EUROPEAN UNION.

The European Union (EU) came into being on 1 November 1993 when the Treaty on European Union, negotiated and ratified by the twelve member states of the European Communities (EC)—Belgium, Denmark, France, the Federal Republic of Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom—took effect. The treaty was negotiated in an Intergovernmental Conference of the member states that began in December 1990 and concluded in December 1991 in the Dutch city of Maastricht (hence the frequent reference to it as the "Treaty of Maastricht"). The treaty was formally signed on 7 February 1992.

Article A of the treaty states that it "marks a new stage in the process of creating an ever closer union among the peoples of Europe" and that the Union "shall be founded on the European Communities, supplemented by the policies and forms of cooperation established by this Treaty." The Communities, commonly referred to as the European Community, consisted of the European Coal and Steel Community (ECSC), which came into being on 23 July 1952 as a result of the Treaty of Paris signed by France, the Federal Republic of Germany, Italy, Belgium, the Netherlands, and Luxembourg on 18 April 1951; and the European Economic Community (EEC) and European Atomic Energy Community (Euratom), both of which came into being on 1 January 1958 as a result of the Treaties of Rome signed by the six member states of the ECSC on 25 March 1957.

After withdrawing from discussions in the early and mid-1950s about possible membership in the ECSC and the EEC the British government, as well as those of Ireland, Denmark, and Norway, applied for membership in the EC in August 1961. President Charles de Gaulle (1890–1970) of France vetoed British membership in January 1963, saying that Britain lacked a "European vocation," and one week later signed a Treaty of Friendship with the Federal Republic of Germany. A subsequent British government applied again for membership in May 1967, but again de Gaulle vetoed British membership.

De Gaulle resigned after a referendum defeat in April 1969. His successor, Georges Pompidou (1911–1974), signaled that the EC would welcome an application from Britain and in July 1969 Britain, Ireland, Denmark, and Norway applied for the third time. After the completion of accession negotiations Norwegian voters rejected membership in a referendum in September 1972. Britain, Ireland, and Denmark joined the EC on 1 January 1973.

On 21 April 1967 a military coup led by Colonel George Papadopoulos (1919–1999) and other colonels took power in Greece. After seven years of a repressive dictatorship the regime collapsed in August 1974 in the wake of the invasion and occupation of northern Cyprus by Turkey. Democracy was restored, the Greek government applied for membership in the EC in June 1975, and Greece joined the EC on 1 January 1981.

In April 1974 a military coup in Portugal launched by a group of army captains and other lower-level officers opposed to the government's colonial policies in southern Africa brought an end to a lengthy period of authoritarian rule and inaugurated a short-lived period of social revolution. A democratic regime was established in 1975 and the government applied for EC membership in March 1977.

In Spain, Francisco Franco (1892–1975) died in November 1975. Franco had come to power when his Nationalist forces, aided by Nazi Germany and Benito Mussolini's (1883–1945) Italy, defeated the supporters of the Second Republic in the Civil War of 1936–1939. After some uncertainty as to the nature of the post-Franco regime, a government headed by Adolfo Suarez (b. 1932) engineered, with the vital assistance of King Juan Carlos I (r. 1975–), who had become head of state upon the death of Franco, engineered a transition to a democracy that culminated in the first free election of the Congress of Deputies in June 1977. One month later Spain applied for membership in the EC. After a prolonged accession negotiation, complicated by the fears of French, Italian, and Greek agricultural producers, Spain and Portugal entered the EC on 1 January 1986.

The Treaty on European Union, which took effect on 1 November 1993, transformed the existing European Communities (EC) into the European Union (EU). All of the existing treaties, laws, regulations, directives, court rulings, and institutions of the Communities continued in the EU. The treaty changed the Communities into a single Community and added new functions, responsibilities, and institutions to those that had existed in the EC. Most notably, it committed the member states to the establishment of an Economic and Monetary Union (EMU); implementation of a Common Foreign and Security Policy (CFSP), including the eventual framing of a common defense policy that might in time lead to a common defense; close cooperation in the area of justice and home affairs (JHA); creation of citizenship in the Union; and an increase in the legislative power of the European Parliament. The treaty provided, however, that both the Common Foreign and Security Policy and cooperation in the area of justice and home affairs would be pursued solely through intergovernmental cooperation. The treaty thus defined three "pillars" of activity, the first of which involved the institutions and domains of policy of the existing European Community, the second of which involved the CFSP, and the third of which involved cooperation in the area of JHA.

THE ANTECEDENTS OF EMU

The idea of economic and/or monetary union had been on the agenda of the European Communities in some form for several decades prior to the negotiation of the Treaty on European Union. Indeed, Belgium and Luxembourg had created the Belgium-Luxembourg Economic Union (BLEU) on 25 July 1921. BLEU removed the economic frontier between the two countries and created a monetary union in which the exchange rate for the two currencies, the Belgian franc and Luxembourg franc, was fixed at 1:1 with no fluctuation range. The Belgian central bank assumed the role of the central bank for the two countries and the Luxembourg central bank became, instead, the Luxembourg Monetary Institute.

On 5 September 1944 the governments-in-exile of Belgium, the Netherlands, and Luxembourg, meeting in London, agreed to institute after World War II a common tariff regime with a common external tariff and, eventually, a customs union that would, in time, evolve into an economic union in which there would be a single internal market in which goods could move freely and without barriers across the national borders. The Benelux Customs Union came into being in 1948 and in 1960 it was replaced by the Benelux Economic Union.

The Benelux countries played a major role in the creation of the European Economic Community in 1958. As early as 1950 one or more of the Benelux governments proposed that a customs union be created that would include additional countries beyond the Benelux three. In June 1950, after the French politician Robert Schuman (1886–1963) had proposed the creation of what would become the ECSC, the Dutch government proposed a sector-by-sector plan of trade liberalization that would eventually result in a free-trade area. Known as the Stikker plan after its proponent, the Dutch foreign minister Dirk Stikker (1897–1979), it was followed in 1953 by another Dutch proposal put forward by the foreign minister, Willem Beyen (1897–1976), which aimed to create a customs union.

In August 1954 the French National Assembly rejected a treaty negotiated by the six founding member states of the ECSC to create a European Defense Community. With that defeat and the resignation of Jean Monnet (1888–1979), who had devised the Schuman Plan and had served as the first president of the High Authority of the ECSC, the ambition to integrate the economies of the six member states appeared to be thwarted. In an effort to relaunch the effort to integrate Europe, the foreign ministers of the Benelux countries—Paul-Henri Spaak (1899–1972) of Belgium, Joseph Bech (1887–1975) of Luxembourg, and Beyen—put forward a series of proposals in early 1955 to relaunch European integration. In April 1955 they resurrected Beyen's 1953 proposal for a customs union, combined it with proposals to extend supranational regulation to other sectors, such as atomic energy and transportation, and submitted it for consideration by the ECSC foreign ministers at their meeting in Messina, Italy, in June 1955. At the conclusion of the meeting the ministers agreed to create a committee of experts to study the proposal that, by then, featured the creation in stages of a customs union, the institution of a common external tariff, fiscal and monetary harmonization, and the development of common policies in agriculture, energy, and transportation.

The committee of experts, chaired by Spaak, began meeting in the fall of 1955 and submitted a report to the foreign ministers in April 1956 that proposed the creation of a customs union as well as an atomic energy community and a common agricultural policy. The ministers, meeting in Venice in May 1956, agreed to start negotiations aimed at implementing the proposal and did so in October 1956. The Treaties of Rome, creating the EEC and Euratom, were signed on 25 March 1957. The treaty establishing the EEC promised to eliminate in stages all tariffs and quotas limiting trade between the member states; establish a common external commercial frontier; coordinate the economic policies of the member states; and provide for the free movement of goods, services, capital, and people. In its preamble, the signatories stated they were "determined to lay the foundations of an ever closer union among the peoples of Europe."

Why were the Benelux countries the leading proponents, from the advent of BLEU in 1921 to Messina, Venice, and Rome in 1955–1957, of trade liberalization and the creation of a customs union and eventually an economic and monetary union in Europe? The answer lies in the fact that their economies are unusually open in the sense of being highly dependent on trade. Throughout the twentieth century many of the goods these countries produced were purchased by consumers in other countries and many of the goods they consumed were produced in other countries. In 1958, for example, Italian and French exports were equivalent to roughly 12 percent of GDP and German exports to roughly 22 percent of GDP. Belgian exports, by contrast, represented one-third of GDP, those of the Netherlands nearly one-half of GDP, and those of Luxembourg more than three-quarters of the country's GDP. And those countries were also much more dependent on trade with their large neighbors than those large neighbors were on trade with them. Thus, in 1958, roughly 25 percent of all of the exports of France, Italy, and Germany went to the other five member states of the EC. In contrast, more than 40 percent of the exports of Belgium, Luxembourg, and the Netherlands went to the other member states. As countries that were highly dependent on trade, including trade with larger neighbors that maintained protective barriers to their national markets, the Benelux countries had a strong national interest in liberalizing trade both among themselves and with their larger neighbors.

The Treaty of Rome anticipated the creation of a common market in which all internal tariffs, quotas, and other barriers to trade would be removed by 1970. But the move to a common market occurred more rapidly than anticipated and elimination of the last remaining internal tariffs was advanced to July 1968. In anticipation of that development, as well as the scheduled introduction at that time of a common pricing scheme in the Common Agricultural Policy, Pierre Werner (1913–2002), the prime minister and minister of finance of Luxembourg, proposed in January 1968 that the six member states irrevocably lock the exchange rates among their currencies and create a fund that could intervene in foreign exchange markets in order to maintain the fixed rates. It was hardly surprising, of course, that the first call for a monetary union of the Six would come from Luxembourg; by that time it had participated for nearly a half-century in the BLEU, a central feature of which was the irrevocably locked 1:1 exchange rate without a fluctuation range between the Belgian and Luxembourg francs.

Werner's proposals prompted several memoranda to the Counsel from Raymond Barre (b. 1924), the vice president of the commission in charge of monetary affairs. Barre did not fully endorse Werner's proposals but did call for a reduction in the margins of fluctuation between the EC currencies, provision for multilateral negotiation of currency realignments, a fund and mechanism for joint intervention in currency markets, and a common exchange rate vis-à-vis other EC currencies.

In July 1969 the council approved Barre's recommendation for the creation of some form of joint consulting and decision-making mechanism in the domains of monetary and exchange-rate policy. At their summit in The Hague in December 1969 the leaders of the six member states endorsed the idea of creating an Economic and Monetary Union and recommended that the council accept Barre's proposal that an EMU be created in three stages, with the third and final stage coming into existence in December 1980. The council approved the plan in March 1970 and created a working group, chaired by Werner, to develop the plan. In October 1970 the Werner group proposed that in the first stage the fiscal and monetary policies of the member states be coordinated and harmonized, regulatory restrictions in financial markets be eliminated, and the range of fluctuation among exchange rates be narrowed. New supranational monetary institutions would come into being in the later stages.

The council accepted the Werner Committee's report at its meeting in February 1971 and stage one of what was anticipated would be a ten-year transition to an economic and monetary union began shortly thereafter. But only months later the first of several crises in the International Monetary Fund's exchange-rate regime, in which the value of the American dollar was fixed vis-à-vis gold and all other currencies were pegged to the dollar, took place. Pressure from holders of dollars who sought to exchange them for gold as the United States experienced trade and budget deficits and an acceleration of the rate of change in prices led President Richard Nixon (1913–1994) to close the gold window in August 1971. Shortly thereafter the dollar was devalued vis-à-vis gold and the margin of fluctuation between the dollar and other currencies was increased from plus or minus 0.75 percent to 2.25 percent.

The threefold increase in the range of fluctuation between the dollar and other currencies meant, of course, that rather than narrowing, the fluctuation range among the EC currencies had increased dramatically. The widening range of fluctuation among the currencies would of course create havoc for the trade among countries with highly interdependent economies and common prices in the agricultural sector. In order to reduce that fluctuation, the member states agreed in April 1972 to limit the fluctuation in the exchange rates among their currencies to a range equal to one-half that allowed by the IMF, and they reaffirmed the objective of achieving EMU by 1981 in summit conferences in October 1972 and again in December 1974. By 1976, however, it became obvious that the widened fluctuation range, coupled with the absence of any mechanism to keep the currencies in a more narrow range, spelled the end—at least for the time being—of the ambition to create an economic and monetary union.

The EC continued to face the problem of maintaining an internal market among highly interdependent economies in the face of continuing fluctuation of each EC currency vis-à-vis the other EC currencies, since the fluctuations translated into immediate changes in the prices of goods produced in one member state relative to the prices of goods produced in the other member states. That meant that producers might obtain competitive advantages or, on the other hand, be harmed in both their home markets and other markets through fluctuations in the value of the currencies. It also greatly complicated the task of setting common prices for agricultural commodities in the CAP.

The necessity of dampening the fluctuations among the currencies of highly interdependent economies belonging to a common market led the EC, after the large fluctuations in inflation rates and exchange rates in the wake of the first "oil price shock" and subsequent economic downturn in 1973–1975, to search for a new way to limit the fluctuations among their currencies and create a zone of monetary stability. Following a proposal in October 1977 by Roy Jenkins (1920–2003), the president of the commission, chancellor Helmut Schmidt (b. 1918) of Germany and president Valery Giscard d'Estaing (b. 1926) of France—both former finance ministers who were knowledgeable about exchange-rate and monetary policy—agreed to create a new European Monetary System (EMS). The EMS, which came into being in March 1979, created a bilateral parity grid among all the currencies, limited the fluctuation range among them to plus or minus 2.25 percent, provided a means of monitoring the fluctuations among the currencies, and provided for a means of negotiating realignments in the values of the currencies.

Not all of the member states participated in the EMS. Britain, for example, refused to join until 1990. But those that did participate gradually came to understand EMS constraints on monetary and fiscal policy. A critical period in the development of the EMS occurred during the first two years of the administration of President François Mitterrand of France. Mitterrand, a Socialist, was elected in 1981 with the support of the Communist Party. Coming to power for the first time since the advent of the Fifth Republic in 1958 and in the midst of a recession marked by an increasing rate of unemployment, the Left-dominated government sought to pursue a reflationary policy that tolerated large increases in wages, a substantial increase in public spending, a budget deficit, and an acceleration in the rate of inflation to 12–13 percent. The predictable result was a deteriorating balance of trade and downward pressure in the currency markets on the franc relative to the German mark. As it approached its floor against the mark, France was forced to negotiate a devaluation of the franc within the EMS on three occasions in the first two years of the Mitterrand-led government—in October 1981, June 1982, and March 1983. Since any devaluation of the franc involved, by definition, a revaluation of other currencies that would hurt the competitive position in the EC of goods produced in the revaluing countries, the devaluations were always modest. Moreover, agreement on a devaluation—even a modest one—came only with a French agreement to scale back public spending, first in a pause, then in a policy of rigueur, then in a policy of austerity.

The French experience conveyed a lesson to the rest of the EC. Participation in the EMS required countries to emulate the macroeconomic policy of the strong-currency countries, such as Germany, which sought to stabilize prices through a tight monetary policy and a balanced fiscal policy. As that lesson was internalized by the participating member states in the 1980s, the frequency of realignments decreased. But countries such as France and Italy continued to object to what they regarded as the asymmetry of influence and benefit in the EMS. The German Bundesbank in effect set monetary policy for the countries participating in the EMS, since its interest rates established the de facto floor for interest rates in the other countries. And Germany, along with the Netherlands, which shadowed German monetary and fiscal policy, enjoyed substantial gains from trade since participation in the EMS in effect caused their currencies to be undervalued, especially as realignments—which invariably involved revaluation of the mark and the guilder—became less frequent.

The decreasing frequency of realignments in the exchange rates of the EMS currencies created the impression that the EC might someday approach the stability of a fixed-exchange-rate regime such as would exist in an EMU with irrevocably locked rates. And perhaps for that reason, EMU reappeared, albeit surreptitiously, on the agenda of the EC in the mid-1980s. The preamble of the Single European Act (SEA) of 1986, which was designed to remove the non-tariff barriers that still interfered with the free movement of goods and services in the internal market of the EC, claimed as one of the objectives of the Act "the progressive realization of economic and monetary union." And the SEA amended the Treaty of Rome by adding an ambiguously titled chapter, "Cooperation in Economic and Monetary Policy (Economic and Monetary Union)."

The preamble and reference to EMU in the SEA were apparently the work of Commission President Jacques Delors (b. 1925). Soon after the SEA was agreed to in February 1986 Delors convened a group of economists to analyze the effects of the SEA. In their report, published in 1987, they concluded that completion of the internal market by 1992—the overarching objective of the SEA—would require greater coordination of monetary policy and a strengthening of the EMS. They noted the incompatibility of nationally determined monetary policies with EC–wide free movement of goods, services, and capital, on the one hand, and an exchange-rate regime that, because of the decreasing frequency of realignments, was becoming increasingly analogous to a fixed-exchange-rate regime.

It was, however, a dispute between France and Germany over exchange-rate policy that ultimately led to the resurrection of the Werner plan to create in stages an Economic and Monetary Union. Very soon after taking power after the election of March 1986, the French cohabitation center-right government headed by Prime Minister Jacques Chirac (b. 1932)—Mitterrand was still president—negotiated another devaluation of the franc, which by then had become significantly overvalued in the EMS. Yet despite that devaluation, the franc remained over-valued and under pressure in the foreign exchange markets. As the franc moved toward its floor against the mark in January 1987, the French finance minister Édouard Balladur (b. 1929), taking the view that the problem was caused in part by the systematic undervaluation of the mark, let the franc go through its floor in order to force the Bundesbank to intervene in support of the franc.

Eventually the German government revalued the mark by a modest amount. But the French government remained dissatisfied with the operation of the EMS. In July 1987 and again in August 1987 Balladur called upon the EC to strengthen the EMS and alleviate the asymmetry that existed between Germany and its partners. The result was the Basel-Nyborg Agreements of September 1987, in which the governors of the EC central banks and the ministers of finance agreed on a credit facility to support intra-margin interventions in the currency markets. In December 1987, with the franc again under attack in the markets and the government again forced to raise interest rates to support the currency, Balladur called again for reform of the EMS. He proposed a greater degree of symmetry in the operation of the EMS—especially in the defense of currencies at their floors—and strengthening of the European Monetary Cooperation Fund. And in order to present a common front vis-à-vis the American dollar and Japanese yen, he called for the EC to create a common currency and assign the responsibility for monetary policy to a single central bank—in short, for EMU.

The French proposal, soon supported by the Italian government, was placed on the agenda of the June 1988 meeting of the heads of state and government in Hanover, Germany. The leaders created a committee, chaired by Delors and composed largely of the central-bank governors, to study the issue. In April 1989 the committee recommended, very much along the lines of the earlier Werner committee, creation in three stages of an Economic and Monetary Union. Meeting in Madrid in June 1989, the leaders accepted the report as defining a process leading to EMU, agreed that the first stage would begin on 1 July 1990, and agreed that an Intergovernmental Conference would be convened sometime after the start of the first stage to negotiate the treaty amendments necessary for the later stages. At a meeting in Strasbourg in December 1989 the leaders agreed the IGC would begin one year hence.

THE TRANSITION TO EMU

Title VI of the Treaty on European Union committed the member states to coordinating their economic policies through the formulation of broad guidelines for their economic policies and multilateral surveillance and assessment of those policies by the Commission, Council, and Parliament of the EU. The treaty stipulated that the member states would avoid "excessive deficits," defined as a ratio of the combined deficit of all levels of government to Gross Domestic Product in excess of 3 percent unless the ratio had declined substantially and continuously to a level close to 3 percent or the excess was exceptional and a ratio of government debt to GDP in excess of 60 percent unless the ratio was diminishing and approaching 60 percent. The treaty established sanctions, including fines, to be levied on countries that did not repair their excessive deficits.

The treaty committed the member states to the creation of an EMU in stages by 1999. The first stage of EMU had begun, by agreement of the heads of state and government, on 1 July 1990. The treaty provided for a transitional second stage beginning in 1 January 1994 and a third and final stage to begin on 1 January 1999 at the latest. In the second stage the member states were to undertake programs to ensure their lasting economic convergence, the achievement of price stability, and avoidance of excessive deficits. They were also required, if it was necessary, to begin the process leading to the independence of their central banks. At the start of the second stage a European Monetary Institute (EMI) was to be created. The EMI was to be headed by a council consisting of a president appointed by the heads of state and government and the governors of the national central banks. The EMI was mandated to strengthen the cooperation between the national central banks and the coordination among their monetary policies, oversee the functioning of the European Monetary System, and prepare for the third and final stage of EMU.

The treaty stipulated that in the third and final stage of EMU the EMI would be transformed into a new European Central Bank that would assume responsibility from the national central banks for the formulation and implementation of monetary policy in the participating member states. The Governing Council of the ECB, which would be located in Frankfurt, Germany, would consist of the six members of the ECB's Executive Board—a president, a vice-president, and four other members, appointed by the heads of state and government—and the governors of the national central banks of the participating member states. The exchange rates among the national currencies of the participating member states would be irrevocably locked and the national currencies would, in time, be replaced by a new single currency, the euro.

The treaty stipulated that during the second stage the EMI and the commission would report periodically to the council on the fulfillment by the member states of the criteria, set forth in the treaty, by which the achievement of the high degree of sustainable convergence necessary for participation in the third and final stage of EMU would be judged. Those criteria, often referred to as the "convergence criteria," included: (1) the achievement of price stability as reflected in a rate of inflation close to that of the three best-performing member states; (2) the achievement of a sustainable budgetary position as reflected in the absence of an "excessive deficit;" (3) the observance of the normal fluctuation margins in the Exchange Rate Mechanism of the European Monetary System for at least two years without a devaluation; and (4) the durability of convergence as reflected in long-term interest rates that were close to those of the three best-performing member states.

The treaty provided that the Council, meeting as the heads of state or government, would vote no later than 31 December 1996 whether a majority of the member states satisfied the "convergence criteria" and thereby fulfilled the necessary conditions for participation in the third and final stage of EMU and, if so, when that stage would begin. It stipulated, also, that if by the end of 1997 a date for the start of the third stage had not been set, it would start on 1 January 1999 and the leaders would decide, prior to 1 July 1998, which member states fulfilled the conditions for participation.

By the time the decisions pertaining to movement to the third stage of EMU were to be taken, three more states—Austria, Finland, and Sweden—had joined the EU, all having acceded on 1 January 1995.

Meeting in Cannes in June 1995, after the finance ministers of the fifteen member states had agreed that the earliest possible date for entry to the third stage of EMU—1 January 1997—was "not realistic," the heads of state and government stated their "firm resolve" to move to the third stage by 1 January 1999. Meeting at Madrid six months later, the leaders confirmed "unequivocally" that the third stage would begin on that date. They also adopted the EMI's scenario for the move to the third stage, according to which the exchange rates among the participating currencies would be irrevocably locked with each other and with the euro as of 1 January 1999 and the national currencies and the euro would circulate as "different expressions of the same money" until the first half of 2002, at which time the national currencies of the participating member states would be withdrawn from circulation and the euro would become the sole legal tender, and single currency, of the participating states.

Meeting in Brussels in May 1998, the leaders of the fifteen member states decided that eleven of the fifteen member states—all but the United Kingdom, Denmark, Sweden, and Greece—fulfilled the necessary conditions for adoption of a single currency and would, therefore, enter the third and final stage of EMU on 1 January 1999. The United Kingdom had negotiated an "opt-out" at the concluding meeting at Maastricht of the Intergovernmental Conference by which it is not obliged or committed to move to the third stage without a separate decision to do so by its government and parliament. In October 1997 the British government set forth five criteria by which it would assess whether it was appropriate to enter. It did not carry out an assessment prior to the May 1998 meeting. In fact, it did not carry out an assessment until 2003, at which time it found some of the criteria had not been satisfied. Moreover, Britain had not participated in the Exchange Rate Mechanism of the EMS since September 1992, when it had been forced by unabated downward pressure on the exchange rate of the pound vis-àvis the German mark to withdraw the pound.

After the Treaty on European Union was signed in early 1992 the Danish Storting had overwhelmingly approved it. But ratification of the treaty required, also, approval by the Danish electorate in a referendum. Despite the fact that the Danish government had obtained at Maastricht an "opt-out" from the third and final stage of EMU, in the referendum, held on 2 June 1992, 50.7 percent of the voters rejected the treaty. The government subsequently obtained additional "opt-outs" at a meeting of the heads of state and government at Edinburgh in December 1992 that allowed it to call another referendum, on 18 May 1993, at which 56.7 percent approved the treaty. But at Edinburgh, Denmark gave notice that it would not participate in the third stage. (Later, in 2000, the Danish government had second thoughts about participating in the third stage of EMU and called another referendum on the issue but 53.1 percent voted against participation on 28 September 2000.)

In June 1997 the Swedish government announced that it would not enter the third stage in 1999 and that it would hold an election or referendum on the issue if it decided to recommend entry. Moreover, Sweden, like the United Kingdom, refused to participate in the Exchange Rate Mechanism of the EMS, thereby failing to satisfy one of the necessary "convergence criteria" for participation. Like the Danish government, the Swedish government did subsequently have second thoughts about participating in the single currency and called a referendum on the matter. In the referendum, which took place on 14 September 2003, only three days after the murder of Anna Lindh (1957–2003), the Swedish foreign minister who had become the chief spokesperson supporting participation, 53.1 percent of the Swedish electorate voted against participation.

On the basis of its economic performance in 1997 Greece did not satisfy all of the "convergence criteria" and was barred from entering the third stage with the eleven other participating member states. However, it did subsequently qualify and joined as of 1 January 2001.

At their May 1998 meeting the leaders of the fifteen member states chose the president, vice president, and four other members of the Executive Board of the European Central Bank. The meeting was marked by a heated dispute between Helmut Kohl (b. 1930), the German chancellor, who supported Wim Duisenberg (1935–2005), the Dutch central-bank governor, for president and Chirac, the French president, who favored Jean-Claude Trichet (b. 1942), the governor of the Banque de France. Chirac reasoned that since the ECB was to be located in Frankfurt and since it embodied the German Bundesbank's priorities, which favored price stability above all else, it would only be fair for France to hold the presidency. Ultimately, it was agreed that the initial eight-year term would be split, with Duisenberg holding the presidency until some time after the national currencies had been withdrawn from circulation in early 2002. He assumed the presidency on 1 June 1998 and held it until 31 October 2003, at which time Trichet became president.

In late 1998 the exchange rates among the currencies of the eleven participating countries were irrevocably locked and the third and final stage of EMU came into being on 1 January 1999. The ECB assumed responsibility for monetary policy in the eleven states as of that date. In early 2002 the national currencies were withdrawn from circulation and replaced with bills and coins denominated in euros.

THE COMMON FOREIGN AND SECURITY POLICY

In addition to creating the European Union and committing the member states to the creation of an Economic and Monetary Union, the Treaty on European Union committed them to defining and implementing a Common Foreign and Security Policy (CFSP). The CFSP would be designed to safeguard the common values and interests of the EU, strengthen the security of the EU and its member states, preserve peace and strengthen international security and cooperation, and develop and consolidate democracy and the rule of law and respect for human rights and fundamental freedoms. It was designed to deal with all questions related to the security of the EU, including "the eventual framing of a common defense policy, which might in time lead to a common defense."

The CFSP was designed to achieve these objectives by establishing systematic cooperation between the member states and gradually implementing joint action in the areas in which they had important interests in common. The member states were mandated to consult with each other on any matter of foreign and security policy and they could, when necessary, define a common position in the Council. In such cases they were to ensure that their national policies conformed to the common position and they were mandated, further, to coordinate their action in international organizations in order to uphold the common positions. The Council could also decide, on the basis of general guidelines established by the heads of state and government, that a particular matter should be a subject of joint action and, if so, by what means that action would be undertaken. The presidency of the Council was designated as the representative of the EU in matters falling within the CFSP and the office responsible for the implementation of common measures.

Having been negotiated at a time in which Europe was undergoing a historic geopolitical transformation with the collapse of communist regimes throughout central and eastern Europe and in the Soviet Union, it was inevitable that the Treaty on European Union would attempt to empower the EU as an international actor. But the commitment to the pursuit and implementation of a CFSP was nearly derailed even before the formal signing ceremony of the treaty in February 1992 by developments in the former Yugoslavia.

After the former Yugoslav republics of Slovenia and Croatia declared their independence in June 1991 and the Yugoslav army undertook military action in both, the EC became deeply involved in efforts to resolve both conflicts. An effort by the EC to end the Yugoslav intervention in Slovenia was facilitated by the unexpected ability of the Slovenian National Guard to defeat the Yugoslav army's contingent in a "ten-day war" in July 1991. But in Croatia, where the Yugoslav army came to the defense of the Serb population concentrated in the Krajina and shelled Vukovar in eastern Slavonia and Dubrovnik, the EC found itself unable to prevent a full-fledged war. By December five hundred thousand Croats and two hundred thousand Serbs had been displaced, Vukovar had been destroyed, and the Yugoslav army occupied one-third of Croatia.

In the fall of 1991, as the negotiations on the Treaty on European Union were drawing to a close, the EC faced the issue of whether it should recognize Slovenia, Croatia, and perhaps other Yugoslav republics as independent. In November 1991 it created a five-person commission headed by Robert Badinter (b. 1928) to develop criteria for international recognition.

Meeting only a week after the heads of state and government had agreed to the treaty and its provisions for a CFSP the German foreign minister, Hans-Dietrich Genscher (b. 1927), made it clear that if the EC refused to recognize Croatia and Slovenia, Germany would do so unilaterally. The ministers agreed that any Yugoslav republic seeking EC recognition should apply immediately, the applications would be considered by the commission, and the commission would report in January 1992. Several member states opposed immediate recognition. But Germany had already told Slovenia and Croatia they would be recognized by Christmas. Four republics applied—Slovenia, Croatia, Macedonia, and Bosnia and Herzegovina. The Badinter commission recommended that Slovenia and Macedonia be recognized, that Croatia not be recognized until it guaranteed the rights of the Serb minority, and Bosnia not be recognized until it had held a national referendum on the issue. Greece vetoed the recognition of Macedonia, Croatia was recognized despite the commission's recommendation, and Bosnia and Herzegovina was advised to hold a referendum on independence. The Bosnia referendum had the entirely predictable effect of precipitating a three-year war. The sizable Serb population in Bosnia abstained from the referendum since it was obvious their desire to remain in Serb-dominated Yugoslavia would lose. As a result the vote overwhelmingly endorsed independence; Bosnia immediately received international recognition; hostilities broke out immediately between the Bosnian Serbs, Muslims, and Croats; and the Yugoslav army entered the fray.

The inability of the EC to deal collectively with the recognition issue was amplified by its inability to terminate the conflict. Lacking the military capacity and will to take on the Yugoslav army in a ground war, the EC could only stand by and watch as two hundred thousand were killed and two million displaced in a war that ended only in 1995. Eventually, the war came to an end, but only after the United States had engineered a coalition of Bosnian Croats and Muslims in 1994 and provided assistance to the Croatian military, which, beginning in May 1995, swept through the Serb-controlled areas of the country and took control of a significant portion of Serb-occupied Bosnia. In the wake of the Bosnian Serb army's massacre of eight thousand Bosnian Muslims at Srebrenica in July 2005 the air power of the North Atlantic Treaty Organization was brought into the battle and the war ended with the signing of the Dayton Accords (negotiated at an American air base in Ohio).

In 1998, as NATO prepared to once again use military force to bring to an end Serbia's effort to defeat the Kosovo Liberation Army and remove large numbers of ethnic Albanians from the territory, it became apparent once again that the EU lacked the military capacity to carry out a Common Foreign and Security Policy even in the unlikely event that it could adopt a "common position." That realization, shared by Prime Minister Tony Blair (b. 1953) of the United Kingdom and President Chirac of France, the two countries that had made the largest contributions to a United Nations peacekeeping force in Croatia and Bosnia in 1992–1995, resulted in an agreement at St. Malo in December 1998 that set the stage for the development of an EU Rapid Reaction Force and a European Security and Defense Policy. Both the Force and the ESDP came into being in 1999.

The EC and EU's failure to prevent and then terminate the genocidal wars of the 1990s in the Balkans made it apparent that the pursuit and implementation of a Common Foreign and Security Policy requires more than a substantially increased capability to conduct military operations, important as such capability may be. The failure made it apparent that pursuit and implementation of CFSP requires, also, the articulation of a "common position" and the binding commitment of the member states to that position. The articulation of and adherence to a binding "common position," depending as it does upon a convergence of the national interests of the member states in the domains of foreign, security, and defense policy, may be difficult—if not impossible—to achieve. That difficulty was perhaps best illustrated in the acrimonious dispute within the EU in the run-up to the American-led war in Iraq in 2003. In that dispute, some member states—most notably, the United Kingdom but also Spain, Italy, and several others—enthusiastically supported and joined the American "coalition of the willing" while other member states—most notably, France, Belgium, and Germany—strongly objected to the American effort to use military force, rather than the efforts of the International Atomic Energy Agency and United Nations, in dealing with Iraq.

THE ENLARGEMENT OF THE EUROPEAN UNION

The negotiation of the Treaty on European Union took place in the immediate aftermath of the historic events of 1989–1991 in central and eastern Europe and the Soviet Union. As the communist regimes collapsed many of the new governments looked toward the EC and EU and sought arrangements that would enable them, in time, to become members. As early as 1990, for example, governments in Poland and Hungary negotiated "Europe Agreements" with the EC that anticipated eventual membership.

The EC sought initially to create a new entity, the European Economic Area, in which the post-communist states would participate, enjoying many of the economic benefits of the single market without, however, participating in the institutions of the EC. But it soon became obvious that, armed with the slogan "Return to Europe," most if not all of postcommunist Europe wanted nothing less than full membership.

In June 1993 the leaders of the twelve member states of the European Communities, in Copenhagen for their recurring summit meeting, approved criteria by which the applications of states for membership would be evaluated. The criteria, known as the Copenhagen Criteria, require that in order to be considered for membership a country must be democratic and abide by the rule of law; must respect the rights of minorities and human rights; must have a functioning market economy; and must be able to administer and implement the acquis communautaire, the body of all treaty obligations, laws, regulations, directives, and policies of the EU.

By 1996 the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, Slovenia, Bulgaria, and Romania had applied for membership in the EU. (Prior to the demise of the postcommunist regimes in central and eastern Europe, two small island countries in the Mediterranean—Cyprus and Malta—had applied for membership in the EC, and Turkey had applied as early as 1987.) Applying the "Copenhagen Criteria," the EU opened accession negotiations with the Czech Republic, Poland, Hungary, Slovenia, Estonia, and Cyprus in early 1998. In 1999 it agreed to open the negotiations as well with the Slovak Republic, Latvia, Lithuania, Malta, Bulgaria, and Romania and did so in early 2000.

By late 2002 those negotiations had reached agreement on all but a few of the most difficult aspects of the acquis communautaire. Negotiations on two of the most contentious chapters of the acquis—agriculture and financial and budgetary provisions—were completed with ten of the twelve candidates—all but Bulgaria and Romania—at the Copenhagen meeting of the heads of state and government in December 2002. The accession treaty was signed in Athens on 16 April 2003 and the ten candidates, as well as the fifteen member states, set about the process of ratifying the treaty. All did so and the ten entered the EU on 1 May 2004. As of that date, therefore, the EU increased from fifteen to twenty-five member states.

Bulgaria and the EU concluded their accession negotiations in December 2004, at which time the EU expressed the view that it anticipated that Bulgaria would enter in January 2007. However, the accession treaty signed in April 2005 allows the EU to postpone Bulgaria's entry one year to January 2008 if there is clear evidence that it is unprepared for membership. Any such delay would, however, have to be approved by all of the member states.

Like Bulgaria, Romania completed its accession negotiations with the EU in December 2004, signed the accession treaty in April 2005, and anticipates accession on 1 January 2007. However, as with Bulgaria, its entry can be postponed one year upon a unanimous vote of the twenty-five member states that clear evidence exists that it is unprepared for membership.

In November 2000 a summit meeting between the EU and the governments of the Western Balkans—Croatia, Bosnia and Herzegovina, Serbia and Montenegro, the Former Yugoslav Republic of Macedonia, and Albania—agreed upon a Stabilization and Association Process (SAP) that supports the development of the Western Balkan countries and prepares them for eventual membership in the EU. The SAP is designed to support the countries through a Stabilization and Association Agreement, trade, and financial assistance. An SAA is regarded as a precursor of an application for membership.

Croatia applied for membership in the EU in February 2003. After Croatia addressed a number of issues pertaining to minority rights, the return of refugees, and judicial reform, the EU set March 2005 as the date for the start of accession negotiations, provided the government cooperated fully with the International Criminal Tribunal for the former Yugoslavia (ICTY) in The Hague. Unable or unwilling to turn over a popular former general, Ante Gotovina (b. 1955), who had led the Croatian military in its 1995 victory over the Serb and Bosnian Serb armies, the start of Croatia's negotiations was delayed until October 2005. After being assured by the Chief Prosecutor of the ICTY, Carla del Ponte (b. 1947), that Croatia was cooperating fully, the negotiations began on 3 October 2005. Gotovina was arrested in December 2005 in the Canary Islands.

Macedonia reached agreement with the EU on an SAA in April 2001 and it applied for membership in March 2004. In December 2005 the EU concluded that Macedonia was officially a candidate for membership, but it did not set a date for the start of accession negotiations pending continued progress in a variety of economic and political domains of policy.

Albania opened negotiations with the EU for an SAA in January 2003. Both sides hoped to complete the negotiations in the first half of 2006.

Serbia and Montenegro opened SAA negotiations in October 2005 and Bosnia and Herzegovina opened the same negotiations a month later. The EU made it clear that in both cases progress in the negotiations would depend upon the countries' full cooperation with the ICTY.

In addition to the ongoing negotiations between the EU and the five countries that are part of the Stabilization and Association Process for the Western Balkans, the EU opened accession negotiations in October 2005 with Turkey, which had applied for membership in April 1987.

In the event all of the countries that, as of 2006, were acceding countries (Bulgaria, Romania), candidates for membership (Croatia, Macedonia, Turkey), or potential candidates for membership (Albania, Bosnia and Herzegovina, Serbia, and Montenegro) join the EU, it will have thirty-three states encompassing nearly six hundred million citizens. In addition, it should be noted that some of the non-Baltic states of the former Soviet Union—most notably, Georgia after its "Rose Revolution" of 2004 and Ukraine after its "Orange Revolution" of 2005—have expressed a strong desire to join the EU. In 2006 the EU declared that Ukraine had a functioning market economy, thereby satisfying one of the criteria for membership set forth at Copenhagen in June 1993.

See alsoBenelux Economic Union; Euro; European Coal and Steel Community (ECSC); European Commission; European Constitution 2004–2005; Maastricht, Treaty of; Monnet, Jean; Rome, Treaty of; Schuman, Robert.

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David R. Cameron