EUROPEAN INTEGRATION: THE IMPLICATIONS FOR CANADA

The Standing Senate Committee on Foreign Affairs

Chairperson: The Honourable John B. Stewart
Deputy Chairperson: The Honourable Pat Carney, P.C.

JULY 1996


RECOMMENDATIONS

CANADA - EU TRADE AND INVESTMENT LINKS

1. The Committee recommends that Statistics Canada undertake a study of Canada-European Union (EU) trade patterns to discover in which sectors of the EU market Canada is losing import market share and where this country is gaining a larger share of the EU market. The study would also show how Canada's major competitors are faring in the EU import market. The general purpose of the study would be to provide data on the performance of Canadian exports in various import sectors. When compared with information on EU trade barriers by sector, this might help to explain the performance of Canadian merchandise exports in the EU market. The study would also be used to sharpen Canada's export promotion strategy for the EU market.

ECONOMIC AND MONETARY UNION

2. We recommend that the Department of Foreign Affairs and International Trade, in consultation with the Bank of Canada and the Department of Finance, undertake a study on the effects of the EU's economic and monetary union on Canada. The completion of such a study ought to be given high priority by the Canadian government.

3. Further, the Committee recommends that the Canadian government convene a conference based on this study. Such a conference of Canadian business people, economists, and policy makers would help the government in estimating the implications of economic and monetary union (EMU) for Canada and in formulating appropriate policy responses.

4. The Committee recommends that the Canadian government and the provinces continue work on the elimination of inter-provincial trade barriers. Canada already has a monetary union, but has yet to achieve a true single market for goods, services, capital, and people.

THE 1996 INTERGOVERNMENTAL CONFERENCE

5. The Committee recommends that the Canadian government monitor carefully the discussions taking place at the 1996 Intergovernmental Conference (IGC). We note that decisions respecting policies such as the EU's common foreign and security policy and European defence policy will be taken in this IGC and that these policies may affect Canadian interests. Therefore, the Department of Foreign Affairs and International Trade should consider whether additional personnel need to be assigned to key foreign missions during the IGC, in order to ensure that the Canadian government is aware of, and able to respond promptly to, any developments that may affect Canadian interests.

EUROPEAN UNION ENLARGEMENT

6. The Committee recommends that the Canadian government monitor the progress of all discussions between the European Union and prospective members in order to prepare a strategy for dealing with EU enlargement. We recommend that this strategy should include the following elements:

7. First, the Canadian government should immediately commission an analysis of the potential impact on Canada of future EU enlargements. The analysis should examine three implications of enlargement for Canada:

potential diversion of trade;

potential diversion of investment;

the effect on decision-making in those institutions of which Canada is a member.

8. Second, the Committee believes that it is imperative that the Canadian government work towards "raising the floor" of international agreements -- in other words, towards achieving rules that will bind the EU with respect to the imposition of new trade restrictions. Most importantly, the Canadian government should press for the negotiation of another round of multilateral tariff reductions. Priority should be given to concluding an agreement that would eliminate or lower tariffs on Canadian exports which, on the basis of the aforementioned study, are likely to be most affected by EU enlargement. To the extent that the EU agrees to bind its tariffs at zero (or very low rates) new EU entrants will not have to harmonize their own tariffs upwards to meet those of the EU.

9. In Chapter III the Committee recommended that Statistics Canada undertake an analysis to determine in which sectors Canada has been losing share of the EU import market to other competitors. In some cases these competitors have access to the EU market which is more favourable than that provided to Canada. The Minister for International Trade informed the Committee that Canada is one of the few countries without preferential access to the EU market. Therefore, the Committee recommends that the Canadian government emphasize also tariff reductions in those sectors where Canada has lost market share to competitors that have more favourable access to the EU market.

10. Third, the Committee recommends that, as soon as practicable, the Canadian government begin discussions with the European Union on proposed EU enlargements. It is important to begin these discussions early in order to ensure that an adequate compensation package for Canada is in place by the time the new members accede to the EU.

11. Fourth, ongoing negotiations with the EU should also be concluded as soon as possible, such as those involving a Mutual Recognition Agreement, a Telecommunications Agreement, an Information Technology Agreement, and a Multilateral Agreement on Investment. Perhaps the most difficult area, agricultural trade liberalization, will probably have to wait until 1999, when the World Trade Organization (WTO) Agreement on Agriculture requires the beginning of another round of agricultural negotiations.

12. Fifth, the Committee was impressed with the German position that EU enlargement should not be allowed to raise trade barriers to outside countries. We recommend that the Canadian government consult regularly with the German government, and, where appropriate, the governments of other EU countries, to ensure that regional integration does not run counter to multilateral trade liberalization. In this regard, the Committee recommends that the government take care to assure that Canada's bilateral relations with individual EU Member States do not weaken. In addition, we recommend that the government review the allocation of its personnel and resources to particular European countries. For example, is the allocation to Germany commensurate with the role that country now plays in the European Union?

13. Sixth, the Committee recommends that representatives from the Department of Foreign Affairs and International Trade be invited to appear twice each year before the Standing Senate Committee on Foreign Affairs to report on:

(1) the latest developments in the EU's plans to accept new members; and

(2) how the Canadian government is dealing with EU enlargement.

THE COMMON FOREIGN AND SECURITY POLICY

14. The Committee recommends that Canada remain a firm supporter of the North Atlantic Treaty Organization (NATO). This country has limited defence resources of its own; membership in NATO acts as a "force multiplier" which helps to guarantee Canadian national security. Membership in the Alliance also permits this country to make a valuable contribution to European and global security by participating in NATO peacemaking activities, such as the Implementation Force (IFOR) in Bosnia. By participating in NATO outreach programs, such as the North Atlantic Cooperation Council (NACC) and the Partnership for Peace program (PfP), which keep Russia and the countries of central and eastern Europe engaged with NATO, Canada also is contributing to global peace and security.

15. The Committee recommends that the Canadian government consider carefully on its own merits each country's application to join NATO so as to ensure that approval of the application will serve Canada's interests. Non-member countries should not be allowed to determine who does, and who does not, become a NATO member. At the same time, NATO members must be cognizant of the reaction of outside countries.

16. Therefore, the Committee recommends that the Canadian government encourage NATO to continue to implement policies that will help to ensure that the enlargement process does contribute to enhanced security and stability in Europe. Consequently, it is imperative that NATO continue to build bridges between itself and Russia. In particular, the Committee believes that NATO outreach programs, such as PfP and NACC, have a key role to play in serving as vehicles for consultation and cooperation between the Alliance and non-member countries, especially Russia. The Organization for Security and Cooperation in Europe (OSCE) -- the organization with the widest membership -- also has an important role to play in securing Europe's security and stability by overcoming divisions between NATO members and non-members.

17. The Committee recommends also that, in enlarging its membership, NATO ensure that its decision-making ability is not hampered. In order to remain effective, the Alliance must be able to take decisions quickly on the basis of consensus. As the organization becomes larger and more heterogeneous, the danger that decision-making may become bogged down increases as members' interests come into conflict.

18. Finally, the Committee recommends that the Canadian government undertake a study of the implications for Canada's national interests of the development of a EU common foreign and security policy. An area which deserves attention is the linkage between NATO and the Western European Union (WEU). As EU enlargement proceeds, more countries will become members of the WEU, which is both the EU's defence component and the European pillar of the Atlantic Alliance. Should those countries that are expected to become EU members be given special consideration when they seek to join NATO? Is there a danger that EU enlargement could provide a "backdoor" means of entry into NATO for certain countries? What are the implications of the emergence of a European pillar within NATO for the nature of the Alliance?

JUSTICE AND HOME AFFAIRS

19. The Committee recommends that the Canadian government continue to pursue cooperation with the EU in third pillar areas. These include immigration and asylum, as well as combating organized crime, terrorism, money laundering, illegal arms trade, and drug trafficking.

FORGING CANADA-EU LINKS

20. The suspension of the Action Plan negotiations over a single issue demonstrates the potential benefit of engaging the support of other countries in future negotiations in order to offset both EU power and the interests of individual Member States. Conducting negotiations under the auspices of multilateral fora, such as the Organization for Economic Cooperation and Development (OECD) and the WTO, provides one way of counterbalancing EU power. However, the Action Plan negotiations are an attempt to achieve a bilateral agreement which aims to fill in the gaps in the multilateral framework. The Committee recommends that, in future negotiations involving Canada and the EU, the Canadian government try to enlist the participation of the United States. Like Canada, the United States has a strong interest in opening up the EU market. Moreover, the United States is the only country with sufficient economic and political weight to offset that of the European Union.

21. We recommend that the Canadian government pursue the Action Plan negotiations during the Irish presidency. Clearly, however, the success of the negotiations will depend on whether Canada and the EU can resolve the outstanding bilateral fisheries issues, primarily involving the appropriate method of protecting fish stocks outside the 200-mile territorial limit.

22. The Committee recommends that the Canadian government continue to press to have the study on transatlantic trade barriers carried out on a trilateral basis. Although it is unclear that such a transatlantic trade study would form the basis of a concrete plan for bilateral trade liberalization, we believe that Canada should be involved from the outset. Otherwise, there is a danger that two separate bilateral studies (Canada-EU and U.S.-EU) would eventuate in two separate bilateral trade agreements. This raises the possibility that the U.S., with its greater economic and political weight, could negotiate better access to the EU market than Canada can obtain and/or that the U.S. could become a more attractive location for investment compared to Canada . On the other hand, a trilateral trade agreement would ensure that Canada obtained access to the EU market equivalent to that attained by the U.S.

23. The Committee recommends that Canada be in the forefront of countries calling for another round of multilateral tariff negotiations. Therefore, the Canada-EU Action Plan should contain a commitment to undertake negotiations on a new package of multilateral tariff reductions.

24. The Committee recommends that the Canada-EU Action Plan include a statement of Canada's intention to conclude the Information Technology Agreement (ITA) negotiations.

25. The Committee recommends that, as a member of the Arctic Council, Canada should cooperate fully and diligently with the EU Arctic nations, Finland, Denmark (Greenland), and Sweden, in the context of the Action Plan, to deal with the problems arising from Arctic contamination. Also, the government should work with non-EU Arctic countries, such as Norway, U.S.A., and Russia, to establish a plan to deal with the problem.

EUROPEAN INTEGRATION:

THE IMPLICATIONS FOR CANADA

I. INTRODUCTION: CHANGING CIRCUMSTANCES IN EUROPE

AND NORTH AMERICA

The Committee's decision in early 1995 to examine the implications of events in Europe was based on a concern that unless adequate attention was paid, Canadian-European relations would drift and deteriorate. It is 23 years since the Committee made a report on Canada-European Community relations.<1> Since then, momentous changes have remade Europe's economic and political map. The Cold War has ended; democracy and free markets have swept Europe. The Berlin Wall has crumbled; Germany has been reunified. The world's second superpower -- the Soviet Union -- has broken into separate republics. More than any other event, the end of the Cold War has forced a re-evaluation of the North American-European relationship, which for cohesion depended greatly on the defence alliance.

In addition, political and economic changes within the European Union are affecting the transatlantic relationship. The single market program, which removed internal EU barriers to trade, rejuvenated the EU economically, giving rise to a new optimism within the Union. It provided also a stimulus for a three-part plan to introduce a single currency and a common monetary policy by 1999. However, the achievement of this goal will be difficult: the fiscal and financial criteria to be met by Member States are demanding. Furthermore, two Member States -- Great Britain and Denmark -- may decide not to join the economic and monetary union (EMU). What are the prospects for achieving EMU? What are the implications of EMU for the value of the Canadian dollar and for international trade and investment flows between Canada and Europe? Will the creation of a third significant currency bloc diminish Canada's role in international economic policy discussion fora, such as the G-7?

Moreover, the EU is remodeling its political structure. No longer content to remain "an economic giant but a political dwarf," the European Union's Intergovernmental Conference (IGC), which began at the end of March 1996, will, among other things, examine (a) proposals to improve the common foreign and security policy and (b) ideas to enhance cooperation in matters such as justice, police, and immigration.

How will the adoption by the EU of common policies on drug trafficking, illegal immigration, and organized crime affect Canadian efforts to combat these problems? Will the EU be able to present Canada and the world with a single decisive foreign policy and a corresponding defence arm with which to act? If so, why are central and eastern European countries lining up to join NATO? Should Canada reconsider its contribution to NATO in view of the EU's plan for a European defence identity?

When the Committee's report on Canada-European Community relations was issued in 1973, the EC had just expanded from six to nine members with the accession of the United Kingdom, Denmark, and Ireland. That enlargement, particularly Britain's entry, threw a significant adjustment burden on Canada. Since then, six more countries have joined the EU, bringing the total membership to 15. In the next few years, the membership may increase to 18 or 20. Subsequent enlargements could swell membership to possibly 28 countries as the EU expands southward and eastward. How would such an ambitious enlargement affect Canada's commercial and foreign policy interests in Europe?

It seems likely that the accession of the new members to the EU will reduce access for a number of Canadian exports, including agricultural and fish products. What strategy should the Canadian government employ to offset this potential loss of markets? Enlargement will also increase the EU's influence in international organizations in which Canada is a member, organizations such as the OECD and the WTO.

Since our 1973 report, Canada-EC merchandise trade has declined in relative importance. In 1973, merchandise exports to the then 9-member EC accounted for 12.4% of total Canadian merchandise exports while imports from the EC represented 13.3% of all Canadian imports. In 1995, Canadian merchandise exports to the EU were 6.4% of total merchandise exports, and merchandise imports from the EU had fallen to 10.0% of total imports — and this despite the EU's enlargement to 15 member countries. Why has Canada-EU trade continued to decline in relative importance? What can Canada do about it?

Of course, Canada's own trading arrangements have changed markedly since 1973 and are still evolving. In 1989, bilateral free trade with the United States was introduced, followed in 1994 by the North American Free Trade Agreement, which added Mexico to the trading bloc. Free trade negotiations between Canada and Chile are now underway and there are plans to negotiate by the year 2005 a Free Trade Area of the Americas (FTAA) encompassing the entire western hemisphere. Also, as a member of the Asia Pacific Economic Cooperation (APEC) forum, Canada is committed to the achievement by the year 2020 of free trade with other countries in the Pacific Rim.

Consequently, the Committee believed that changing circumstances both in North America and in Europe had increased the danger that the transatlantic relationship could drift as the two great trading blocs became preoccupied with their respective agendas. Nor did this danger escape the attention of Canada's executive government. Beginning with a speech in September 1994, the International Trade Minister, the Honourable Roy MacLaren, began raising the possibility of negotiating a free trade agreement between North America and Europe. This theme was picked up by Prime Minister Jean Chrétien in an address to the French Senate in December 1994.

The Canadian government's proposal to build bridges between the EU and NAFTA by negotiating a transatlantic free trade area (TAFTA) was, perhaps, too advanced for either the United States or the EU to accept at the time. Nevertheless, Canada's insistence on the need to strengthen the transatlantic relationship gave impetus to a new dialogue between Europe and North America. The first fruit of this dialogue was the "Joint U.S.-EU Action Plan," signed in Madrid in December 1995. That Action Plan established a program for enhancing economic, defence, and security relations between the EU and the U.S.

Canadian efforts to trilateralize the U.S.-EU negotiations had been unsuccessful, due partly to resistance from the Spanish, who held the Presidency of the Council during the second half of 1995. However, on a parallel track, in November 1995, a Canada-Germany working group proposed an agenda for negotiations to improve trade and investment ties between Canada and the Union. On 28 February 1996, the European Commission released a draft agenda for closer relations with Canada. Areas to be covered included: an early warning system for trade disputes, a joint study of trade barriers, the promotion of contacts between businesses, and joint support for security arrangements. This agenda was approved by the Council of the European Union on 25 March 1996. However, negotiations with the EU reached an impasse over the extraterritorial dimension of Canadian fisheries policies. As a result, the agreement was not approved as planned in Rome on 26 June 1996 at the summit between Canada's Prime Minister Jean Chrétien, the President of the European Commission, Jacques Santer, and Italian Prime Minister, Romano Prodi.

The fact that an important international agreement, such as the Action Plan, could be derailed because of disagreement over a single issue, involving the interests mainly of one Member State, illustrates vividly the difficulty that besets outside countries, such as Canada, in trying to deal with the 15-member EU. Moreover, plans to enlarge the Union to include as many as 28 Member States is bound to multiply the potential areas of disagreement between the EU and Canada. What steps can the Canadian government take to deal with an EU which is growing in respect to the diversity of national interests represented as well as in terms of overall economic and political strength?

The Committee undertook this study convinced that the time was ripe for an examination of Canada-European Union relations. However, when we began the study, we did not foresee how quickly events would unfold. As it happened, our study coincided with a strong initiative by the Canadian government to fortify Canada-EU relations. In March 1996, some members of this Committee went to Europe for meetings with parliamentarians, officials, and business people.<2> That mission provided insights and information which have been invaluable in the formulation of this report. Also, it may have served to emphasize to some European policy-makers the importance that Canadian government and parliamentary representatives place on strengthening the European-Canadian relationship.

II. THE EUROPEAN UNION: WHAT IS IT? WHERE IS IT GOING?<3>

A. The Formative Period

In order to understand where the European Union is going, it is important to know where it came from. Although the EU was founded on agreements, which superficially had purely commercial purposes, the agenda for European integration always has been driven in large part by political motives.<4> History shows also that European integration does not move forward in a straight line. Rather, as one witness put it, European integration can be seen as a series of crab-like movements -- some forward steps followed by a few backward or sideways movements. As outlined in the following short history, each period of optimism seems to be followed by a period of pessimism. Likewise, each setback appears to be followed by another stage of integration.

According to Dr. Charles Pentland (Professor of Political Studies, Queen's University) the post-war debate over European integration centered around two different ideas: the federalist view and the functionalist view.(28:6)<5> Under the federalist view, Europe should move quickly toward a kind of United States of Europe with nations surrendering national sovereignty to supranational institutions. In contrast, according to the functionalist view, "what Europe needed was a solid dose of old fashioned cooperation among its Member States, particularly in the economic and technological spheres, and that it was foolish or certainly premature to talk about compromising national sovereignty."(28:6)

Dr. Pentland explained that "the post-war history of European integration can be divided into four broad phases, each with its own distinctive characteristics." In Phase One -- the formative period from 1945 to 1955 -- the economic and security groundwork was laid for the European Community's institutions. The economic foundation was laid in the Marshall Plan and by the Organization for European Economic Cooperation (OEEC), which provided for collaboration among the European states, allocated Marshall aid among states, and encouraged trade liberalization. The political and security framework, which allowed economic integration to proceed, was provided by the establishment of NATO in 1949. The alliance provided some assurance that France and Germany would not go to war again and it formed a bulwark against Soviet aggression.

The Council of the European Union

The Council of the European Union is the main decision-making institution. It is made up of Ministers from the 15 Member States with responsibility for the policy area under discussion at a given meeting: foreign affairs, agriculture, industry, transport, the environment, etc.

The Presidency of the Council rotates, changing hands every six months. The ground for the Council's discussions is prepared by Coreper, a committee of Member States' permanent representatives to the Union, which is assisted in turn by committees of civil servants from the appropriate national ministries. There is also a General Secretariat, based in Brussels.

Under Article 145 of the EC Treaty, the Council is responsible for coordinating the general economic policies of the Member States. But as the Union's powers increase, so does the range of Council activities. The Council, which represents the Member States, enacts Union legislation (regulations, directives and decisions). It is the Union's legislature, as it were, although in certain areas specified by the Single Act and the Maastricht Treaty it shares this function with the European Parliament. The Council and Parliament also have joint control over the Union's budget. Finally, the Council adopts international agreements negotiated by the Commission.

Article 148 of the EC Treaty distinguishes between decisions adopted unanimously, by a simple majority and by a qualified majority (at least 62 votes out of a total of 87). Where a qualified majority (at least 62 votes) is required, votes are distributed as follows: France, Germany, Italy and the United Kingdom have 10 votes each; Spain has eight; Belgium, Greece, the Netherlands and Portugal five; Austria and Sweden four; Denmark, Finland and Ireland three; and Luxembourg two. Most decisions are taken by qualified majority. Unanimity is only required on issues of fundamental importance such as the accession of a new Member State, amendments to the Treaties or the launching of a new common policy.<6>

In the late 1940s, after two world wars had devastated Europe, the idea was taken up that the way to prevent new major conflicts in Europe was to bring about the federation of the principal countries. It was during this period that French Foreign Minister Robert Schuman put forward a proposal by Jean Monnet, France's Planning Commissioner at the time, to integrate the French and German coal and steel industries. There was a fear that Germany still posed a significant threat to peace and the Schuman-Monnet proposal provided a way to link Germany economically and politically with a community of European states.<7>

On 18 April 1951, the Treaty of Paris was signed between France, West Germany, Italy, and the Benelux countries (Belgium, Netherlands, Luxembourg), thus founding the European Coal and Steel Community (ECSC). The new Community's founding fathers saw the ECSC as the first step towards European political integration. The ECSC's institutions would later become the prototype for the institutions of two other communities, an economic community and an atomic energy community. After this initial success, the French put forward the idea of a European Defence Community (EDC); thereby a re-armed Germany would be bound militarily to a supranational Community. However, in 1954 the French National Assembly defeated the EDC proposal because it could not accept the loss of sovereignty entailed in giving up the national army. The EDC's failure represented a major setback for European federalists who had seen this step as the beginning of a European Political Community.

B. The "Golden Age"

The second phase of European integration -- the "Golden Age" of the European Economic Community -- occurred from 1956 to 1968. In March 1957, two Treaties of Rome were signed by the six ECSC Member States; one treaty established the European Economic Community (EEC), and the other established the European Atomic Energy Community (Euratom). The Treaty establishing the EEC provided for the elimination over 12 years of all internal tariffs, quotas, bounties, differential freight rates, discriminatory taxes, and foreign exchange rate restrictions.

By July 1968 -- one and a half years ahead of time -- internal tariffs and most internal quotas had been eliminated, Member States had harmonized their external tariffs with the EEC Common Customs Tariff (CCT), and the common agricultural policy (CAP) was in place. The rules permitting the free movement of labour between countries came into effect immediately upon implementation of the Treaty. In practice, however, there remained a number of barriers to the completely free movement of labour, capital, goods, and services.

The "golden age" coincided with a period of world-wide economic growth, low inflation, low unemployment, declining trade barriers, and monetary stability. During this phase, intra-Community trade increased by a factor of four while trade with the rest of the world also increased rapidly, although not as fast as trade within the EEC. As Dr. Pentland put it, "we gained the impression of the community as a dynamic force, as a kind of trade vortex which acted as a pole of attraction for many countries around it, not the least the United Kingdom which eventually made up its mind that it had to get on the train before it went too much farther out of the station."(28:8)

The European Parliament

The European Parliament provides a democratic forum for debate. It has a watch-dog function and also plays a part in the legislative process. Elections for the European Parliament are held by direct universal suffrage every five years (the first were held in June 1979). Parliament currently has 626 seats. Germany has 99 seats, France, Italy and the United Kingdom 87 seats each, Spain 64, the Netherlands 31, Belgium, Greece and Portugal 25 each, Sweden 22, Austria 21, Denmark and Finland 16 each, Ireland 15 and Luxembourg 6.

Parliament normally meets in plenary session in Strasbourg. Brussels is the usual venue for meetings of its 20 committees, which prepare the ground for meetings in plenary, and its political groups. Parliament's Secretariat is located in Luxembourg.

Parliament shares the legislative function with the Council: it has a hand in the drafting of directives and regulations, proposing amendments which it invites the Commission to take into account. The Single Act, which amended the Treaties, established a procedure with two readings in Parliament and two in the Council. Known as the 'cooperation procedure', it gives Parliament a bigger say in a wide range of policy areas, notably the single market.

The Maastricht Treaty strengthens Parliament's hand even further by granting it powers of co-decision in specific areas: the free movement of workers, the single market, education, research, the environment, trans-European networks, health, culture and consumer protection. Parliament may now reject the Council's common position and halt the legislative process provided that an absolute majority of Members of the European Parliament (MEPs) are in favour and the conciliation procedure has failed.

Finally, the Single Act made international cooperation and association agreements and all subsequent enlargements of the Community subject to Parliament's assent. In Maastricht it was decided that Parliament's assent would also be required for a uniform electoral procedure and Union citizenship.

Parliament also shares budgetary powers with the Council. It can adopt the budget or reject it, as it has on two occasions in the past. In this case the whole procedure begins again from scratch. The budget is prepared by the Commission. It then passes backwards and forwards between the Council and Parliament, the two arms of the budgetary authority. While the Council's opinion prevails on 'compulsory', largely agricultural, expenditure, Parliament has the last word on 'non-compulsory' expenditure, which it can alter within the limits set by the Treaty. Parliament makes full use of its budgetary powers to try to influence policy.

One of Parliament's essential functions is, of course, to provide political impetus. It frequently calls for new policies to be launched and for existing ones to be developed or altered. Its draft Treaty on European Union, adopted in 1984, was the catalyst which finally set the Member States on the road to the Single Act. And it was Parliament which successfully called for the convening of the Intergovernmental Conferences on economic and monetary union and political union.

Lastly, Parliament provides democratic control. It can dismiss the Commission by a vote of censure supported by a two-thirds' majority of its members. It also comments and votes on the Commission's programme each year. Parliament monitors implementation of the common policies, relying for its information on reports produced by the Court of Auditors. It also monitors the day-to-day management of these policies by means of oral and written questions to the Commission and the Council.

Foreign Ministers, who are responsible for European Political Cooperation, also answer MEPs' questions, giving them an account of their stewardship and briefing them on action taken in response to Parliament's resolutions on international relations and human rights. Parliament is briefed on the conclusions of each European Council by the President of the European Council.

Klaus Hänsch has been President of the European Parliament since July 1994.<8>

The European Council

The European Council evolved from the practice, started in 1974, of organizing regular meetings of Heads of Government of the Community (the Head of State in the case of France). The arrangement was formalized by the Single European Act in 1987. The European Council meets at least twice a year, and the President of the Commission now attends in his own right.

Initially, the idea was to formalize the summit meetings which have been held from time to time since 1961. As European affairs became more and more important in the political life of the Member States, it became clear that there was a need for national leaders to meet to discuss the important issues being examined by the Union. As a launch pad for major political initiatives and a forum for settling controversial issues blocked at ministerial level, the European Council soon hit the headlines, thanks to its high profile membership and its dramatic debates.

The European Council also deals with current international issues through the common foreign and security policy (CFSP), a mechanism devised to allow the Member States to align their diplomatic positions and present a united front.<9>

The UK had formed the European Free Trade Area in 1959 with Norway, Sweden, Denmark, Austria, Portugal, and Iceland. Finland joined as an associate member. However, it soon became apparent that the UK was in danger of becoming isolated from the economic and political heart of Europe. In 1961, the UK applied to join the EEC, and Ireland, Denmark, and Norway decided to follow, mainly because of their economic links to Britain. However, the UK application was vetoed by French President De Gaulle in 1963 and once again in 1968.

Another key event in the EEC's history during this period was the "crisis of the empty chair." The crisis occurred in 1965 when the French boycotted EEC institutions because of the Commission's proposal to move away from unanimity in Council voting to greater use of qualified majority voting. France objected also to the way that the proposal was introduced; it was delivered first to the European Parliament before being sent to the Council of Ministers. The crisis was resolved by an extraordinary meeting of the Council of Ministers held in Luxembourg rather than in Brussels. The so-called "Luxembourg Compromise" established the principle that, where very important national interests are at stake, unanimous consent must be given by the Council of Ministers. Again, this was seen as a blow to the federalists who wanted to shift power to the Community and away from the Member States.

C. The Era of Europessimism

In 1967, the treaty merging the three communities -- the EEC, Euratom, and the ECSC -- came into force. Although juridicially the three communities continued to exist as separate entities, they now would share a common set of institutions, including the Parliament, the Council of Ministers, the Commission, and the Court of Justice.

The third phase of the EC's development ran from about 1967 to 1983. During this period the EC appeared to lose its sense of direction and dynamism. National protectionism became more prevalent, so that by the end of the period Community governments became concerned about high rates of unemployment and low rates of economic growth compared with the EC's two major competitors -- Japan and the United States. Also, there was the perception that Europe was lagging in terms of research and development, innovation, and competitiveness. Institutionally, this period saw a reassertion of national interests through the Council of Ministers while the guardian of Community interests -- the Commission -- saw its power decline relatively. According to Professor Pentland, "the period is best summed up by the fashionable phrases of the time -- Euro-pessimism and Euro-sclerosis. In fact, 'Euro' anything in this period became a term of opprobrium or so it seemed." (28:8)

The Hague Summit of EC leaders in December 1969 called for economic and political union, and the Paris Summits in 1972 and 1974 set the end of the decade as the deadline for achieving that goal. The Tindemans Report, worked out by Belgian Prime Minister Leo Tindemans, anticipated aspects of the Maastricht Treaty by advancing a plan for economic and monetary union and the implementation of a common foreign policy, among other items. However, once again federalists were disappointed when the plan failed because Member States were unable to agree on the constitutional structure and the necessary institutional reforms.

The departure from office of President De Gaulle in 1969 opened the way for the UK to join the EC. On 1 January 1973, the UK, Ireland, and Denmark were admitted to the Community; Norway declined membership after the question was defeated by a majority of 53.49% in a national referendum. The UK membership raised internal difficulties within the Community as the British, unhappy with their share of the financial burden, attempted to renegotiate the terms of their entry throughout this phase.

Although the EC failed to achieve political and monetary union in the 1970s, it did manage to introduce two measures to enhance cooperation in these fields. The first element was European Political Cooperation (EPC) in 1970, which established an instrument for foreign policy cooperation between Member States on a voluntary basis. The second element -- the creation of the European Monetary System (EMS) in 1979 as the result of a bargain between German Chancellor Helmut Schmidt and French President Valéry Giscard d'Estaing -- was meant to provide a zone of monetary stability in Europe. The Exchange Rate Mechanism (ERM) provided that countries must intervene in foreign exchange markets whenever a country's exchange rate deviated by more than ±2¼% from its central rate. The system provided a period of relative monetary stability until the late 1980s.

At the Paris Summit in 1974, the EC heads of government decided to establish the European Council; thereby, they formalized their practice of holding meetings to decide issues which could affect or direct the course of European integration. Meetings of the European Council took place about three times a year until 1986; thereafter usually they were held twice a year except where an extra meeting was required because of an emergency. It was also agreed at the Paris Summit to institute direct elections to the European Parliament; in 1979 the first direct elections to the European Parliament brought 410 MEPs into office. On 1 January 1981, the EC underwent its second enlargement with the accession of Greece to the Community.

The Commission

The Commission is another key Community institution. A single Commission for all three Communities (the ECSC, the EEC and Euratom) was created when the Treaty merging the executives entered into force on 1 July 1967. The number of Commissioners was increased to 20 on 5 January 1995 (two each for France, Germany, Italy, Spain and the United Kingdom, and one each for the remaining countries). Commissioners are appointed by the Member States 'by common accord'. Under the Maastricht Treaty their term of office was extended to five years and their appointment has to be approved by Parliament.

The Commission enjoys a great deal of independence in performing its duties. It represents the Community interest and takes no instructions from individual Member States. As the guardian of the Treaties, it ensures that regulations and directives adopted by the Council are properly implemented. It can bring a case before the Court of Justice to ensure that Community law is enforced.

The Commission has sole right of initiative and can intervene at any stage in the legislative process to facilitate agreement within the Council or between the Council and Parliament. It also has an executive function in that it implements decisions taken by the Council - under the common agricultural policy, for instance. And it has significant powers in relation to the conduct of common policies in areas such as research and technology, development aid and regional cohesion.

The Commission can be forced to resign en bloc by a vote of censure in Parliament supported by a two-thirds' majority, but this has yet to happen.

The Commission is backed by a civil service, mainly located in Brussels and Luxembourg. It comprises 23 departments, called Directorates-General, each responsible for implementation of common policies and general administration in a specific area. In contrast to the secretariats of conventional international organizations, the Commission enjoys financial autonomy and has complete independence in exercising its prerogatives.

Federalists see the Commission as the embryo of a European government, accountable to a bicameral Parliament comprising the present European Parliament and a Senate of the Member States to replace the Council. Jacques Santer took office as President of the Commission in January 1995.<10>

D. The "Renaissance" Period

The fourth period, which Professor Pentland calls the "renaissance," began in 1984. The settlement of British grievances over the EEC budget was one positive element during the period. Another force encouraging internal cooperation among EC members was the drift in European-American relations over the issue of the stationing of nuclear missiles in Europe.

In 1984, the federalist agenda was resurrected by a European Parliament that was "beginning to get the bit in its teeth."(28:10) The Parliament produced a report that "insisted the only way the Community could go forward was to adopt a more federalist set of institutions, including a more powerful executive, more majority voting in the Council of Ministers, and a Parliament with real powers. The draft treaty on European Union went a long way before it sank. It had an important influence on the institutional design that followed."(28:10)

However, the main factor contributing to European renaissance was probably the single market program. As noted earlier, the EC had become acutely aware in the 1970s and early 1980s of a decline in European competitiveness vis à vis the United States and Japan, particularly in the high technology field. Much of the reason for the problem, according to the Commission, was the EC's balkanized internal market, which denied European businesses the economies of scale necessary to spread R&D and production costs. A study for the Commission, referred to as the Cecchini Report, concluded that removing internal trade barriers would add approximately 4.5% to the Community's GDP; lower consumer prices by about 6.1%; and increase employment by 1.8 million people.

In 1985, the Commission presented a White Paper, entitled Completing the Internal Market, containing almost 300 proposals designed to eliminate by the end of 1992 impediments to the free movement of goods, services, capital, and people. The deadline took on greater significance as the single market program became known as "Europe 1992." Completion of the internal market was a popular goal with EC members, including the UK, where it coincided with Prime Minister Margaret Thatcher's free market philosophy. Nevertheless, implementation might have dissolved into endless debate had it not been for passage of certain provisions of the Single European Act (SEA) that amended the Treaty of Rome so as to permit the Council of Ministers to adopt by qualified majority voting most directives affecting the establishment and functioning of the internal market. Exceptions to the qualified majority voting rule included measures relating to fiscal actions, free movement of persons, and the rights and interests of employed persons.

The Court of Justice

The Court of Justice, which sits in Luxembourg, comprises 15 judges appointed for a six-year term by agreement among the Member States, which select them 'from persons whose independence is beyond doubt'. The Court has two main functions:

(i) to check the instruments enacted by the Community institutions for compatibility with the Treaties (a matter may be brought before the Court by one of the institutions, by a Member State or by members of the public if they consider that their rights have been violated);

(ii) to give its opinion on the correct interpretation or the validity of Community provisions when requested to do so by a national court; if a question of this kind is raised in a case before a court or tribunal against whose decision there is no appeal, the Court of Justice must be asked to give a preliminary ruling.

The Court's judgments and interpretations are gradually helping to create a body of European law applicable Community-wide. In the area of Community law, its decisions take precedence over those of national courts. It has therefore played a decisive role in shaping the Community as we know it today.

In 1987 a Court of First Instance was set up to deal with administrative disputes within the institutions and disputes between the Commission and businesses over the Community's competition rules.<11>

The SEA established also the principle of mutual recognition. This meant that, where human health and safety were not at stake, goods legally manufactured and marketed in one member country must be permitted free entry into other Member States. This rule had a major impact in helping to break down the EC's plethora of non-tariff internal trade barriers in the form of different national technical standards and specifications for products. Another key part of the SEA was the increased powers given the European Parliament. Under the so-called "cooperation procedure," if the Parliament votes to amend legislation proposed by the Commission, only a unanimous vote by the Council of Ministers can defeat such amendments.

The Court of Auditors

The Court of Auditors, set up by Treaty on 22 July 1975, has 15 members appointed for a six-year term by agreement among the Member States. Its role is to check that revenue is received and expenditure incurred 'in a lawful and regular manner' and that the Community's financial affairs are properly managed. Its findings are set out in annual reports, drawn up at the end of each year. The Maastricht Treaty gave the Court of Auditors the status of a Community institution, making it the fifth.<12>

Also in 1986, the EC completed its third enlargement when Spain and Portugal gained admission to the Community. The success of the single market program (including greater recognition of the goal of economic and social cohesion), combined with the favourable economic conditions worldwide and with greater consensus among the Member States, encouraged more ambitious integration plans. European integration received a major impetus from the collapse of communism and the reunification of Germany. The growing strength of Germany and the political instability on Germany's eastern borders persuaded EC Member States of the need for a common foreign and security policy and for cooperation in the fields of justice, asylum, and immigration.

The Economic and Social Committee

In EC and Euratom matters, the Council and Commission are assisted by the Economic and Social Committee. This consists of 222 members, representing the various categories of economic and social activity. It must be consulted before decisions are taken on a large number of subjects, and is also free to submit opinions on its own initiative.

Through the Economic and Social Committee, trade and industry and the unions are actively involved in the development of the Community.<13>

In December 1991, European Community leaders, meeting in the Dutch town of Maastricht, agreed in principle to the Treaty Establishing the European Union (TEU), better known as the Maastricht Treaty. This treaty provided the framework for closer economic and political union. Maastricht was the result of a year's work at two intergovernmental conferences, one on political union, the other on economic union.

Committee of the Regions

The Committee of the Regions, set up by the Maastricht Treaty, consists of 222 representatives of regional and local authorities appointed for four years by the Council on proposals from the Member States. It is consulted by the Council or the Commission in the cases specified by the Treaty, and it meets in Brussels.<14>

Dr. Gretchen MacMillan (Associate Professor of Political Science, University of Calgary) told the Committee that it was during these two intergovernmental conferences that it was agreed that the European Union would have "three pillars." The first pillar covers items which fall under the treaties that originally established the European Community in the 1950s, including amendments, like those leading to economic and monetary union. It also includes the instruments that changed the roles of the European Commission and the European Parliament. Dr. MacMillan explained that "this pillar is usually referred to as the supranational pillar because the decision-making framework is between the supranational institutions."(31:5)

European Union Or European Community?

The Maastricht Treaty, which entered into force on 1 November 1993, has established a European Union "founded on the European Communities supplemented by the policies and forms of cooperation established by this Treaty." It consists of:

( The European Community (EC), formerly the European Economic Community (EEC).

( The European Coal and Steel Community (ECSC).

( The European Atomic Energy Community (EURATOM).

( Intergovernmental cooperation in the fields of common foreign and security policy (CFSP), and justice and home affairs.

The European Union does not replace the European Community. Rather, the EC (along with the ECSC and EURATOM) is one pillar of the Union, the others being CFSP (sometimes known as the "second pillar") and justice and home affairs (the "third pillar"). European legislation is a matter for the Communities rather than the Union, which does not legislate. Unlike the EC, the European Union does not enjoy international legal personality: it may not, for example, enter into legal obligations, or send or receive legations.<15>

The same intergovernmental conferences agreed also to certain advances outside the framework of the supranational institutions. According to Dr. MacMillan, these changes, which are classified under the second and third pillars, "go to the heart of the nation state because they deal with internal and external security relationships." (31:6) The second pillar relates to a common foreign and security policy; the third pillar relates to cooperation in the fields of justice and home affairs.

Dr. Peter Leslie (Professor of Political Studies, Queen's University) told the Committee that the impetus for the Maastricht Treaty came from the interplay of four very large factors. First, the collapse of communism in Eastern Europe and the danger of upheaval on the EC's borders raised the "need to facilitate the transition to a western-style political and economic system." (31:17) Second, the reunification of Germany boosted that country's political and economic weight within the Community. Thus, it became important that the new, larger Germany be bound even tighter within the EC's political and institutional structure.

The third factor motivating the negotiation of Maastricht, according to Dr. Leslie, was the desire to advance the reform of the EC's institutions, which had been begun under the Single European Act of 1986. The objective was to give the EC a more democratic political system but also one that was more effective in implementing policies involving the economy, social affairs, the environment, and so forth. In general, the idea was "to lay the basis for a fully federal state."(31:18)

The fourth factor was the desire for monetary union, a desire which was especially strong in France. The Bundesbank's rigorous monetary policy had made the Deutchmark the bell-wether European currency; consequently, other countries had been forced to follow along or face speculative pressure against their currencies. A European Central Bank was seen as a means of providing other countries with a seat at the table in determining European monetary policy.

E. European Integration Suffers a Setback

If the signing of Maastricht produced a wave of optimism on the part of European federalists, this was soon flattened by the ratification process.<16> In June 1992, Denmark failed to approve the Treaty in a national referendum. In France, a country which has traditionally been a strong supporter of Europeanism, a referendum (September 1992) produced a bare majority. Denmark approved the Treaty in a second referendum in May 1993, but only after protocols were attached exempting Denmark from the defence component of the common foreign and security policy and from the adoption of the single currency.

In the summer of 1992, financial markets, reacting in part to the Danish referendum and the decline of support for Maastricht in French public opinion polls, created pressure on currencies within the European Monetary System. In September 1992, the British pound and the Italian lira suspended participation in the exchange rate mechanism. Continued pressure on a number of other currencies, including the French franc, the Danish krone, the Spanish peseta, and the Portuguese escudo, resulted in the exchange rate band being widened from ±2¼% to ±15% in August 1993.

Maastricht's success has also been circumscribed by the United Kingdom's decision to attach a protocol to the Treaty giving it the right to "opt out" of EMU. The British government cannot move to stage three of EMU without a separate decision to do so by the British government and Parliament. The Member States also failed to obtain unanimity on the Treaty's social policy. The UK would not agree to the provisions respecting workers' rights; as a result, the social chapter was appended to the Treaty as a separate protocol rather than as an integral part of Maastricht, as had been intended.

With the entry into force of the Maastricht Treaty in 1993, the title of the European Economic Community was officially changed; thereafter it was the European Community. At the same time a new entity, the "European Union (EU)," came into being. Subsumed under the EU are: the European Community; the European Coal and Steel Community; and the European Atomic Energy Community. In 1995, the EU widened further with the entry of Austria, Finland, and Sweden. Norway, which had been granted the right to accede, declined to join after the question had been defeated in a national referendum in November 1994. However, other countries are waiting in the wings to join the EU; these include Malta, Cyprus, Hungary, Poland, the Czech Republic, Slovakia, and various other central and eastern European countries.

The following chapters provide more detail on aspects of European integration that flowed out of the Maastricht Treaty: the introduction of economic and monetary union; the adoption of a common foreign and defence policy; the establishment of cooperation in the areas of justice and home affairs. The issue of EU enlargement is also discussed.

III. CANADA-EU TRADE AND INVESTMENT LINKS

A. Introduction

In 1995, Canadian exports of goods and services comprised 37% of Canadian GDP, making this country the most trade-dependent nation among the G-7, eclipsing even Germany in this regard. One reason why Canada is so trade-dependent is that it is situated next door to one of the world's largest markets, the United States. Yet across the Atlantic Ocean from Canada there exists a comparable market, that of the European Union, which has a population of 375 million and a GDP of US$8.4 trillion (1995). This compares with the United States which has a GDP of US$7.0 trillion and a population of 261 million people. The EU exported US$1.5 trillion worth of goods in 1994 and imported a similar amount, accounting for 35% of total world trade. The EU is the world's largest exporter of services and the world's largest importer of goods. The EU is also one of the world's largest sources of foreign investment. The following sections examine Canada's commercial relationship with the world's largest economic entity.

B. Canadian-EU Merchandise Trade

When the Committee reported on Canada-European Community relations in 1973, the United Kingdom, Canada's largest trading partner in Europe, had just joined the Community.<17> In that year, Canada shipped $3.1 billion worth of merchandise to the nine-member European Community. This represented 12.4% of all Canadian exports (Chart 3.1). By 1988, Canadian merchandise exports to the enlarged 12-member European Community had risen to $10.9 billion, but represented only 8.0% of Canadian exports. In 1995, despite the addition of three new members to the EU and sharp increases in exports to the major national markets in the EU, Canadian exports to the EU accounted for just 6.4% of all Canadian exports.

Chart 3.1

Canadian Merchandise Trade with the EU

(as % of trade with all countries)

Source: Statistics Canada

In the case of imports, Canada purchased $2.4 billion worth of goods in 1973, representing 13.3% of all imports. By 1988, Canada was importing $16.1 billion in merchandise from the European Community, or 12.3% of total goods imports. In 1995, Canada bought $22.6 billion worth of EU goods, accounting for 10.0% of all Canadian imports.

Table 3.1

Canadian Merchandise Exports by Country Grouping

(in billions of Canadian dollars) (1988-1995)

1988

1989

1990

1991

1992

1993

1994

1995

United States

$98.1

$98.7

$105.5

$103.3

$118.7

$142.5

$173.1

$196.2

Japan

$8.8

$8.8

$8.2

$7.1

$7.5

$8.4

$9.6

$11.9

Other Pacific Rim

$8.1

$7.4

$7.3

$8.0

$7.6

$7.3

$9.2

$12.9

European Union

$10.9

$11.5

$11.7

$11.1

$11.2

$10.6

$11.3

$15.9

All countries

$134.9

$134.8

$141.7

$138.5

$154.5

$177.6

$213.3

$247.7

Source: Statistics Canada

Table 3.2

Canadian Merchandise Imports by Country Grouping

(in billions of Canadian dollars) (1988-1995)

1988

1989

1990

1991

1992

1993

1994

1995

United States

$86.0

$88.1

$87.9

$86.4

$96.5

$114.0

$136.6

$150.7

Japan

$9.3

$9.6

$9.5

$10.3

$10.8

$10.7

$11.3

$12.1

Other Pacific Rim

$9.1

$9.7

$9.6

$10.0

$11.5

$13.9

$16.2

$19.2

European Union

$16.1

$14.9

$15.6

$14.7

$14.4

$14.8

$17.7

$22.6

All countries

$131.2

$135.2

$136.2

$135.5

$148.0

$170.1

$202.7

$225.5

Source: Statistics Canada

Clearly, the growing dominance of Canada-U.S.A. trade flows in the last four or five years accounts for some of the decline in the relative importance of Canada-EU trade (Table 3.1). However, the decline in the relative importance of the EU as an export destination pre-dates the recent surge in Canadian exports to the United States. Indeed, as Table 3.1 shows, Canadian exports actually declined in absolute terms during the early 1990s. In 1995 Canadian exports to the EU rebounded by 41.3% over 1994. Even with the new members (Austria, Finland, and Sweden) factored out, exports to the EU still rose by 35.2% in 1995 over the previous year.

During the 1980s, imports from the EC actually rose as a proportion of imports from all countries. However, the early 1990s saw imports from the EC decline in both absolute terms and as a proportion of total imports.

As the EC exporters were losing share of the Canadian import market, Canadian exporters' share of the EC import market was eroding. Table 3.3 (Chart 3.2) shows Canadian exports' share of total EC imports from all outside countries. In 1988, Canadian exports represented 2.2% of the EU's imports from non-EU sources; by 1991, this share had declined to 1.9%, and by 1994 it was down to 1.7%. By comparison, the U.S. share of the EU import market was 17.3% in 1988, 18.2% in 1991, and 18.0% in 1994. While the US has managed to maintain or increase its share of the EU import market, Canada's share has declined since 1988.

What does this mean in terms of lost exports? If Canada had managed to maintain its share of the EU market at 2.2% (the 1988 level), this country would have exported about $4.6 billion more merchandise to the EU in 1994. In rough terms, this would have meant about 50,000 more jobs for Canadians.<18>

Table 3.3

Shares of the European Union's Import Market

1986

1988

1990

1991

1992

1993

1994

Canada

2.0%

2.2%

2.1%

1.9%

1.8%

1.6%

1.7%

United States

17.0%

17.3%

17.7%

18.2%

17.7%

17.4%

18.0%

Japan

10.1%

10.9%

10.2%

10.6%

11.0%

10.4%

9.3%

Source: Calculations based on data from: IMF, Direction of Trade Statistics Yearbook.

It is not yet clear whether the resurgence in Canadian exports in 1995 represents a reversal of this decline in Canada's share of the EC market. However, the data up to 1994 paint a less encouraging picture of Canada's trade performance with the EC than some have presented. Sir Leon Brittan acknowledged to the Committee that trade between Canada and the EU "has been in the doldrums" and that this was a major area of interest to the EU. He suggested that the situation should be examined with a view to doing something about it.

Several reasons have been given for Canada's slower export performance in Europe during the 1980s -- first, the Canadian dollar's exchange rate, and, second, the European recession in 1991-93. During the early 1980s, both the Canadian and U.S. dollars appreciated substantially against most world currencies, including the European currencies. Between 1980 and 1984, the Canadian dollar rose by 57% against the British pound, by 86% against the French franc, and by 41% against the German mark.

Chart 3.2

Shares of the EU's Import Market

In early 1985, the Canadian dollar began to depreciate against the European currencies (Figure 3.1). After the Plaza Accord, in 1985, the U.S. dollar began to depreciate steadily against most world currencies, including the Canadian dollar. Once again the Canadian dollar was pulled down against the European currencies. If not for tight Canadian monetary policy in the late 1980s, the Canadian dollar would have fallen further against the EU currencies.

Canadian exports to the EU might have responded better in the early 1990s to the Canadian dollar's depreciation if it had not been for the recession which hit Canada's largest European export market, Britain, in 1991-92, and which affected the other major European economies, those of Germany, France, and Italy in 1993. However, other countries' exports to the EU also should have been affected by the recession. Therefore, the European recession cannot explain why Canada's share of the EU import market declined.

One possible reason for this country's disappointing performance in exporting to Europe is that Canada is one of the few countries in the world which must export over the EU's full Common Customs Tariff. The Minister for International Trade, the Honourable Art Eggleton, told the Committee that Canada could better compete in the European market if there were "a level playing field with other countries already granted preferential entry." "Even after reducing tariffs under the Uruguay Round, the Union will still levy significant duties on such products as aluminum, copper and other non-ferrous metals, chemicals, telecommunications equipment, fish and consumer packaged-fish products, agricultural products, and wood products. Duties on these goods range from 3 to 10 per cent and up to 25 per cent for certain fish products." (3:6)

The Committee was told by Mr. Chris Albinson (Director, Government Relations, Newbridge Networks) that the EU tariff facing his company's telecommunications products had recently been revised upwards from 4.5% to 7.5%. He indicated that the EU tariff was an effort to protect indigenous European producers of telecommunications equipment, which had been lagging behind the technology of North American equipment. He said that the "barrier is causing us to lose the advantage that we had by investing early. Removal of this tariff barrier would be a great asset in allowing us to compete."(30:16)

Non-tariff barriers are another hurdle which Canadian exporters must jump in order to gain access to the European market. Chris Albinson explained that product standards are a major issue in telecommunications. So far, North America and Europe have not agreed to recognize each others' safety requirement standards and electromagnetic emission requirements. "A company that is exporting to Europe must repeat its testing on all of its equipment. For a Canadian company, especially a small- or medium-sized one, it costs about $40,000 per product per country to become certified. In the case of Newbridge, it would cost $30 million to certify our products for sale into Europe."(30:15-16)

Despite problems with EU tariff and non-tariff barriers, Newbridge's sales of telecommunications equipment to Europe represent a significant share of the company's total sales. Sales to Europe are now surpassing those to the United States because Europe has just begun to liberalize its internal telecommunications markets, whereas the U.S. started this process in 1984. And, although Newbridge occupies a very small niche in the European market, the company's customers there include every major telecommunications carrier -- as well as numerous major corporations in Europe. In Mr. Albinson's view, the opportunity is immense for Canadian companies to play a part in the modernization of the European telecommunications infrastructure.

As shown above, there is room for improvement in Canada's export performance with the EU. Nevertheless, viewed as a single entity, the EU remains Canada's second largest merchandise trading partner. In 1995, forestry products (wood pulp, softwood lumber, newsprint and other paper) accounted for $4.6 billion (29.0%) of Canadian exports to the EU. However, fabricated products and finished goods now also comprise a major share of Canadian exports to Europe. Together, industrial goods and machinery and equipment (including iron and steel and non-ferrous metals, transportation equipment, and industrial machinery) accounted for $8.2 billion (51.5%) of exports to the EU.

Table 3.4

Canadian Exports to the EU by Country and Commodity Grouping

(in millions of Canadian dollars) (1995)

Germany

France

UK

Italy

Other EU

Total EU

Agricultural & Fishing Products

197.0

182.8

317.3

178.1

1,104.3

1,979.5

Energy Products

0.3

31.2

83.9

83.1

98.9

297.4

Forestry Products

1,203.5

475.7

905.2

866.3

1,166.8

4,617.5

Industrial Products

585.7

400.1

1,325.1

379.8

1,809.3

4,500.0

Machinery & Equipment

921.5

681.4

961.2

224.7

916.5

3,705.2

Automotive Products

107.1

15.6

21.3

8.8

89.0

241.8

Consumer Goods

132.9

88.5

120.1

26.5

180.2

548.2

Special Transactions

2.4

12.3

13.8

0.3

8.0

36.8

Total

3,150.3

1,887.5

3,747.7

1,767.5

5,373.0

15,926.8

Source: Statistics Canada, Canadian International Merchandise Trade, December 1995.

Canada's major national export markets within the EU are the UK, Germany, France, and Italy.<19> Canadian exports experienced strong export growth in all these major national markets in 1995. One trend which should be noticed is the rising level of exports to Germany. If this trend continues, Germany soon will overtake the UK as Canada's largest customer for merchandise exports in the EU.

Table 3.5

Canadian Imports from the EU by Country and Commodity Grouping

(in millions of Canadian dollars) (1995)

Germany

France

UK

Italy

Other EU

Total EU

Agricultural & Fishing Products

139.4

360.2

258.4

233.1

520.0

1,511.1

Energy Products

16.2

18.0

1,487.9

14.6

184.5

1,721.2

Forestry Products

9.1

1.0

2.8

17.4

19.0

49.4

Industrial Products

1,210.9

747.3

1,113.9

846.2

1,796.5

5,714.7

Machinery & Equipment

2,292.8

1,319.7

1,722.2

1,453.3

1,895.8

8,683.9

Automotive Products

609.0

81.4

198.7

76.4

514.5

1,480.0

Consumer Goods

466.2

546.4

604.8

598.4

933.5

3,149.1

Special Transactions

57.6

50.8

81.4

30.9

42.7

263.3

Total

4,801.0

3,124.7

5,470.1

3,270.3

5,906.5

22,572.8

Source: Statistics Canada, Canadian International Merchandise Trade, December 1995.

As Table 3.5 indicates, imports from the EU tend to be finished or semi-finished goods such as machinery and equipment (38.5%); industrial products (25.3%); and consumer goods (14.0%). The UK remains Canada's chief source of imports from the EU, accounting for 24.2% of all Canadian imports from the EU; Germany accounts for 21.2% of imports from the EU; and Italy is Canada's third largest import source, representing 14.5% of total imports.

C. Canada-EU Services Trade

Canada-EU services trade also figures prominently in the bilateral commercial relationship. In 1995, Canada exported $6.0 billion in services to the EU and imported $7.6 billion worth in return -- mainly in the form of travel and business services (Table 3.6). These amounts represented 17.1% of total Canadian services exports and 17.2% of total services imports. In 1995, Canada sold $2.3 billion worth of business services, including financial services, computer services, and transportation services. In that year, Canadians purchased from the EU about $2.6 billion in business services, including financial services, transportation-related services, and films and broadcasting services.

Table 3.6

Canada's Services Trade with the European Union

(in billions of Canadian dollars)

1994 1995

Type of Service

Exports

Imports

Balance

Exports

Imports

Balance

Travel

$2.1

$2.8

-$0.7

$2.6

$3.4

-$0.8

Freight & Shipping

$0.7

$0.8

-$0.2

$0.9

$1.0

-$0.1

Business Services

$1.9

$2.5

-$0.6

$2.3

$2.6

-$0.4

Gov't transactions

$0.1

$0.4

-$0.3

$0.1

$0.4

-$0.3

Other services

$0.1

$0.1

0

$0.1

$0.1

0

Total services

$4.9

$6.7

-$1.8

$6.0

$7.6

-$1.6

Source: Statistics Canada, Canada's Balance of International Payments , Fourth quarter 1995.

D. Canada-EU Investment Links

There are also substantial investment links between Canada and the EU. At the end of 1995, Canadians had $55.1 billion invested in the 15 EU countries and their securities (including direct investment, stocks, bonds, and other assets), of which $27.9 billion was direct investment.<20>

The EU is the second most important destination for Canadian direct investment abroad (CDIA). In the last ten years CDIA in the EU has grown both in absolute terms and relative to other foreign destinations. In 1985, 12.7% of CDIA was in EU countries; in 1995 this share had risen to 19.6% of all CDIA (Chart 3.3). Sectorally, the largest share of Canadian direct investment in the EU in 1995 was found in finance and insurance ($6.4 billion); metallic minerals and metal products ($4.4 billion); communications ($4.3 billion); and food, beverage, and tobacco ($3.6 billion).

A number of prominent Canadian companies have invested heavily in the European market, including: Alcan Aluminium Ltd., Bata Industries Ltd., Bombardier Inc., Bank of Nova Scotia, Cascades Inc., Hiram Walker and Sons Ltd., Hollinger Inc., Husky Injection Molding Systems Ltd., McCain Foods Ltd., Moore Corporation, Northern Telecom, Royal Bank of Canada, Seagram Company Ltd., Speedy Muffler King Inc., and TeleGlobe Inc.

Canadian companies invest in the European market for several reasons. One reason is a need for companies to have manufacturing and/or service facilities close to the market. The Committee was told in Frankfurt by representatives from several Canadian companies, including Husky Injection Molding Systems Ltd. and Speedy Muffler King Inc., that the key to their success in the German market has been their ability to provide their customers with a superior level of service.<21>

A second reason for investing in the European market may be to jump the EU Common Customs Tariff. As explained earlier, EU tariffs remain quite high in a number of sectors. For example, the existing 6% EU duty on aluminum is a hurdle which Alcan finds difficult to jump and consequently a lot of the company's aluminum production is sold in North America rather than in the European market. The Committee was told by Mr. Roger Scott-Taggart (Director, Business Analysis, Alcan Aluminium Ltd.) that, over the past five years, his company had spent $1.1 billion in Europe, mainly in Germany. He explained that the European operations represent roughly one-third of Alcan's worldwide business activity. Mr. Andrew DeSchultess (Director, Government Relations, Alcan Aluminium Ltd.) said that there are big growth opportunities in Europe and that Alcan had established significant manufacturing facilities to pursue those markets.

Chart 3.3

Direct Investment Between Canada and the EU

Source: Statistics Canada, Canada's International Investment Position

(as a proportion of direct investment with all countries)

Table 3.7

Canada's Assets with the European Union

(in billions of Canadian dollars)

1985

1987

1989

1991

1993

1995

Direct investment

$7.3

$10.9

$15.7

$21.6

$23.2

$27.9

Portfolio bonds

$0.3

$0.4

$0.6

$1.5

$2.9

$4.7

Portfolio stocks

$1.0

$2.7

$2.8

$4.4

$5.9

$8.3

Other assets

$8.2

$9.9

$10.8

$11.4

$12.2

$14.3

Allowances

-$0.4

-$1.0

-$0.9

-$0.3

-$0.3

-$0.2

Total

$16.3

$22.9

$28.8

$38.7

$44.0

$55.1

Source: Statistics Canada, Canada's international investment position, 1995.

Canadian investment in EU portfolio bonds increased from $0.3 billion in 1985 to $4.7 billion in 1995. This represented an increase from 6.0% in 1985 of all foreign bonds held by Canadians to 25.0% in 1995. Canadian investment in EU portfolio stocks rose from $1.0 billion in 1985 (or 6.4% of all foreign stocks held by Canadians) to $8.3 billion (13.0%) in 1995.

At the end of 1995, EU residents had $159.2 billion invested in Canadian businesses and securities. Of this amount, $36.2 billion was direct investment, accounting for 21.5% of total foreign direct investment in Canada (FDIC), making the EU the second largest source of FDIC. The major part of EU direct investment in Canada is found in finance and insurance ($10.3 billion); food, beverage and tobacco ($5.9 billion); energy ($4.5 billion); chemicals and textiles ($4.4 billion); and construction and related activities ($2.4 billion).

Table 3.8

Canada's Liabilities with the European Union

(in billions of Canadian dollars)

1985

1987

1989

1991

1993

1995

Direct investment

$15.4

$21.3

$27.8

$31.2

$31.7

$36.2

Portfolio bonds

$26.5

$31.3

$36.9

$52.5

$65.3

$79.6

Portfolio stocks

$1.9

$1.5

$1.3

$1.0

$0.8

$1.5

Other liabilities

$3.7

$6.0

$10.9

$31.6

$45.2

$42.0

Total

$53.9

$68.8

$90.9

$116.4

$143.0

$159.2

Source: Statistics Canada, Canada's international investment position , 1995.

Over the last ten years, there has been a significant increase in EU direct investment in Canada both in absolute and proportionate terms. In 1985, EU direct investment was 17.0% of all FDIC. By 1995, the EU's share of FDIC had risen to 21.5%.

The Minister for International Trade, the Honourable Art Eggleton, told the Committee that Canada is the home to over 4,000 subsidiaries of European companies. Many of these companies hold regional or global mandates for research and development or manufacturing, and they export into other markets from their Canadian base. These European subsidiaries "act as important channels for transfer of management expertise and advanced technologies to Canada." (3:5)

The proportion of Canadian portfolio bonds held by EU investors has not changed markedly over the last ten years despite a tripling of the total amount of EU holdings. In 1985, EU investors held 23.7% of all Canadian portfolio bonds held abroad; by 1995, this share had risen only slightly to 24.1%. The explanation for this stable relative share is that the total value of bonds issued by Canadian governments and corporations and held abroad also tripled over the period -- up from $111.9 billion in 1985 to $329.8 billion in 1995.

Canadian portfolio stocks appear to have limited appeal to EU investors. Indeed, as Table 3.8 indicates, the amount actually declined in absolute terms during the late 1980s and early 1990s. In 1985, EU investors held 12.6% of all Canadian portfolio stocks held by foreigners; by 1995 this proportion was down to 4.6%.

An important characteristic of Canada-EU investment links is the geographic distribution within Europe. Roughly one-half of all Canadian investments in the EU are in the UK, and one-half of EU investments in Canada originate in the UK. Up until 1993, direct investment from the UK exceeded direct investment from all other EU countries. This changed in 1994 when FDIC from the UK ($15.7 billion) was surpassed by FDIC from the other EU countries ($16.0 billion).

In 1995, the value of portfolio holdings of Canadian bonds by UK investors, which amounted to $32.5 billion, was exceeded by the $47.1 billion held by investors from other EU countries. However, UK investors appear much more willing to invest in Canadian short-term securities than are other EU investors. In 1995, UK investors purchased $10.0 billion in portfolio money market instruments, most of which are issued by Canadian governments, while other EU investors held $2.1 billion in these securities.

In 1995, for the first time, Canadians owned more direct investment in other EU countries ($14.1 billion) than in the UK ($13.8 billion). On the other hand, Canadians preferred investing in portfolio bonds in the UK ($3.5 billion in 1995) than in other EU countries ($1.2 billion). Canadian portfolio holdings of stocks were more likely to be held with the UK ($4.9 billion) than with other EU countries ($3.4 billion).

E. Conclusion and Recommendation

The Committee believes that more study is needed to ascertain (a) in which industries Canada is losing its share of the EU import market and (b) where its share is improving. We note that industry studies of this kind have been carried out by Statistics Canada on trade patterns between Canada and the U.S.<22> The results of these studies, which were presented to the Committee by Mr. Jacob Ryten, Assistant Chief Statistician, indicated inter alia which Canadian manufacturing industries had been gaining U.S. market share and which industries had lost market share.

The Committee recommends that Statistics Canada undertake a study of Canada-European Union (EU) trade patterns to discover in which sectors of the EU market Canada is losing import market share and where this country is gaining a larger share of the EU market. The study would also show how Canada's major competitors are faring in the EU import market. The general purpose of the study would be to provide data on the performance of Canadian exports in various import sectors. When compared with information on EU trade barriers by sector, this might help to explain the performance of Canadian merchandise exports in the EU market. The study would also be used to sharpen Canada's export promotion strategy for the EU market.

IV. MAJOR CANADA-EUROPEAN UNION IRRITANTS

A. Introduction

In the previous chapter we outlined the size of the two-way commercial relationship between Canada and the European Union -- goods and services trade of $52.1 billion and direct investment links of $64.1 billion. Given the scale of the relationship, it is not surprising that some bilateral irritants have arisen. What is troublesome is that some of these seem to remain unsolved for relatively long periods of time.<23> Further, even when a dispute, such as that involving fisheries, appears to have been resolved, it may resurface again disrupting Canada-EU relations. The fisheries dispute also illustrates the predicament for Canada in dealing with a bloc of countries like the European Union, which operates on the basis of solidarity. A dispute over a single issue affecting the interests primarily of a single Member State, in this case Spain, automatically affects negatively relations with the entire European Union. As will be pointed out later, this problem is likely to be compounded in the future as the EU takes in more members.

B. Canada-EU Fisheries Disputes<24>

On 9 March 1995, Canadian authorities boarded and seized the Spanish vessel Estai, which was fishing in international waters off the coast of Newfoundland in an area where fishing activities are regulated by international agreement. This incident touched off the worst dispute in the history of Canada-EU relations. At the time, Sir Leon Brittan (Commissioner for Multilateral Trade and Relations with Developed Countries) stated that the dispute "will inevitably continue to have repercussions well outside the fisheries sector ... . Many in the EU were shocked by Canada's disregard for international law and by its apparent willingness to resort to gunboat diplomacy... . It is in the interests of those who wish to advance our relationship to face up to the fact that the effect of this dispute will be to reduce European enthusiasm for any further opening up to Canada for the time being."<25> On the other hand, some EU countries, such as Germany and the UK, expressed understanding for Canada's action.

Canada-EU fisheries relations had been deteriorating since the late 1980s because of overfishing. This overfishing in the NAFO<26> Regulatory Area caused Canada in 1988 to begin prohibiting EC fishing vessels from entering Canadian waters and ports. After the EC changed its policy and decided to abide by NAFO quotas decisions, Canada negotiated a bilateral ad referendum agreement on fisheries in December 1992. Part of that agreement would have permitted EU fishing boats access to Canadian ports. Although the EC ratified the agreement, Canada did not do so because of on-going violations of NAFO conservation measures by EC vessels.

In May 1994, the Canadian Parliament passed Bill C-29, which amended the Coastal Fisheries Protection Act to provide the Canadian government with the "legal authority to make regulations for the conservation on the high seas of straddling stocks that exist both within the Canadian 200-mile limit and in the adjacent high seas area beyond the 200-mile limit."<27> Most importantly, the legislation provided for the use of force, if necessary, to arrest vessels that were violating NAFO quotas either inside or outside the 200-mile limit.<28> Although the government said that stateless and flag-of-convenience vessels constituted the major threat to the conservation of straddling stocks, other categories of vessels, including those flying the colours of EU countries, were not exempted from the provisions of Bill C-29.

The March 1995 incident involving the Spanish arose over a dispute about the quantity of Greenland halibut, or turbot, being caught by EU boats near Canadian waters and over the nature of the equipment being used to catch these fish. In February 1995, NAFO allocated to the EU 3,400 tonnes out of the 27,000 tonne total allowable catch of turbot. The EU made use of the existing NAFO objection procedure and unilaterally established a quota of 18,630 tonnes. After the Council of the European Union rejected a 60-day moratorium on turbot fishing proposed by Prime Minister Chrétien, Canada seized the Spanish fishing vessel, Estai. On 26 March 1995, the net warps of another Spanish fishing vessel, the Pescamaro Uno, were cut by the Canadian Coast Guard after Spanish vessels had refused to withdraw from the area while negotiations were conducted on the issue of fish quotas.

On 15 April 1995, Canada and the EU came to an agreement on the conservation and management of fish stocks that straddle Canada's 200-mile limit. That agreement provides for enhanced surveillance and increased inspections, verification of gear and catches, new minimum fish size limits, and the size of catches. Under the agreement, the EU was permitted to catch 5,013 tonnes of turbot from mid-April 1995 to the end of the year. In September 1995, NAFO established turbot quotas in line with the agreement reached in April between Canada and the EU.

In the spring of 1996, more than one year after the two sides had agreed on fish quotas, Canada-EU relations appeared to have begun to approach normalcy. However, the Committee was informed repeatedly by officials in Europe that there still was a residue of ill feeling in some countries. Indeed, the turbot dispute had temporarily delayed the start of negotiations on a Canada-EU Action Plan.<29> In addition, Canada's failure to ratify the 1992 ad referendum agreement has remained a source of irritation for the EU. On 31 May 1996, the Canadian government announced that it was opening Canadian ports to EU fishing vessels, thus eliminating part of the EU's complaint. Canada's move seemed to open the way for ratification of the Canada-EU Action Plan. However, as outlined in Chapter X, resentment over Canadian actions against Spanish fishing vessels in March 1995 has put on hold indefinitely the achievement of the Action Plan.

C. Classification of Sea Scallops

In March 1993, the French Government introduced a new labeling regulation for sea scallops, restricting the use of the label "Coquille St-Jacques" or "Noix de Coquille St-Jacques" to the genus known as "pecten." Canadian scallops, which are of the genus "Placopecton," were required to bear the designation "pétoncle" rather than the more prestigious St-Jacques label. French consumers associate the "St Jacques" name with a large, high-quality scallop, while the "pétoncle" is considered to be a small, low-quality product, which commands a lower price.

Following GATT consultations, in December 1993, France modified the regulation to permit Canadian scallops to use the label "St-Jacques" (with the scientific name in brackets) until the end of 1995. Subsequently, the French amended the regulation to require, beginning in January 1995, that the appellation "petoncle" be added to the label and that the use of the St-Jacques name be prohibited as of January 1996. WTO consultations took place in June 1995 and a dispute settlement panel was established in July 1995. The panel held meetings in October and December 1995 and in February 1996. After that, Canada and the EU continued their discussions.

On 25 June 1996, the Canadian government announced that Canada and the European Union had reached agreement concerning the labelling of Canadian scallops exported to France. Under this agreement, Canadian scallops, as well as others sold in France, are now permitted to be labelled "Saint-Jacques," along with the particular species name.

D. The EU Fur Ban

In 1991 the European Community approved a regulation which, starting on 1 January 1995, would have banned the use of jaw-type leg-hold traps in the Member States. The regulation also required that for all 13 species listed in the legislation, countries exporting furs to the EU either ban leg-hold traps or begin observing humane trapping standards by 1 January 1995. However, at the present time, no internationally-agreed standard exists for humane trapping. Subsequently, the EC changed the interpretation of the regulation so as to ban entirely the use of leg-hold traps. In June 1994, the timetable for commencing the ban on imports from countries that failed to meet this regulation was extended to 1 January 1996.

Canada has been concerned about the impact of the import ban on its fur industry. The annual harvest of raw wild furs amounts to about $25 million,<30> with many aboriginal communities relying on the industry for their livelihood. Including the value added by garment makers, the fur industry contributes hundreds of millions of dollars to the Canadian economy and employs over 100,000 persons.

Prime Minister Chrétien raised the issue with European leaders, and Canadian ministers presented the Canadian position to their EU counterparts; the EU was asked to delay the introduction of the import ban until international humane trapping standards had been established. Canada has made it clear that if an acceptable solution cannot be found it will launch a WTO complaint.

On 22 November 1995, the EU Commission proposed to delay until 1 January 1997 the introduction of the import prohibition. However, the European Parliament opposed any further delay. In January 1996, the Netherlands government imposed unilaterally a ban on the import of all furs from animals caught in leg-hold traps.

This Committee was told by Ken Collins (President of the Environment Committee, European Parliament) that the Parliament has not been happy with the way that the Commission has dealt with the fur import issue. According to Mr. Collins, new legislation banning the importation of furs caught in leg-hold traps will be introduced and is expected to pass during the Irish presidency, that is, between July 1 and December 31 1996.

E. Pinewood Nematode (PWN)

Since July 1993 EU plant regulations have required that all softwood lumber imports from Canada (except cedar) must be certified to be either kiln-dried or heat-treated. The regulations are designed to prevent the introduction into Europe of the Monochamus beetle from Canadian lumber. In accordance with WTO rules, in July 1995 the EU Commission submitted a Pest Risk Assessment (PRA). After reviewing the PRA, a panel of scientists established by Canada concluded that the report had overstated the risk of the pinewood nematode being introduced into the EU. Also, the PRA did not provide an economic impact analysis, and, the Canadian government contends that there are inconsis-tencies with regard to other points agreed upon in a Canada-EU-U.S.A. technical report of 1993.

Canada has proposed the introduction of a stronger visual inspection program to ensure that Canadian lumber exports are free of the pinewood nematode. The visual inspection program is to be presented to the Plant Health Committee in Brussels which will take place in mid-June 1996. At stake, are the $300 million in annual lumber exports to the EU, which have been denied access over the past three years.

F. Geographical Indications for Wines and Spirits

In the Uruguay Round Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), the EU was successful in placing "geographical indications" on the agenda for multilateral trade negotiations. However, the EU was not successful in getting certain outside countries, including Canada, to require their wine producers to stop using certain EU-origin names, especially champagne, port, and sherry.

The EU strategy for getting non-member countries to comply has been to pursue bilateral negotiations with other wine-producing nations, such as Australia, Hungary, Chile, and Argentina. In return for protecting EU-origin appellations, these countries are offered access to the EU market. For its part, Canada would like the EU to provide protection for Canadian whiskey against trademark infringement, but the Canadian government believes that the two issues should be kept on separate negotiating tracks. Canada's position is that it has met its obligations under the TRIPs agreement with recent revisions to the Trade Marks Act.

V. ECONOMIC AND MONETARY UNION

A. Introduction

In July 1990, the European Union launched the first stage of a three-part plan to introduce a single currency and a common monetary policy for the Union. It is widely recognized that economic and monetary union (EMU) will confer economic gains as well as imposing costs on the Member States involved. However, much less attention has been paid to how EMU will affect outside countries, such as Canada. This section of our report begins by sketching the origins and key elements of the EMU plan. It is suggested that, although there may be some slippage in the 1999 deadline for entering EMU's final stage, the leaders of Germany and France are committed to achieving ultimately the goal of monetary union in Europe. We conclude that the Canadian government ought to be cognizant of the potential effects of EMU on the exchange rate of the Canadian dollar, on trade and investment patterns between Canada and the EU, and on the balance of power in international economic policy coordination forums, such as the G-7.

B. The Werner Report

The idea of European monetary cooperation is not new. In 1950, the European Payments Union was established to serve as a clearing system for international transactions between member countries.<31> In 1969, at the Hague Summit the EC members took the first steps toward economic and monetary union. The Summit asked a group of experts headed by Mr. Pierre Werner, Prime Minister of Luxembourg, to examine the possibility and make recommendations. The Werner Report, released in 1970, set out a three-stage plan for the achievement of an economic and monetary union among the six EC members by 1980. The plan was endorsed by the EC Council of Ministers in March 1971, and implementation began one year later.

The plan's first step involved introducing a system of quasi-fixed exchange rates. Fluctuations between pairs of currencies were to be kept within a band of ±2¼% of each other. When either country's currency reached the limit of its fluctuation band, that country's central bank was to intervene.<32> Currencies began falling out of the joint European exchange rate arrangement after the U.S. dollar was floated in 1973, thus allowing the "snake" to fluctuate widely against the dollar.<33> Although certain Werner Report recommendations were implemented, such as the establishment of the European Monetary Cooperation Fund to defend weak currencies, the Report's broad agenda for economic and monetary union was abandoned.

C. The European Monetary System

At the 1978 Summit held in Bremen, Germany, EC leaders endorsed a plan put forward by French President Valéry Giscard D'Estaing and German Chancellor Helmut Schmidt to create a "zone of monetary stability" in Europe. Schmidt's goal was to prevent the D-mark from appreciating excessively against the currencies of its major trading partners.<34> The French government favoured fixed exchange rates in principle, but saw that the previous "snake" arrangement had been dominated by Germany through the Bundesbank. A new monetary arrangement controlled by EC institutions, the French believed, would solve this asymmetry problem by providing France with greater influence on exchange rate policy.

Introduced in March 1979, the new regime, called the European Monetary System (EMS), borrowed some of the elements of the "snake" arrangement. The key element of the EMS was the exchange rate mechanism (ERM), under which each member was

A Brief Chronology of EMU

October 1970 Final Report by Werner Committee

March 1971 Council endorses achievement of economic and monetary union by 1980

March 1972 European "snake" established, surrounding bilateral EC exchange rates by narrow band

April 1973 European Monetary Cooperation Fund established

July 1978 Bremen meeting of European Council endorses plan for European Monetary System

March 1979 European Monetary System begins to operate

February 1986 Signing of Single European Act aimed at completing internal market by 1992

June 1988 Hanover meeting of European Council establishes Delors Committee

April 1989 Delors Committee publishes report on EMU

June 1989 Madrid meeting of European Council agrees that Stage One of EMU will start on July 1, 1990

December 1989 Strasbourg meeting of European Council calls for intergovernmental conference to design subsequent stages

July 1990 The first stage of EMU begins

October 1990 Rome meeting of European Council, with UK dissenting, agrees that Stage Two will start on January 1, 1994

December 1990 Beginning of intergovernmental conferences on EMU and political union

December 1991 Maastricht meeting of European Council adopts Treaty on European Union

June 1992 First Danish referendum rejects Maastricht Treaty

September 1992 Britain suspends participation in EMS; Italy suspends participation in EMS; French referendum approves Maastricht Treaty

May 1993 Second Danish referendum approves Maastricht Treaty

August 1993 EMS fluctuation band is widened from ±2¼% to ±15%

November 1993 Maastricht Treaty enters into force

January 1994 The second stage of EMU begins with the establishment of the EMI<35>

obligated to keep within a band of ±2¼ of the central rate between its own and every other currency. Effectively, therefore, the exchange rate for each pair of currencies could deviate by a maximum of 4½%. When a country's currency reached the upper or lower limit of its fluctuation range both governments were supposed to intervene in foreign exchange markets.

Another EMS feature was the creation of the European Currency Unit (ECU), comprised of a basket of EC currencies weighted according to the EU members' economic size. The ECU was supposed to assume a central role in the EMS. Although it never acquired the intended importance as a reserve asset, the ECU did become an important unit of account in private financial markets. Frequently, governments, EC institutions, and corporations have issued ECU-denominated securities, banks hold ECU deposits, and ECU-denominated claims can be settled by means of an international clearing system.

When the EMS was established in 1979 all existing EC members joined the system.<36> However, in a move that anticipated Maastricht 12 years later, Britain did not agree initially to participate in the ERM component. British authorities argued that fixing the exchange rate would restrict national monetary policy independence and would jeopardize the pound's role as a petrocurrency and an internationally-traded currency.<37> However, in October 1990, the British pound did join the ERM, albeit with a wider, ±6%, fluctuation band. Over the ERM's 14-year existence, 19 currency realignments have been required, most of these occurring in the early period. Indeed, there were no realignments between January 1987 and mid-1992. Then, in September 1992, higher German interest rates put pressure on the weaker currencies, forcing the Italian lira and the British pound out of the ERM.<38>

Before the fall of 1992, therefore, the ERM had worked remarkably well, gradually becoming a fixed system of exchange rates. Increasingly, however, the ERM was becoming a de facto D-mark zone, with the Bundesbank determining monetary policy for all member countries. By fixing their exchange rates to the D-mark, other European countries supposedly were able to "borrow credibility" from the Bundesbank, with lower national inflation and reduced interest rates as results. Yet the asymmetric nature of this fixed exchange rate system was not entirely satisfactory to all ERM participants. It became clear that the only way for most of the countries to gain some control over their own monetary policy, while maintaining a system of fixed exchange rates, was to establish an independent European central bank. The 1991 Annual Report of the Banque de France summarized this position as follows: "Only collective management of a single currency inside a well-balanced and independent institution will allow France to participate fully in the European monetary decision-making process and provide the best guarantee for the exercise of national monetary sovereignty."<39>

It was argued also by some, notably the EC Commission, that the benefits of the single market could not be fully realized unless the exchange rate risks and transactions costs were eliminated.<40> Another concern was that the removal of capital controls under the single market program would permit speculative capital movements to destabilize the ERM's system of quasi-fixed exchange rates or to interfere with national monetary policy. Free trade, full capital mobility, fixed exchange rates, and independent monetary policy were described as an "inconsistent quartet" of policy objectives. "In the long run, the only solution to the inconsistency is to complement the internal market with a monetary union."<41>

D. The Delors Report

At this point, the process towards economic and monetary union was already underway. In June 1988, European leaders requested that a team of experts be established under the chairmanship of the European Commission President, Mr. Jacques Delors, to study ways and means of achieving economic and monetary union (EMU). The Delors Report, presented to the Madrid Summit in June 1989, set out a detailed plan to reach the goal. At the Summit, it was decided that Stage 1 of EMU would begin in July 1990. In November 1990, the Committee of the Governors of the European Central Banks drew up draft statutes for the proposed European Central Bank.

When European leaders met in Maastricht, the Netherlands, in December 1991, the plan set forth in the Delors Report, as modified by the work done at the intergovernmental conference on EMU, became part of the Treaty on European Union.

Under Stage 1 of the plan, which went into effect on 1 July 1990, member countries were: (a) to remove the remaining controls on money transactions and capital movements, (b) to achieve closer coordination of their economic and budgetary policies, and (c) to encourage greater cooperation between European central banks.

Stage 2 of EMU began on 1 January 1994 with the establishment of the European Monetary Institute (EMI) in Frankfurt, Germany. The EMI has three main objectives: (1) strengthening the coordination of monetary policies with the aim of ensuring price stability; (2) making preparations for the European System of Central Banks, for the conduct of a single monetary policy, and for the creation of a single currency; and (3) overseeing the development of the ECU and the smooth functioning of the clearing system.

Another major task of the EMI is advising on which countries meet the EMU entry requirements -- called "convergence criteria" -- respecting government debt, budget deficits, inflation, interest rates, and exchange rate stability. The EMI is not to be the final arbiter of which countries meet the criteria (this will be decided at a summit meeting of leaders of Member States in 1998), but, along with the Commission, it issues periodic progress reports on the criteria.

Stage 3 of EMU is scheduled to begin on 1 January 1999 at the latest. The Maastricht Treaty provides that EMU may begin earlier if a majority of countries meet the convergence criteria and the European Council decides to allow them to proceed. If, by the end of 1997, another date for commencement of stage 3 has not been set, EMU's third stage will begin on 1 January 1999.<42> On that date, participating countries' exchange rates will be irrevocably locked at agreed conversion rates, and the "Euro" will be used for settling interbank accounts. At that time, the European Central Bank (ECB) will begin conducting monetary policy for the EMU members. In the year 2002, the "Euro" will be issued to the public in the form of banknotes.

E. The EMU Convergence Criteria

The Maastricht Treaty establishes five main criteria that Member States must fulfill if they are to participate in the third stage of EMU. These relate to price stability, government deficits, government debt, interest rates, and exchange rates. According to Mr. John Murray (Chief, International Relations Department, Bank of Canada), the idea behind these criteria is two-fold: "First, one could think of it as a type of initiation; that it was proof that the members were serious in their commitment and were worthy of membership. It is a bit like the entry into a fraternity -- in other words, prove your worth and resolve."(31:12)

Second, and more importantly, the convergence criteria are intended "to ensure that, to the greatest extent possible, the economies were in alignment -- at least at the start of the union -- and therefore in a position to guarantee the successful launch of the union -- again to the extent possible. These criteria are really directed toward eliminating macro-economic imbalances and tensions among the potential members."(31:12)

1. Price Stability

In order to enter the final stage of EMU, a Member State's average rate of inflation, measured in the year before the union is initiated, must not exceed by more than 1½ percentage points that of the three best-performing Member States.

2. Interest Rates

A Member State's long-term interest rate cannot exceed by more than 2 percentage points that of the three Member States with the best performance in terms of price stability.

3. Public Deficits

At the time of examination, the Member State's general government deficit (including deficits at all levels of government) should not exceed 3% of GDP. However, there is some flexibility in the way that this test is interpreted. A deficit-to-GDP ratio above 3% may not be excessive where the ratio "has declined substantially and continuously" and has reached a level close to 3%. Alternatively, the ratio may not be excessive where the amount over 3% is "only exceptional and temporary."

4. Public Debt

At the time of examination, the Member State's general government debt should remain within 60% of GDP. Again, a ratio above the reference level may be acceptable where it is diminishing and is approaching the (60%) reference value "at a satisfactory pace."

5. Exchange Rates

A Member State may not join the final stage of EMU if its exchange rate has moved outside the normal fluctuation margins provided for by the EMS during the preceding two years without severe tensions for at least two years before the examination.<43>

F. Meeting the Convergence Criteria

The Treaty provides that, if by the end of 1997, another beginning date for Stage 3 has not been set, then the third stage will start on 1 January 1999.<44> The Madrid EU leaders' summit in December 1995 confirmed that 1 January 1999 will indeed be the start date for Stage 3. Before 1 July 1998, the Heads of State or Government will decide, on the basis of a qualified majority, which Member States have met the convergence criteria necessary to enter the final stage of EMU. This means that the decision on whether or not to proceed will have to made on the basis of economic data for 1997. Opinions differ as to how many countries are likely to meet the criteria at that time.

The IMF predicts, in its latest publication of World Economic Outlook, that, if the criteria are strictly enforced, most EU countries, including France and Germany, will fail to meet the 3% deficit/GDP target in 1997. Also, the latest OECD economic forecasts, released on 21 May 1996, also showed that France and Germany would miss the deficit-to-GDP target established by Maastricht. (However, the latest plans announced by France and Germany to make further budget cuts were not factored into the OECD forecast.) If the IMF and OECD views are correct, it would mean that EMU would not proceed on schedule.<45>

A more optimistic view has been put forward by the European Commission. A Commission report released on 15 May 1996 indicates that seven Member States might meet the deficit/GDP criteria in 1997. The report recognized that economic growth in the Community had slowed towards the end of 1995 and that the unemployment rate had started edging up in November 1995. However, the Commission predicted that economic activity in the Community would rebound in the second half of 1996 and gradually strengthen in 1997.

Based on these forecasts and on policy measures already adopted or announced by national governments, the Commission expects that only Denmark, Ireland, and Luxembourg will achieve a budget deficit below 3% of GDP in 1996, as they did in 1995. (See Table 5.1) Thereafter, budget deficits are expected to decline in all member countries except two -- Germany (where the deficit may approach 4% of GDP) and the Netherlands (where it may reach 3.5% of GDP). It is expected that this group of three countries (with deficits below 3% of GDP) will be joined by Germany, France, the Netherlands, and Finland in 1997.

As Table 5.1 shows, most countries that are expected to meet the 3% deficit target (with the possible exception of the Netherlands) are also anticipated to reach, or approach, the 60% debt to GDP goal. With respect to the other convergence criteria -- inflation rates, exchange rates, and interest rates -- all countries, which are expected to meet the budget deficit target, also will meet these requirements. The sole exception is Finland, which would not qualify under the exchange rate criteria because it is not an ERM member at the present time.

The political difficulty of meeting EMU's budget criteria cannot be underestimated. Germany's unemployment rate was 10.4% in April 1996, while France's rate touched 11.9% in March. Further budget cuts would have a contractionary effect on their economies and could exacerbate these already high unemployment rates. French budget cuts necessary to meet the criteria sparked strikes and riots in France in December 1995, and there are signs of labour unrest in Germany due to government budget measures. Professor Detlev Karsten (Bonn University) told the Committee that he believed that EMU probably will be postponed because high unemployment rates argue for an expansionary, rather than a contractionary, fiscal policy.

Whether or not EMU proceeds on schedule may depend on how strictly the convergence criteria are interpreted. As stated earlier, the Maastricht Treaty does provide some leeway in evaluating excessive deficits and debt. Specifically, the Treaty's provision permits deficits above 3% where the excess is "exceptional and temporary." The IMF has suggested that this phrase should be interpreted to allow for cyclical changes to the deficit. In other words, the 3% ceiling would apply only to the cyclically-adjusted, or structural, deficit. According to IMF calculations, every EU country other than Greece and Italy would qualify if only structural deficits were counted.<46>

Table 5.1

Prospects for a 1998 Decision on EMU Starting in 1999 (An Unofficial Prognosis Using Forecast Data)

Italics and bold means country will meet criterion on 1 January 1999 according to forecasts

(EU Leaders to Decide in 1998 on EMU) (updated 20 May 1996)

Deficits

Debt

Inflation

Exchange Rates

Current LT Interest Rates 3

Criteria

Total Government Balance

(Deficit-to-GDP ratio below 3%)

Debt-to-GDP

ratio below or

falling steadily

towards 60%

Inflation rate less

than 1.5% above

average of 3 best

Member States

Forecast criteria

for 1998:

3.1% 4,5

In ERM for 2 years

without devaluing

LT Interest Rates less than 200BP over average of 3 best

Member States

Forecast criteria for 1998:

7.7% 4

Gov.'t Balance-to-GDP: ratio in

1996 1997

Debt-to-GDP ratio in

1996 1997

CPI Inflation in:

1996 1997

ERM Status in 1996

LT Interest Rates in:

1995 (EMI Annual Avg.)

Belgium

Denmark

Germany

-3.2

-0.9

-3.9

-3.7

-0.6

-2.9

132.2

71.0

61.5

130.6

68.7

62.4

2.0

1.8

1.6

1.8

2.4

1.6

ERM Member 2

ERM Member

ERM Member

7.5 8.3 6.8

Greece

Spain

France

-8.1

-4.8

-4.2

-6.9

-3.7

-3.0

111.8

67.8

56.1

111.4

68.0

57.3

8.3

3.6

1.8

7.0

3.2

1.6

Non-member

Devalued ERM rate 3/95

ERM Member

17.3

11.3

7.5

Ireland

Italy

Lux.

-2.0

-6.3

0.7

-1.6

-5.2

0.3

81.3

124.5

6.2

77.31

122.8

6.8

2.3

4.1

1.7

2.4

3.5

2.1

ERM Member

Non-Member

ERM Member 2

8.3

12.2

7.6 2

Netherlands

Austria

Portugal

-3.5

-4.6

-4.4

-2.9

-3.1

-3.7

79.4

72.4

72.2

78.7

73.9

71.8

1.9

2.1

3.1

2.0

1.6

3.0

ERM Member

ERM Member

Devalued ERM rate 3/95

6.9

7.1

11.5

Finland

Sweden

UK

-3.3

-5.2

-4.4

-1.6

-3.1

-3.7

62.5

80.8

55.5

63.2

79.6

56.2

1.0

1.7

2.7

1.5

2.5

2.5

Non-member

Non-member

Non-member

8.8

0.2

8.3

EU (15)

-4.4

-3.4

73.9

74.3

2.6

2.4

Canada

-3.1

-2.06

97.3

95.77

1.4

1.78

8.49

1. Ireland exempted from debt criteria under Art. 1040(2)B. 2. Luxembourg and Belgium share a currency. 3. As DGII no longer publishes LT interest rate forecasts in its public forecasts, we use 1995 annual averages from the EMI 1995 Annual Report. 4. Forecast criteria based on forecast figures above. 5. Inflation is DGll's "Deflator of Private Consumption," which is to be used as the Maastricht criterion. 6. OECD Forecast (Dec. 1995 - Economic Outlook). 7. OECD Forecast (debt calculation differs from basis used in Commission forecast). 8. Conference Board of Canada, Spring 1996, Canadian Outlook. 9 Government of Canada 10-Year Bond yield.

Source: Prepared by DFAIT based on European Commission (DGII) Spring 1996 Economic Forecasts (15 May 1996). The 1997 "Scenario" figures are based on "adopted or clearly announced in sufficient detail" policies.

Among EU Member States, Germany has been, perhaps, the strongest advocate of the need for strict adherence to the convergence criteria. In fact, in December 1995, the German Minister of Finance, Theo Waigel, proposed tightening the fiscal criteria by introducing a "stability pact" for Europe. Under the pact, Member States moving to EMU would reduce their budget deficits to 1% of GDP during normal periods of economic growth.

The German government's belief in the need for strict adherence to the convergence criteria is held also by officials at the Bundesbank. Mr. Johann Wilhelm Gaddum (Vice-President, Bundesbank) told the Committee that there is "nothing magic" about the selection of these particular budget criteria (3% deficit/GDP; 60% debt/GDP). Nevertheless, he emphasized that these criteria are necessary to prevent excessively expansionary fiscal policy that could give rise to a clash between monetary and fiscal policy. Countries with large government deficits, he argued, would be sensitive to changes in monetary policy; these countries should not be allowed to influence monetary policy, interest rates, and the exchange rate.

Recent statements by Mr. Gaddum in the press appear to signal that the Bundesbank is prepared to be somewhat more flexible about the way that the convergence criteria are interpreted. "The success of monetary union, after all, certainly will not be decided alone on the figure behind the decimal point for this or that criteria, but rather on the fiscal culture that is established in that society."<47>

G. The ECB's Mandate and Powers

Six months before the start of EMU, the European Central Bank will be established. The ECB, together with the central banks of the Member States, will comprise the European System of Central Banks (ESCB). The national central banks are the ECB's shareholders, with subscriptions allocated according to national economic and population weights. The national central banks will carry out the instructions and follow the guidelines set out by the ECB. The national central bank governors will comprise the ECB's Governing Council while the day-to-day operations will be controlled by the Executive Board.

Johann Wilhelm Gaddum told the Committee that the exercise of monetary policy by the ECB will be governed by four important criteria: (1) complete independence from political interference; (2) a commitment to the goal of price stability; (3) all financial instruments are available to carry out monetary policy; (4) complete freedom from any requirement to finance fiscal deficits.

1. ECB Independence

The ECB is to set a standard for independence from interference by governments. Indeed, as a former President of the Bundesbank, Karl Otto Pohl, told the Committee, the ECB will have the same independence as the central bank of Luxembourg and more independence than the Bundesbank. The bank's independence is prescribed explicitly in the ECB's mandate.

Article 107 of the Treaty Establishing the European Community reads: "When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any Government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks."<48>

In one important way the ECB will be more independent than any national central bank. In the case of a national central bank, such as the Bundesbank or the Bank of Canada, the legislature ultimately can control the Banks' powers and duties by amending the institution's governing legislation.<49> The ESCB's statute, however, cannot be changed without the amendment of the relevant protocol to the Maastricht Treaty, which would require the unanimous approval of the Member States. Some observers have cited this as another example of the EU's democratic deficit and have called for the European Parliament to be given the right to initiate, and perhaps to enact, amendments to the ESCB statute.

2. The Price Stability Goal

The primary objective of the ECB is to be to promote price stability. Without prejudice to that goal, however, the ECB "shall support the general economic policies in the Community." These include "... balanced development of economic activities, sustainable and non-inflationary growth respecting the environment, a high degree of convergence of economic performance, a high level of social protection, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States."<50>

3. Monetary Policy Instruments

The ECB and the national central banks are to have access to a full range of instruments for conducting monetary policy. These instruments include control of accounts at the ECB of market participants, open market operations, and control over minimum reserve requirements for credit institutions. The ECB's Governing Council, on the basis of a two-thirds majority, may also decide on the use of "other operational methods of monetary control as it sees fit." In order to carry out exchange rate policy, the ECB will have access to some of the international reserves of the national central banks. Finally, the ECB may issue regulations "to ensure the efficient, and sound clearing and payment systems within the community and with other countries."<51>

4. The "No Bail-Out" Clause

Article 104 of the Treaty,<52> which Bundesbank Vice-President Gaddum referred to as the "no bail-out clause," prohibits the ECB and the national central banks from purchasing the debt of, or granting credit to, central governments, regional or local authorities, or public entities. This provision is designed to prevent governments from using the central bank system to cover government deficits by printing money.

H. The Benefits of EMU

1. Lower Transaction Costs

There is no doubt that the cost of converting one currency into another can be substantial for the individual traveller. One example cited is that of an individual, starting with £100, travelling throughout the EU. After visiting each EU country, changing the entire amount of money in each country, that person would arrive home with only £50, the rest having been consumed by commissions and differential exchange rates. A European Commission study estimates that the weighted average of banknote conversion costs for individuals amounts to 2.5% of the amount traded.<53> Corporations generally conduct larger foreign currency transactions, and can pay as little as 0.05% for amounts in excess of ECU 5 million.

The Commission study estimates that the total transaction-costs savings from introducing a single currency would likely vary between 0.1% and 0.2% of GDP for most Member States, but could amount to as much as 0.9% of GDP for small, open, and less-developed economies. Total annual currency conversion costs saved from moving to a single currency are estimated at more than ECU 15 billion (US$18.6 billion), or about 0.4% of Community GDP.<54>

2. Reduction in Exchange Rate Variability and Uncertainty

Exchange rate variability for currencies keeping within the ERM fluctuation bands has not been large, so the incremental effect from moving to a single currency under EMU would not be significant for these countries. Furthermore, studies have not turned up a robust link between suppression of exchange rate variability and increases in international trade. One explanation may be that traders can offset risk by diversifying their currency portfolios and by means of hedging in forward markets.

Another potential gain from introducing a single currency may flow from reducing uncertainty for investors. The Commission study estimates that a reduction in the risk premium that firms have to pay on equity would greatly increase investment. For example, a reduction in the risk premium of only 0.5 percentage points could raise EU economic output by 5%-10% in the long run.<55>

3. Enhancing Price Stability

The Commission study argues that inflation involves substantial economic costs, although these are difficult to measure. Microeconomic theory suggests that an inflation rate of 10% that is fully anticipated leads to direct welfare losses of between 0.1% and 0.3% of GDP.<56>

Higher rates of inflation are usually associated with greater inflation rate variability and, therefore, greater unpredictability. It is suggested that unanticipated inflation has a much stronger adverse effect than anticipated inflation. Unanticipated inflation leads markets (presumably after the first surprise) to build an inflation risk premium into interest rates. Also it can lead to distortions in the price system if relative prices do not remain constant. Highly variable inflation also keeps output away from equilibrium as economic actors take time to adjust their expectations to the new price level.

It is argued that if the ECB follows a credible monetary policy, such as that pursued by the Bundesbank, the costs of inflation should be reduced for EMU members. There is no guarantee that the European Central Bank will perform as well as the Bundesbank, but the ECB would be independent from instructions from national government bodies and it has a statutory mandate to maintain price stability.

4. Public Finance

As outlined earlier, EMU will require governments to meet certain fiscal targets in order to qualify for entry to Stage 3. After Stage 3 of EMU has commenced, member governments will still have to avoid excessive deficits and debts or face possible penalties.<57> These rules, demanding fiscal discipline, it is argued, will bring gains through reductions in interest rates, as premiums for inflation and exchange rate risk are eliminated.

5. Completion of the Internal Market

This argument states that monetary union is a necessary prerequisite for the completion of the internal market.<58> The elimination of capital controls under the single market program will give rise to speculative attacks on currencies, thus threatening the EMS exchange rate regime. While fixed exchange rates, it is argued, are incompatible with free movement of capital, flexible exchange rates are deemed by EU policy-makers to be unacceptable.<59> The only way to avoid speculative currency pressures without imposing capital controls, according to this view, is to form a monetary union with a single currency. The Committee was also told by European central bankers that EMU would help complete the EU internal capital market, producing deeper European financial markets to compete with those in the U.S.

I. The Costs of EMU

1. Loss of an Independent National Monetary Policy

At the start of Stage 3 of EMU, individual exchange rates will be irrevocably locked and the ECB will begin conducting a single monetary policy for the entire EMU area. What are the implications for national economic stabilization policy?

John Murray (Chief, International Relations, Bank of Canada) explained that, under the theory of optimum currency areas, "different economic regions and countries are suited for different exchange rate arrangements. Some of them are similar enough with respect to the shocks that hit them and their economic objectives, that they form a natural or optimum currency union. Others are so disparate or different in terms of the shocks that hit their economy and again, their economic objectives, perhaps, that they are not likely or natural partners for a currency union. Therefore, the test on an agreement for Europe is the extent to which the various nations satisfy the criteria of: 'Are they natural partners?'"(31:11)

According to John Murray, research done by the Bank of Canada indicates that countries in the centre of Europe are very similar and would seem to form a natural partnership. However, the farther you travel from the centre, the "more unlikely the match."<60> The Bank of Canada study cited by Murray reached the following main conclusion: "relative to U.S. regions, most European countries are facing highly asymmetrical supply and real demand shocks. This is particularly true for the peripheral countries (Greece, Italy, Norway, Portugal, and Sweden), which may find the transition period leading to monetary union fairly costly in terms of increased variability in output and employment. In fact, the only countries that are closely associated with the common European component of supply and real demand shocks are Germany and Switzerland. Consequently, even countries belonging to the intermediate group (Austria, Belgium, France, the Netherlands, Spain, and the United Kingdom) may face significant costs by joining the monetary union."<61>

If most EU economies react so differently to economic shocks, how can they adjust to an external shock? For example, suppose international demand declines for a country's exports, resulting in an increase in unemployment. The most important mechanisms that can substitute for an exchange rate devaluation include: (1) domestic price and wage adjustments; (2) interregional migration; (3) interregional flows of private and public capital; and (4) interregional fiscal transfers.<62>

If real wages in EMU countries are flexible downwards, unemployment need not increase from a negative output shock, such as a decline in demand for a country's exports. However, evidence shows that European wages have less tendency than Canadian or U.S. wages to decline in response to unemployment.

A rise in unemployment in one country can be offset also without an independent monetary policy if labour moves freely from the country with high unemployment to the low unemployment country. However, studies indicate that this is not a viable option for European countries where labour mobility between countries is fairly low because of cultural and linguistic barriers.<63>

Capital flows are not yet as mobile between EU member countries as they are within the United States. However, capital mobility within the EU will improve after economic and monetary union eliminates exchange rate risk.

With respect to interregional fiscal transfers, the EU's budget (1.2% of GDP) is too small in relation to economic output to offset a significant demand or supply shock.

2. Fiscal Constraints

If exchange rates and monetary policy are no longer available as stabilization tools, more weight falls on fiscal policy to offset economic shocks. The Maastricht Treaty does not restrict public spending; governments can still spend as they see fit, but they will have to raise most of what they spend through taxation because Article 104 of the Treaty constrains the levels of permissible government deficits and debt. Consequently, the ability to react to unexpected economic downturns by means of Keynesian-style deficit spending may be hampered by the Maastricht restrictions on deficits.

Another type of constraint may become more evident as the EU capital market becomes more integrated. Studies indicate that the government budget constraint is tightened when capital is highly mobile and exchange rates are fixed (or under monetary union). The higher the level of capital mobility, the more likely it is to flee from high-tax jurisdictions to those with lower tax rates. Evidence from the United States suggests that state and local governments are rationed out of the capital markets when their debt ratios reach a certain level, thereby forcing a degree of tax-rate convergence.<64>

The constraints on national fiscal policy have led some to argue for a new form of fiscal federalism at the EU level. The EU already transfers resources under the structural funds program, but these are not intended to offset temporary economic disturbances. Rather, they are transferred to regions where incomes are persistently below the EU average. Also, as noted earlier, the EU budget's scale, at 1.2% of GDP, is too small to handle meaningful stabilization payments.

3. The "Ins" and the "Outs"

It now seems that some EU countries — Italy, Belgium, Spain, Portugal, and Greece perhaps — may not be able to meet the convergence criteria by 1998. Moreover, other countries, such as the UK, Denmark, and perhaps Sweden, may choose to remain outside the EMU area.<65> This has raised concerns by countries that intend to join the single currency -- the "Ins" -- that those outside EMU -- the "Outs" -- will undertake competitive devaluations. The "Ins" have called for the creation of an ERM-type of system with fixed exchange rates between the "Euro" and the currencies of those countries outside the EMU. There is opposition to such a plan in the UK where the ERM was discredited by the September 1992 crisis, which forced the pound out of the system. Sweden is also reported to oppose the plan while Denmark strongly backs the idea.

4. Other Costs

A number of technical obstacles have been raised in regard to establishing the single currency. One issue concerns the legal status of forward contracts stated in a national currency but which come due after the "Euro" has been introduced. Although a contract might specify payment in, say, D-marks, this currency will cease to be legal tender after 1 July 2002, according to the European Monetary Institute plan.

Other costs will be incurred to change accounting systems, to re-program computers, to change price lists, and to modify vending machines. Some of the greatest costs will borne by commercial banks, which will have to account for both Euros and the national currency during the transition period from 1999 to 2002. Automated teller machines, for example, will process a request in Euros, but will carry out the transaction in the national currency. The ECU Banking Association estimated the costs to its members at about £175 million each.<66>

J. EMU's Effects on the Outside World

Understandably, the Europeans have paid much less attention to EMU's external impact than they have to its internal consequences. Nevertheless, EMU will have an impact on outside countries in three main areas. First, it will affect the demand for international currencies and, consequently, exchange rates. Second, it could affect trade and investment patterns. Third, it has implications for international economic policy coordination and exchange rate management.

1. The Demand for International Currencies

In economic theory, money has three different functions: to act as a medium of exchange, as a store of value, and as a unit of account. Demand for the new European currency as a medium of exchange will increase as outside countries, which conduct trade with the EU, invoice more of their transactions in the Euro. This tendency will be heightened for eastern European countries, which already have strong trade ties with the EU and intend eventually to join the Union and to adopt the common currency. The Euro may also begin to erode the share of non-EU transactions that is invoiced in U.S. dollars. For example, it is possible that oil-producing countries could decide to demand payment in Euros rather than U.S. dollars. On the other hand, the stock of official international currency reserves in the form of European currencies held by central banks will decline as foreign exchange trading ceases to take place between European currencies.<67>

If the ECB is able to acquire a reputation for maintaining price stability similar to that of the Bundesbank, the Euro will become more valuable to hold as a store of value than were the individual European national currencies, except, perhaps, the D-mark. This might persuade outside countries to hold fewer dollars and more of the European currency.

To the extent that EMU encourages European integration and economic growth, it will increase the EU's share of the global economy, thereby raising the proportion of transactions stated in Euros.

A key consideration is how the demand for global financial assets will be affected by the introduction of the European single currency. One view is that EMU will lead to a relatively small (5%) shift into Euro-denominated assets.<68> Another perspective is that the demand for Euro assets will decline as investors, seeking more diversification, shift into non-European currencies.<69> For example, a French investor who formerly held most of her assets in francs would be able to obtain currency diversification by holding, say, D-marks and U.S. dollars. After the single money is introduced, her wealth will be denominated in only two currencies -- Euros and dollars. If the investor wanted more diversification of currencies, she will have to look outside Europe.<70>

2. Trade and Investment Patterns

Outside countries such as Canada, must also consider how the single currency's introduction will affect their exchange rate vis à vis their largest trading partners within the EU. The Committee was told that, although the majority of the German public opposes EMU, the country's business community is generally in favour of the single currency. The reason is that German business is concerned about the effect the D-mark's high value is having on exports, and sees the introduction of a single currency as a means of obtaining a de facto devaluation of the D-mark. While a D-mark devaluation may help German exports, it implies less demand for imports, including those from Canada. On the other hand, Mr. Gordon Venner (Deputy Director, European Union Division, DFAIT) noted that Canadian exporters may benefit from a reduction in transaction costs from operating in Europe with only one currency.

Gordon Venner also raised the possibility that EMU could affect international investment patterns. "If the European Union were to achieve an extremely large area of exchange rate stability, that would make them an attractive investment location. We would be competing with the European Union for that investment."<71> (1:28)

3. International Policy Coordination

It has been suggested that EMU will transform the G-7 into a G-4 with the United States, Canada, Japan, and the EU participating. However, it is not clear that this will be the case. As Mr. Barry Eichengreen points out, the key actors in G-7 policy coordination discussions are ministers of finance, not central bankers.<72> Although there will be one European Central Bank, there will be 15 ministers of finance. "Article 109 of the Maastricht Treaty does not detail the nature of cooperation between them. While emphasizing the need for the Community to speak with a single voice, it does not specify who will do the talking. Will the finance minister of the country occupying the EC presidency represent the Community in G-7 summits? Will the independent president of the ECB also have a voice?"<73> The question of who speaks for Europe is further complicated when the possibility is raised that two G-7 countries -- the UK and Italy -- may not join EMU initially.

Assuming that the EU works out its internal coordination problems, the adoption of a single currency will enhance Europe's negotiating power vis à vis the other G-7 partners. How will this affect the balance of power in the global community? As John Murray put it, "Once there are three major entities instead of seven, what is Canada's place in all this? In other words, there will be the United States, there will be Japan and now, instead of a collection of European countries, there will be Europe representing the third significant currency block. How does Canada fit in? Once France, Germany, the UK and Italy have been absorbed into this common Europe, we will be pretty lonely and small, so we need to look ahead to that."(31:15-16)

K. Conclusion and Recommendations

Like most developments in the process of European integration, the path to EMU has not followed a straight line. And like many proposals to integrate the EU economically, this proposal is partly driven by political considerations. After the attempt to implement the 1970 Werner Report on EMU was aborted, a more modest plan was introduced in form of the European Monetary System. The catalyst for resurrecting EMU was the unification of Germany and the need to bind that country more tightly into Europe. On the economic side, EMU represents an attempt on the part of other EU countries, especially France, to gain a greater say in the way that European monetary policy is conducted. Now, despite budgetary setbacks and the EMS currency crises of 1992-93, the leaders of the two countries that matter most to European integration, France and Germany, seem committed to the successful launch of EMU. German Chancellor Helmut Kohl, in particular, is anxious to anchor the new Germany in Europe, and has voiced concerns that if EMU fails to go forward, the EU could disintegrate. The Committee learned also that there is a consensus among German and French central bankers that EMU will proceed.

The Committee believes that, even if there is some slippage in the 1999 deadline, there is a high probability that EMU will go forward. We are concerned, however, about the lack of serious study that has been given to EMU's external effects. Although Canada and other outside countries have no say on whether or not EMU goes forward, the plan entails great uncertainties for us in at least three areas -- currency demand and exchange rates, trade and investment patterns, and international policy coordination.

We recommend that the Department of Foreign Affairs and International Trade, in consultation with the Bank of Canada and the Department of Finance, undertake a study on the effects of the EU's economic and monetary union on Canada. The completion of such a study ought to be given high priority by the Canadian government.<74>

Further, the Committee recommends that the Canadian government convene a conference based on this study. Such a conference of Canadian business people, economists, and policy makers would help the government in estimating the implications of economic and monetary union (EMU) for Canada and in formulating appropriate policy responses.

Finally, the Committee notes that EMU will eliminate some of the obstacles remaining in the way of realizing a true European single market. Analysis suggests that EMU will deepen EU capital markets and make European firms more competitive. With markets becoming more global in nature, the Committee believes that it is imperative that Canadian firms' home operating environment should be at least as advantageous as the EU home market is for European firms.

The Committee recommends that the Canadian government and the provinces continue work on the elimination of inter-provincial trade barriers. Canada already has a monetary union, but has yet to achieve a true single market for goods, services, capital, and people.

VI. THE 1996 INTERGOVERNMENTAL CONFERENCE ("MAASTRICHT II")

A. Introduction

On 29 March 1996, the leaders of EU Member States met in Turin, Italy, to launch an Intergovernmental Conference (IGC) to decide issues affecting the future course of the Union. Decisions taken at the 1996 IGC will affect Canada indirectly through their implications for the EU's defence identity and the common foreign and security policy. Also, to the extent that reforms to the EU's institutional structure enable future enlargements to occur, Canadian trade and investment will be affected by decisions taken at the IGC.

B. The IGC Process

What is an IGC and how does it operate? "An Intergovernmental Conference or IGC is a special meeting of representatives of the governments of the Member States which is convened to consider amendments to the Treaties. Under Article N of the Treaty (formerly Article 236) any member state may submit to the Council proposals for amending the Treaties. ... IGCs may be launched and concluded at the European Council level of heads of state or government and the European Council may have a significant role in furthering progress, clarifying areas of ambiguity and agreeing on final texts."<75>

The groundwork for IGCs is laid by special committees comprised of representatives of the Member States as well as representatives from EU institutions, such as the Commission and the European Parliament. For example, the Delors Committee designed a plan for economic and monetary union which formed the basis of that section of the Maastricht IGC. Another committee's work formed the basis of the Maastricht IGC on political union. The preparatory work for the Turin IGC was done by the Reflection Group, which was set up to study the EU's problems and to consider various possible solutions while taking into account the implications of future enlargement.<76>

The procedure followed by IGCs usually involves monthly meetings by EU Foreign Ministers. Thus, the IGC is similar to meetings of the Council of Ministers except that the IGC meetings are concerned with amending the Treaty rather than with discussing EU legislation.<77> Proposals for treaty amendment may come from a variety of sources, the presidency, the Member States, or the EU institutions, with the presidency having "an important role to play as collator of proposals and facilitator of negotiations."<78>

C. The IGC Agenda

Since 1957, six IGCs have been held to revise the Treaties governing the European Communities. These IGCs produced the 1965 Treaty merging the EC institutions, the 1970 and 1975 Treaties amending the European Parliament's budgetary powers, the 1986 Single European Act, and the two intergovernmental conferences (one on political union and the other on economic and monetary union) which produced the 1992 Treaty on European Union (Maastricht).

The 1996 IGC has no fixed agenda, but the Maastricht Treaty requires that the following issues be addressed at the conference:

The pillared structure of the European Union as established at Maastricht (Maastricht, Article B);

Defence, against the background of the 1998 review of the Western European Union Treaty (Maastricht, Article J.4.6);

The common foreign and security policy (Maastricht, Article J.10);

The scope of the co-decision procedure in the European Parliament (Maastricht, Article 189b);

New Community chapters on energy, civil protection, and tourism (Maastricht, Declaration 1); and

The so-called "hierarchy of Community Acts," which might involve a reclassification of Community legislation to establish different procedures for different categories of act (Maastricht, Declaration, 16).<79>

Since the conclusion of the Maastricht Treaty, EU Member States have agreed also to review:

The budgetary provisions of the Treaty, including the arrangements for compulsory and non-compulsory expenditure (Inter-Institutional Agreement of October 1993);

The number of European Commissioners (European Council, December 1993); and

Qualified Majority Voting procedures -- both voting weights and the qualified majority threshold (Informal Foreign Affairs Council at Ioánnina (Greece), March 1994).<80>

In addition, issues raised in the Report of the IGC Study Group (the Reflection Group) are to be discussed at the 1996 IGC. Since it was already agreed at the 1993 Copenhagen Summit that the EU will admit new members, the principle of enlargement should not be one of the main topics of debate. However, a larger Union will have implications for many of the other topics under discussion, topics such as institutional reform, qualified majority voting, and the common foreign and security policy. In other words, the implications of enlargement have to be examined.

With respect to economic and monetary union (EMU), the necessary treaty amendments were made at Maastricht; consequently, there appears to be little reason for more debate in this round of treaty changes. Nevertheless, it seems likely that there will be discussions, at least in the corridors, over some of the outstanding issues, such as the interpretation of the convergence criteria and the relationship between those countries inside the EMU area and those that remain outside -- the problem of the "Ins" and the "Outs."

The current IGC has no fixed termination date, and is likely to extend into 1997. Mr. Jim Wright (Political and Social Affairs Counsellor, Canadian High Commission, London) told the Committee that the IGC is expected to be prolonged until at least after the next British election. The views of the Labour Party are different from those of the present government on many European issues, such as economic and monetary union, the Maastricht Treaty, the common foreign and security policy, and qualified majority voting in the Council of Ministers.

This IGC started under the Italian presidency and will continue under the Irish presidency, which begins in July 1996. If the IGC is completed under the presidency of The Netherlands, which starts in January 1997, a new Treaty could be signed in Maastricht. This possibility has given rise to the application of the title "Maastricht II" to this IGC.

D. Recommendation

The Committee recommends that the Canadian government monitor carefully the discussions taking place at the 1996 Intergovernmental Conference (IGC). We note that decisions respecting policies such as the EU's common foreign and security policy and European defence policy will be taken in this IGC and that these policies may affect Canadian interests. Therefore, the Department of Foreign Affairs and International Trade should consider whether additional personnel need to be assigned to key foreign missions during the IGC, in order to ensure that the Canadian government is aware of, and able to respond promptly to, any developments that may affect Canadian interests.

VII. EUROPEAN UNION ENLARGEMENT

A. Introduction

In the next decade or so the number of countries in the European Union will expand from the current 15 Member States to as many as 28. From an internal perspective, this enlargement heightens the need for reform of the EU's budget and institutional structures. From Canada's standpoint, EU enlargement will raise tariffs against some of our exports, thereby reducing opportunities for Canadian business in the growing markets of central and eastern Europe. This eventuality intensifies the need for Canada to reach an agreement with the European Union on further tariff cuts in key sectors. Enlargement will also increase the EU's power in international organizations, such as the OECD and the WTO, in which Canada is a member. As the number of EU members rises, the Union will be obliged to defend a wider range of national interests, increasing the potential number of disputes between the EU and outside countries, including Canada. Enlargement also will enhance the EU's economic and political leverage relative to that of Canada.

B. Prospective EU Members

On 1 January 1995, the European Union expanded to 15 Members with the accession of Austria, Finland, and Sweden.<81> Norway had applied for membership, but, on the basis of a 52.4% majority in a national referendum held in November 1994, accession to the EU was again rejected.<82>

The EU committed itself to further enlargement at the Copenhagen European Council meeting in June 1993. Turkey, Cyprus, and Malta have long-standing Association Agreements, which provide them access to the EU market for their industrial goods. All three have applied for full EU membership. Although Cyprus and Malta are likely to be granted early admission the Turkish application appears unlikely to go forward.<83>

The greatest enlargement challenge for the EU is posed by the future accession of central and eastern European countries. Since 1989 the EU has concluded "Europe Agreements" with Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. The main areas covered by the agreements are: political dialogue, free trade and freedom of movement, economic cooperation, financial cooperation, and cultural cooperation.

Altogether 13 countries have applied for EU membership or are expected to do so soon.<84> The EU has stated that any associated country in central and eastern Europe may join as soon as it is "able to assume the obligations of membership by satisfying the economic and political conditions required." The requirements include: stable democratic institutions, respect for minorities, the existence of a competitive market economy, and the ability to adhere to the Maastricht Treaty's aims of political, and economic and monetary union.

The EU's eastern enlargement is being driven at least as much by geopolitical motives and security concerns as by economic considerations. Dr. Steven Wolinetz (Professor of Political Science, Memorial University) told the Committee that German concerns about their eastern borders increase the likelihood that Poland, the Czech Republic, and Hungary will be admitted to the EU.

Russia has made clear that it would not welcome full membership in NATO for its neighbours in central and eastern Europe. However, Russia does not object to EU enlargement, despite the EU's plan to adopt a common foreign and security policy. By joining the EU, the central and eastern European countries could achieve a greater sense of security without evoking the reaction in Russia that NATO membership would generate. The Committee was told that joining the EU would raise living standards and would tend to consolidate democratic and economic reforms in the former communist states, thereby increasing political and economic stability on the EU's eastern borders.

Ms. Anne Leahy (Canadian Ambassador to Poland) told the Committee that Poland already has entered into a "structural" dialogue with the EU on enlargement issues, such as agriculture. Poland is also moving closer to EU norms in certain areas, she said. For example, the Polish Parliament passed a law in 1995 which would require the harmonization of all future standards with those of the EU. Mr. Pastusiak (Deputy Chairman of the Sejm Foreign Relations Committee, Poland) told us that it was important that Poland joined the European Union because it would:

consolidate Polish economic reconstruction;

help develop a Polish environmental policy;

respond to the geopolitical situation;

sustain democratic construction;

provide access to new markets;

provide mutual trade benefits because of the complementarity of the Polish and EU economies; and

assure an influx of new technology.

Mr. Andrzej Wieczorkiewicz (Under Secretary of State and Government Plenipotentiary for Foreign Investment, Government of Poland) explained that Poland wanted to join the EU in order to consolidate its growing economy by gaining greater access to markets in the face of EU practices that impeded trade. But he said also that the desire to join the EU is not motivated by purely economic motives. Poland feels itself to be a European country and "it wants to join the family." He said that Poland wants to match European standards in matters of democracy and law.

What is the expected timing of future EU enlargements? Accession negotiations with Cyrpus and Malta will begin six months after the conclusion of the current IGC. As noted earlier, the European Council has agreed in principle that the countries of central and eastern Europe should be admitted when they are ready to assume the obligations of membership. Dr. Steven Wolinetz told the Committee that the most likely prospective candidates from central and eastern Europe are the so-called "Visegrad Four" -- Poland, Hungary, the Czech Republic, and Slovakia.<85> Obviously, accessions will not take place until the EU is ready to accept them. The European Council has agreed that the Union's capacity to absorb new members will be an important consideration in deciding on future enlargements.<86> During the Irish presidency, the European Council will meet to consider the "opinions" of the Commission on the application of each associated state.

C. The Internal Implications of Enlargement

Questions have arisen about whether the EU can simultaneously deepen its political integration while expanding its membership and increasing its diversity. A recent Commission report stated the dilemma, "How can we enhance our capacity to take decisions and to act, when our diversity becomes more pronounced? Enlargement must represent a new arrangement worked out with our eyes open. We have to be aware of its implications for the institutions and policies of the Union. There is no compelling reason why an endeavour based on openness and solidarity should mean weakness and dilution: enlargement and deepening are perfectly compatible."<87>

There are internal tensions within the EU over whether to widen or to deepen European integration -- in other words, between enlargement and the improvement of internal policies. Some countries, such as France, have favoured deepening European integration before moving ahead with additional enlargements. Other countries, notably Great Britain, favour enlargement over further deepening. Lord Clinton-Davis (Chairman, Transport Committee, House of Lords) argued that there is a hidden agenda associated with enlargement. He said that some people support enlargement because they believe that it will "bust the EU"

Figure 7.1

Source: Foreign and Commonwealth Office, A Partnership of Nations - The British Approach to the European Union Intergovernmental Conference 1996, London, March 1996.

There are internal tensions within the EU over whether to widen or to deepen European integration -- in other words, between enlargement and the improvement of internal policies. Some countries, such as France, have favoured deepening European integration before moving ahead with additional enlargements. Other countries, notably Great Britain, favour enlargement over further deepening. Lord Clinton-Davis (Chairman, Transport Committee, House of Lords) argued that there is a hidden agenda associated with enlargement. He said that some people support enlargement because they believe that it will "bust the EU" by requiring the Union to loosen its grip with respect to certain policies, such as the common agricultural policy and the structural policies. In contrast, Germany appears to hold the view that the EU should press ahead simultaneously with both the widening and the deepening of the Union.

One consideration is the budgetary cost of enlargement. The common agricultural policy (CAP) subsidies now absorb more than 40% of the Community's budget. In general, central and eastern Europe is much more rural in nature than the present EU. In the EU, only one person out of 20 makes a living from the land. On average, agriculture accounts for 5.5% of GDP in Poland, Hungary, Slovakia, Slovenia, and the Czech Republic. In the EU, agriculture accounts for less than one half this proportion of the economy.

The Committee was provided with a different perspective when it visited Poland. Mr. Jacek Saryusz-Wolski (Government Plenipotentiary for European Integration, Government of Poland) suggested that the integration of Polish agriculture with the EU was not as problematic as some people in the Union seem to think. He pointed out that, although Polish agriculture represents 7% of GDP and one quarter of the population lives in rural areas, only one quarter of these people are actually involved in agricultural production. The fact that agriculture is less heavily subsidized than it is within the EU will make it easier for the country's farm sector to adjust. Although Polish consumers will have to pay higher food costs, Jacek Saryusz-Wolski stated that compensatory payments to consumers can be negotiated.

Another direct cost of enlargement relates to the compensation provided to less developed regions by the economic and social cohesion funds. In 1994, over 30% of the EU budget (about ECU 23 billion) was spent on assistance to poorer, backward regions and to areas suffering from industrial decline. Enlargement of the EU to include the approximately 70 million people in central Europe (Poland, Hungary, the Czech Republic, Slovakia, and Slovenia) and eventually the millions more in eastern Europe would raise the cost of these programs substantially. (When Spain and Portugal joined the EC in 1986, the number of people living in regions where the per capita income is less than 75% of the Community average doubled.)

The EU has several options for dealing with the budgetary implications of the enlargement issue. First, it can raise more revenues, either by increasing the contribution levels from Member States or by raising the VAT rate paid to the EU. Mr. Jacques Delors told the Committee that the EU will have to pay more to bring the central and eastern European countries into the Union. He reckons that the EU budget would have to increase from the current ratio of 1.2% of GDP to a ratio of 1.6% in order to accommodate entry of those countries. François Guillaume (Vice-President, Foreign Affairs Committee, National Assembly of France) told the Committee that CAP payments alone would be boosted by 25%.

A second way in which the EU could tackle the enlargement issue would be to reduce expenditures on the common agricultural policy and the economic and social cohesion funds. Mr. Delors told the Committee that, although the EU succeeded in the Uruguay Round negotiations in decreasing CAP support for farmers, it would be impossible for France to make further reductions. However, Mr. Delor's view is not universally held. For example, Mr. Kimon Valaskakis (Canadian Ambassador to the OECD) told the Committee that he believes that there is a growing recognition on the part of France about the need to do something about the CAP.

France is not the only country which could face costs from enlargement. The Committee learned in Dublin that EU transfer payments account for 6% of Ireland's GNP, making that country the largest recipient of EU transfers. A Member of the Irish Parliament explained to the Committee that Ireland supports enlargement because it represents new markets for Irish exports, but that Ireland does have concerns about the potential reduction in transfer payments. Other countries such as Spain, Portugal, and Greece, which receive substantial amounts of EU agricultural and structural funds, would also be affected. Moreover, enlargement will pose industrial restructuring problems for the EU in general.

A third way to deal with enlargement would be to offer new Member States only partial membership, thus denying them access to the CAP and structural and social cohesion funds. However, as Dr. Steven Wolinetz pointed out, a multi-speed or multi-tiered Europe would be a major departure for the EU.

Apart from its budgetary implications, enlargement would require major institutional reform in the EU.<88> Consider the European Commission. At the present time, there are 20 Commissioners, each of whom is responsible for a different portfolio. Each Member State appoints at least one Commissioner, with each of the larger countries -- Germany, France, Italy, Spain, and the UK -- providing two Commissioners.<89> If the EU expands to include 25 or 28 Member States, either more portfolios will have to be invented or some countries will be without representatives on the Commission. Another proposal is that two kinds of Commissioners be created, (a) full members and (b) deputies, either voting or non-voting.

Also, it seems likely that the number of parliamentarians from each country would have to be adjusted. Currently, there is a total of 626 Members of the European Parliament (MEPs). It is generally believed that the number of MEPs cannot increase much further without Parliament becoming too large and cumbersome. It has been recommended that the number of seats in the European Parliament be capped at, say, 700.<90>

Similarly, the Council of Ministers would grow from 15 to perhaps 25 or more members. This could make the Council less effective and might require adjustment of the number of votes required to reach a qualified majority vote. A question which concerns the larger states is their proportional under-representation on the Council, especially with the accession of a number of smaller countries to the EU.

D. The Implications of Enlargement for Canada

Since the EEC was created in 1958 it has increased in size from six to fifteen members, undergoing four enlargements: 1973 (Denmark, Ireland and the UK); 1981 (Greece); 1986 (Portugal and Spain); and 1995 (Austria, Finland, and Sweden).<91> Each new accession has brought more countries within the EC's customs union, which requires that a common external trade policy be employed vis à vis outside countries. This harmonization by new members with EC trade policies has resulted in diminished market access for Canada in respect to certain exports.

The EC's trading partners are entitled under GATT Article XXIV to negotiate compensation for the loss of markets, but this process seems to have been less than satisfactory to outside countries. The negotiation of compensation for enlargement often has been long and arduous, and there is no guarantee that the final package will offset the trade diversion suffered by the outside country. Furthermore, compensation in the form of increased access often is provided in a different commodity, or even in a sector entirely different from the one in which the trade diversion occurred. The reason for this is that commodities in a compensation package are carefully selected in order to benefit mainly the countries involved in the negotiations. For example, Canada was recently provided with a compensation package which included increased access for "uniquely" Canadian exports such as ice skates, snow groomers, and durum wheat. (See discussion below.) For an outside country, such as Canada, which might not be happy with the compensation offered by the EU, the options are limited. It is difficult to retaliate by raising Canadian import tariffs against one Member State's goods, say those of Sweden, and not sideswipe imports from another country.

The UK's 1973 accession to the EEC was particularly damaging to Canadian agricultural exports, especially wheat, barley, cheese, oilseeds, and oilseed products. The major Canadian export affected by the 1973 enlargement was high quality wheat and Canada's request for compensation in this area has still not been satisfied more than 23 years later. When the UK joined the EEC, Canada (and other commonwealth countries) lost the British Commonwealth Preference, British tariffs on Canadian goods were raised to EEC levels, and variable import levies were applied in many cases. In addition, competitors from other EEC countries gained duty-free access to Britain's market, while CAP subsidies artificially stimulated British domestic agricultural production. Finally, certain outside countries with which the EEC already had trade agreements, such as the Lomé Convention countries and Mediterranean countries, received preferential access to the British market.

With respect to the accessions to the EU of Greece (1981), Spain (1986), and Portugal (1986), the EU's tariffs were generally lower than those of the three new members. As a result, there was little impairment of market access for Canadian exports. However, Canadian exports to Spain and Portugal of three commodities -- salt cod, newsprint, and barley -- were affected. Despite an arbitration report by then GATT Director General Arthur Dunkel to the effect that there should be "a certain continuity of trade" in wet salt cod, this issue has never been resolved to Canada's satisfaction.

Access for Canadian newsprint exports also remains a problem. When Spain and Portugal joined the EC in 1986, the Community refused to increase Canada's quota into the EC market in order to accommodate the traditional level of Canadian newsprint exports to those countries' markets. That problem will finally be resolved in the year 2002 when the EU eliminates the duty on newsprint imports. Compensation to Canada for loss of market access for Canadian barley exports was resolved in December 1995, almost ten years after Spain and Portgual joined the EC.

The most recent enlargement, which brought Austria, Finland, and Sweden into the EU on 1 January 1995, gave rise to a dispute between Canada and the EU over tariff increases on Canadian exports of fish and seafood, aluminum, wood, and snowmobiles. The EU's failure to provide provisional compensation prompted the Canadian government to announce in February 1995 that it was raising tariff bindings on imports of EU-produced vodka, perfume, shoes, and glassware.<92>

Canada announced that applied tariffs (i.e., the actual duties in effect at the border) would be raised first on imports of European vodka and lead crystal if the EU did not provide at least partial compensation. At a later point, Canada would raise duties on other imports if overall compensation was not forthcoming. Tariff increases by Canada were delayed, however, after a deal was reached under which the EU would accelerate Uruguay Round tariff cuts on newsprint.

On 5 December 1995, Canada and the EU reached agreement on a number of outstanding issues, including compensation to Canada for EU enlargement. In addition to the reduction of newsprint tariffs agreed to earlier, the EU is to eliminate some tariffs and to accelerate reductions already agreed upon. The EU will eliminate tariffs on certain paper products of particular interest to Canada, on boiled and peeled shrimp, on ice skates, pig iron, snowgroomers, canary seed, durum wheat (up to an annual quota of 50,000 tonnes), and feed oats (up to 10,000 tonnes). The EU will reduce tariffs (or accelerate tariff reductions already agreed to) on frozen lobsters, fish products, snowmobiles, lead, zinc, and chainsaw blades. Also, the EU will improve access for Canadian pork and provide an import quota for Canadian pork of 75,600 tonnes on final implementation of the Uruguay Round.

As the EU undergoes future enlargements, Canada and other outside countries will face further negotiations over reductions in access to the European market. Moreover, as pointed out to the Committee by Dr. Lorenz Schomerus (State Secretary in the German Ministry of Finance), since some of the prospective EU members are large agricultural producers, this could lead to a build-up of trade barriers to outside countries.

The Committee learned that Canada has at least one EU ally on this issue. Dr. Schomerus told the Committee that Germany has consistently said that enlargement must not de-liberalize trade. In other words, no new trade barriers should be raised against existing trading partners. Dr. Schomerus stated that Germany intends to take a firm line on this issue with respect to future enlargements. In his view, regional integration should not run counter to mulitlateral trade liberalization. Moreover, starting a new round of multilateral trade negotiations has a very high priority.

Sir Leon Brittan (European Commissioner for Multilateral Trade) said that under previous enlargements Canada had negotiated compensation, "presumably to the Canadian satisfaction." Nevertheless, Sir Leon informed the Committee that a study would be done by the Commission to determine whether prospective enlargements will result in more trade barriers to outside countries.

The Committee learned that Canadian exports to central European countries already may be affected by future EU enlargements. When countries accede to the World Trade Organization (WTO) they are usually encouraged to reduce their level of tariff protection. However, candidates to join the EU are not being pressed by the Union to lower their tariffs upon entering the WTO because the EU does not want to have to pay compensation when these countries accede to the Union.

The Committee received sound advice on the enlargement issue from Mr. Christopher Thomson (Canadian Deputy Permanent Representative to the OECD). Asked about how Canada should deal with future EU enlargements, Mr. Thomson told the Committee that Canada should constantly "raise the floor" of agreements reached with the EU. In Mr. Thomson's opinion, the EU can be bound in many respects by further agreements, such as accords reached at the OECD and the WTO. For example, another round of multilateral tariff reductions by the EU would decrease the likelihood that new EU members would need to harmonize their tariffs upwards, thereby diverting existing trading patterns.

Another issue which was raised in connection with EU enlargement is the effect that it will have on Europe's influence in international organizations, like the WTO and the OECD. Mr. Kimon Valaskakis (Canadian Ambassador to the OECD) explained that in the OECD, for example, Europe now accounts for 20 out of 26 members.<93> The EU is the major player in the OECD, and this is something with which Canada and other outside countries have to deal, according to Valaskakis. The Committee notes that, in recent years, disagreements in both the OECD and the WTO have erupted over whether a North American or a European will lead these institutions. As the EU membership grows through enlargement, so will its economic and political weight in international organizations.<94>

Finally, something should be said about the implications of EU enlargement for international disputes. Two points are relevant here. First, at the present time, a disagreement over a single issue that involves primarily the interests of one Member State has the power to disrupt Canada's relations with the entire EU. The case in point is the June 1996 suspension of negotiations on the Canada-EU Action Plan because of EU objections to Canada's fisheries policies, in particular the extraterritorial application of Canadian law under Bill C-29. As the number of EU Member States increases, the EU will be forced to defend a growing number of different national interests. For outside countries, such as Canada, this means that the possibility of running afoul of the EU will be multiplied as enlargement proceeds.

The second point about international disputes concerns the imbalance of power when a medium-sized country, such as Canada, negotiates with a large bloc of countries, like the EU. Canada is already at a decided disadvantage in negotiating with a 15-member EU, which has a GDP more than ten times that of Canada. As the EU enlarges to possibly 28 countries, the Union's economic and political leverage will grow in relation to that of Canada. The growing divergence in relative power will place Canada in an increasingly more disadvantageous bargaining position.

E. Conclusion and Recommendations

The Committee fears that future EU enlargements could have serious consequences for Canadian trade and investment patterns. Although existing Canadian trade and investment links with the countries of central and eastern Europe are relatively modest, certain of these economies are now growing rapidly as economic reforms take hold. In another 10 years, these countries could represent sizable potential markets for Canadian exports. Accession to the EU will increase their economic growth but it may also restrict access by Canadian exports to these promising markets.

The Committee recommends that the Canadian government monitor the progress of all discussions between the European Union and prospective members in order to prepare a strategy for dealing with EU enlargement. We recommend that this strategy should include the following elements:

First, the Canadian government should immediately commission an analysis of the potential impact on Canada of future EU enlargements. The analysis should examine three implications of enlargement for Canada:

(1) potential diversion of trade;

(2) potential diversion of investment;

(3) the effect on decision-making in those institutions of which Canada is a member.

Second, the Committee believes that it is imperative that the Canadian government work towards "raising the floor" of international agreements -- in other words, towards achieving rules that will bind the EU with respect to the imposition of new trade restrictions. Most importantly, the Canadian government should press for the negotiation of another round of multilateral tariff reductions. Priority should be given to concluding an agreement that would eliminate or lower tariffs on Canadian exports which, on the basis of the aforementioned study, are likely to be most affected by EU enlargement. To the extent that the EU agrees to bind its tariffs at zero (or very low rates) new EU entrants will not have to harmonize their own tariffs upwards to meet those of the EU.

In Chapter III the Committee recommended that Statistics Canada undertake an analysis to determine in which sectors Canada has been losing share of the EU import market to other competitors. In some cases these competitors have access to the EU market which is more favourable than that provided to Canada. The Minister for International Trade informed the Committee that Canada is one of the few countries without preferential access to the EU market. Therefore, the Committee recommends that the Canadian government emphasize also tariff reductions in those sectors where Canada has lost market share to competitors that have more favourable access to the EU market.

Third, the Committee recommends that, as soon as practicable, the Canadian government begin discussions with the European Union on proposed EU enlargements. It is important to begin these discussions early in order to ensure that an adequate compensation package for Canada is in place by the time the new members accede to the EU.

Fourth, ongoing negotiations with the EU should also be concluded as soon as possible, such as those involving a Mutual Recognition Agreement, a Telecommunications Agreement, an Information Technology Agreement, and a Multilateral Agreement on Investment. Perhaps the most difficult area, agricultural trade liberalization, will probably have to wait until 1999, when the World Trade Organization (WTO) Agreement on Agriculture requires the beginning of another round of agricultural negotiations.

Fifth, the Committee was impressed with the German position that EU enlargement should not be allowed to raise trade barriers to outside countries. We recommend that the Canadian government consult regularly with the German government, and, where appropriate, the governments of other EU countries, to ensure that regional integration does not run counter to multilateral trade liberalization. In this regard, the Committee recommends that the government take care to assure that Canada's bilateral relations with individual EU Member States do not weaken. In addition, we recommend that the government review the allocation of its personnel and resources to particular European countries. For example, is the allocation to Germany commensurate with the role that country now plays in the European Union?

Sixth, the Committee recommends that representatives from the Department of Foreign Affairs and International Trade be invited to appear twice each year before the Standing Senate Committee on Foreign Affairs to report on:

(1)the latest developments in the EU's plans to accept new members; and

(2)how the Canadian government is dealing with EU enlargement.

VIII. THE COMMON FOREIGN AND SECURITY POLICY

A. Introduction

The common foreign and security policy (CFSP) adopted under the Maastricht Treaty was supposed to enable the EU to project successfully its identity on the world scene. However, the EU's reluctance or inability to act in the former Yugoslavia has forced the Union to re-evaluate the operation of CFSP. Improvements to the CFSP are being considered at the Intergovernmental Conference, but these will not produce stronger policies unless the collective will to act exists on the part of the Member States. At this point, foreign policy in Europe will continue to be made at the level of the Member States themselves. The creation of a European defence identity is likely to take place within NATO rather than being constructed as a separate self-contained pillar. NATO will continue "to provide the bedrock of European security;" therefore, Canadian and American support for NATO will remain important.

B. The Origins of European Political Cooperation

The threat of Soviet invasion provided the impetus for the creation of several defence organizations in post-World War II Europe. The first of these, the Brussels Treaty Organization (BTO), established in 1948, included Britain, France, and the Benelux countries. In 1954, this organization's name was changed to the Western European Union (WEU), and Italy and West Germany became members.

By this time, however, the BTO/WEU had been reduced in significance by the North Atlantic Treaty (NAT), signed in April 1949. The North Atlantic Treaty Organization brought together in alliance the United States, Canada, the BTO countries, Denmark, Italy, Norway, Iceland, and Portugal. NATO's aim, to provide for collective security, derived from Article 5 of the Treaty, which states that an attack on one member is deemed to be an attack on all members. "The assumption was that the provision of an adequate military shield served to convince Moscow that aggressive acts would not go unopposed. In the longer term, economic recovery in western Europe would provide the means for self-help."<95>

Canadians have remained committed to NATO since its formation. "As long as there was a fear of nuclear holocaust which would engulf Canada most Canadians understood the rationale for participating in NATO and supporting its two-track policy of defence/deterrence and dialogue/détente. Canadian policy under successive governments was committed to making both a military and a diplomatic contribution to the alliance. Indeed, Canadian defence policy was almost entirely devoted toward NATO requirements. Two lessons had been learned from this country's wars: that it cost far more to fight a war than to prevent one; and that stability in Europe had a direct bearing on the security of North America, indeed, that the security of one could not be divorced from that of the other."<96>

The North Korean invasion of South Korea in June 1950 raised concerns in Europe about a possible Soviet invasion of Europe. These led to demands for a larger European defence capability. The United States wanted to rearm West Germany, but some European countries, notably France, had no zeal for such a move so soon after the war. An idea for a European Defence Community (EDC), designed by Jean Monnet and put forward by French Prime Minister René Pleven in October 1950, was based on principles similar to those underlying the European Coal and Steel Community (ECSC) -- a common budget, a Council of Ministers, and a European Ministry of Defence. As one commentator said: "The kernel of the proposal was to arm Germans but not Germany."<97>

The EDC Treaty was signed in May 1952 by the ECSC's six Member States and was ratified by Germany and the Benelux countries. However, the French Assembly, still nervous about German re-armament, decided not to ratify, with the result that the EDC never came into being. The Treaty is noteworthy because it would have created a real European defence identity under the NATO umbrella -- a concept that the EU has now decided to put into action.

A plan for the political union of the six EEC members was put forward in 1962 by a committee headed by Christian Fouchet, the French Ambassador to Denmark. But once again the plan foundered when member countries were unable to agree within the Committee on the nature of the projected political union.

In 1969, the Hague Summit called for more progress on economic and political union. This was followed by the Paris Summits of 1972 and 1974, which proclaimed European Union as a goal to be achieved by 1980. The Tindemans Report, drawn up at the request of EC Leaders, set forth a plan to introduce economic and monetary union, to reform the EEC institutions, to implement a common foreign policy, and to establish common regional and social policies. Again, the plan came to naught because of differences of opinion between Member States concerning the essential constitutional and institutional reforms.

Although the Tindemans initiative ultimately failed, in 1970 the Member States approved the Davignon Report (named after the Political Director in the Belgian Foreign Ministry), which resulted in a process called European Political Cooperation (EPC). This mechanism involved meetings between EC Foreign Ministers at least twice a year to discuss foreign policy matters and the establishment of constant contacts between officials from Member States. The goal was to improve communications between members and to try to reach a common position on key foreign policy issues.

In 1984, a draft treaty on European Union put forward by the European Parliament would have transferred new powers to the EC, including powers in the foreign policy area. Yet, once again the proposals proved too adventurous for the Member States.

A formal legal framework for European Political Cooperation (EPC) was provided in the Single European Act of 1986; however, the process remained purely intergovernmental in nature. One drawback was that common positions had to be achieved by unanimous agreement, and security discussions were limited to political and economic considerations. The failure of the EC to speak with one voice during the 1991 Gulf War and the need to take decisive action in the former Yugoslavia forced a re-appraisal of the role the EC should play in foreign policy.

C. The Common Foreign and Security Policy

In 1989 and 1990 several interrelated events occurred: the collapse of the Soviet Union, the fall of the Berlin wall, and German unification. As a consequence, political leaders, such as German Chancellor Helmut Kohl and French President François Mitterrand, began to press for greater European political integration. The purpose was to anchor Germany more securely in Europe. It was agreed, therefore, at the Dublin European Council meetings in April 1990, to establish the Intergovernmental Conference on Political Union. The results of that IGC formed the basis of the Maastricht's Treaty on European Political Union, of which CFSP forms a part.

The common foreign and security policy and justice and home affairs elements of Maastricht are dealt with in Titles V and VI of the Treaty. These two areas correspond to the second and third pillars, respectively, of the European Union, under which decisions are to be taken on an intergovernmental basis. In other words, the Member States did not agree to devolve final authority in these areas to the EC's supranational authorities -- the Commission, the Parliament, and the Court of Justice.

Objectives of the Common Foreign and Security Policy

Title V of Maastricht provides an intergovernmental procedure by which the principles and general guidelines of the common foreign and security policy are to be established by the Heads of Government in the European Council. Decisions of the Council<99> defining and implementing the CFSP are to be taken unanimously. Two types of instruments are available for the execution of the common foreign and security policy:

(1) common positions, which are "intended to make cooperation more systematic and coordinated."<100> Member States are supposed to ensure that their national policies conform to the common positions, and are to uphold the common positions in international fora. In order to facilitate the adoption of common positions, Member States have declared that whenever possible they will avoid using their veto if there is a qualified majority in favour of a position.

(2) "joint actions, under which both national and Community resources (of all sorts: manpower, know-how, finance, material, etc.) are directed to achieving the concrete objectives adopted. These joint actions also commit Member States. While the adoption of these actions requires unanimity, the precise way they are put into practice may be settled by qualified majority."<101>

The Maastricht Treaty clearly states that security matters are included under CFSP: "The common foreign and security policy shall include all questions related to the security of the Union, including the eventual framing of a common defence policy, which might in time lead to a common defence."<102> Again, "the Western European Union (WEU) will be developed as the defence component of the European Union and as a means to strengthen the Atlantic Alliance."<103> For the time being, issues having defence implications are to remain subject to unanimous voting procedures.

D. Operational Assessment

Given the high hopes that some had for CFSP when it was introduced by the Maastricht Treaty in November 1993, the results have been disappointing. As Geoffrey Howe, former British Foreign Secretary, has explained: "The QMV [qualified majority voting] provisions have never been used. Relatively few joint actions have been undertaken. The CFSP budget is bogged down in controversy, immobilized between an unwillingness of individual countries to fund it, and a reluctance to let the European Union fund it for fear of the power that it might give to the European Parliament. One is reminded of Charles Péguy's comment: 'Everything begins in mysticism and ends in politics.' We certainly have been brought down to earth. Things might have looked much brighter if the Yugoslav crisis had not occurred. But that luxury has not been offered to us by history."<104>

The European Commission has made several of the same criticisms of CFSP. A Commission report states that though cooperation and coordination of foreign policy has improved under CFSP as compared to EPC, "the aim of a substantial improvement has not been achieved."<105> Also, there is confusion about the role of the instruments -- "common positions" versus "joint actions." Another reason why CFSP has been ineffective, according to the Commission, is that unanimous voting has been the rule even where the Treaty allows qualified majority voting. "Unanimity and declarations continue to predominate (the latter at the rate of roughly two per week, despite not being specified in the Treaty.)"<106>

However, it is not clear that the CFSP's unanimity voting rule is to blame for the EU's inability to take decisive action, as in the case of the former Yugoslavia. It has been suggested that more qualified majority voting under CFSP would not have led to a more resolute policy. The real reason for the immobility of EU decision-making on Yugoslavia was the lack of political will on the part of the Member States themselves.<107> The Commission states: "It needs first of all to be emphasized that the common foreign and security policy cannot develop without real political resolve on the part of the Member States, together with clearly defined objectives."<108>

Certain problems cited by the Commission relate to the connections between the three EU pillars. Common positions taken under CFSP (pillar 2) are legally binding, but actions to achieve the objectives (actions, such as economic embargos) must, in legal terms, be taken under the Community treaties (pillar 1). The lack of a proper interconnection between the pillars sometimes results in the introduction of two simultaneous Council instruments: (1) a Community regulation under the Community treaties, and (2) a common position under the CFSP. There are also questions about whether expenditures incurred under CFSP should be charged to the Community budget (i.e., under the first pillar) or to the Member States (under the second pillar).

Other difficulties reside in the security and defence aspects of CFSP. The connection between the EU and the WEU, which is supposed to assume the EU's defence identity, has been "used rarely and with limited success."<109> One problem which besets the EU's defence arrangement is overlapping memberships between the EU, the WEU, and NATO. As Figure 8.1 indicates, five EU Member States are not full members of the WEU (Ireland, Austria, Finland, Sweden, and Denmark). It has been suggested that it is impractical, or even dangerous, to consider merging the EU and the WEU when some countries are not prepared to contribute to a common defence or to undertake a mutual security guarantee.<110> The Irish government, for example, has no intention to seek membership for Ireland in either NATO or the WEU.<111> Nor does the Irish government intend to assume any mutual defence guarantees, despite having observer status at the WEU. While neutral EU Member States, such as Ireland, may not want to contribute to the collective defence of territorial integrity, they may be willing to cooperate on other aspects of collective security by participating in humanitarian, peacekeeping, and other crisis management operations.

Certain steps have been taken toward making the CFSP security aspects operational. The January 1994 NATO Summit declaration gave European NATO members permission to use Alliance resources and facilities for their operations under the Combined Joint Task Force (CJTF) concept. The WEU headquarters have been moved from London to Brussels, thus facilitating contact between the EU and NATO and helping to develop the WEU's operational capabilities. Also, the development of the Eurocorps, or joint European army, is seen as a promising development. The Commission has established a new Directorate-General for External Political Relations, using the staff which had been dealing with the issues under the EPC mechanism. The Directorate-General's structure and responsibilities were revised at the end of 1994.

E. Proposals for Change

In preparation for the 1996 Intergovernmental Conference (IGC), the European Council called on a group of experts, "the Reflection Group," chaired by Carlos Westendorp, to study the changes needed to cope with the external and internal challenges facing the European Union. Some of the Reflection Group's proposals are:

to create a legal personality for the European Union so that it can conclude international treaties under EU pillars 2 and 3;

to define more carefully the various instruments -- for example, clarification of the difference between common positions and joint actions;

to ensure greater consistency of actions taken between pillars;

E. Proposals for Change

In preparation for the 1996 Intergovernmental Conference (IGC), the European Council called on a group of experts, "the Reflection Group," chaired by Carlos Westendorp, to study the changes needed to cope with the external and internal challenges facing the European Union. Some of the Reflection Group's proposals are:

to create a legal personality for the European Union so that it can conclude international treaties under EU pillars 2 and 3;

to define more carefully the various instruments -- for example, clarification of the difference between common positions and joint actions;

to ensure greater consistency of actions taken between pillars;

to establish an analysis, forecasting, early warning system and planning unit to prepare a common foreign policy;

to increase the frequency of majority voting in the Council and to explore other ad hoc voting arrangements, such as "unanimity minus one," "super-qualified majority," etc.;

to embody the CFSP behind the figurehead of a "Mr. or Ms. CFSP";

to establish specific procedures ensuring the availability of funds for rapid action (the CFSP should be financed from the Community budget is one view);

to develop further the WEU's operational capabilities;

to preserve the intergovernmental nature of decisions related to military participation;

to continue improving the relationship between the EU and the WEU; and

to integrate gradually the WEU into the EU, in parallel with the development of European operational capabilities.

F. Implications of European Integration for NATO

It is generally agreed that Europe will have to start paying more of its own defence bill. Nevertheless, the consensus of opinion the Committee heard in Europe was that NATO will continue to be needed to help maintain European security. In other words, it is recognized that European security has to be built within NATO, rather than being constructed as a single self-contained pillar. One major reason for this is that the Europeans simply cannot afford to duplicate all of NATO's assets, particularly NATO's intelligence and transport infrastructure.<112> Also, France's return to NATO's military committee after 30 years makes it much easier to contemplate a European defence identity inside NATO.<113> Mr. Jürgen Trumpf (Secretary-General, Council of the European Union) told the Committee that since the French change in policy toward NATO, the WEU's role as the EU defence identity is very much in doubt. So far, he said, the WEU hasn't developed as expected.

Mr. Jacques Delors told the Committee that he favours the full integration of France into NATO and that it is unrealistic for Europe to have its own defence infrastructure. He questioned whether another defence structure is needed when NATO already exists. He said that a European defence pillar could act alone (without the U.S.), but using NATO infrastructure.

However, so far the EU has appeared unable to act militarily without U.S. involvement, and this is another reason why NATO will continue to be needed in Europe. As Mr. Joe Wilson (Member of the European Parliament) told the Committee, "when the United States decides to act, it acts; the EU spends most of its time bickering." The EU's failure to act decisively without NATO involvement has been a chastening experience for those Europeans who believed that CFSP would provide the EU with a single decisive foreign policy.

The Committee was told by Mr. Wojciech Lamentowicz (Under Secretary of State, Foreign Affairs Adviser to the President of Poland) that, in his view, the European defence pillar would not develop as expected. He said that any European security organization should not be separate from, or in competition with, NATO; the Alliance is the only security organization for Europe. Wojciech Lamentowicz believes that Europe is still not self-confident enough to assume responsibility for its own security; American participation in European security is essential.

The EU's policy on enlargement into central and eastern Europe has implications for NATO. Dr. David Long (Professor of Political Science, Carleton University) told the Committee that EU expansion eastward is a security question par excellence. "Whether you are thinking of security in the military sense -- that is to say, in the context of a threat to the newly democratic central European countries -- or whether you are thinking about wider security questions, such as environmental security questions or migration from east to west, or even wider. These countries are adamant, furthermore, in their desire to join the European Union. Indeed, we need to be careful. A lot of these countries, such as the Visegrad 4, are looking to the European Union anyway as a bridge to NATO membership." (32:12-14)

NATO has made the commitment to open itself to new members from central and eastern Europe at some point in time, although it still remains unclear exactly when this will occur and which countries will be admitted. Dr. Long stated: "With regard to NATO and EU expansion, however, there is a consensus. The consensus seems to be that they should be parallel or should go together, but that they should not be rigidly linked."(32:12) Dr. Long's own view is that EU expansion should come first; the new countries should first be brought into the EU, and then into the WEU, and then after an interim stage, brought into NATO. He said that NATO expansion "is likely to be a long way in the future."

Mr. Karsten D. Voigt (President of the North Atlantic Assembly, Foreign Policy Spokesman for the SPD Party in the Bundestag) gave his views to the Committee on both EU and NATO enlargement. He said that entry into the EU of the smaller states, such as the Baltics, needs to be subsidized because they cannot be allowed to join NATO at this time.

The Poles place a very high priority on joining NATO.<114> The question of NATO enlargement was addressed repeatedly by Polish officials and Polish parliamentarians during the Committee's visit to Warsaw. Mr. Longin Pastusiak (Deputy Chairman of the Sejm Foreign Relations Committee) acknowledged that, although there was no immediate security threat to Poland, there might be such a threat in 10 or 20 years. He said that in effect, by joining NATO, Poland would be acquiring insurance.

Polish representatives addressed also the question of how the Russians would react to NATO enlargement. In their view, NATO enlargement should be non-confrontational, and Russia should be involved in some way in European security arrangements. One method would be a bilateral pact between Russia and NATO. One Polish representative pointed out that Russia is involved already in other European security arrangements, such as the OSCE.

Mr. Adam Struzik (Senate Marshall, Polish Parliament) explained that Poland's goal of joining NATO is not aimed at anyone in particular; rather, given the country's geopolitical situation, what is needed is to assure the nation's general security. He insisted that Poland wants to have good relations with Russia, but stated that his country has concerns about the state of democratic development in certain countries, including Russia and the former Yugoslavia. According to Adam Struzik, NATO should enlarge to include all the countries of central and eastern Europe.

Mr. Andrzej Towpik (Deputy Minister of Foreign Affairs, Government of Poland) told the Committee that Russia is not as isolated as it claims. It is a member of a number of international organizations, including the UN and the OSCE. He said that NATO policy is transparent and that the Alliance is no threat to Russia. Furthermore, NATO maintains relations with non-members like Russia and Ukraine.

Ms. Karen McDonald (Political Advisor, Canadian Delegation, NATO) identified two NATO outreach programs which contribute to European peace and security by involving Russia and central and eastern European countries. One is the North Atlantic Cooperation Council (NACC), which carries on a dialogue between NATO and countries of central and eastern Europe. The NACC meets twice a year and is engaged in peacekeeping, science, and environmental cooperation.

The second outreach program is the Partnership for Peace (PfP), which facilitates military budgeting, training, and democratic control of the military in central and eastern European countries. Canada's primary vehicle for assisting PfP is the Military Training Assistance Program (MTAP), whereby language training, peacekeeping, safety, staff officer training, and civil-military operations are provided. Karen McDonald told the Committee that NACC and PfP are important in that they help to keep Russia and other countries engaged with NATO. Without NACC and PfP, she said, IFOR wouldn't be in Bosnia.

Dr. John Barrett (Head, Policy Planning and Speechwriting Section, Canadian Delegation, NATO) told the Committee that Russia has stated three conditions under which NATO enlargement can proceed: (1) no nuclear weapons should be stationed in the new member countries; (2) no NATO infrastructure should be located in these countries; and (3) there should be "no second wave" of new members.

G. Conclusion and Recommendations

Foreign affairs and security policy are of fundamental importance to sovereign states. Although Member States have willingly given up authority over trade and other economic issues to EU institutions, they have been extremely reluctant to surrender control over their foreign and security matters. Recognizing the sensitivity of these issues, the EU established limited objectives and instruments in connection with CFSP. Most importantly, CFSP maintains the intergovernmental decision-making nature of the European Political Cooperation (EPC) mechanism which preceded it.

The general impression that CFSP has not performed well is based partly on the unrealistic expectations that many had for the new policy, which, after all, made relatively modest changes to the EPC mechanism. There seemed to be a sense after Maastricht that "Europe's moment has come." After European dithering over what to do in the former Yugoslavia, the mood changed. One MEP sounded particularly disillusioned, telling the Committee that, after Maastricht, there was supposed to be a common foreign and security policy -- where is the CFSP after Europe's failure in Bosnia? The EU, he said, is an "ill-formed child" which doesn't have a single fist with which to act.

The 1996 IGC, now underway, is considering a number of proposals to improve the CFSP so as to enable the EU better "to assert its identity on the international scene."<115> Although the IGC may recommend a number of changes to the CFSP machinery, it is unlikely to alter the intergovernmental decision-making process, which requires unanimity in the case of major decisions. The Committee formed the impression during interviews with European policy-makers that there is little support among the Member States for a move toward supranational decision-making in this area.

It is the Committee's view that CFSP is not yet at the stage where it can replace national foreign policy making. Although the IGC may result in improvements to the EU's foreign policy-making mechanism, it is unlikely to produce stronger common policies or to result in more decisive joint actions unless the collective will exists on the part of the Member States. Moreover, as the British Government has said, "if there is no collective will within the European Union to act, it is unwise to force action through artificial voting procedures."<116>

The January 1994 NATO Summit declaration gave European NATO members the right to use Alliance resources and facilities under the Combined Joint Task Force (CJTF) concept. This allows the EU to undertake out-of-theatre missions using NATO resources, and to do so without involving the United States or Canada. Although the WEU may provide the basis of European defence cooperation, (and other organizations, such as the UN and the OSCE, have a role to play) NATO will continue to provide "the bedrock of European security."

The Committee recommends that Canada remain a firm supporter of the North Atlantic Treaty Organization (NATO). This country has limited defence resources of its own; membership in NATO acts as a "force multiplier" which helps to guarantee Canadian national security. Membership in the Alliance also permits this country to make a valuable contribution to European and global security by participating in NATO peacemaking activities, such as the Implementation Force (IFOR) in Bosnia. By participating in NATO outreach programs, such as the North Atlantic Cooperation Council (NACC) and the Partnership for Peace program (PfP), which keep Russia and the countries of central and eastern Europe engaged with NATO, Canada also is contributing to global peace and security.

With respect to NATO enlargement, the decision already has been made by the 16 NATO leaders; the only questions left are who and when? Prime Minister Jean Chrétien has said that Canada's position on NATO enlargement is that countries moving toward democracy and market economies should be accorded full membership in the Alliance.<117> The major stumbling block is the Russian reaction to NATO enlargement. However, as Mr. John Anderson (Canadian Ambassador and Permanent Representative to NATO) explained, NATO is not marketing itself; it is responding to a "knock on the door." Moreover, according to him, we must not fail to ask the question: "What happens if we don't enlarge?"

The Committee recommends that the Canadian government consider carefully on its own merits each country's application to join NATO so as to ensure that approval of the application will serve Canada's interests. Non-member countries should not be allowed to determine who does, and who does not, become a NATO member. At the same time, NATO members must be cognizant of the reaction of outside countries.

Therefore, the Committee recommends that the Canadian government encourage NATO to continue to implement policies that will help to ensure that the enlargement process does contribute to enhanced security and stability in Europe. Consequently, it is imperative that NATO continue to build bridges between itself and Russia. In particular, the Committee believes that NATO outreach programs, such as PfP and NACC, have a key role to play in serving as vehicles for consultation and cooperation between the Alliance and non-member countries, especially Russia. The Organization for Security and Cooperation in Europe (OSCE) -- the organization with the widest membership -- also has an important role to play in securing Europe's security and stability by overcoming divisions between NATO members and non-members.

The Committee recommends also that, in enlarging its membership, NATO ensure that its decision-making ability is not hampered. In order to remain effective, the Alliance must be able to take decisions quickly on the basis of consensus. As the organization becomes larger and more heterogeneous, the danger that decision-making may become bogged down increases as members' interests come into conflict.

Finally, the Committee recommends that the Canadian government undertake a study of the implications for Canada's national interests of the development of a EU common foreign and security policy.<118> An area which deserves attention is the linkage between NATO and the Western European Union (WEU). As EU enlargement proceeds, more countries will become members of the WEU, which is both the EU's defence component and the European pillar of the Atlantic Alliance. Should those countries that are expected to become EU members be given special consideration when they seek to join NATO? Is there a danger that EU enlargement could provide a "backdoor" means of entry into NATO for certain countries? What are the implications of the emergence of a European pillar within NATO for the nature of the Alliance?

IX. JUSTICE AND HOME AFFAIRS

A. Introduction

Under the so-called "third pillar" the Maastricht Treaty established cooperation in matters of immigration policy, asylum, combating drug trafficking and terrorism, combating international fraud, and other similar areas. Although some progress has been made toward increasing cooperation on justice and home affairs issues, the Member States are reluctant to surrender sovereignty in these areas. However, the prospect of common EU policies in the area of justice and home affairs offers Canada an opportunity to pursue cooperation with the Union on some of these important issues.

B. Background

As with foreign affairs and external security, issues related to justice, internal security, and immigration traditionally have been regarded as the exclusive preserve of national governments. Reluctant to transfer authority in these sensitive areas to Community institutions, Member States initially sought to strengthen their cooperation through various intergovernmental fora.

An early attempt to combat terrorism was made in 1976 when the TREVI Group, comprised of Member States' justice and interior ministers, met for the first time.<119> The Group was set up initially to discuss the apprehension and prosecution of fugitive terrorists, but progressively it expanded its ambit to include enforcement in other areas. The TREVI Group subsequently split into four key working groups: TREVI I, which was concerned with combating terrorism, involved liaison between police forces; TREVI II worked on public order issues, football hooliganism, forensic science, legal possibilities for tapping communications, finger-print data bases, etc.; TREVI III discussed issues involving serious organized international crime, such as drug trafficking, money laundering, law enforcement on environmental offences, and art theft; TREVI 92 covered police and security issues related to freedom of movement of persons, cross-border pursuit, the creation of a European Information System, and compensatory measures to combat the relaxation of internal border controls.<120>

The Schengen Agreement, signed in 1985, commits the members (the Benelux countries, France, and Germany) to the gradual removal of checks at shared borders and free passage for anyone crossing these borders. Parts of the agreement came into force on 1 January 1986; other elements required further consultation. The Agreement provides common rules on measures to combat terrorism, smuggling, and organized crime. It also provides for the standardization of procedures affecting tourists, asylum-seekers, and legal immigrants from outside countries. Other countries have entered into the Schengen agreement -- Italy (1990), Spain and Portugal (1991), Greece (1992), and Austria (1995); and negotiations are now underway which would bring Finland and Sweden into the agreement. On 26 March 1995, other elements of the Schengen Agreement came into force between the Benelux countries, Germany, France, Spain, and Portugal.<121> In April 1996, agreement was reached to bring all the Nordic Union states into Schengen, with Finland, Sweden, and Denmark accepted for eventual membership and Iceland and Norway accepted as permanent observers.

The need for greater cooperation in the areas of justice, immigration, and asylum came to the fore during the introduction of the single market program. The imminent realization of the single market gave rise to concerns that the four freedoms -- free movement for goods, services, capital, and persons -- would be exploited by criminals, terrorists, and illegal immigrants. The Maastricht Treaty reflected the realization that there was a need to bring justice and home affairs issues into the EC structure in a formal sense.

C. The Maastricht Treaty

The Maastricht Treaty provides that legal competence for judicial cooperation resides in an intergovernmental arrangement. Decisions in this area by the Council of the European Union (in this case the Council on Justice and Home Affairs) are taken on the basis of unanimity, except in matters of procedure, or in cases where the Treaty specifies a two-thirds majority. The Council on Justice and Home Affairs meets formally at the ministerial level twice during each Presidency and there are one or two informal meetings. The Council is supported by a group of senior officials, known as the K.4 committee. (The Committee is named after the section of the Maastricht Treaty providing for its establishment.) The Treaty establishes three kinds of legal instruments for use by the Council in the fields of justice and home affairs. These are common positions, joint actions, and conventions.

Under Maastricht Title VI, nine areas of common interest are subject to judicial cooperation. These correspond closely to the major elements of the Schengen Agreement, and relate to concerns raised about the completion of the single market.<122> These areas are:

(1) asylum policy;

(2) rules governing, and controls on, the crossing by persons of the external borders of the Member States;

(3) immigration policy and the residence rights of third country nationals;

(4) combating unauthorized immigration and the establishment of rules governing residence and work by third country nationals;

(5) combating drug trafficking;

(6) combating international fraud;

(7) developing judicial cooperation on civil and criminal matters;

(8) customs cooperation; and

(9) police cooperation to combat terrorism, drug trafficking, and other serious crimes through the creation of a European-wide police intelligence office, known as Europol.

The role of the EC's supranational institutions is limited in the area of justice and home affairs. The Commission has the right to initiate policy, but it shares this right with the Member States in six of the nine areas covered by the third pillar. The European Parliament has the right to be kept informed, the right to be consulted on the principal areas of judicial cooperation, and its views are supposed to be taken into consideration. Normally, the European Court of Justice does not have jurisdiction over third pillar disputes, but the Council may make provision for this in some areas.

D. Operational Assessment

The Commission's assessment of the achievements under Maastricht's justice and home affairs provisions states that, so far, the Council has made very little use of the Treaty's new legal instruments -- common positions, joint actions, and conventions drawn up by the Council.<123> According to the Commission, there is a marked preference by the Council for the use of the old instruments, such as recommendations, resolutions, or conclusions, which were available before the Treaty came into effect. With respect to the substance, "practically all the topics dealt with flow from the impetus given by the Luxembourg European Council (June 1991). In this respect the Treaty has had no significant innovative impact."<124>

The Commission identified certain problems with the Treaty's legal instruments. In particular, there is disagreement over whether joint actions and common positions are mandatory or not; adoption and implementation of conventions is slow and complicated; the unanimity voting rule has been a major source of paralysis; and there is no monitoring of any actions adopted.

Problems connected also with the introduction and implementation of Title VI proposals have been identified. Although the right to initiate actions has been extended to all Member States, and to the Commission in a number of areas, many proposals and initiatives, as before Maastricht, still emanate primarily from the Council Presidency. In addition, the European Parliament has not been consulted on certain initiatives of the Presidency. (However, the disagreement between the Parliament, the Commission, and the Member States over the powers and role of Parliament under Maastricht goes beyond third pillar issues.) Too many overlapping administrative structures are involved in the negotiations in this area, structures such as the Council, Coreper, the Article K.4 Committee, steering groups, and working parties. Although the Maastricht Treaty says that the Council may call on the Court of Justice to interpret and adjudicate disputes involving conventions in this area, there is disagreement between the Member States over exactly how broad a role the Court of Justice should have.

As in the case of CFSP, difficulties stem also from the lack of clear demarcation between the EU pillars -- in this case, the Community pillar and the justice and home affairs pillar. For example, in the area of visa policy, the Community establishes the list of non-member countries' nationals who require visas, while the Member States decide, on the basis of intergovernmental cooperation, the conditions under which the visas are to be issued.

E. Proposals for Change

A number of proposals for reform of the EU's third pillar have been put forward for consideration at the IGC by the Reflection Group.<125> Included are the following changes:

The IGC should define better the objectives in this area of the Treaty; this would clarify actions contemplated and the final goals sought.

The instruments (common positions, joint actions, and conventions) to carry out the policies in this area need to be improved. Perhaps, the intergovernmental instruments should be replaced by a legal framework.

Policy areas should be identified where less intergovernmental decision-making is necessary to the end that the Community institutions can play a greater role (the Commission's right of initiative, control by the European Parliament and the Court of Justice, and the use of majority voting). One policy area where this might apply is the crossing of external frontiers (arrangements for aliens, immigration policy, asylum, and common rules for external border controls).

There should be closer intergovernmental cooperation in the fields of justice and police affairs.

The number of preparatory levels necessary for the introduction of policies should be reduced.

The Schengen Agreement should be incorporated into the Treaty (according to some, but not all, members of the Reflection Group).

F. Conclusion and Recommendation

Dr. Gretchen MacMillan (Associate Professor of Political Science, University of Calgary) told the Committee that there had been some successes in the area of justice and home affairs, but that there had also been a great many failures. Many of the problems, in her opinion, arise from the fact that justice and home affairs issues (along with those associated with CFSP) "go to the heart of the nation state and these are probably the last areas in which the nation state is willing to give up control."(31:9)

In Ireland, the Committee heard from Gay Mitchell (Minister of State for European Affairs) that one area of potential cooperation between Canada and the EU relates to third pillar activities, such as combating drug trafficking, money laundering, and terrorism. Mr. Mitchell seemed particularly interested in obtaining Canada's cooperation in dealing with drug trafficking. He stated that third pillar issues would be given priority during the Irish presidency.

The Committee notes that justice and home affairs issues have been included in proposals for a Canada-EU Action Plan. However, we recognize that there is some resistance within the EU to negotiating with outside countries to achieve closer cooperation in these areas. For example, in June 1995, the EU Justice Council announced new rules which restrict the EU's ability to negotiate in this area with third countries. These new rules were put into effect because of French concerns about third-country involvement in internal EU affairs. Nevertheless, Canadian ministers and officials met September 29-October 2, 1995, with Ms. Anita Gradin, EU Commissioner responsible for Immigration and Judicial Affairs. A program for further cooperation on third pillar activities resulted from this meeting.

It is in Canada's interest to be able to deal with the EU on the basis of single unified policies affecting immigration, asylum, organized crime, drug trafficking, and other third pillar issues. Not only would it be less costly and more efficient for Canada to negotiate agreements with one actor, rather than with 15 national governments, but it would help prevent criminals, terrorists, and illegal immigrants from exploiting differences in bilateral treaties between Canada and the several EU countries.

The Committee recommends that the Canadian government continue to pursue cooperation with the EU in third pillar areas. These include immigration and asylum, as well as combating organized crime, terrorism, money laundering, illegal arms trade, and drug trafficking.

X. FORGING CANADA-EU LINKS

A. The Framework Agreement

From the beginning, Canada supported European integration, believing that it was an important element in maintaining European security. As Professor Pentland explained to the Committee, concerns about certain EC protectionist practices, such as the common agricultural policy, did not come to a head until the UK decided to join the Community in the 1960s. In 1973, the UK was finally admitted to the EC, forcing Canada and other Commonwealth countries to seek other markets for agricultural exports.

At about the same time, Canadian policy-makers became concerned about the growing dominance of U.S.-based interests in the Canadian economy. American ownership of Canadian industry had been growing and Canadian trade was becoming increasingly north-south oriented. This made Canada vulnerable to changes in U.S. policies, such as the temporary 10% import surcharge introduced in 1971 by President Nixon to defend the U.S. dollar. These factors led Secretary of State for External Affairs, Mitchell Sharp, in 1972, to propose the so-called "third option" under which Canada adopted a long-term policy designed to strengthen the Canadian economy and to reduce Canadian vulnerability to the U.S.<126> In practice, however, the third option came to be associated solely with obtaining a "contractual link" with Europe rather than with the goal of general economic diversification.

The European Community also saw some potential benefits from the establishment of a link with Canada. To the EC, Canada represented a source of abundant natural resources and raw materials. Furthermore, the Europeans were accumulating significant direct investments in Canada and were concerned about the effect that Foreign Investment Review Agency (FIRA) rulings might have on these.

In 1976 Canada and the European Union signed the Framework Agreement for Commercial and Economic Co-operation Between Canada and the European Communities. This Agreement, which laid out a structure to manage and develop cooperation between business and governments, was intended to promote reciprocal commercial exchanges and to foster mutual economic cooperation.

The Agreement established a Joint Co-operation Committee (JCC) in which senior officials from the Government of Canada and the European Commission, as well as representatives from the Canadian provinces and the EU Member States, meet regularly. A number of sub-committees and working groups, each pursuing cooperation in its own area, report to the JCC. The Framework Agreement also established a tradition of regular meetings between the Canadian International Trade Minister and the European Commissioner responsible for External Economic Relations.

It is difficult to evaluate the results of the Framework Agreement. It can be argued that, in terms of success in diversifying Canada's commercial relations, the Agreement failed to deliver. Canada's exports to the EC over the past 19 years have continued to decline as a proportion of total exports. This is, perhaps, not surprising given the fact that the Agreement "created few obligations and no special rights for the contracting parties, and it offered no advantages that would stimulate the interest of businessmen."<127>

Nevertheless, the Framework Agreement laid the foundation for cooperation between government officials. And this led to the creation of the Industrial Cooperation Sub-Committee, which pursues areas of mutual interest in the industrial policy field, and the Trade and Investment Sub-Committee, which provides a warning system for potential trade irritants. Other areas of cooperation have been developed in specific sectors, such as metal and minerals, wood and paper products, and information technologies. Special annual consultations take place between Canadian and EU representatives in the environmental and telecommunications fields.

B. The Transatlantic Declaration

In 1990, the Declaration on EC-Canada Relations, or Transatlantic Declaration, was issued. The Transatlantic Declaration (TAD) broadens the scope of political dialogue between Canada and the EU. Most importantly, it provides for annual meetings between Canada's Prime Minister and the President of the Council of the European Union. For example, Prime Minister Chrétien met with EU President Jacques Santer and French President Jacques Chirac in June 1995 during the G-7 Summit in Halifax. Also, other meetings have taken place in the context of the TAD, including the meeting between Canada's Prime Minister Jean Chrétien and Italian Prime Minister Lamberto Dini in January 1996 at the Sharm al Sheik Summit, the visit by Sir Leon Brittan to Ottawa in March 1996 for discussions with International Trade Minister Art Eggleton, the meeting between Canada's Foreign Affairs Minister Lloyd Axworthy and Italian Foreign Minister Lamberto Dini in Berlin in April 1996, and the TAD Summit with Canada's Prime Minister Jean Chrétien, European Commission President Jacques Santer, and Italian Prime Minister Romano Prodi, which took place in Rome on 26 June 1996.

C. The Science and Technology Cooperation Agreement

The Canada-European Union Agreement for Science and Technology Cooperation was signed in June 1995 on the margins of the G-7 Summit in Halifax. It provides Canadian companies, universities, and research institutes an opportunity to compete (with their European partners) for projects under the European Commission's Framework Research and Technological Development (RTD) Program. For the years 1994-98, the Commission has earmarked about $21 billion for the RTD program, which will cover all research and technological development activities funded by the EU, rather than by the Member States themselves.

The Department of Foreign Affairs and International Trade has identified the Agreement as an important element in the strategy to develop transatlantic links. In October 1995, the Department held three major conferences, one in Montreal, a second in Toronto, and a third in Vancouver, to inform the Canadian business community of the opportunities provided by the Agreement. According to the Department, over 60 Canadian organizations, in conjunction with their European partners, are already competing for EU Research and Development projects.

D. The Higher Education and Training Cooperation Agreement

On 19 December 1995, Canada and the EU signed the Agreement Establishing a Cooperative Program in Higher Education and Training. This agreement is designed to encourage joint projects between consortiums mainly of institutes of higher education, from both sides of the Atlantic, thus increasing the international mobility of students. At the closing date for the first competition, 56 proposals for joint programs had been made.

E. Parliamentary Links

In addition, Canada has extensive contacts with Europe through parliamentary associations and friendship groups. Direct links between the Canadian and European parliaments are maintained through the Canada-Europe Parliamentary Association (CEPA), officially established in 1980. CEPA is responsible also for maintaining contacts with other European organizations, such as the Council of Europe, the Western European Union, and the Organization for Security and Cooperation in Europe; however, CEPA's main focus of activity and exchange is with the European Parliament.

CEPA membership numbers over 200 Canadian MPs and Senators with an average of more than 30 members participating in delegations annually. Canadian delegations visit Brussels every second year while Canada hosts Members of the European Parliament in the other years. CEPA provides members with a means of learning about European developments and gives them an opportunity to make known Canadian views on issues of importance to Canada, such as fisheries, trade, and environmental matters. It is Canada's turn in 1996 to host the meeting of the parliamentary delegation.<128>

F. The Transatlantic Dialogue

1. The Origins of the Transatlantic Dialogue

Credit for launching the transatlantic dialogue between Europe and North America goes to Canada's former International Trade Minister Roy MacLaren. The seed of the idea was planted in a September 1994 speech by Mr. MacLaren when he asked the question: if we can contemplate free trade with Latin America and with Asia Pacific, why not negotiate a free trade agreement with our traditional trading partners in Europe?(27:8)

Subsequently, Prime Minister Chrétien, addressing the French Senate on 1 December 1994, proposed the negotiation of a trade liberalization agreement between the NAFTA countries and the European Union. In other speeches, MacLaren developed further the transatlantic free trade idea, calling for "the removal of industrial tariffs by a specified date," and for agreements on investment and competition.<129>

Paul Dubois (Director General, Western Europe Bureau, DFAIT) told the Committee that two of Canada's most important trading partners, the United Kingdom and Germany, responded extremely favourably to the idea of strengthening transatlantic economic links. In fact, according to Mr. Dubois, the German Foreign Minister, Klaus Kinkel, was enthusiastic about the concept of a free trade agreement between Canada, the United States, and the European Union. The same was true in Great Britain, where both Malcolm Rifkind, the current Minister of Foreign Affairs, and Douglas Hurd, his predecessor, were "very open to the Canadian message" and encouraged Canada to develop the dialogue.(27:8) The TAFTA proposal was also received favourably by other EU countries, including Italy, Sweden, and the Netherlands.

However, some other countries, France and the United States, for example, were at best lukewarm to the idea of transatlantic free trade. One U.S. official dismissed the idea out of hand, calling it "an idea in search of a problem." Nevertheless, Canada's TAFTA proposal seems to have given impetus to a new dialogue between Europe and North America. This point was confirmed to the Committee by officials in Europe. Mr. Stephen Wright (British Undersecretary of State (EU)), told the Committee that Roy MacLaren had made an enormous contribution to the transatlantic debate by putting forward the TAFTA proposal. According to Wright, Mr. Rifkind is still committed to the TAFTA concept.

2. The U.S.-EU Action Plan

In the spring of 1995, the Spanish approached the United States with a proposal to renew U.S.-EU relations. In a 2 June 1995 speech in Madrid, U.S. Secretary of State Warren Christopher, while skirting the transatlantic free trade issue, recognized the need for a new relationship. This speech signalled that the U.S. was willing to take up the Spanish offer to negotiate a new U.S.-EU partnership.

When discussions began between the U.S. and the EU on the possibility of a joint action plan, the Canadian government pressed for the trilateralization of the negotiations. The rationale for Canadian participation, according to Mr. Jean-Pierre Juneau (Assistant Deputy Minister, Europe Branch, DFAIT), was to maintain a level playing field for trade and investment between the European Union and North America. "New transatlantic trade and/or investment agreements that exclude Canada could have negative economic consequences for Canadian jobs and growth." (1:11)

But two events intervened, making it impossible for Canada to gain entry to the negotiations. First, in March 1995, Canadian authorities seized the Spanish fishing vessel, Estai, in international waters, souring Canada-EU relations. When Sir Leon Brittan visited Ottawa in May 1995, he put Canada on notice that relations would be strained for some time.<130> Second, on 1 July 1995, Spain assumed the Presidency of the Council of the European Union, thus acquiring control of the EU agenda for the next six months.

On 3 December 1995, U.S. President Bill Clinton, the President of the EU Commission, Jacques Santer, and the President of the Council, Felipe Gonzalez, meeting in Madrid, signed an accord entitled, the New Transatlantic Agenda. This accord establishes a Joint U.S.-EU Action Plan with four shared goals: Promoting peace and stability, democracy and development around the world (foreign policy and security issues); Responding to global challenges (cooperation in the areas of justice, immigration, health and the environment); Contributing to the expansion of world trade and closer economic relations (strengthening multilateral trade and creating a new transatlantic marketplace); and Building bridges across the Atlantic (the transatlantic business dialogue and cooperation in science and technology).

The third element of the Action Plan -- Contributing to the expansion of world trade and closer economic relations -- is made up of three sections -- (1) Strengthening the multilateral trading system; (2) The New Transatlantic Marketplace; and (3) Jobs and growth.

With respect to Strengthening the multilateral trading system, the Action Plan exhorts the two parties:

to adhere to multilateral rules;

to ensure a successful Singapore ministerial meeting of the WTO;

to complete unfinished business from the Uruguay Round (including telecommunications and maritime services);

to launch negotiations on government procurement;

to ensure the full implementation of the TRIPs agreement;

to deal with "new" trade issues involving the environment, investment, competition policy, and labour standards;

to conclude an Information Technology Agreement;

to explore the possibility of further tariff reductions on industrial products and the acceleration of Uruguay Round tariff cuts;

to develop international standards for customs procedures; and

to implement the 1994 OECD Recommendation on Bribery in International Transactions.

The second part of the trade and economics section -- The New Transatlantic Marketplace -- sets out the matters that the EU and the United States intend to address on a bilateral basis.

The New Transatlantic Marketplace calls on the U.S. and the EU:

to carry out a joint study on ways of facilitating trade in goods and services and further reducing or eliminating tariff and non-tariff barriers;

to resolve bilateral trade issues and disputes;

to conclude agreements on standards, certification and regulatory issues;

to conclude an agreement on veterinary standards;

to increase the coverage of the U.S.-EU bilateral commitment on public procurement;

to address intellectual property issues;

to expand the dialogue on financial services to include aspects of relations with third countries;

to conclude a customs cooperation and mutual assistance agreement;

to expand and develop the bilateral Information Society Dialogue;

to reduce obstacles to cooperation in research and development in the field of information and communications;

to examine options for deepening cooperation on competition;

to discuss data protection issues;

to consult on design and implementation of Global Satellite Systems, improve cooperation on air traffic management and consult on maritime transport safety;

to intensify cooperation on energy-related issues;

to cooperate in the area of biotechnology; and

to explore an agreement for the exchange of information on health and safety issues at work

3. Canada-EU Negotiations

The Canadian government has continued to make the case that the transatlantic initiative should include Canada, in other words, that it should not be a bilateral process involving only the European Union and the United States. Nevertheless, in the absence of trilateralization, the Canadian government began to proceed along a track parallel to that of the United States and the EU. In October 1995, Canada and Germany formed a working group to develop an outline for a Canada-EU Action Plan.

The fruit of this collaboration, a working document outlining a Canadian proposal for a Canada-EU Action Plan, was presented by Canada to the European Commission and the Italian Presidency in January 1996. The document, which forms the basis of the Canadian government's negotiations with the EU on an Action Plan, covers three main areas: (i) Economic and Trade Issues; (ii) Foreign Policy and Security Issues; (iii) New Global Challenges.

(i) Elements of the Canadian Proposal for an Action Plan

(a) Economic and Trade Issues

The Canadian government supports the initiation of a transatlantic study on ways to facilitate trade in goods and services and to reduce further or to eliminate tariff and non-tariff barriers. In addition, it advocates a number of other steps including:

the early resolution of trade disputes;

the establishment of an early warning system to prevent trade and investment disputes;

the reduction and elimination of non-tariff barriers by harmonization and development of product standards and through mutual recognition of certification and testing procedures;

the early completion of WTO negotiations on procurement;

the conclusion of a multilateral investment accord at the OECD;

the completion of negotiations in telecommunications and maritime services and cooperation and consultation in other service sectors;

work on new issues, such as trade and the environment, trade and competition policy, and trade and labour standards;

better harmonization of export controls on dual-use goods and the creation of more convergence on arms export policies;

expansion of the Information Society Dialogue;

more cooperation on science and technology, including biotechnology; and

full participation of Canadian business in the Transatlantic Business Dialogue.

(b) Foreign Policy and Security Issues

The Canadian document of January 1996 states that Europeans, Canadians, and Americans have a pre-eminent stake in the security of Europe, the spread of democracy, the rule of law, respect for human rights, and support for effective international efforts in the resolution of international and civil conflicts. Canada is committed, it says, to a process of strengthening the ability of Europe and North America to act together. The Canadian government believes that Canada and the European Union should strive to achieve the following:

a commitment to NATO and to opening NATO to new members and adaption to new missions;

to strengthen the OSCE;

an active dialogue between the Western European Union and Canada and the United States in the development of a European defence identity;

increased transatlantic consultation and cooperation in multilateral and regional fora, such as the UN and in organizations such as the EBRD;

regular joint consultation by Ministers and by officials on political developments in other regions;

an improvement of UN humanitarian operations and of the coordination of Canada and EU aid programs; and

joint action to prevent conflict in the North Atlantic, central and eastern Europe, and elsewhere in the world.

(c) New Global Challenges

According to the document, the Canadian government believes that there is substantial scope for greater transatlantic cooperation in the areas of justice and domestic policy issues, and that discussion in this area should incorporate the following items:

exploration of joint measures to address all forms of international organized crimes including drug trafficking, terrorism, hate crimes, computer crimes, money laundering, the smuggling of firearms and radioactive materials, etc.;

increased cooperation on the movement of people and in combatting illegal migration;

cooperation in combatting sex tourism;

coordination in the development of the information highway;

cooperation to enhance transborder data flows;

better coordination in the delivery of legal and technical assistance programs in justice and home affairs for central and eastern Europe;

cooperation in transborder environmental issues and sustainable development;

cooperation on the sustainable development of the Arctic; and

cooperation for further recognition and enforcement of civil judgments.

(ii) Discussion of the Canadian Proposal for an Action Plan

Many of the issues set forth in the United States-EU Action Plan are addressed in the Canadian proposal. However, as Mr. Juneau explained to the Committee, the Canadian proposal is much more concise than the EU-U.S. Action Plan. First, through the various bilateral agreements outlined earlier, Canada already has advanced its relationship with the EU much further than has the U.S. For example, as already mentioned, the 1976 Framework Agreement requires annual consultations between Canadian and EU officials on matters of joint concern; and the 1990 Transatlantic Declaration mandates annual meetings between the Canadian Prime Minister and the EU President. In addition, Canada has new bilateral agreements covering both (a) education and (b) science and technology.

Second, according Mr. Juneau, "the Canadian proposal is a more focused, action-oriented agenda than the EU-U.S.A. plan. The Canadian proposal addresses our priority interests. Among these, economic and trade elements figure prominently." (1:12) The Canadian government's short-term economic objectives include "the resolution of outstanding bilateral trade disputes, acceleration of scheduled WTO tariff reductions, the conclusion of a series of bilateral agreements currently under negotiation, enhanced cooperation in the WTO, and a more active transatlantic business dialogue." (1:12)

Although the Canadian government believes that there is not enough support in Europe or the United States just now to reach an agreement on a transatlantic free trade area, one of its long-term objectives, according to Mr. Juneau, includes "the reduction and, where possible, eventual elimination of barriers to transatlantic trade and investment." (1:12) One element in the strategy is the proposal for a transatlantic study to determine ways to facilitate trade in goods and services. The government has identified the transatlantic study proposal and a number of other issues as those which should be pursued on a trilateral basis. In the preamble to the proposals, the government states: "We recommend that this action plan be pursued on a trilateral (Canada, USA, EU) basis wherever a trilateral basis is appropriate and offers reasonable opportunities for achieving substantial results."

(iii) The European Commission's Proposal for an Action Plan

On 28 February 1996, the European Commission, with the purpose of ensuring better cooperation on economic, political, and security issues, submitted to the Council its own proposals for closer ties with Canada. The Commission document proposals are covered under four main areas: (i) Foreign policy and security ; (ii) Trade cooperation and investment; (iii) Justice and home affairs; (iv) Building bridges.

The Commission document touches upon some of the areas that are brought forward in the Canadian proposals. In the area of foreign policy and security, the Commission document is less precise than the Canadian proposals. The trade and investment issues highlighted by the Commission are virtually the same as those presented in the Canadian government document. One difference is that the Commission document contains a section on the importance of a sound macroeconomic framework for the "development of a harmonious relationship and the possibility of Canada and the EU exchanging views on macreoconomic issues."

A second difference is that the Commission makes specific reference to an outstanding dispute between Canada and the EU. This disagreement arises from the fact that Canada has not signed the bilateral fisheries agreement of 1992, which includes the re-opening of Canadian waters and ports to Community vessels.<131>

The section of the Commission paper on "Justice and home affairs" corresponds to Part "C" "New Global Challenges" in the Canadian government paper. The Commission concentrates on dealing with only three issues in the short term -- immigration and asylum, international crime, and the smuggling of illegal immigrants and trafficking in women. However, it opens up the possibility of cooperation across a broad range of justice and home affairs issues.

The Canadian proposals do not include a section corresponding directly to the Commission paper's Part (iv) on "Building bridges." This section presents ways that links between people and businesses on both sides of the Atlantic can be promoted. The paper proposes cooperation in the areas of science and technology, multi-media use in education and health care, discussions on regional development policies, increased contacts between citizens, study of each others' government, cultures, and languages, and mutual recognition of university studies and degrees.

(iv) The Action Plan Negotiations Reach an Impasse

On 18 March 1996, Sir Leon Brittan met in Ottawa with the Prime Minister and the Ministers of Foreign Affairs and of International Trade to launch the negotiations on the action plan between Canada and the European Union. The Commission proposals were approved by the Council of the European Union on 25 March 1996. However, negotiations between Canada and the EU could not be concluded in time for an approval ceremony in Rome on 26 June 1996 between Canada's Prime Minister Jean Chrétien, European Commission President Jacques Santer, and Italian Prime Minister Romano Prodi.

Just days before Prime Minister Jean Chrétien left for Rome, the negotiations on the Canada-EU Action Plan were suspended. Once again, the Spanish had managed to derail the negotiations by raising objections to Canada's fisheries policies. The disagreement arose over language in the proposed Action Plan calling for cooperation to combat the "extraterritorial" application of national laws. This section of the Plan was intended to promote Canada-EU cooperation in the fight against the U.S. Helms-Burton legislation, which penalizes foreign companies and individuals allegedly "trafficking" in U.S.-claimed assets in Cuba. Both Canada and the EU have strongly condemned the extraterritorial application of U.S. law represented by Helms-Burton.

The EU focused on this provision of the Action Plan, arguing that it was inconsistent for Canada to oppose the principle of extraterritoriality in the Helms-Burton legislation while at the same time applying Canadian fisheries law in the North Atlantic outside the internationally-recognized 200-mile limit of national jurisdiction. Two possible options would have satisfied EU objections to Canada's fisheries law. First, Canada could have rescinded Bill C-29, which amended the Coastal Fisheries Protection Act to enable the Canadian government to enforce the protection of straddling fish stocks outside the 200-mile limit. The second option offered to Canada was to modify Bill C-29 to exempt EU fishing vessels from the application of the law.

Since the Canadian government was not prepared to accept either of these solutions, the negotiations over the Action Plan came to an impasse. The Canadian government hopes to be able to revive the negotiations during the Irish presidency of the Council. However, one side or the other will have to modify its position if an agreement is to be reached. At this point, the Canadian government will not do or say anything concerning the application of Canadian law outside the 200-mile limit that might jeopardize this country's case concerning the seizure of the Spanish fishing vessel, Estai, which case is presently before the International Court of Justice

Without a change in Canadian fisheries policy, it is unclear that a new Canada-EU Action Plan would receive a better reception from the Spanish than did the first one. While there are those who believe that the Spanish are ready to seize on any opportunity to wreck the Action Plan negotiations with Canada, others believe that it would be advisable for Canada and the EU to resume negotiations during the Irish presidency as there has been agreement on 95% of the Action Plan and complete agreement on the Political Declaration.

G. Conclusion and Recommendations

Obviously, the suspension of the negotiations in June 1996 represents a serious setback to the achievement of a Canada-EU Action Plan. However, the plan is not dead; the government expects to revive these negotiations sometime during the Irish presidency, which extends from 1 July to 31 December 1996. Moreover, the Committee believes that the suspension of these negotiations illustrates vividly the problems for Canada in dealing with the European Union. Two points raised earlier in connection to EU enlargement are worth repeating here.

First, Canada's relations with the EU can easily be held hostage to a dispute over a single issue involving primarily the interests of one Member State. In such cases, a problem with one member country automatically translates into a problem with the entire Union. As enlargement proceeds, the EU will be obliged to defend a growing number of individual national interests. This heightens the danger that Canadian and EU interests will come into conflict.

Second, a medium-sized country, such as Canada, is at a decided disadvantage in dealing with a large bloc of countries, like the EU. Moreover, the EU's economic and political leverage will grow in relation to that of Canada as the Union absorbs up to 13 more countries. The growing imbalance of power will place Canada in an increasingly disadvantageous bargaining position.

The Committee concludes that negotiations with the EU can prove difficult and are likely to become more difficult as new members are absorbed. As a medium-sized country, Canada will often find it advantageous to pursue negotiations with the EU on a plurilateral or a multilateral basis. If, for example, the Action Plan negotiations had proceeded on a trilateral basis (with the United States included) as Canada originally intended, it seems unlikely that the EU would have blocked an agreement in order to send a message to Canada concerning the extraterritorial nature of Bill C-29.

The suspension of the Action Plan negotiations over a single issue demonstrates the potential benefit of engaging the support of other countries in future negotiations in order to offset both EU power and the interests of individual Member States. Conducting negotiations under the auspices of multilateral fora, such as the Organization for Economic Cooperation and Development (OECD) and the WTO, provides one way of counterbalancing EU power. However, the Action Plan negotiations are an attempt to achieve a bilateral agreement which aims to fill in the gaps in the multilateral framework. The Committee recommends that, in future negotiations involving Canada and the EU, the Canadian government try to enlist the participation of the United States. Like Canada, the United States has a strong interest in opening up the EU market. Moreover, the United States is the only country with sufficient economic and political weight to offset that of the European Union.

The Committee continues to support the government's initiative to negotiate a Canada-EU Action Plan designed to expand and deepen the transatlantic relationship.

We recommend that the Canadian government pursue the Action Plan negotiations during the Irish presidency. Clearly, however, the success of the negotiations will depend on whether Canada and the EU can resolve the outstanding bilateral fisheries issues, primarily involving the appropriate method of protecting fish stocks outside the 200-mile territorial limit.

The Committee believes that the ultimate goal of transatlantic negotiations should be the dismantling of barriers to the free movement of goods, services, and investment across the Atlantic. If Canada and the United States can consider negotiating free trade with Latin America and Asia Pacific, surely the idea of a transatlantic free trade area should not be ignored. It is clear, however, that the goal of transatlantic free trade will not be won easily. As noted earlier, several countries, including France and the United States, are hesitant to discuss the possibility. Indeed, the term "free trade" no longer is being used in connection with the transatlantic dialogue. Instead, the EU and the U.S. have agreed to carry out a joint study on the creation of a "New Transatlantic Marketplace."

The Committee recommends that the Canadian government continue to press to have the study on transatlantic trade barriers carried out on a trilateral basis. Although it is unclear that such a transatlantic trade study would form the basis of a concrete plan for bilateral trade liberalization, we believe that Canada should be involved from the outset. Otherwise, there is a danger that two separate bilateral studies (Canada-EU and U.S.-EU) would eventuate in two separate bilateral trade agreements. This raises the possibility that the U.S., with its greater economic and political weight, could negotiate better access to the EU market than Canada can obtain and/or that the U.S. could become a more attractive location for investment compared to Canada. On the other hand, a trilateral trade agreement would ensure that Canada obtained access to the EU market equivalent to that attained by the U.S.

Any commitment to undertake another round of tariff reductions under the WTO is absent from both the Canadian Action Plan proposal and the Commission document. In contrast, the U.S.-EU Action Plan commits the U.S. and the EU to explore the possibility of negotiating a package of tariff cuts on industrial products and to consider accelerating tariff reductions already agreed to under the Uruguay Round. The U.S.-EU Action Plan also states the intention to conclude an Information Technology Agreement (ITA) which could eliminate tariffs on ITA-type products, including telecom equipment, computers and computer parts, semi-conductors, and so on. The Canadian proposal does not contain a specific commitment to conclude the ITA negotiations.

It is easy to underestimate the effect that tariffs still have on Canada-EU trade. Mr. Juneau told the Committee that the fact that many of our leading exports already enter the EU duty-free renders marginal the direct economic gain that we could attribute to a transatlantic free trade agreement. From a macroeconomic perspective, this is true. However, Mr. Juneau agrees with us that there are substantial microeconomic gains that would be produced by further tariff cuts.

The Committee believes that the government needs to examine EU tariff levels. We realize that average EU tariff levels appear quite low (3.6% on a trade-weighted basis post-Uruguay Round). However, this obscures the fact that EU tariffs are sufficiently high in certain sectors to restrict important Canadian exports.<132> For example, the Committee was told by Alcan representatives that, although the EU is one of the world's most promising aluminum markets, the EU tariff of 6% on aluminum ingot remains an effective barrier to Canadian aluminum exports. Moreover, a representative from Newbridge Networks told the Committee that the EU tariff facing the company's telecommunications equipment exports had recently been revised upwards from 4.5% to 7.5%. These are only two examples; yet they illustrate the need for more tariff reductions. In the case of aluminum, such tariff reductions would have to take place in the context of another round of multilateral tariff negotiations.

The Committee recommends that Canada be in the forefront of countries calling for another round of multilateral tariff negotiations. Therefore, the Canada-EU Action Plan should contain a commitment to undertake negotiations on a new package of multilateral tariff reductions.

With respect to telecommunications equipment tariffs, proposals have already been put forward in the Quadrilateral for an Information Technology Agreement (ITA) that would eliminate tariffs on telecom equipment.

The Committee recommends that the Canada-EU Action Plan include a statement of Canada's intention to conclude the Information Technology Agreement (ITA) negotiations.

Non-tariff trade barriers, such as product standards, testing and certification procedures, can also be a problem for Canadian exporters. For example, the Committee was told that North American certification and testing for telecommunications equipment are not acceptable in Europe, with the result that Canadian-made telecommunications equipment must be re-tested and re-certified for use in Europe, at a cost of about $40,000 per product. As cited earlier, one company, Newbridge Networks, calculates that it would cost $30 million to certify all its products for sale in Europe.

The Committee notes that the proposed Canadian Action Plan states the government's intention to reduce and eliminate non-tariff barriers by harmonization and development of product standards and through mutual recognition of certification and testing. The European Commission proposal emphasizes also the importance of developing regulatory cooperation and of the early completion of mutual recognition agreement negotiations.

The Committee was pleased to see that the Canadian proposal suggests a broad range of "third pillar" issues where Canada and the EU can cooperate, including transborder environmental issues and sustainable development of the Arctic. One issue that particularly concerns the Committee is the disposal of nuclear weapons in the Arctic. The problem is especially acute in the Russian Kola peninsula where Russian nuclear submarines are waiting to be decommissioned. Other sorts of nuclear waste also are seeping into the ground and into streams and bays. In addition, toxic waste from southern regions is flowing into rivers and streams that empty into the Arctic.

The Committee recommends that, as a member of the Arctic Council, Canada should cooperate fully and diligently with the EU Arctic nations, Finland, Denmark (Greenland), and Sweden, in the context of the Action Plan, to deal with the problems arising from Arctic contamination. Also, the government should work with non-EU Arctic countries, such as Norway, U.S.A., and Russia, to establish a plan to deal with the problem.

XI. CONCLUSION

Throughout this century Canadians have had a deep interest in "the liberties of Europe." That we have had this interest is readily understandable: a great many Canadians have strong and lively ties with that part of the world. There are Canadians with origins in Great Britain, France, Ireland, Germany, Italy, Ukraine, Portugal, Poland, Greece, the Netherlands; indeed, from every country in Europe. Our European traditions are reflected in our parliamentary institutions, in our system of justice, in our belief in democracy and in the value of individual rights, and our view of the efficacy of markets in organizing economic activity.

Canadians have demonstrated the importance they place on preserving a free and peaceful Europe. Over one hundred thousand Canadians gave their lives in two world wars (most of these in Europe) and Canadian troops were stationed in Europe throughout the Cold War. Recently, we have been involved in peacekeeping in the former Yugoslavia, first in the United Nations force, and now in IFOR. The Committee believes that NATO will continue to provide the bedrock of European security and that Canada should remain a firm supporter of the Alliance.

Canada's continuous security commitment to Europe needs to be emphasized because it bears on Canada's attitude toward European integration. Security concerns lie at the heart of the origin of European integration efforts. The European Coal and Steel Community and the European Economic Community were born, in part, out of the need to prevent new European conflagrations by binding European countries together economically. And in the minds of the architects of European integration -- Jean Monnet and Robert Schuman -- economic integration was to lay the foundation for political union.

How successful have these architects of European integration been in creating a zone of peaceful coexistence? For the first time in centuries, the major causes of European conflict seem to have been removed. Consequently, from the standpoint of helping to ensure European peace and security, Canadians should continue to support European integration efforts.

The end of the Cold War has prompted both Canada and the United States to re-evaluate their interests in Europe. For Canada, a main priority now is to build a solid economic partnership with the EU in order to promote trade, economic growth, and prosperity. Proposals by the former Minister for International Trade, Roy MacLaren, and Prime Minister Jean Chrétien for free trade between NAFTA and the EU helped to start a new transatlantic dialogue. In December 1995, this resulted in a U.S.-EU Action Plan and a proposal for a parallel Canada-EU Action Plan was expected to be concluded by the end of June 1996.

The suspension of the Action Plan negotiations illustrates the difficulty of negotiating with the EU where a dispute over a single issue involving the interests primarily of one Member State has the power to disrupt Canadian relations with the entire Union. Moreover, as EU membership rises from the present number of 15 countries to as many as 28 members, it will be obliged to defend a wider diversity of national interests. This increases the possibility that some Canadian policy will offend one EU Member State, thereby running afoul of the entire Union. Also, the EU's economic and political leverage with outside countries will increase as it absorbs new Member States, making Canada's negotiating position more and more disadvantageous.

European integration initiatives make this an opportune time to re-affirm and strengthen long-standing Canada-European links. The Maastricht Treaty established the common foreign and security policy (CFSP) in order that EU Member States may speak and act together on the world stage. The Committee found that, thus far, the CFSP has not created a single, decisive EU foreign policy. However, the 1996 Intergovernmental Conference underway in Europe may result in changes that will improve CFSP's performance.

In order to coordinate better the battle against terrorism, organized crime, drug trafficking, and illegal immigration, Maastricht established EU cooperation in the area of justice and home affairs. Here again, the IGC will discuss proposals to deal with problems associated with the new mechanism.

Perhaps the most significant development is the EU's plan to create an economic and monetary union. The decision to introduce a single European currency and a common monetary policy may represent the greatest surrender of national sovereignty by the Member States since the Treaty of Rome was signed in 1957. For EMU members, national monetary policy will no longer be available as a stabilization policy tool, and deficit spending by Member States' governments will be restricted. With respect to outside countries, such as Canada, EMU may affect exchange rates, trade and investment patterns, and international economic policy coordination.

The EU's commitment to further enlargement presents other challenges to outside countries. Previous EU enlargements have raised trade barriers against some of Canada's major exports, particularly in the agricultural sector. In the next five to ten years, as many as 13 more countries may accede to the Union, with additional trade diversion a possible result. If the EU will agree to negotiate further significant tariff reductions, there will be less likelihood that new Member States will need to raise their import duty rates in order to harmonize these with the EU Common Customs Tariff. This is one reason why the Committee believes that it is imperative that the Canadian government press for further multilateral tariff reductions.

There are additional reasons why the Canadian government should strive for further trade liberalization. Constantly we are reminded that the European Union is the world's largest market. However, trade data indicate that Canada's share of this important market has been declining in recent years. Without detailed study, all of the reasons why this has occurred are unclear. Yet it is evident that EU trade barriers (both tariff and non-tariff) hinder a number of important Canadian exports, including aluminum, copper and non-ferrous metals, chemicals, telecommunications equipment, fish and fish products, agricultural products, and wood products.

While some EU Member States supported Canada's idea for a transatlantic free trade area, the proposal was dismissed by others. The Committee suggests that this goal should not be forgotten even if the means of achieving it have changed. While we believe that the proposed Canada-EU Action Plan has a number of worthwhile goals in the areas of foreign affairs and security, and justice, we emphasize that it is imperative that meaningful progress be made on the Action Plan's trade and economic issues.

Right now both Canada and the EU are occupied with their own agendas. The EU is engaged in an Intergovernmental Conference on the issues arising from deepening and widening the Union. For its part, Canada is working on new trade deals with Chile, Latin America and the Caribbean, and the Asia Pacific region. Notwithstanding our cultural and linguistic ties and our other mutual commitments, substantially stronger transatlantic commercial links need to be forged to the end that the Canada-Europe relationship will be preserved and strengthened.

Canadians cannot be indifferent. Europe means far too much to us -- whether we are talking in terms of the origins and cultures of many of our people, whether we are talking in terms of trade and investment, whether we are talking in terms of military security. We have a deep interest -- in every sense of the word -- in a prosperous, peaceful Europe.

APPENDIX A

Fact-finding Mission to Europe

LONDON - March 17 to March 19

From the Canadian High Commission:

Royce Frith, Canadian High Commissioner to the United Kingdom

James Wright, Counsellor, Political and Social Affairs

John Sloan, Counsellor, Economic and Financial Affairs

From the UK Government:

Stephen Wright, Assistant Under-Secretary of State (EU)

Mark Pellew, Head, North America Department and the Commonwealth

Roundtable Discussion on Europe and Relations with Canada:

Peter Lyon, Academic Secretary, Institute of Commonwealth Studies and Chairman of the Canada-UK Colloquia

Robert Boyce, Department of International History, London School of Economics and member of the Canada-UK Colloquia Council of Management

Mads Andenus, Centre for European Law, King's College

Lord Clinton-Davis, Chairman, Transport Committee, House of Lords

From the House of Commons Foreign Affairs Committee:

David Howell, Chairman

Dennis Andrew Canavan, Member

Michael John Gapes, Member

David Harris, Member

Michael Jopling, Member

Jim Lester, Member

Edwards Rowlands, Member

Peter David Shore, Member

John P. Stanley, Member

David Anthony Gerald Sumberg, Member

Robert Nelson Wareing, Member

Conference on the Future of Europe:

The Senators attended one session of the Conference on the Future of Europe held at Lancaster House, with Parliamentarians from all over the continent.

DUBLIN - March 20

From the Canadian Embassy:

Barry Mawhinney, Canadian Ambassador to Ireland

From the Oireachtas Joint Committee on European Affairs:

Alan Dukes, Chairman

and other members

From the Government of Ireland:

Gay Mitchell, Minister of State for European Affairs

Representatives of Canadian Business in Ireland:

Fergus O'Rafferty, President, Ireland-Canada Business Association

W. L. Acton, Executive Director, Canada-Life

Peter Kluge, Managing Director, Scotia Bank, Ireland

Alan Sommerville, Executive Vice-President, Saturn Fulfilment Service Ltd.

Derek Smith, Vice-President Investments, IG International Management Ltd.

BONN - March 21

From the Canadian Embassy:

Paul Heinbecker, Canadian Ambassador to Germany

Lorenz I. Friedlaender, Minister

Edwin Mallory, Minister Counsellor (Trade)

Michael Brock, Counsellor (Political)

Micheline Aucoin, Counsellor (Finance)

Ross Miller, Counsellor (Economic)

Marcus Pistor, Parliamentary Relations Assistant

From the North Atlantic Assembly:

Karsten D. Voigt, MP, President of the Northatlantic Assembly, Foreign Policy Spokesman for the SPD Parliamentary Party

From the Foreign Office:

Dr. von Ploetz, State Secretary (Europe, Foreign Economic, Legal and Cultural Branches)

From Bonn University:

Detlev Karsten, Professor

From the Ministry of Economics:

Lorenz Schomerus, State Secretary (DM), responsible for Foreign Economic Policy and Development Policy

From the Bundesrat Committee for Foreign Affairs:

Kurt Biedenkopf, Ministerpresident (Premier) of the Free State of Sachsen (Saxony), Chairman of the Bundesrat Committee for Foreign Affairs

Burkhard Dreher, Minister of Economy, Small Businesses and Technology, Brandenburg

Christine Lieberknecht, Minister for Federal Affairs in the State Chancellery and Representative to the Federation for the Free State of Thüringen

Karin Schubert, Minister for Justice, Sachsen-Anhalt

Gerd Walter, Minister for State and European Affairs, Schleswig-Holstein

Heide Dörrhöfer-Tucholski, State Secretary, Representative to the Federation for Nordrhein-Westfalen

Günter Ermisch, State Secretary, Representative on Federal and European Affairs for the Free State of Sachsen

Helmut Holl, State Secretary, Representative to the Federation for Niedersachsen

Alfred Sauter, State Secretary in the Ministry of the Interior of the Free State of Bavaria

Günter Jaspert, Director (Clerk), Secretariat of the Bundesrat Committees on Foreign Affairs, the European Union and Defence

Ute Müller, Deputy Secretary of the Bundesrat Committees on Foreign Affairs, the European Union and Defence

FRANKFURT - March 22

From the Bundesbank:

Johann Wilhelm Gaddum, Vice-President

Helmut Schieber, Board Member responsible for international affairs

Roundtable discussion with representatives of Canadian Business:

Bahman Anzalichi, Managing Director, Pit-Stop Autoservice

René Bertschi, Husky Spritzgiess System

Cecil Morkel, Royal Bank of Canada

Gerhard Pfeiffer, Geschäftsführer der Richardson Securities of Canada

Rainer Pütz, Managing Director, Manulife Reinsurance Europe

Eva E. Renken, Representative for Germany, Bank of Montreal

Wolfgang Schuck, Managing Director, First Marathon Bank

Michael Siebold, Chairman of the German-Canadian Business Club

Individuals:

Karl-Otto Pöhl, former President of the Bundesbank

PARIS - March 23 to March 26

From the Canadian Embassy:

Benoît Bouchard, Canadian Ambassador to France

John Noble, Plenipotentiary Minister

Serge Dupont, Counsellor

Sheila Coutts, First Secretary

Jean Bourassa, First Secretary

Roundtable discussion with representatives of Canadian Business:

Mathieu Debost, Bunting-Warburg

Jean-Guy Pepin, Vice-President, Cascades Forest Products

Klaus Berg, Director-General, Air Canada

Hugues De Guitaut, Director-General, Royal Bank

From the Canadian mission to the OECD:

Kimon Valaskakis, Canadian Ambassador to the OECD

Christopher Thomson, Deputy Permanent Representative

Peter McGovern, Counsellor

François Weldon, First Secretary

From the French Department of Foreign Affairs:

Mr. De Zorzi, Deputy Director of European Cooperation

From the Foreign Affairs Commission of the "Assemblée Nationale":

François Guillaume, Vice-President

From the Foreign Affairs Commission of the "Sénat":

Xavier de Villepin, Chairman

From the Bank of France:

Michel Albert, Member of the Monetary Policy Counsel

Individual:

Jacques Delors, former President of the European Commission

BRUSSELS - * March 27 to March 28

From the Mission of Canada to the European Union:

Jacques Roy, Head of Mission, Canadian Ambassador

From the Canadian Embassy:

Jean-Paul Hubert, Canadian Ambassador to Belgium

From the Canadian Joint Delegation to NATO:

John Anderson, Canadian Ambassador and Permanent Representative

Lt. General Paul Addy, Canadian Military Representative

Daniel Dhavernas, Minister-Counsellor and Deputy Permanent Representative

Karen McDonald, Deputy Political Advisor

Elizabeth Baldwin-Jones, Second Secretary

Lt. Colonel Pierre Labelle, Senior Staff Officer, Army

Commander George Godwin, Senior Staff Officer, Navy

Lt. Colonel Pat Dennis, Senior Staff Officer, Military Transition Issues

Naida Nelson, First Secretary, Finance

George Betts, Counsellor, Nuclear Affairs

From NATO International Staff:

Dr. John Barrett, Head Policy Planning and Speechwriting Section, Political Affairs Division

From the European Parliamentary Committee on External Economic Relations:

Willy de Clercq, Chairman

Boudewijn van der Gaag, Head of Division

From the European Parliament:

Ken Collins, Chairman, Environment Committee

Raymonde Dury (Be-PSE), Institutional Affairs Committee

Joe Wilson, Member of the European Parliament's Delegation for Relations with Canada

Other Members of the European Parliament

From the Council of the European Union:

Jürgen Trumpf, Secretary General of the Council of the European Union

From the Belgium-Canada Parliamentary Group:

Léo Delcroix, Senator, Chairman

From the Belgium Senate Foreign Relations Committee:

Valere Vautmans, Chairman

From the European Commission:

Leon Brittan, European Commissioner for Multilateral Trade, Relations with Developed Countries

WARSAW - * March 27 to March 28

From the Canadian Embassy:

Anne Leahy, Canadian Ambassador to Poland

Alexander Lukie, Head, Social Affairs Section (Immigration)

Otch von Finckenstein, Head, Technical Assistance Section

Linda McDonald, Head, Commercial Section

Angela Bogdan, Head, Political/Public Affairs Section (Culture)

Col. Hubert Leduc, Canadian Forces Attaché

James Visutskie, Head, Administration Section

From the Senate:

Adam Struzik, Marshall (Speaker) of the Senate

Wojciech Sawicki, Head of the Senate Chancellery

From the Senate Foreign Relations Committee:

Stanislaw Kucharski, Senator, Deputy Chairman

Longin Pastusiak, Deputy Chairman of the Sejm Foreign Relations Committee

August Chelkowski, Senator (former Marshall of the Senate)

Ryszard Czarny, Senator

Eugeniusz Patyk, Senator

Zofia Kuratowska, Senator

Ryszard Ochwat, Senator

Piotr Marciniak, MP

Zygmunt Cybulski, MP, Deputy Chairman of the Parliamentary European Agreement Committee

Bronislaw Geremek, Chairman of the Sejm Foreign Affairs Committee

From the Polish Foreign Affairs Department:

Andrzej Towpik, Deputy Minister

Mr. Kozowski, Director, American Department

Mr. Bahr, Director, Europe I

Mr. Ogrodzi(ski, Director, Planning Department & Head of the Polish Institute of International Affairs

Mr. Ludwiczak, Deputy Director, American Department

Mr. Opalski, Deputy Director, European Institutions

Mr. Waszckykowski, Head, NATO Section

Ms. Kisielewska, Head, EU/Council of Europe

From the Polish Government:

Andrezej Wieczorkiewicz, Minister, Under Secretary of State and Government for Foreign Investment

Wojciech Lamentowicz, Foreign Affairs Adviser to the President of the Polish Republic

Dariusz Rosati, Foreign Minister

Jacek Saryusz-Wolski, Minister, Government Plenipotentiary for European Integration

From Polish and Canadian Business:

Jacek Buchacz, Minister of Foreign Economic Relations

Jacek Gadomski, President, TPSA, Telecommunications Poland, S.A.

Jan Litwinski, President, Polskie Linie Lotnicze LOT

Marek Rusin, Under-Secretary of State, Ministry of Telecommunications

Andrzej Urban, Under-Secretary of State, Ministry of Physical Planning and Construction

Aleksander Janiszewski, Vice-Chairman of the Supervisory Board, Polish State Railways (PKP)

Zygmunt Stepinski, Publisher/General Director, "Murator Edition"

Victor Boraks, Director, Bridgings Polska (Warszawa)

Zygmunt S. Lask, Manager, NORTEL (Warszawa)

Louise Campbell, Director, Polish Development Bank

* For the meetings scheduled in Brussels and Warsaw the 8-member delegation divided into two groups.

APPENDIX B

List of witnesses

NAME OF ORGANIZATION

AND/OR WITNESS

ISSUE

NUMBER

DATE OF

APPEARANCE

FIRST SESSION OF THE THIRTY-FIFTH PARLIAMENT

ALCAN ALUMINUM LIMITED

Andrew de Schulthess, Director, Government Relations

30

1995/11/29

Roger Scott-Taggart, Director, Business Analysis

30

1995/11/29

BANK OF CANADA

John Murray, Chief, International Relations Department

31

1995/12/06

DEPARTMENT OF FOREIGN AFFAIRS AND INTERNATIONAL TRADE

Paul Dubois, Director General, Western Europe Bureau

27

1995/11/01

NEWBRIDGE NETWORKS CORPORATION

Chris Albinson, Director, Government Relations

30

1995/11/29

ROYAL BANK OF CANADA

John McCallum, Vice-President and Chief of Economics

30

1995/11/29

INDIVIDUALS

Peter Leslie, Professor of Political Studies, Queen's University

31

1995/12/06

David Long, Professor of Political Science, Carleton University

32

1995/12/13

Gretchen MacMillan, Associate Professor of Political Science, University of Calgary

31

1995/12/06

Charles Pentland, Professor of Political Studies, Queen's University

28

1995/11/08

Steven Wolinetz, Professor of Political Science, Memorial University

21

1995/12/13

SECOND SESSION OF THE THIRTY-FIFTH PARLIAMENT

DEPARTMENT OF FOREIGN AFFAIRS AND INTERNATIONAL TRADE

The Honourable Lloyd Axworthy, Minister of Foreign Affairs

in camera

1996/05/15

The Honourable Art Eggleton, Minister of International Trade

3

1996/06/04

Jean-Pierre Juneau, Assistant Deputy Minister, Europe Branch

1

3

1996/03/06

1996/06/04

Gaétan Lavertu, Associate Deputy Minister of Foreign Affairs and International Trade

in camera

1996/05/15

Roxanne Dubé, Legislative Assistant, Office of the Minister of Foreign Affairs

Albert-Jan Galpin, Policy Advisor, European Union Division

in camera

1996/05/15

Paul Haddow, Director, Tarrifs and Market Access Division

3

1996/06/04

Michael T. Mace, Director General, Central and Eastern Europe Bureau

in camera

1996/05/15

Denis Stevens, Policy Advisor, Office of the Minister of Foreign Affairs

in camera

1996/05/15

Gordon Venner, Deputy Director, European Union Division, Western Europe Bureau

1

3

1996/03/06

1996/06/04

INDIVIDUAL

Panayotis Soldatos, Professor, Holder of the Jean Monnet Chair - European Studies, Montréal University

4

1996/06/05

<1>Report of the Standing Senate Committee on Foreign Affairs Respecting Canadian Relations with the European Community, July 1973.

<2>Refer to Appendix A for a list of the Committee's meetings in Europe.

<3>Readers who are familiar with the origins and history of the European Union may wish to proceed to Chapter III.

<4>Mr. Jacques Delors, former President of the Commission, told the Committee in Paris that economic integration has always been used as a back door to achieve the political goal. Although this approach achieved much success down to 1988 or so, thereafter it was necessary to address the political needs of the people directly, according to Mr. Delors.

<5>Note: Bracketed numbers refer to the issue number and page number in the proceedings of the Standing Senate Committee on Foreign Affairs where the testimony can be found.

<6>Pascal Fontaine, Europe in Ten Lessons, Office for Official Publications of the European Communities, December 1994, p. 9.

<7>"The Coal and Steel Plan was Monnet's reaction to a rather grandiose idea of Prime Minister Georges Bidault's put forth in a speech at Lyons on April 16 calling for an "Atlantic High Council for Peace." This appeared to combine propaganda, in the use of the word "peace," with the urge to pile machinery on machinery in an effort to form a holding company to "coordinate" the North Atlantic Treaty, the Western Union, the Organization for European Economic Cooperation, and the Council of Europe. Whatever idea may have lurked within this proposal was stillborn. Monnet's apparently more limited and modest plan was, in reality, more imaginative and far-reaching, because it picked out the basic materials of Europe's industrial economy, coal and steel, to put under the supranational control of an organization of the participating European states, with governmental powers and clearly defined purposes. The High Authority's immediate powers and effects would be great; its potential ones still greater." (Dean Acheson, Present at the Creation: My Years in the State Department, W.W. Norton and Company, New York, 1969, p. 383.)

<8>Ibid., p.10.

<9>Ibid., p. 9.

<10>Ibid., p. 11.

<11>Ibid., p. 12.

<12>Ibid., p. 13.

<13>Ibid.

<14>Ibid.

<15>United Kingdom, Foreign and Commonwealth Office, A Partnership of Nations, The British Approach to the European Union Intergovernmental Conference 1996, London, March 1996, p. 4.

<16>As outlined in Chapter VIII, Maastricht's burst of optimism was also dashed by the EU's inability to act decisively in the former Yugoslavia.

<17>At one time, Britain was Canada's largest export market. Despite the introduction in 1919 by Britain of tariff preferences favouring Commonwealth countries, Canadian trade continued to shift toward a north-south axis. By the 1930s, the U.S. and Britain accounted for roughly the same quantity of exports; however, the U.S. had become the largest source of Canadian imports.

<18>Rules of thumb for the number of jobs created by exports vary from 11,000 jobs per C$1 billion of exports (Canadian government estimate) to the U.S. Department of Commerce estimate that every US$1 billion in exports creates 25,000 jobs.

<19>According to Statistics Canada data, Canada exported more merchandise to Belgium in 1995 than to Italy. However, these data should be treated with some skepticism. Since the EU is a customs union, goods can move freely throughout the union and the point of entry for exports need not coincide with their final destination. For example, the Port of Antwerp in Belgium serves as the point of entry for goods destined for a number of European countries, thus inflating apparent Canadian trade with Belgium.

<20>A "direct investment" is one in which the investor may exercise some influence over the management of the company. Statistics Canada defines a direct investment as one in which ownership amounts to at least 10% of the equity of an enterprise and that covers claims intended to remain outstanding for more than one year.

<21> The Committee was told that the level of service provided by German firms was inferior to that usually offered in North America. This has given Canadian and U.S. firms an edge in the German market.

<22>Statistics Canada, Trade Patterns: Canada-United States, The Manufacturing Industries, 1981-1991. Catalogue 65-504 Occasional.

<23>See Chapter VII for information on the resolution of Canada-European Union disputes respecting EU enlargements.

<24>This summary does not exhaust all the factors involved in the Canada-EU fishing dispute.

<25>Sir Leon Brittan, Speech, Ottawa, 2 May 1995.

<26>The Northwest Atlantic Fisheries Organization (NAFO) is the organization charged with regulating Atlantic fishing in international waters.

<27>Government of Canada, News Release, "Canada Takes Action to End Overfishing," May 10, 1994, p.1.

<28>It was this provision of the legislation that gave rise to the charge by the EU that Canada was applying its laws extraterritorially.

<29>See later discussion on the Transatlantic Dialogue.

<30>Source: Department of Foreign Affairs and International Trade.

<31>The EPU allowed members to use bilateral claims against certain trading partners to offset debts to other countries thereby economizing on scarce foreign exchange reserves. The EPU was successful in relieving the dollar shortage and it allowed members to liberalize trade more quickly with each other. The payments system was disbanded in 1958 when a number of member countries announced that they would make their currencies convertible.

<32>This system, known as the "snake in the tunnel," allowed EC countries' exchange rates to fluctuate against one another within a relatively narrow band of ±2 (% (the snake) while moving together against the U.S. dollar within the wider band of ±4 (% (the tunnel) which had been established by the 1971 Smithsonian Agreement.

<33>The other event which eroded the "snake" was the first oil price shock in 1973. As the oil price hike worked its way through the system, national economic performances began to diverge with respect to both inflation and unemployment.

<34>The Carter Administration's failure to control inflation was weakening the U.S. dollar and generating a "flight to quality." The result was a D-mark appreciation, not only against the dollar, but also against the other European currencies.

<35>Peter Kenen, Economic and Monetary Union in Europe: Moving beyond Maastricht, Cambridge University Press, 1995, Cambridge, UK, p. 4.

<36>Italy was a member from ERM's beginning but the lira had a ±6% fluctuation band.

<37>Horst Ungerer et al., The European Monetary System: Developments and Perspectives, IMF Occasional Paper No. 73, Washington D.C., November 1990, p. 4.

<38>Another factor that helped to trigger the September 1992 currency crisis was the erosion of support for the Maastricht Treaty. In June 1992, Denmark rejected the Treaty in a referendum; subsequent opinion polls showed also that the support of the French public for Maastricht was slipping. (Peter Kenen, Economic and Monetary Union in Europe: Moving Beyond Maastricht, Cambridge University Press, 1995, p. 159).

<39>Wilhelm Nölling, Monetary Policy in Europe after Maastricht, St Martin's Press, New York, 1993, p. 127.

<40>Michael Emerson et al., One Market, One Money, An Evaluation of the Potential Benefits and Costs of Forming an Economic and Monetary Union, Oxford University Press, 1992.

<41>T. Padoa-Schioppa, "The European Monetary System: A Long Term View," in Giavazzi, Micossi, and Miller, eds., The European Monetary System, Cambridge University Press, Cambridge, 1988, p. 376.

<42>The Madrid EU leaders' summit in December 1995 confirmed that 1 January 1999 will be the start date for Stage 3 of EMU.

<43>In August 1993, the ERM's fluctuation margins were widened from ±2¼% to ±15%. This change has raised questions about whether the Maastricht criterion requires EMU applicants to meet the ERM's previous narrow fluctuation margin or whether respecting the new, wider margins is sufficient.

<44>Treaty Establishing the European Community, Title VI, Chapter 4, Article 109.

<45>The Committee was told by Bundesbank officials that EMU will not start unless France and Germany are participants.

<46>"Economic and Monetary Union: How to shift the goal-posts," The Economist, April 20, 1996.

<47>"Ease terms for money, banker asks", The Globe and Mail, Saturday, May 11, 1996, p. A5A.

<48>Article 107.

<49>In the case of the Bank of Canada, the legislation doesn't have to be changed in order to force a change in Bank policy. Since 1967, the Bank of Canada Act has contained a provision that permits the Minister of Finance to issue a directive to the Governor of the Bank if the government disapproves of Bank policy.

<50>Treaty Establishing the European Community, Article 2.

<51>Treaty Establishing the European Community, Protocol (No. 3) on the Statute of the European System of Central Banks and of the European Central Bank, Chapter IX, Article 22.

<52>Treaty Establishing the European Community, Article 104.

<53>Michael Emerson et al., One Market, One Money, An Evaluation of the Potential Benefits and Costs of Forming an Economic and Monetary Union, Oxford University Press, 1992, p. 65.

<54>Ibid.

<55>However, even the Commission study admits that the empirical evidence is "weak" concerning the impact of exchange rate variability on investment. (Emerson et al., One Market, One Money, 1992, p. 83).

<56>Ibid., p. 89.

<57>Article 104(c) of the Treaty Establishing the European Community provides that the Council, on the basis of an opinion by the Commission, may recommend that a Member State take measures to correct an excessive deficit. If the Member State fails to take corrective action, the Council may apply certain penalties including: withdrawal of lending to the Member State by the European Investment Bank; requiring the Member State to make a non-interest bearing deposit with the Community until the excessive deficit has been corrected; and imposing fines on the Member State.

<58>Whether or not these arguments by supporters of EMU are valid is debatable. The point here is not to evaluate the validity of these arguments but merely to present them as clearly and concisely as possible since they have been used to justify proceeding with EMU.

<59>One reason appears to be that flexible exchange rates disrupt the common agricultural policy which supports the domestic currency prices for agricultural commodities.

<60>Similarly, Canada's regions are sometimes out of phase economically. Periodically, the Bank of Canada has been accused of establishing a national monetary policy that serves the economic needs of Central Canada but does not take into account different economic conditions occurring in Atlantic Canada or the West.

<61>Nick Chamie et al., Optimum Currency Areas and Shock Asymmetry: A Comparison of Europe and the United States, Working Paper 94-1, Bank of Canada, January 1994, p. 24.

<62>Barry Eichengreen, Should the Maastricht Treaty be Saved?, Princeton Studies in International Finance, No. 74, December 1992, p. 16.

<63>Although labour mobility is greater within EU countries than between them, internal mobility is still low by U.S. standards. (Eichengreen, Should the Maastricht Treaty be Saved?, 1992).

<64>Ibid., p. 26.

<65>The UK and Denmark have the right to opt out of the Third Stage of EMU. Denmark has already declared that it will not join the single currency; the UK government has not yet decided. Sweden has said that it will not join the "Euro" unless its Parliament approves the move.

<66>Timothy Edmonds and Vaughne Miller, Economic and Monetary Union, Research Paper 96/33, House of Commons Library, 1 March 1996, London, p. 38.

<67>The Commission study estimates a savings on the foreign exchange reserves of the Community Member States amounting perhaps to US$200 billion. (Emerson et al., One Market, One Money, 1992, p. 178).

<68>Ibid.

<69>Barry Eichengreen, Should the Masstricht Treaty be Saved?, 1992, p. 58.

<70>Ibid.

<71>As noted earlier, the evidence linking investment and exchange rate stability is tenuous.

<72>Barry Eichengreen, Should the Maastricht Treaty be Saved?, 1992, p. 58.

<73>Ibid., p. 58-59.

<74>The Committee understands that the Department of Foreign Affairs and International Trade now plans to undertake a study on the effects of EMU on Canada. We suggest that completion of this study be given priority by the government.

<75>Vaughne Miller, Towards the IGC: Approaching Turin, Research Paper 96/41, House of Commons Library, 19 March 1996, p. 5.

<76>Vaughne Miller, Towards the IGC: Weighing the Options, Research Paper 95/123, House of Commons Library, 5 December 1995, p. 6.

<77>Vaughne Miller, Towards the IGC: Approaching Turin, Research Paper 96/41, House of Commons Library, p. 7.

<78>Ibid.

<79>Foreign and Commonwealth Office, A Partnership of Nations: The British Approach to the European Union Intergovernmental Conference 1996, London, March 1996, p. 28.

<80>Ibid.

<81>The accession to the EU of Austria, Finland, and Sweden means that the European Economic Area (EEA) now comprises only three states outside the EU -- Norway, Iceland, and Liechtenstein. The EEA, which came into effect on 1 January 1994, is a common market between the EU and the countries of the European Free Trade Area (minus Switzerland). The EEA's diminished size leaves its future somewhat in doubt.

<82>In the 1972 referendum, Norway rejected membership in the EEC by a majority of 53.5%.

<83>On 1 January 1996, a customs union between Turkey and the EU went into effect.

<84>Foreign and Commonwealth Office, A Partnership of Nations: The British Approach to the European Union Intergovernmental Conference 1996, London, March 1996, p. 6.

<85>Dr. Wolinetz told the Committee that Poland, Hungary, and the Czech Republic are much more likely to be admitted soon than Slovakia because these three are politically and economically more advanced.

<86>As Professor Pentland has pointed out, this point should be emphasized since it means that the EU is master of the enlargement agenda. If the European Council decides that the EU is not ready to accept new members, enlargement will not proceed.

<87>European Commission, Intergovernmental Conference 1996 - Commission Report for the Reflection Group, Brussels, 1995.

<88>Institutional reform is on the 1996 IGC agenda, but EU enlargement possibilities would seem to make the issue more urgent.

<89>For example, the UK has two Commissioners, Sir Leon Brittan (Multilateral trade, relations with developed countries) and Neil Kinnock (Transport).

<90>Progress Report from the Chairman of the Reflection Group on the Intergovernmental Conference, 1 September 1995.

<91>The unification of Germany meant that the former German Democratic Republic became part of the EC on 3 October 1990.

<92>Tariffs are "bound" when countries agree under the GATT/WTO not to raise these above a fixed level.

<93>Fifteen of the 20 European countries in the OECD are members of the European Union, giving the EU a majority at the OECD.

<94>In some sense, the OECD is different since individual European countries are freer to express themselves, frequently taking the opportunity to criticize the European Commission. In the WTO, EU members are supposed to present a single, unified trade policy.

<95>Jonathan Story, "Europe in the global state and market system," in Jonathan Story, ed., The New Europe, Politics, Government and Economy since 1945, Blackwell, Oxford, UK, 1992, p.18.

<96>John Halstead, "International Security Institutions: NATO and the CSCE," Canadian Foreign Policy, Spring 1994, p. 48.

<97>Trevor C. Salmon, "The Union, CFSP and the European security debate", in the European Community and the Challenge of the Future, 2nd edition, edited by Juliet Lodge, St Martin's Press, New York, 1993, p. 253.

<98>Treaty on European Union, Article J.1.

<99>The "Council" here refers to the Council of the European Union, formerly called the Council of Ministers.

<100>European Commission, Intergovernmental Conference 1996, Commission Report for the Reflection Group, May 1995, p. 62.

<101>Ibid.

<102>Treaty on European Union, Article J.4.

<103>Treaty on European Union, Declaration (No 30) (Introduction).

<104>Geoffrey Howe, "Bearing More of the Burden: In Search of a European Foreign and Security Policy", The World Today, January 1996, p. 23.

<105>European Commission, Commission Report for the Reflection Group, 1995, p. 63.

<106>Ibid., p. 64.

<107>Geoffrey Howe, "Bearing More of the Burden: In Search of a European Foreign and Security Policy", The World Today, January 1996, p. 23.

<108>European Commission, Intergovernmental Conference 1996, Commission Opinion, Reinforcing political union and preparing for enlargement , Brussels, February 1996.

<109>Ibid., p. 66.

<110>Geoffrey Howe, "Bearing More of the Burden: In Search of a European Foreign and Security Policy", The World Today, January 1996, p. 23.

<111>Ireland, Department of Foreign Affairs, Challenges and Opportunities Abroad, White Paper on Foreign Policy, Dublin, p. 119.

<112>This point was made by Mr. Daniel Dhavernas (Canadian Deputy Permanent Secretary to NATO).

<113>In March 1966, French President Charles de Gaulle announced the withdrawal of French forces in Germany from NATO command and the closure of NATO facilities in France. However, France remained within NATO and a bilateral cooperation agreement was signed between the Alliance and the French military.

<114>Public opinion polls show that the Polish people are more supportive of joining NATO (90% approve) than of gaining entry to the EU (75%-80% approve).

<115>Treaty on European Union, Title I, Article B.

<116>Foreign and Commonwealth Office, A Partnership of Nations - The British Approach to the European Union Intergovernmental Conference 1996 , March 1996, p.20

<117>"Canada urges NATO to include Slovenia," Financial Post, 10 May 1996.

<118>The Committee understands that the Department of Foreign Affairs and International Trade intends to undertake a study of CFSP. The Committee recommends that the government make the completion of this work a priority.

<119>TREVI is an acronym which stands for terrorism, radicalism, extremism, and political violence.

<120>Juliet Lodge, "Internal security and judicial cooperation," in Juliet Lodge ed., The European Community and the Challenge of the Future , 2nd edition, St. Martin's Press, New York, 1993, p. 318.

<121>The Senate Committee experienced first hand the results of the Schengen Agreement: travelling from Germany to France, and from France to Belgium, we found that there were no passport controls upon arrival.

<122>Juliet Lodge, "Internal security and judicial cooperation," in Juliet Lodge ed., The European Community and the Challenge of the Future , 2nd edition, St. Martin's Press, New York, 1993, p. 325.

<123>European Commission, Commission Report for the Reflection Group, Intergovernmental Conference 1996, May 1995, p. 51.

<124>Ibid.

<125>Reflection Group's Report on the Intergovernmental Conference , 5 December 1995.

<126>The first option was to maintain Canada's existing relationship with the U.S. and the second option was to move toward closer integration with the United States.

<127>Daniel Roseman, "Canada-European Community Relations: An Agenda for Action," Behind the Headlines, Spring 1989, p. 6.

<128>It should be noted that this year's meeting has been put on hold because of pro-separatist comments by the President of the European Delegation, Mr. Georges Berthu, made in Canada during the Quebec Referendum.

<129>Roy MacLaren, Canada's Trade Policy for the 21st Century: The Walls of Jericho Fall Down, Notes for an address by the Honourable Roy MacLaren, Minister for International Trade, to the Centre for International Studies and the Centre for International Business, University of Toronto, Toronto, 18 January 1995.

<130>See earlier discussion on Canada-Europe irritants.

<131>The fact that the Commission mentions only this one dispute suggests the importance that is placed on its resolution. It is to be noted that, on 31 May 1996, the Government of Canada announced that Canadian ports were being re-opened to EU fishing vessels.

<132>As noted earlier, the Committee was told by the Minister for International Trade, the Honourable Art Eggleton, that even after reducing tariffs under the Uruguay Round, the EU will still levy significant duties on products such as aluminum, copper and non-ferrous metals, chemicals, telecommunications equipment, fish and consumer-packaged fish products, agricultural products, and wood products. Duties on these goods range from 3 to 20%, but up to 25% for certain fish products. Canada could better compete in the European market if we had a level playing field with other countries already granted preferential entry, according to the Minister.


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