Europe 1992

As noted in Table 11.2, the EC is a formidable economic bloc with 320 million people and the largest combined GNP in the world outside of the U.S.Canada Free Trade Agreement. However, the early part of the 1980s was a difficult time for the EC. "From 1970 to 1975, gross domestic product in EC countries averaged 2.7 percent growth per year, dropping to approximately 1.4 percent annually by the 1980-1985 period. In the meantime, the United States had recorded 2.2 percent and 2.5 percent rates, respectively. In Japan, growth in the same periods averaged an impressive 7.6 percent and 3.8 percent."10 It was evident that the elimination of tariffs was not the only solution  to achieving a free flow of goods. A variety of nontariff barriers was keeping
 ^ Ec from bei     a true common market.
 Three examples illustrate how ditficult it was to do business in a uni-
 fled" Europe. The first involves jam. The Dutch like to spread jam on bread
for breakfast, so chey like their jam smooth. The French prefer to eat jam right out of the jar, so they like their jam lumpy and fruity. The British, however, used the term "marmalade" to refer to "jam," whereas the marmalade of the Continental Europeans was nothing more than low-grade "jam" to the British. Thus the members of the EC argued for more than twenty years over what should be jam and what should be marmalade.11
The second example involves transportation. Even though the Europeans eliminated tariffs in 1968, they did not eliminate border guards and differences in documentation. At each border, drivers had to provide documentation averaging 35 pages, with each border requiring a different set of documents. It was estimated that in 1987 customs regulations cost companies over $6 billion in delays and red tape.12
The third example involves value added taxes (VAT). The major source of revenue for the EC, and 40 percent of the government revenues in France, is from the VAT. The VAT is assessed against the selling price of a product less any inputs that have already been assessed a VAT. The rates are different for different categories of products, and the rates and categories vary significantly from country to country. The standard VAT rates vary from 22 percent in Denmark to only 12 percent in Spain and Luxembourg. The rate on luxury items is 38 percent in Italy, whereas the Dutch and British do not have a VAT on luxury items. The same differences exist in excise taxes, such as on alcohol and tobacco products. The excise tax on beer in Spain is less than 3 percent of the excise tax on beer in Ireland. Several countries, such as Greece, Italy, Spain, Portugal, and Germany, do not even have an excise tax on wine.13
As a result of these and other issues, Jacques Delors, the President of the European Commission and, ironically, the former Socialist Finance Minister of France, decided to eliminate the remaining barriers to a free and open Europe. He appointed Lord Cockfield, a conservative British business leader, to chart a course to open Europe. Lord Cockfield identified 300 proposals that needed to be enacted to complete an internal market. As of June 1990, the total number of proposals that were to be adopted was pared down to 282, the number of proposals that had been drafted by the European Commission was 279, the number of proposals adopted by the Council of Ministers was 164, and the number of proposals incorporated in all member states was 21. Denmark and the United Kingdom had adopted 77 proposals by that time, whereas Portugal and Italy had only adopted 37 and 36 proposals, respectively.14
 The proposals identified by Lord Cockfield and included in a 1985 White
-   paper to the European Commission can be divided into the following general areas:
1. Frontier controls and formalities for goods
2. Freedom of movement and establishment for people
3. Technical and standards harmonization
4. Opening up of the public procurement markets
5. Liberalization of financial services
6. Gradual opening up of the market in information services
7. Liberalization of transport services
8. Creation of suitable conditions for industrial cooperation in the field of company law and intellectual and industrial property
9. Removal of fiscal barriers"
A major impediment to the implementation of the proposals was the requirement that they be adopted unanimously by the Council of Ministers. However, the Single European Act was established in 1987, which allowed all proposals except those relating to taxation, workers' rights, and immigration to be adopted by a system of weighted majority voting by member states (more populous countries get more votes than less populous ones).
As an example of how these proposals will solve some of the barriers to trade, let's look at the three examples of nontariff barriers that were discussed above. In the case of jam, an EC expert decided that it would be better for countries to set basic health and safety standards than to decide how much fruit and sugar had to be in jam before it could be called "jam." Several proposals were developed on issues such as food additives, food labeling, composition and special labeling requirements for particular foodstuffs, etc. In the case of border controls, there is now a one-page document that is accepted at all border crossings, significantly eliminating the delays and complexity of moving goods from country to country. France, Germany, and the Benelux countries signed an open border agreement in 1985, and those border posts are not busy. What will happen to France's 21,000 border guards when December 31, 1992, comes?16
Finally, taxes are probably the most difficult to harmonize. The EC has proposed that there be a normal VAT rate of 14-20 percent and a reduced rate of 4-9 percent for basic goods and services. Countries would choose their rates within the brackets.17