Lessons of European Integration for the Americas

26 February 2004
Article

This report is available in PDF

Contents

  1. Summary
  2. Introduction
  3. Major Findings
    • Development Funds. Ireland Case Study
    • Migration
    • Agriculture
    • Social Standards
    • Environmental Standards
    • Public Participation
  4. Conclusion

Summary

As criticism mounts in the Americas over what many perceive to be an overly narrow approach to integration, there is growing interest among political leaders and citizen groups to learn more from the most advanced regional integration project in the world: the European Union. We list below a summary of what we judge to be the most important lessons in five issue areas from the European experience that may be relevant for the Americas.

1. Development Funds

From Europe there is strong evidence that regional economic arrangements can include mechanisms to reduce disparities among member nations. The EU invested 324 billion in development grants to reduce disparities between and within its member states between 1961 and 2001, most of it since the mid-1980s. Accordingly, poorer European countries have made progress in catching up with their neighbors, and there is widespread consensus that EU aid grants were an important factor in that region's trend towards reduced disparity. By contrast, the European funds were roughly ten times the amount of US economic assistance grants to all of Latin America during the same period. And, NAFTA contained no mechanisms whatsoever to reduce inequalities. As Ireland and the other formerly poor European nations have surged forward, Mexico has fallen further behind its NAFTA partners.

The general lesson for the Americas is that trade and investment liberalization alone do not guarantee a narrowing of the economic divide. This said, there are many questions that should be explored regarding the most appropriate approach to resource transfer in the Americas. It may be that debt reduction, or a combination of debt reduction and aid would be a more appropriate approach.

The EU also offers lessons on how to develop and maintain support for development aid in the richer countries. This has been accomplished by "de-politicizing" aid by assigning responsibility for administration to a supra-national body (the European Commission) and by allowing a portion of aid to be channeled into the poorer regions of the richer countries.

2. Migration

EU citizens enjoy the right of freedom of movement from one member state to another. In response to fears of massive flows of migrants into the richer countries, the EU has focused aid and other assistance to lift up living standards in poorer countries to mitigate migration pressures. As a result, when the EU lifted borders with Portugal and Spain, out-migration was negligible. Even though the EU is confronting wider income gaps in the current round of enlargement, countries scheduled to join the EU in May 2004 are slated to enjoy full rights to freedom of movement within seven years. By contrast, NAFTA side-stepped the migration issue, aside from offering limited visas for professionals. There is a great deal the Western Hemisphere can learn from the EU approach in adopting a long-term plan for leveling the playing field among nations and working towards increased labor mobility.

3. Agriculture

The lessons of the EU on agriculture are mixed. For the first two decades or so, the EU approach centered on boosting yields and production levels. This exacerbated a problem of massive surpluses that drove down world market prices for many commodities. It also encouraged intensive farming practices that had substantial negative environmental impacts. And despite massive spending (672 billion between 1963 and 2001), the EU also experienced a rapid decline in small farms, since subsidies disproportionately benefited large producers.

Even if the results had been more positive, it would be unrealistic to propose such an expensive approach to agricultural policy in the Americas. However, more recent attempts to reform the EU agricultural policy, while too early to judge, may prove more fruitful. These changes have focused on de-linking subsidies from production and conditioning them on respect for environmental and other standards. The EU is also planning to cut payments to large farmers. These reforms can inform the debate in the Americas region, where small-scale agriculture remains highly significant in terms of employment, as well as social, environmental, and cultural welfare. Like the EU, the Western Hemisphere should recognize that increased exports and other trade liberalization policies will not solve the serious problems facing rural residents.

4. Social and Environmental Standards

One overall lesson of the EU is that development aid, trade and foreign investment are most effective when accompanied by social and environmental protections. NAFTA lacks strong mechanisms on these issues and as a result, corporations, particularly in Mexico, continue to profit through severe labor repression and environmental degradation. Through EU-wide standards on labor rights, gender equity, racial discrimination, health and safety, environment and other issues, the EU has helped promote a high-road path to development.

The EU model also offers lessons on how to handle enforcement of social and environmental standards in a way that promotes compliance, including through financial and technical assistance, rather than rushing to penalize violators. At the same time, there are those who have been frustrated by the slow pace of justice against violators of EU laws.

5. Public Participation

The EU offers several avenues for civil society input in policymaking. Two of the most significant are: 1) the European Economic and Social Committee, which is made up of representatives of employers, workers, and other civil society sectors from each member state and provides input to the European Commission, and 2) the social partnership process, in which trade unions and employer groups develop proposals for EU initiatives, including some that have led to legislation. EU employees of multinational companies also have rights to consultation at the company level.

While all of these mechanisms have their shortcomings, the EU has made some progress towards creating an institutional framework for ensuring that policies reflect a measure of public consensus. By contrast, neither the NAFTA nor the proposed FTAA offer any opportunities for civil society participation in decision-making.

The EU model is not without flaws. Moreover, there are historical, economic and cultural differences between Europe and the Americas that would make it both foolhardy and unrealistic to attempt to simply replace the NAFTA model with the EU approach. However, as talks on the FTAA as well as at the World Trade Organization flounder, our leaders would do well to broaden their discussions to consider alternative approaches, including that of the EU.

Introduction

The debate over economic integration is more robust and less predictable today than at any point in the past decade. This is particularly the case in the Americas. Since 1994, 34 countries in the Western Hemisphere (all but Cuba) have been engaged in talks around a proposed Free Trade Area of the Americas. Until recently, the model for the FTAA, as evidenced by draft texts, has been the North American Free Trade Agreement. However, while the official January 2005 deadline for completing the FTAA is fast approaching, the US government's goal of a NAFTA-style agreement appears more remote than ever.

During the past few years, citizens organizations in Latin America have confronted governments with a growing record of negative social and environmental consequences from decades of market-opening policies. Leaders associated with these policies were voted or driven out of office in Brazil, Argentina, Ecuador and Bolivia, and the new Presidents of Brazil and Argentina are particularly critical of the proposed FTAA. In Venezuela, President Hugo Chavez has also been a consistent critic, while leaders of Caribbean nations have demanded strong concessions for small economies. Even Mexican President Vicente Fox, one of the United States' closest economic allies, has conceded at times that if he had the chance to re-negotiate NAFTA, he would take a different approach.

The growing backlash had a clear impact on FTAA negotiations in November 2003 at a meeting of lead trade negotiators in Miami. Facing a deadlock in the talks, the US government backed down from its demand that the FTAA be a comprehensive agreement endorsed in full by all 34 governments. Instead, they agreed to a two-track approach that would allow countries to opt out of some of the more controversial areas. At this point, the details of the new approach are yet to be determined, but it is clear that resistance from developing country governments has shaken up the debate. Unless the US government launches a successful arm-twisting campaign, the FTAA is likely to be a hollowed out version of the original vision.

But while the hemisphere appears to have digressed from the NAFTA path, the road ahead is unclear. Leaders are far from achieving consensus around an alternative road map for integration in the Americas. One frequent theme, however, is that the Western Hemisphere should consider the experience of the European Union (EU). This message has been most explicit in statements by the governments of Mexico and Venezuela. Mexico's Fox has promoted the idea that both the NAFTA and the FTAA include EU-style development funds and that the NAFTA countries follow the EU by adopting a common currency and more liberal migration policies. The Chavez administration in Venezuela issued a memo stating that "one of the key goals of a successful integration project, as demonstrated by the experience of the European Union, is to ensure that integration allows for concrete steps to be taken towards significantly reducing these inequalities". As the Western Hemisphere grapples with its own integration process, the EU offers one of the few concrete examples of an alternative approach.

This report lays out some of the main differences between the NAFTA and EU experiments and attempts to draw some lessons from the European experience that might be relevant to the debate in the Americas. The two approaches are indeed quite distinct. In short, NAFTA is a narrow, free market-oriented agreement that combines trade and investment liberalization with strong investor protections. By contrast, the EU has never been just about economics. Built on the ashes of World War II, it has the dual goals of economic prosperity as well as social and political harmony. And to promote the latter, EU architects have developed mechanisms to reduce disparities, established legally binding social and environmental protections, and created numerous avenues for civil society input into decision-making. They have also allowed free labor movement within the EU zone, while seeking to minimize migration pressures by narrowing gaps in living standards.

To be clear, though, the EU is not without conflicts of its own. In fact, there are raging debates over virtually every aspect of this complex project. EU policies can roughly be grouped into two categories: those that restrict government intervention and those that require it. The restrictive policies include trade and investment liberalization, the adoption of the common currency (which is tied to restrictions on fiscal policy), competition policy (which restricts government subsidies to the private sector) and free movement of labor (which inhibits restrictions on labor flows). There are particularly contentious battles over EU restrictions on deficit spending and interest rate policies that were imposed as part of the adoption of the euro. National government leaders and civil society groups alike have complained that these restrictions undermine democratic processes and pose unacceptable obstacles to achieving social goals.

The other category of policies, those that involve government intervention, include the EU's development aid and farm supports, social and environmental policies, and public participation and consultation mechanisms. This report focuses primarily on this set of initiatives because they are absent from the NAFTA model and are also those most frequently cited by government officials as well as civil society groups in the discussion around a more favorable alternative to the FTAA. The report also discusses EU migration policy since this issue is of great interest in the Americas. A comprehensive analysis of the policies that restrict government intervention is beyond the scope of this report.

As the remainder of this report makes clear, almost all of these initiatives are contentious. Particularly as the EU has worked to prepare for its upcoming enlargement in May 2004 from 15 to 25 members, there has been intense scrutiny of and debate on these issues. EU institutions and member state governments have grappled with conflicting views on such questions as whether and how to reform these initiatives and - perhaps most difficult - how to pay for them. We present the issues in these debates in the pages that follow.

These European debates have produced a rich body of thinking that should be more closely integrated into discussions in the Americas. The goal of this report is to summarize some of the weaknesses and strengths of the EU experience in order to draw lessons that could help guide the integration debate in the Americas.

Key Elements of the EU and NAFTA Approaches

EU

NAFTA

Restrict Government Intervention

Trade and investment liberalization

Trade and investment liberalization

Common currency

None

Competition building

Included, but not-binding

Free labor mobility

Limited visa for professionals only

Require Government Intervention

Development funds

None

Agriculture supports

None

Enforceable social/cultural standards

Weak "side-agreements" on labor and environment *

Official channels for public participation at regional level

None

* Included in NAFTA, but not in FTAA draft