Chapter

II Background

Author(s):
International Monetary Fund
Published Date:
December 1990
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Origins of the EC and EFTA

The issue of economic and political integration has been on the Western European agenda since the end of World War II (Siegler, 1961). The first step toward forming the European Communities (EC) was taken in 1951, when Belgium, France, Germany, Italy, Luxembourg, and the Netherlands formed the European Coal and Steel Community (ECSC) with a supranational administrative body, the High Authority.6 In 1955, following the failure of plans to form a European Defense Community and a European Political Union, the same six countries agreed in principle to form a common market, which envisaged the free movement of goods, services, labor, and capital—the “four freedoms.” The founding document of the European Economic Community (EEC)—the EEC Treaty, signed in March 1957—embodied a vision for broadly based economic integration going well beyond simple cooperation on trade issues.

Talks on a larger Western European free trade zone—instigated by the United Kingdom—failed in 1958, partly because of British insistence on preferential treatment of its Commonwealth ties and its special relationship with the United States, and partly because the EC Commission in Brussels—as well as several EC member countries—feared an undermining of the EC consolidation process. In reaction, Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom formed the European Free Trade Association (EFTA) in January 1960. Finland joined in 1961, and Iceland in 1970.7

Free Trade Agreements of 1972–73

From the outset the EC was more cohesive than the EFTA.8 The EFTA countries tried to bridge the opening gap between the two blocs. However, it did not take long before the EFTA countries realized that they needed to forge closer links with the Community. As early as 1961, the United Kingdom, Denmark, Norway, and Sweden applied bilaterally to the EC, either for association or membership. However, the political climate in Western Europe and setbacks in the EC’s internal integration delayed new accessions to the EC in the 1970s. Negotiations between four countries—Denmark, Ireland, Norway, and the United Kingdom—and the EC began in June 1970 and resulted in Danish, British, and Irish membership in 1973. Denmark and the United Kingdom left the EFTA concurrently. Norway elected not to join following a national referendum on membership.

The remaining EFTA members, including Norway, concluded parallel bilateral Free Trade Agreements (FTAs) with the EC in 1972–73. In the FTAs, the EC and each EFTA member bilaterally agreed on a timetable to abolish tariffs on most industrial goods in five cuts of 20 percent by the end of 1977. For some sensitive products, such as paper and steel, temporary quotas remained and tariff removal was delayed until 1984. Special declarations covered certain goods such as Swiss watches, Austrian cheese, and Icelandic fish. Joint committees were also set up to monitor trade relations.

To help solve problems caused by differing trade policies regarding third countries, a system of rules of origin was developed. The initial bilateral provisions of the FTAs treated the EC as one country and did not allow for cumulation of processing by EFTA members.

The Free Trade Agreements of 1972–73 helped to integrate the Western European market for industrial goods. For the EFTA countries, the FTAs still provide the legal framework for more than half of their foreign trade.

Luxembourg Declaration and Its Initial Follow-Up

In April 1984, ministers from all 18 members of the EC and EFTA agreed on a second generation of EC-EFTA initiatives in the so-called Luxembourg Declaration (EFTA, 1987a, pp. 106–11 and 159–61). Faced with a changing global economy, Western European countries saw a need for increased cooperation, including the creation of a “dynamic European Economic Space” (EES). The accord focused on three issues. First, it supported continued efforts to combat protectionism and encourage free trade in Western Europe. Second, it stressed continued pragmatic and flexible cooperation beyond the framework of the FTAs, including joint research and development projects. Third, it encouraged increased consultations and exchanges of information to help find equitable solutions between trading partners and to foster an open and multilateral trading system.

In September 1984, the High Level Contact Group, representing the member countries of the EFTA and the EC Commission, began holding semiannual meetings to monitor progress toward implementing the Luxembourg Declaration. At its first meeting, it agreed that major areas of focus should be on EC-EFTA cooperation in eliminating technical barriers to trade, particularly in the areas of technical regulations and in simplifying rules of origin and border formalities.

In May 1985, the EC Commission reconfirmed its commitment to the Declaration and set four criteria for further cooperation (EC Commission, 1986b, p. 1). First, the EC’s independent powers of decision were not to be affected. Second, eliminating technical barriers to trade and simplifying administrative formalities at EC-EFTA frontiers would be pursued in parallel with the progressive integration of the EC’s internal market. Third, no field was to be excluded a priori. Fourth, to discourage a pick-and-choose policy, the EES could only be achieved if the costs and benefits were shared fairly, requiring real reciprocity among the partners.

White Paper and the Single European Act

A turning point came when the EC Commission issued the White Paper, Completing the Internal Market, in 1985 (EC Commission, 1985). The White Paper was a comprehensive document that laid out a step-by-step plan to create an integrated, coherent economic framework for all of the EC by January 1, 1993. The plan contained some 300 legislative proposals—later cut to 279—designed to eliminate all man-made physical, technical, and fiscal barriers that could hinder the free functioning of a single market in the EC. The program was also seen as requiring a harmonization of laws needed for the functioning of a common market. The White Paper also set a timetable, calling for some actions to be taken as early as 1985. However, in 1987 the Commission moved up the timetable for drafting proposals, with the goal of drafting all proposals by the end of 1988 to allow four years for their adoption and implementation.

The internal market program required certain amendments to the EEC Treaty. These were set out in the Single European Act, signed by the 12 EC governments in 1986, with effect from July 1987 (EC Commission, 1986c). The most important change was replacing the requirement that decisions be reached unanimously with one allowing decisions to be made with a qualified majority in all areas regarding the internal market with the exception of fiscal provisions, provisions relating to the free movement of persons, and the rights and interests of employed persons. It also enhanced the role of the European Parliament in the decision-making process and made foreign policy cooperation a formal part of the EC’s activities. The Act was seen as important because it provided the political impetus and the legal framework needed to achieve a truly unified market by 1992.

EFTA’s Response to the White Paper

While the need for joint cooperation was increased by the adoption of the White Paper, progress was initially slow. The first step was taken in 1986 when the EC Council of Ministers encouraged the EFTA to take concurrent measures aimed at creating the EES. In response, EFTA ministers stressed the need for parallelism with the internal market program and joint cooperation. Since then, semiannual meetings between representatives of the EC Commission and EFTA member states have identified some 20 potential areas of cooperation. The High Level Contact Group also set up working groups to transform these statements into actions. Prior to 1989, the EFTA agreed to the joint use of the EC’s unified custom documents (the “Single Administrative Document”), and the EC agreed that cumulation rules for EFTA products would include all inputs by EFTA members from January 1989. Cooperation to harmonize standards has also advanced through the European standardization bodies, particularly in information technology and data processing.

Although progress was made, the EFTA countries were divided in their negotiation strategy with the EC. While aware of the potential gains from negotiating as a bloc, they were not formally committed to this path. Individual members sought bilateral talks in areas they saw as either especially important to them or as likely to yield concessions from the EC. For example, Iceland sought bilateral talks on fishing rights and trade in fish, and Switzerland on financial services, labor mobility, and road transport.

Recent Developments

Cooperative efforts between the EC and EFTA accelerated following a speech to the European Parliament by EC Commission President Delors on January 17, 1989. In his speech, Mr. Delors said that progress in the pragmatic, step-by-step cooperative process that had begun with the Luxembourg Declaration had become increasingly difficult. He saw two options for future relations. Either the present pattern of bilateral relations could continue, with the aim of creating a free trade area encompassing the Community and EFTA, or the two blocs could strive for “… a new, more structured partnership with common decision-making and administrative institutions to make our activities more effective and to highlight the political dimension of our cooperation in the economic, social, financial and cultural spheres” (Delors, 1989).

In pushing for a more structured relationship—the Delors Initiative—he said that if the EFTA strengthened its institutional structure, “the framework for cooperation would rest on the pillars of our organizations.” He voiced doubts about whether the EFTA countries could continue their pick-and-choose strategy, adopting only EC rules that suited them. While EFTA members were attracted by the EC’s large unified market, the internal market was to be more than this. It was an economic and social area on its way to becoming a political union, requiring greater cooperation on foreign policy and security.

EC-EFTA cooperation was the main topic of the meeting of EFTA heads of state in March 1989. At the meeting they reaffirmed their commitment to the EES and voiced support for the Delors Initiative (“EFTA Summit …,” 1989). They proposed a two-track approach to future talks, with the follow-up to the Luxembourg Declaration focusing on specific topics and an examination of forms of cooperation to achieve a more structured relationship. This showed that the EFTA could agree on a political platform going beyond the lowest common denominator and that the ambition of EFTA governments was greater than earlier believed (“Editorial—Two Tracks …,” 1989).9 Soon after, at an EC-EFTA ministerial meeting in Brussels, further support was given to this new cooperative process—called the Oslo-Brussels process—when most EC ministers also confirmed their support of the Delors Initiative.

In April, a joint High Level Steering Group was set up and working groups formed to examine the potential for cooperation in five areas: free trade in goods; free trade in services and capital movements; free movement of labor; joint cooperative projects; and institutional and legal changes. While the first four groups examined issues relating to the White Paper, the fifth explored institutional and legal changes needed to secure broader, institutionalized cooperation. In these working groups, common positions were achieved by consensus, not by vote.

The High Level Steering Group met in October 1989 to discuss the findings of the working groups and to decide whether to propose formal negotiations on intensified cooperation. While details were not disclosed, the meeting was considered a success. However, the EC restated its unwillingness to allow changes that would interfere with its autonomous decisionmaking process. EFTA members, while expressing a wish to participate in the four freedoms, also wanted to remain independent from the EC and to retain autonomy in their relations with third countries. The EC and EFTA were not aiming at a Common Agricultural Policy (CAP) and did not favor the removal of borders between the blocs, as was envisaged within the EC.

At their meeting in December, EC and EFTA ministers decided to start negotiations on expanded cooperation in the first half of 1990, with the aim of concluding them as rapidly as possible. In their statement, they noted a convergence of views on determining the scope and content of a renewed framework for EC-EFTA relations. Three objectives were cited:

  • (1) to achieve free movement of goods, services, capital and persons on the basis of the relevant acquis communautaire, to be identified jointly; exceptions, justified by considerations of fundamental interests, as well as transitional arrangements, could be matters of negotiation; equal conditions of competition should be ensured;
  • (2) to strengthen and to broaden cooperation in the context of the Community’s actions in other areas, such as research and development, the environment, education, working conditions and social welfare, consumer protection, programs for small and medium-sized enterprises and tourism; and
  • (3) to reduce economic and social disparities between their regions (“EC and EFTA …,” 1989).

While ensuring the decision-making autonomy of the two blocs, EC and EFTA ministers agreed that efforts would be made to facilitate a consensus on decisions relating to the EES. They also agreed that steps be taken to permit “appropriate formulae to ensure the direct effect of common legislation, surveillance of its implementation as well as judicial monitoring.” The ministers envisaged the full implementation of the four freedoms, with only limited scope for exemptions, and a broadening of EC-EFTA relations, possibly including significant legal and institutional actions that could require changes in the relationship between the two blocs and in the structure of the EFTA.10

While EFTA members favored a rapid conclusion of the discussions—ideally by the end of 1990—EC representatives noted that the discussions should be concluded early enough to allow the agreement to become effective on January 1, 1993.11 Under the circumstances, the latter date would seem more likely, since EC-EFTA agreements cannot be concluded in many important areas before the EC formulates its own position.

Formal negotiations began in June 1990. At present, there appear to be three key problem areas:

  • (1) the extent to which the EFTA will be allowed to participate in decision making for laws and regulations governing the EES;
  • (2) the degree to which the EFTA must strengthen its institutional structures as part of the EES; and
  • (3) the extent to which EFTA countries will be granted exemptions—permanent or temporary—from implementing EC laws in the areas covered by the EES agreement.
6The European Communities of today comprise the European Coal and Steel Community (ECSC), the European Economic Community (EEC), and the European Atomic Energy Community (EURATOM). For a review of EC institutions, see Noel (1988).
7Finland became an associate member of the EFTA in 1961. The agreement gave Finland essentially the same rights and obligations as other EFTA members. Finland became a full member in 1986.
8Bilateral trade flows hint that political rather than economic considerations governed many countries’ decisions on which organization to join. Wijkman (1988) presents data on trade flows between EFTA and EC countries that show that Germany was a major market for all EFTA countries, while some EFTA countries, for example, Sweden and Switzerland, were more important for Germany than some of its fellow EC members. Trade between the Nordic and Alpine members of the EFTA was minimal.
9It has been argued that the primary considerations holding the EFTA together are that its members were not EC members and have similar FTAs. The statement appeared to show that the group was now united with a common purpose.
10In his address to the European Parliament in January 1990, Mr. Delors noted that major problems remained concerning the decision-making process. While the EFTA’s interests needed to be taken into account, it would have to be by “osmosis” for major Community decisions; decision making could only be shared with EC members. Therefore, “a delicate balance will need to be struck” (Delors, 1990, p. 13).
11In January 1990, it was agreed that the EFTA’s Council of Ministers should meet more often to help assure that the EFTA presented a united front in its negotiations with the EC.

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