facilities should be available to members, and
throughout its territory. This very special entity enforce membership admission criteria and rules of
was envisioned to assume some of the roles and behaviour. The same considerations also apply to a
prerogatives of all governments, along an ‘ever closer scenario whereby Europe’s countries may join not just
union’ path. one Union, but a constellation of more flexible and
History has not seen uniform convergence specialised arrangements that allow for a ‘variable
towards this ideal. This chapter focuses on past geometry’ of continental maps and ‘multiple speeds’
and possible future exceptions to the rule that all of policy harmonisation and convergence.
European states and their citizens should participate
equally in a single integration process. In the past, Past Reflections about the Future
such exceptions have mostly concerned the United To motivate and define these concepts it is useful to
Kingdom and a few other countries. But the idea of recall Schäuble and Lamers’ (1994; S&L hereafter)
explicitly relaxing that rule has been voiced often, remarkably prescient outline of the problems facing the
particularly after the fall of the Berlin Wall and in the European economic and political integration process
run-up to the introduction of the euro single currency. then and now, and their blunt (and, at the time, quite
The euro crisis, Brexit, and global geo-political trends controversial) proposed solution deserves to be kept in
now make it interesting to revisit the issue of whether mind throughout this chapter.
European states might subscribe to only some of the The two German conservative authors were
rights and obligations of membership. This possibility reacting to the Delors report on Economic and
features prominently in the European Commission’s Monetary Union, which in 1989 set out the roadmap
(2017a) menu of EU configurations in 2025. That for further integration: namely the establishment of
document refrains from conveying a clear sense of a single market, to be followed by the adoption of a
which may be the most plausible among the possible single currency. In 1994, S&L saw two sets of problems
scenarios that its readers are asked to contemplate. for this project. Those arising from the post-Cold War
Like a magician inviting the audience to pick any card, geo-political instability and trade globalisation, and
however, placing “Scenario 3: Those Who Want More especially those deriving from the contrast between
Do More” in the middle of the deck of five, it does hint French and German positions on the prospect of
that this is not the least likely to be the most appealing. a common defence framework and on industrial,
In that scenario, some member countries would be competition and agricultural policies.
granted new rights and accept new responsibilities S&L were very much aware of how fundamentally
in order to foster the coordination of defence, heterogeneous France and Germany were in those
security, justice, tax and social policies. This would respects. However, they felt that Germany’s place in
solve some problems, but also raise new issues of Western political culture would be endangered if its
transparency and accountability of decision-making path diverged from France’s, and thought that frank
and heterogeneity of rights depending on residence. discussions could somehow convince France that
We discuss these and other issues in the light of “deepening the Union prior to enlargement” was in
experience and of the theoretical insights and practical its own interest. If the two countries could agree to
analogies afforded by viewing the European Union, and prevent “regressive nationalism” as a response to
possible sub-entities within it, as ‘clubs’ of countries. “external threats, such as migration”, they could then
EEAG (2018), “All Together Now: The European Union and the Country Clubs”,
EEAG Report on the European Economy, CESifo, Munich, pp. 47–63. EEAG Report 2018 47CHAPTER 3
manage an explicit “variable geometry” configuration The sets of individuals who benefit from
of the European integration process (these quotes, government services are in practice geographically
which still appear very topical, are some of those and legally limited by the boundaries of the country’s
highlighted by Pond, 2000). enforcement power. Ships cannot be prevented from
France and Germany would initially only seeing a lighthouse only if they happen to be within
lead themselves, Belgium, the Netherlands, and sight of it, and an army or the police cannot single
Luxembourg; set criteria for membership in that core out individuals they will not protect within the area
group; and wait for other countries to make sufficient they defend or patrol, but will not defend individuals
progress, at their own variable speeds, towards outside that area. Because the geographic scope of
membership. Italy, Spain, and the United Kingdom could governments is limited, it can be redefined: States may
hopefully join sooner rather than later. Scandinavian form, dissolve, or be joined in new, larger entities. In
countries, along with Austria, Hungary, and other history, the geographic scope of governments has
Central and Easter European countries, would first join grown along with that of markets, driven by economies
the Union and then develop more gradually towards of scale and specialization that required legal
integration in the Franco-German core, rather than frameworks and solidarity links broader than those
just with a German economic block: a possibility that, provided by natural families.
according to Pond’s account of the debate about S&L,
was seen by France as spelling doom for its hegemony 3.2.2 Club Goods
in the European integration process (Pond, 2000).
As the mention of families makes clear, the state is not
3.2 GOVERNMENTS AND CLUBS the only body that produces and administers goods
and services that are not rival and excludable, hence
To assess the pros and cons of a ‘variable geometry’ private and marketable, and manageable by Adam
approach to European integration, before examining Smith’s invisible hand under laissez faire conditions.
its practical implementation and performance, we Some goods and services that are not completely
first revisit and summarise how governments and private, but do not quite belong to the category of
clubs provide facilities and services to their citizens public goods, can in fact be managed through private
and members. contractual arrangements.
A pure private good gives benefits to the person
3.2.1 What Governments Do and Where who owns it and no one else. The production of such
goods can be left to the market, which, under some
Countries have borders, and a key role of their conditions, will allocate resources efficiently. At the
governments is that of supplying public goods that are other pole is the pure public good that does not suffer
or tend to be non-rival (can be used by many individuals from congestion, and from the enjoyment of which
without diminishing their usefulness to each of them) it is not possible to exclude people. The archetypal
and non-excludable (specific individuals cannot be example is national defence: all residents of a country
prevented from using them) within those borders. A receive its benefits, it is not possible to exclude anyone
pure public good is defined as one that is completely from them, and the country’s having a greater number
non-rival and non-excludable, so that all individuals of residents would not cause the benefits received by
can and must benefit from it equally. any one of them to be lower than if there were fewer
Besides such public goods as lighthouses or residents. National defence cannot be paid for in
the protection provided by armies or the police, markets. It must be provided by the state and paid for
governments provide a broad range of services that with revenues from mandatory taxes (free riding would
are complementary to each other and to market be optimal if contributions were voluntary).
activities. States help markets to function by Between the two lie the club goods analysed by
providing infrastructures and regulation. These are the economic theory of clubs (Buchanan, 1965), which
also geographically and legally limited by countries’ studies provision and allocation of goods that are to
boundaries. Money is accepted for payments in specific some extent non-rival and non-excludable, if only
countries, and a country’s courts need not enforce within well-defined limits. A garden or a swimming
contracts written under foreign law. Because well- pool, for example, may be owned and operated by a
organised, competitive, wide-ranging markets need group of individuals who establish membership criteria
not benefit all individuals, governments also engage and rules for the use of the common facilities, and
in redistribution. To make competition and market empower some of their own to maintain and run them,
integration acceptable for those who own factors and to enforce the rules and keep out outsiders.
have skills that are better rewarded in the smaller In this and other cases resources are used to
markets of closed economies, welfare schemes replace provide goods or services that simultaneously benefit
or complement previous rural and extended-family several people. Due to congestion, the benefit each
solidarity in industrialised and urbanised market person stands to gain from them tends, however, to be
economies. smaller the higher the number of users. If the cost of
48 EEAG Report 2018CHAPTER 3
producing or buying the good is shared between the delimit. Non-members may occasionally use the pool
club members, and the benefits of each member depend at night, or outsiders may enjoy the view of a beautifully
(positively) on the quantity of the good available to the landscaped golf course. Conversely, the club may also
club, and (negatively) on the number of club members, disturb non-members if noise or parking congestion
and membership is determined as to produce the spill over its boundaries.
greatest possible net benefits to each member, then Other problems are specific to the collective
membership will be fixed so that an additional member character of the services purchased by club
will have (almost) no effect on the net benefits accruing membership. One is that members need not all receive
to each existing member. The reduction in the cost of the same benefits (subjectively, in terms of the value
providing the good to each member would be offset by they perceive that they get) from the facilities provided.
the reduction in the benefits received, due to the greater Increasing the size of the membership often involves
congestion. The size of the club good should be larger if admitting new members with different preferences to
this increases the benefits per member more than the those of the original members. In principle, fees and
cost per member. If benefits grow progressively less rules could be tailored to individual characteristics:
quickly, and costs grow at a constant or increasing rate, individuals who are unpleasant or heavy users of the
this determines the optimal number of tennis courts, facilities should not be excluded, just charged more for
and the optimal size of swimming pools and pleasant the privilege. In practice, imperfect information and
sitting rooms conducive to interesting conversations. simplicity make this impractical. So bigger clubs may
Entry fees that cover investment costs, and usage enjoy economies of scale, but are more likely to feature
fees meant to control congestion, can implement a greater diversity of views amongst their members,
this optimal configuration. There may be a one-off and worsen problems of reaching agreement on
payment on joining the club, an initiation fee, annual matters of common interest. Will all the golf-club
membership renewal fees, and additional fees for using members support the renovation of the club-house
some of the facilities: a golf club may charge a green and the gilding of the bath-taps? Some may vote for
fee for using the course (and premium fees for peak bling, but others prefer more restrained decorations.
periods, discounts for mid-week rounds and retired A second problem is that clubs, especially
members), and bill bar and restaurant use. There may large ones with heterogeneous members, can be
also be a charge on, or a payoff to, a member leaving cumbersome to run and organise. Within a large club,
the club. Based on this economic cost-and-benefit decision is generally devolved to a small committee
analysis, membership and facilities should grow if this (the chairman, treasurer, and other offices, and other
reduces average production costs, net of additional committee members), often elected by the membership
congestion. When existing clubs do not find it optimal at large, as decision-making by all members becomes
to admit additional individuals, those left out will set too slow and cumbersome. This puts power in the
up their own new club, and let it grow to the efficient hands of a few, and makes it possible for coalitions
size that maximizes the net benefits enjoyed by each within the club to seize the leadership and impose their
member. own preferences.
Costs and payments, however, are not all that Much the same issues naturally arise in
clubs are about. The operation of clubs is a delicate any collective entity, including local and state
matter. Sharing arrangements through private clubs governments. In clubs, however, membership is
can, in principle, allocate resources efficiently, but usually a matter of choice, not a birth right like a
information problems and transaction costs can make country’s citizenship. This introduces a third set of
it difficult. This explains why membership needs to be problems. Deciding how many potential members
applied for and may not be granted, and why meetings should be allowed into the club is not enough: when
of clubs’ governing bodies are not always peaceful. people differ in their behaviour and attitudes, the more
vexed question arises of who those members should
3.2.3 Good and Bad Clubs be. Existing members may wish to prevent the entry
of new members that hold views very different from
The production of club goods, like that of private goods, their own. They may blackball some candidates for
should be left to the market if contracts that ensure entry. The old money may resist the admission of the
efficiency can be stipulated and enforced. This is not a new billionaires who, if they gain sufficient influence
small ‘if’. Several practical matters make the operation within the club, may foist expensive and tasteless
of clubs less straightforward and their benefits less bathroom furnishings on the entire membership.
clear-cut than in the simplest case outlined above, and The possible admission veto is also meant to exclude
in textbook markets for fruit and vegetables or other potential members who seem unlikely to behave
simple, homogeneous private goods. well. While clubs generally have rules for acceptable
Some problems are like those that may be present behaviour, and procedures for expelling members
in all private markets. A key feature of any club is the who do not adequately adhere to them, enforcing
ability to exclude non-members from using its facilities, rules and expelling miscreants is likely to be a difficult
but the club’s borders can be difficult or expensive to and costly process.
EEAG Report 2018 49CHAPTER 3
Because miscreants do enjoy disrupting the Their size was adequate for industrial revolution, but
operations of a club, they will try to gain admission, over time can become too small for their government to
and blackballing is unlikely to completely exclude play its role efficiently. The obvious economies of scale
them. When the old membership finds some of their in defence and police activities can be strengthened by
fellow new members to be disagreeable company, technological progress in weapons and information.
they may exit and form their own club. In a perfectly Similarly, it is increasingly necessary for countries to
frictionless world, this would produce an efficient play some of the government’s economic roles together
constellation of clubs, each just large enough to when production is internationally integrated, and trade
exploit economies of scale, and segregated by member involves knowledge and custom-made components,
type to avoid excessive taste heterogeneity. In reality, rather than commodities.1 In the European Union,
adjustment costs faced by the club as a whole need not supranational policies have mostly been confined
correspond exactly to the entry and exit fees charged to the purely economic area of markets and money,
to individual members. Moreover, because existing leaving redistribution to member states (aside from
members will hesitate to exit if this means forfeiting agricultural policy and cohesion policies meant to
the initiation fee they paid on entry, they cannot use ease adjustment and prevent agglomeration). Other
the exit option to avoid other members’ opportunistic government services are provided or coordinated by
and unpleasant behaviour. other international institutions like NATO for military
These issues complicate the operation of real- defence.
life clubs, and mean that clubs need not achieve a The institutional framework for this cooperation
socially efficient provision of club goods. Many clubs is very much the same as that of a club, in that these
do function properly, but the real world is rife with organisations regulate their own membership and
dysfunctional clubs that are bankrupted by dishonest the amount and quality of some of the same public
administrators or populated by disgruntled members goods that governments traditionally provide within
who fight savagely and inconclusively in governing countries. Like any club, they cater only for members:
bodies. Bad clubs do face death spirals, as a shrinking the Baltic Republics need to be defended because they
membership makes it difficult to maintain facilities were granted membership. As in any club, granting
attractive to new members. Their dispatch can be slow access to facilities also has a price tag: defending
and gruesome, however, and may dissipate resources, both Western and Central Europe need not be much
rather than make them available to better clubs. more expensive than defending the former alone, but
While a society consisting of clubs to provide the plausibly makes an attack more likely.
club goods may be an efficient form of organisation,
it need not be: like that of any market mechanism, 3.3.1 Clubs within States
its efficiency depends on whether a set of conditions
holds. From the point of view of members, clubs need Before discussing the pros and cons of countries
not provide a good service. A world of private clubs may belonging to such club-like groups, rather than having
also be far from efficient from non-members’ point of all the same (possibly none) rights or obligations to
view. If a club that has been set up to give the maximum each other, it is useful to note that similar organisations
benefits to its members has negative effects on non- and issues exist within states, where municipal
members, it will tend to be too large (in the sense of governments can and do pool sanitation or water
having too many members and providing too much of supply services, and regional entities are sometimes
the club good), and everybody would stand to benefit in granted special responsibilities and privileges. Less
principle from it being smaller. The converse is true for obviously, and insightfully, citizens within each
clubs whose existence gives benefits to non-members. territorial unity may also be organised in club-like quasi-
governmental bodies, or “functional, overlapping,
3.3 COUNTRIES AND CLUBS competing jurisdictions” (Frey and Eichenberger, 1996,
p. 343). This can be attractive from a point of view that
Membership as a two-sided choice is what defines a downplays the useful government roles outlined above
club and, to some extent, is also applicable to states. and, distrusting dangerously powerful Leviathan
While most individuals are citizens of a country by states, favours the close citizen control afforded by
birth, some do become or cease to be through marriage popular referenda and local jurisdictions. It does not
or migration. Countries may themselves be formed or imply that some specific class of individuals have
dissolved consensually, and the economic theory of different rights (like native Americans in nineteenth
clubs suggests that the number, size, and shape of century United States, or citizens of occupied European
countries may depend on heterogeneous taste for countries in the 1940s). The idea is that a society of free
public goods (Alesina and Spolaore, 1997) or income and equal individuals might organise itself in multiple
inequality and redistribution policies (Bolton and bottom-up clubs, each providing one specific set of
Roland, 1997). public services and competing for the membership
Traditional nation states were formed by less
consensual military (or occasionally dynastic) methods. 1
Bernard et al. (2017), Fort (2017), Johnson, and Noguera (2017).
50 EEAG Report 2018CHAPTER 3
of heterogeneous individuals who choose freely are non-rival for members, or are at least characterised
among them, pay membership fees, and participate by strong economies of scale, like defence and market
democratically in their operation. Some aspects of infrastructure. They are less likely to function well if
social life are indeed organised in this way. Individuals member countries have heterogeneous preferences
may belong not only to golf clubs, but also to churches, about the type and size of the facilities provided, or
health insurance schemes, and sports organisations ways to try and free-ride on common facilities. They
that span the same territory.2 Moreover, geographical may generate positive externalities for non-members,
mobility can to some extent allow individuals to choose for example by developing product standards that
the local community that provides their most preferred can be freely adopted, or negative externalities, for
set of public services. Dissolving the unitary state into example by enforcing border controls that exacerbate
a constellation of clubs would, however, entail large problems outside the club.
transaction costs and thorny organisational problems. These issues are relevant in all policy fields,
Frey (2001) suggests that governments need not be including defence and other examples of pure public
territorial, but it is hard to see how the government’s goods provided only to a variable and heterogeneous
monopoly on market regulation and on collection membership. They are arguably more of an issue when
of the taxes that fund public good provision may be economic policy is concerned. Amongst countries
enforced other than on a territorial basis. Moreover, some may value the benefits of a common currency
clubs do need to belong to a state, because contracts more than others. They may have differing views as to
among club members must be enforced by a higher how it should be managed, the target inflation rate,
authority (Eichberger, 2001). Families, for example, do exchange rate management, and other such issues.
overlap geographically, but their membership is based Like the individuals who are members of a club, so
on marriage contracts recognised by a state, and the the member countries of supranational organisations
behaviour of their members is subject to state laws. should clearly agree on the purpose of their operation
and abide by suitable behavioural rules.
3.3.2 Country Clubs in Europe To this end the operation and governance of
European country clubs, like that of any club, would
A country clubs structure may or may not have been need to rely on enforceable contractual arrangements.
emerging consciously, but the reality is that Europe There are always conflicts of interest inside clubs and
already has something in place along these lines. Many inside countries: very few policies enjoy unanimous
country groups already exist within Europe and around support, and every government faces opposition
all or part of it. The largest, such as the European Council parties. Conflicts of interest are even more abundant
or NATO, provide relatively vague or tightly focused across the borders of EU member countries, and so is
services. The most numerous are intergovernmental the need for a clear and enforceable set of membership
or interparliamentary structures that operate more and behavioural rules.
or less formally, form easily, often dissolve, and are States can supply the higher authority needed
usually not much more permanent and influential than to enforce the rules of clubs that operate within
occasional summits between pairs of countries. countries, and can therefore be organised to provide
Examples of groups meant to address issues of complementary services to a set of members that is
common concerns are the Visegrád group of former homogeneous and small enough to operate efficiently.
Communist countries; the now dissolved Franco- There are good reasons for tennis clubs to focus on
German-Polish Weimar triangle, which in 2011 tennis facilities and cater mostly for members who
pushed for defence cooperation, but encountered are particularly fond of playing tennis: clubs that
UK opposition; and the Nordic-Baltic 8 group, which provide a broad range of services to many members
included Iceland and Norway along with six EU member can be so complicated to organize and run as to offset
countries, and has been superseded by the Baltic the underlying economies of scale. Unfortunately,
Assembly and Nordic Council groups. Drawing Euler enforcement can be very difficult when clubs are formed
diagrams of such European country clubs is an exercise by sovereign countries. Unlike tennis or whist clubs,
that requires great skill in handling intersections, and clubs of nations need to ensure that good behaviour
conveys little impression of union.3 is the self-enforcing choice of their members. As we
The institutional structures and duties of these shall see and argue below, clubs of geographically
country groups differ widely, but their formation and and historically heterogeneous countries can be
operation generally resemble the mechanisms that more viable if they agree to provide a broad variety of
group individuals into families and clubs, and cities services, because having multiple issues on the table
and regions into states. They are more likely to be can enable compromises and foster trust.
efficient and viable if they make available goods that
3.3.3 The European Union as a Club
2
They do so with special gusto in Switzerland, as discussed EEAG
(2014).
3
See https://en.wikipedia.org/wiki/Template:Supranational_Euro-
Within a supranational entity that encompasses and
pean_Bodies for such complex and evolving diagrams. partly supersedes the powers of traditional states,
EEAG Report 2018 51CHAPTER 3
it is somewhat easier to imagine a more flexible The membership criteria are also a little like the rules
organisation of individual rights and obligations. that in some countries entitle certain individuals to
Casella and Frey (1992) extol the virtues of functional citizenship, because only European states may apply
federalism for the European Union, which could evolve and perhaps all should. Since the 2000 Lisbon Treaty,
towards a set of “overlapping jurisdictions without exit from the EU club is allowed with a procedure laid
explicit ranking, with each jurisdiction responsible out in Article 50.4 There is no provision for the expulsion
for the provision of a specific class of public goods” of current member states, but those breaching the
(p. 640) so that “regions belonging to different states EU’s fundamental values may be stripped of some of
may form cooperative agreements without passing their rights through a procedure laid out in Article 7.
through the higher jurisdictional level […] in a highly- While clubs may expel some of their members, states
decentralized system of intersecting alliances” (ibid.). do not usually strip individuals of citizenship, and the
The existence of a supranational legal structures may European Union sets itself a similar standard.
in fact underlie the propensity of some regions and Enforcement of obligations within the European
ethnicities to secede from member states: Catalunya Union is more difficult than within a state, because
may want to leave Spain, but certainly would not want misbehaviour by sovereign states is not easy to
to be excluded from the European Union. detect and punish. One government policy area that
The European Union does provide an extensive is completely assigned to the Union is trade policy, but
legal framework, but also aims to enforce a its practical implementation is carried out by national
comprehensive set of rights and obligations for its authorities, and their incentives to abide by the rules
citizens and member states. In Europe, countries are are weak. For example, British customs authorities
the members of clubs that produce such public goods might accept fraudulently low value declarations
as common foreign trade policies, a single market, a on Chinese textile imports because this reduces the
single money, atomic energy infrastructures, fisheries expense and bother of collecting duties that are paid
policy, defence, and so on. These are club goods into the Union budget and, while benefiting textile
because each one provides a common set of benefits producers in other European countries, prevent British
to each of the members, who need not all value them consumers from dressing up cheaply. Eschewing
equally. In a world in which there are many club goods, such responsibilities is attractive from a country-
the extent to which they are shareable, and the degree specific point of view, but of course as patently illegal
to which they are affected by congestion, is likely to in a customs union as self-interested leniency or
vary from one good to the next. So, the optimum corruption by public officials is within any country. It
membership of the club is likely to vary from good should, but need not, be prevented and sanctioned by
to good. Setting up and maintaining each of these the club’s administration.5
institutions requires resources, the costs of which Given that enforcement is difficult, and the club’s
must be borne, not necessarily shared equally, by the operation and members’ good behaviour need to be
members. Non-members should be excluded from the based on trust, it can be a good idea to let some rules be
direct costs and benefits, but the operation of some of somewhat less than fully clear. If grounds for expulsion
these clubs does spill over onto outsiders: existence were fully specified upon detection of clearly defined
of a single market affects trade and economic improper behaviour, for example, members might
activity for non-members. Besides economies of well focus more on avoiding detection than on proper
scale and congestion effects, heterogeneity matters: behaviour. And if the process that allows countries to
admission of more members into each club requires exit the European Union were less unclear than it is
more compromises on policies to accommodate the proving to be in the case of Brexit, members might well
circumstances of the new ones, diluting the benefits focus more on whether they would benefit from exiting
that accrue to the pre-existing members. than on behaviour consistent with, and conducive to,
The membership criteria and process for continued membership.
admission of states to the European Union are laid out
in Articles 2 and 49 of the current consolidated Treaty 3.4 SPEEDS OF EUROPE
on the European Union (TEU). They were decided by a
Copenhagen meeting of the European Council in 1993, Countries that are not satisfied with the rights and
when enlargement (and possible multiple speed) was responsibilities of EU membership may exit (as the
looming. In some respects, they resemble those for United Kingdom is doing). Alternatively, they may form
immigration of individuals into a state: applicants must clubs with a more limited and perhaps less permanent
satisfy some conditions (democracy, human rights, the scope than the European Union, or may be allowed
rule of law, a market economy), promise some behaviour to opt out from Treaty provisions by Protocols that
(accept obligations of membership and adopt EU law), establish exceptions to Treaty rules.
and the decision is subject to some political discretion
(a unanimous decision of the European Council 4
EEAG (2017) outlines the procedure and discusses issues arising in
the context of Brexit.
determines whether these criteria are met, and a 5
In March 2017 OLAF, the EU anti-corruption police, did issue a 2 bil-
majority of the European Parliament is also needed). lion euro fine for the UK for its customs’ negligence.
52 EEAG Report 2018CHAPTER 3
3.4.1 Opt-outs within a reasonable period by the Union as a whole”
(emphasis added).
Denmark and the United Kingdom have a formal When approved by a qualified majority of the
opt-out from the adoption of the euro. Ireland and European Council, enhanced co-operation can rely
the United Kingdom have a formal opt-out from the on the Union’s legal framework and enforcement
Schengen process of the gradual abolition of checks powers. This distinguishes it from less stable groups
at common borders (signed by some member states of countries that, without formal recognition by the
of the European Union in Schengen on 14 June European Union, focus on specific projects (such as
1985 and on 19 June 1990, and integrated into the military procurements) or function as lobbies in the
framework of the European Union as a Protocol in the process of EU policy formation. It is in force only
Treaty of Amsterdam of 2 October 1997; there are also in the fields of patents, divorce law, and property
non-EU members that only participate in technical regimes of international couples. The reason why
committees). Less prominent opt-outs are Denmark unanimity could not be achieved is, unsurprisingly,
in defence, Poland and the United Kingdom in the the heterogeneity of policy preferences. Sweden
Charter of Fundamental Rights of the European Union, objected to common divorce and marriage patrimony
and Denmark, Ireland, and the United Kingdom in the rules that would be much less permissive than its own,
area of freedom, security and justice. Unsurprisingly, while Spain and Italy felt European patents should be
the United Kingdom has the most opt-outs (and the written in their historically important and beautiful
Thatcher budget rebate is another exception to the languages, as well as in English, French, and German.
uniform treatment of members). Enhanced cooperation has been approved, but is not
All exceptions highlight a rule, and explicit opt- operational, for financial transaction taxes, and has
outs make it clear that signing up to EU membership been discussed for the web taxes on multinational
is, in principle, a package that includes a large variety internet-based companies.
of obligations and rights. While the membership of In military defence matters a permanent structured
Economic and Monetary Union, Schengen, and other cooperation (PESCO) may be established per Article 42:
clubs within the European Union varies over time “Those Member States whose military capabilities
(in ways reviewed in the next section), it is supposed fulfil higher criteria and which have made more
to be an automatic implication of EU membership: binding commitments to one another in this area with
all EU members without opt-out (currently a view to the most demanding missions shall establish
Bulgaria, Croatia, Cyprus, and Romania for Schengen; permanent structured cooperation within the Union
Bulgaria, Croatia, the Czech Republic, Hungary, Poland, framework.” Their cooperation is to be governed by
Romania, and Sweden for the euro area) must join once Article 46, according to the criteria in Protocol No.
technical requirements are met (but can avoid joining, 10. While these criteria are phrased in rather vague
like Sweden, by not meeting them). Once again, the “undertake to” and “have the capacity” terms, the
structure of the European Union is, in this respect, like resulting set of rights and responsibilities (with
that of traditional states, where boilerplate contracts provisions for suspension, or withdrawal) is intended
are common: commercial law defines just a few types of to structure the PESCO as a proper club of countries.
limited responsibility companies, and states recognise
even fewer types of marriage. 3.5 GEOMETRY VARIATION IN THE PAST
3.4.2 Enhanced Cooperation and PESCO We proceed to inspect what actual experience says
about the multi-speed idea. History is not very
Besides the fragmentation induced by opt-outs and informative, but we can look at the configuration and
gradual implementation of technical criteria there are performance of variable-membership clubs like the
more formal, if admittedly so far less prominent club euro area and the Schengen agreement, even if they
arrangements that allow countries, within the Treaty have only been in existence for relatively short periods
framework and relying on the European Union’s policy of time. The PESCO in military and defence matters has
determination and administrative framework, to not yet begun to operate, and for this reason will be
engage in two forms of cooperation. discussed in the next section, along with other future
The Treaty of Amsterdam introduced an “enhanced developments.
co-operation” facility, whereby at least nine member
states can co-operate without involving other member 3.5.1 The Currency Club
states, in a framework that has been approved by the
European Commission and a qualified majority of The euro area membership criteria and behavioural
the European Council. This is an explicit exception rules were agreed in Maastricht, and very much inspired
to the single-speed rule: Article 20.2 specifies that by the variable geometry concept. To be allowed into
“enhanced cooperation shall be adopted by the the single currency club countries need to have low
Council as a last resort, when it has established that inflation rates, small government deficits, limited
the objectives of such cooperation cannot be attained or declining public debt, stable exchange rates (and
EEAG Report 2018 53CHAPTER 3
technically compatible legislation, Figure 3.2
particularly in terms of central Government Surplus for France, Germany, Italy, and Spain
bank independence). Countries
Spain Germany
that did not satisfy these criteria Italy France
% of GDP
were to be encouraged to try and 2
catch up to them, at their own
speed.
0
Once in the club, exchange
rates were irreversibly fixed
−2
and nominal long-term interest
rates converged completely. But
countries still had to show the −4
seriousness that made them
worthy members by abiding by −6
behavioural rules that took the
form of the Stability and Growth 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Pact budgetary limits, later Source: AMECO. © CESifo
revised, and refined, and extended
to include a scoreboard of other macroeconomic policy The early euro area’s average fiscal misbehaviour
and performance indicators. is driven not by Luxembourg, of course, but by France
and Germany. The key members of the S&L core group
Member Behaviour violate the club’s fiscal rules soon after its formation.
When the accession criteria were decided, they might As Figure 3.2 shows, Italy’s budget deficit grew sharply
have been expected to keep Italy and Spain out of the after euro adoption, while France’s and especially
club, and restrict membership to the S&L core. That is Germany’s fiscal behaviour was not better. On this
not what happened, and it is interesting to consult the basis, keeping Italy out of the club would not have
data to see if the resulting larger club was not as well made it much more viable, and the exclusion of Spain
behaved as the S&L core would have been. would have been even less justifiable in the light of its
Figure 3.1 displays simple arithmetic averages of strong public surpluses.
government budget balances, which according to the Whether or not one agrees that fiscal rectitude
Maastricht criteria should have been balanced or in is necessary in a monetary club, the euro area was
surplus under normal circumstances within a single- not equipped with the monitoring and enforcement
currency area, for both the six-member S&L core facilities that are crucial to the proper operation
and the larger 11-member initial euro area. Sizeable of any club, and particularly not with the means to
improvements are visible just before the club is set control its largest and most powerful members.
up. In 2000, the core has a slightly larger surplus. The admission criteria may or may not have been
Once membership is achieved, however, government satisfactory, but they did not even keep out Greece,
budgets veer towards deficit in the following which joined two years later, and currently available
recessionary phase, and the S&L core ‘misbehaves’ in data show Greek deficits of up to 8% in the period
this respect more strongly than the whole euro area. covered by the figure.
Accession criteria also considered actual inflation,
as an indicator of policy credibility.
Figure 3.1 After joining the euro, inflation may
Government Surplus for S&L Core and Euro Area or may not be under the control of
country-specific policy. Figure 3.3
S&L core Euro area 1999
% of GDP and 3.4 do suggest that the S&L
2
core did not perform significantly
better than the actual euro area in
0 this respect either.
The Maastricht admission
criteria did not keep out Italy or
−2 even Greece, and the Maastricht
behavioural rules did not prevent
France or even Germany from
−4
misbehaving. This does not exactly
support the idea that it would have
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 been better to adopt the different
Note: Unweighted averages. S&L core: France, Germany, Belgium, Netherlands, Luxembourg. formation envisioned by S&L of
Euro area 1999: S&L core and Austria, Finland, Ireland, Italy, Portugal, Spain.
Source: AMECO. © CESifo a virtuous core surrounded by
54 EEAG Report 2018CHAPTER 3
Figure 3.3 pool without an emergency crew.
Inflation (HICP) for S&L Core and Euro Area Sadly, if the club’s contract does
S&L core
not envision those facilities, it is
% Euro area 1999 not clear who will decide to set
3.0 them up, pay the cost and choose
their operating rules.
2.5 The disappointing per
formance of the euro area club
2.0 did motivate the introduction of
new sets of rules and some further
1.5
fragmentation of the Union. The
Six Pack and Two Pack, which
modified the Stability and Growth
1.0
Pact also introducing a broader
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 scoreboard of macroeconomic
Note: Unweighted averages. S&L core: France, Germany, Belgium, Netherlands, Luxembourg. indicators and the European
Euro area 1999: S&L core and Austria, Finland, Ireland, Italy, Portugal, Spain.
Source: AMECO. © CESifo Semester policy surveillance
framework were implemented
6
repentant catchers-up. Perhaps S&L were naïve in by EU regulations and directives. But the Treaty on
supposing that countries could be made to behave Stability, Coordination and Governance fiscal compact
once in the core. More likely, and quite explicitly in took the form of a less permanent intergovernmental
their paper, their criteria for core composition were not agreement, meant to be incorporated in EU law in
economic: severing the knot tied between France and 2018, among a club of countries that did not include
Germany by the European Community would have dire the United Kingdom and the Czech Republic. Neither
consequences. This very valid point, however, is to some of these fully addressed the issues arising from the
extent applicable to most, if not all, other potential core lack of stabilising arrangements within the euro area,
members. Greece in the Economic and Monetary Union which were kept under control on an emergency basis
may be problematic, but still preferable to a failed state by conditional financial support facilities and are only
just outside it, like Libya. When deciding whether to slowly and haltingly being tackled by the development
exclude Poland, or separate Germany and France, geo- of banking union facilities. Current discussions of a
political considerations can easily end up supporting European Monetary Fund focus on whether or not
the traditional view that all European countries should, it should be part of the traditional European legal
in principle, satisfy simple conditions for accession to a and governance structure. Its governance might
single Union on a take-it-or-leave-it-basis, and belong conceivably be based on majority rules dominated
to it for better or for worse, in the name of solidarity, as by relatively large countries, as is the case in the
it develops towards ever closer economic and political International Monetary Fund. Alternatively, as
integration. proposed by European Commission (2017c), it could
Experience suggests that the structure, rather than be anchored in the Union’s legal framework, along
the membership of the euro club, lies at the root of its with the euro area’s intergovernmental fiscal rules,
problems. The European Commission (2017b) reflection which would hopefully be viewed as longer-lasting and
paper lists a very exhaustive catalogue of missing become easier to enforce.
facilities in the euro area club, and
cites poor internal governance Figure 3.4
and a lack of trust as the main Inflation (HICP) for France, Germany, Italy, and Spain
impediments to their provision. Spain Germany
If an extensively patched-up euro % Italy France
4.0
area is still struggling to exit the
crisis, it may be because a single
currency without suitable banking 3.0
facilities and fiscal backstops is
no more viable as a club than a
golf course without parking, or a 2.0
6
Fixed exchange rates and capital flows
did contribute to determining the would- 1.0
be virtuous core’s output and budget
deficits. Unless trade and capital mobility
were restricted or non-core countries had
somehow worked very hard to catch up, 0
however, developments could easily have
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
been worse for a smaller, Japan-like Euro-
pean core. Source: AMECO. © CESifo
EEAG Report 2018 55CHAPTER 3
Figure 3.5 Figure 3.6
GDP per Capita Unemployment Rates
EU-15 = 100 in percent
1995 1995
13.2 − 20.7
135.0 − 213.3 10.2 − 13.2
116.2 − 135.0 9.7 − 10.2
99.2 − 116.2 8.7 − 9.7
62.1 − 99.2 7.9 − 8.7
41.5 − 62.1 6.7 − 7.9
17.0 − 41.5 4.2 − 6.7
9.7 − 17.0 2.9 − 4.2
6.7 − 9.7
2005 2005
145.9 − 229.9 11.2 − 30.3
119.1 − 145.9 9.5 − 11.2
100.9 − 119.1 8.5 − 11.2
72.6 − 100.9 7.9 − 8.5
45.4 − 72.6 7.1 − 7.9
29.6 − 45.4 5.6 − 7.1
21.9 − 29.6 4.6 − 5.6
10.6 − 21.9 2.6 − 4.6
2015 2015
15.0 − 24.0
143.0 − 274.8 10.4 − 15.0
118.5 − 143.0 9.4 − 10.4
109.4 − 118.5 8.5 − 9.4
64.2 − 109.4 6.8 − 8.5
48.5 − 64.2
38.4 − 48.5 6.2 − 6.8
31.1 − 38.4 5.1 − 6.2
17.4 − 31.1 4.0 − 5.1
Source: AMECO. © CESifo Source: AMECO. © CESifo
Evolution of Membership
For countries without on an opt-out, euro area To see how opt-outs, economic performance, and
membership is supposed to be based on an automatic delays in the implementation of technical conditions
administrative decision. Both potential members and delimit the euro area boundaries over time, it can be
club managers, however, do have a say in the adoption interesting to try and see whether the configuration
of the euro. Sweden’s membership is prevented by the and evolution over time of these clubs’ membership
country’s choice not to formally recognise its central lends itself to some sensible economic interpretation.
bank’s independence, and the Commission’s decision It would be nice if the outline of the euro area (or
to allow or prevent specific countries’ membership indeed of the European Union) was easy to spot in
can be based, as in the case of Greece and Estonia, Figures 3.5 and 3.6. But not even France and Germany
on political considerations, as well as on technical always display similar income levels or unemployment
criteria. rates. Somewhat more visible boundaries are apparent
56 EEAG Report 2018CHAPTER 3
Figure 3.7 Figure 3.8
GDP per Capita and Unemployment in Developed Government Surplus and Inflation in Developed and/or
and/or European Countries European Countries
2005 2005
GDP per capita in euro (EU-15 = 100) Government surplus, % of GDP
300 20
Norway
Luxembourg 10
Denmar
Icelandk
200 Norway
Finland
SwedenIreland Spai
n a Bulgaria
Netherlands
Macedonia FYR Luxembourg
Lithuani
Estoni
Romania
0 aa
Sloveni
AustriaCroatia
Belgium
Latvia
Iceland
Switzerland Japan
France
Cyprus
Germany
Czech Malt
Italy aa
Slovaki
Republic
United Kingdom
Poland
United States
Ireland
Denmar
k Greece
Portugal
Hungary
United States
Netherlands
Sweden
United Kingdom
Finland −10
Austri
aB
Australia
Japan elgium
Germany
France
Canada
100 Ital
y
New CyprusSpai
Zealand n
Greece
Korea Portugal
Sloveni −20
aa Republic
Malt
Czech
Hungar
ya
Estoni Croatia
Slovakia
Lithuani
aa
Latvi
Turkey Poland
Romania
Bulgaria Serbia Montenegro Macedonia FYR
0 −30
0 10 20 30 40 % −5 0 5 10
Unemployment rate Inflation (HICP)
2010 2010
GDP per capita in euro (EU-15 = 100) Government surplus, % of GDP
300 20
Luxembourg
Norway
10
Norway
200 Switzerland
0 Luxembourg
Switzerland Estoni
Sweden a
Finland
Malta
Macedonia k FYR
Denmar
Belgium Turkey
Australia
Germany
CzechItala Bulgaria
yCyprus
Austri
Netherlands
Republic
Sloveni
a Hungary
Denmark France
Croatia
Slovaki
a
Lithuani
a Poland Romani
a
Netherlands
Austri
Sweden Ireland
aBelgium
LatviaJapan Spai
n
United Kingdom
Finland
United States
Canada
Germany
Japan −10 Portugal
United States Greece
Iceland
France
Iceland
United
100 New yKingdom
Ital
Zealand
Cyprus Greece Spain
Sloveni
KoreaMaltaa Portugal −20
Czech RepublicSlovakia
Croatia
Hungar
Poland y Estonia
Lithuani
a
Turkey Latvia
Romania
Bulgaria Montenegro
Serbia Macedonia FYR
0 −30 Ireland
0 10 20 30 40 % −5 0 5 10
Unemployment rate Inflation (HICP)
2015 2015
GDP per capita in euro (EU-15 = 100) Government surplus, % of GDP
300 20
Luxembourg
10
Switzerland Norway
Norway Luxembourg
200 Germany
Estoni
Switzerland
Lithuani aMalta
aaSweden Turkey
0 Cyprus
Romani Austri
Latvi
Czech k a
yaRepublic
Iceland
Ireland
Netherlands
Denmar
Ireland aBelgium
Hungar
Italy
Finland
Bulgaria
Slovaki
Sloveni aJapan
France
Poland
United States nPortugal
Croatia
Macedonia
Spai
United
United
Greece
FYR
States
Kingdom
Denmar
k
Australia
Iceland
Sweden
Netherlands
Austri
United
Germanya Finland
Kingdom
Canada −10
Belgium
100 Japan France
New Zealand
Italy
Korea
Malta Cyprus Spain
Sloveni
Estoni
a aPortugal Greece −20
Czech Slovaki
Republic
Lithuania a
y Latvi
Poland
Hungar Turkey Croatia
Romani
a
Bulgaria Montenegro Macedonia FYR
Serbia
0 −30
0 10 20 30 40 % −5 0 5 10
Unemployment rate Inflation (HICP)
Note: 95% confidence ellipses computed from member countries’ means and Note: 95% confidence ellipses computed from member countries’ means
covariances. and covariances.
Source: AMECO. © CESifo Source: AMECO. © CESifo
in the economic and policy spaces defined by GDP well as by variation in member countries’ data: the
per capita, unemployment, government balances, regions covered by each club’s membership become
inflation, inequality and distribution. Figures 3.7, 3.8, larger if increasingly heterogeneous members join
and 3.9 display available data for the 52 developed and/or if, as discussed in the next chapter, existing
and/or European countries covered by the European members tend to diverge from each other.
Commission’s AMECO database. Unemployment and income in Figure 3.7 do tend
The figures label observations by country names, to be both somewhat higher in the euro area initially,
differently for those that are euro area members, and but both the membership and the performance of
display the elliptical regions where countries that the club spread out over time, and eventually the
resemble current members in the respects considered ellipse covers many non-members and excludes not
are statistically most likely to fall.7 The patterns in the only the Luxembourg exception, but also Spain and
figures are generated by membership variation, as Greece.
In Figure 3.8, inflation and government deficits,
7
Bertola (2010a,b) performs a somewhat more technical exercises the key policy indicators considered by the
of this type, focusing on comparisons between countries that did
or did not join Economic and Monetary Union, before and after the
club’s admission and behaviour rules, are no-
event. tably more homogeneous than economic outcomes
EEAG Report 2018 57CHAPTER 3
Figure 3.9 shows that the euro area, much
Market Income and Net Income Inequality in Developed and/or European Countries like the nation states formed
within it centuries ago, does tend
2000 to develop in geographically
Net income inequality ᵃ
50 Mexico compact ways. Proximity to
France and Germany does matter.
Of course, Switzerland is an
obvious exception: the country
Turkey
40 sits squarely in the geographic
United States
core of the European Union,
Portugal Estonia
United Kingdom
but its economic and cultural
Spain New Zealand
Montenegro
Greece
Italy
Latvia peculiarities explain why it prefers
Ireland Canada Australia
Albania
Japan
Lithuania
Malta
not to be a member. But geography
30
Bulgaria Romania Switzerland Croatia BelgiumHungary
Poland France
does interact with economics and
Luxembourg
Austria
Cyprus Germany structure. Distance from Russia,
Norway Netherlands Sweden
Czech Republic Finland a potentially problematic non-
Iceland
Slovenia Denmark
member of any European club,
20
30 35 40 45 50 55 may for example explain why
Market income inequality ᵇ among otherwise homogeneous
Scandinavian countries, Norway is
2010 not an EU member, Denmark opts
Net income inequality ᵃ
50 out of many EU policies, Sweden
prefers not to adopt the euro, but
Mexico
Finland participates fully in that
and all other EU policies (as do the
40 Baltic countries at present).
Turkey
United States
United Kingdom
Bulgaria
Spain
LatviaLithuania 3.5.2 The Borderless Club
Greece Portugal
New Australia
Zealand
Canad Italy
Romani a Estoni
a
a
Poland
Montenegr o
Switzerland
Japan
France
Cyprus
Croatia Geography is a strong determinant
Ireland
30 Austria Germany
Malta
Luxembour
of membership in the Schengen
Hungary g
Finland
Netherlands
Slovenia Belgium
Denmark
club for even more obvious
Iceland Czech Norway
Republic
Sweden
reasons: even Switzerland belongs
to it, as do the Baltics and Finland
20
30 35 40 45 50 55 (see Figure 3.11).
Market income inequality ᵇ The Schengen club’s
Note: 95% confidence ellipses computed from member countries’ means and covariances. operation is also like that of the
ᵃ Gini index of net (post-tax, post-transfer) income inequality
ᵇ Gini index of market (pre-tax, pre-transfer) income inequality euro area in other respects. Its
Source: SWIID, Solt (2016). © CESifo
rules were not designed to enable
it to work well. To form a viable
among euro area members. The contrast between club, it is not enough to deprive national governments
outcome divergence and policy convergence is more of some prerogatives. A way must be found to perform
apparent in the more recent data, influenced by together tasks like pooling police information on
perhaps stronger policy coordination and certainly terrorism and border controls on immigration. The
by more asymmetric crisis shocks and post-crisis Schengen Agreement envisioned “cooperation and
developments. coordination between the police and the judicial
Figure 3.9 shows that the initial euro area was authorities in order to safeguard internal security and,
significantly more homogeneous and distinct from in particular, to fight organised crime” and, in practice,
neighbouring countries in a respect that at least development of the Schengen Information System
superficially appears quite orthogonal to the adoption database for certain categories of people and goods.
of a single currency. Redistribution policies reduce As in the case of the euro area, problems became
inequality within euro area members more than within apparent in a crisis. The Schengen agreement “largely
non-members. The crisis again has visible effects, abolished Europe’s internal borders, but it did not
increasing the variety of laissez faire inequality within envisage a strengthening of the continent’s external
the euro area, and drastically changing the relative borders. So when the migration crisis erupted, it was
position of countries within it. seen as a destabilising loss of security” (Draghi, 2016).
Club membership has many pros and cons that Like the euro area, the Schengen club does not
each country appreciates and suffers more or less appear to have operated in a particularly efficient
strongly, and that are not only economic. Figure 3.10 way. The club’s rules allow members to reinstate
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