Understanding the legal status of the world's largest business market: the European Union.

Abstract

A great deal of confusion exists as to the legal status of the European Union (the EU) today. The EU is widely recognized as the latest phase in the economic evolution of the Common Market initiative which began in the 1950's. However, the general public is unaware of the steps the EU has already taken toward political union (i.e., nationhood), and the depth of the EU's commitment to achieving an enduring form of European political union.

Introduction

Recently, the European Union's gross national income in purchasing power parity has grown to the point where it is slightly larger than that of the United States, the world's second-largest market [1]. At least for now, the European Union represents more potential business sales than any other market in the world. Combined, the gross national income in purchasing power parity of the European Union and the United States comprises more than half of the world's gross national income. Therefore, by understanding both markets, a business executive today is well-prepared to take advantage of more than half the sales opportunities in the world.

Now that the EU has become the largest market for international trade, most business executives find themselves unprepared to take advantage of the opportunities presented by this gigantic market. Certainly, business executives are adapting to the international nature of business today. They realize that international issues currently pervade nearly every aspect of a business, today, regardless of whether it is large or small. Unfortunately, this does not help them understand how to do business effectively in a particular market.

Markets such as China, India, Japan, the United States and the European Union each have a different legal, regulatory, social and economic framework that business executives must understand in order to do well in each of these markets. It does not help business leaders to understand only aspects of the U.S. market when they must make business plans and strategies for other markets.

Also, experience and training in general aspects of international business does not prepare a business leader to do well in the European Union because of the specific peculiarities of the EU market. Business success in the EU depends on a business leader's ability to understand, specifically, the European Union. Business leaders must understand what the EU is, how it operates, and how it affects their business.

This article focuses on what the European Union is. It explains the true nature of the EU and provides a greater depth of understanding it by exploring its historical development, and providing perspectives that allow a business executive to understand the European Union as Europeans do.

The Members of the European Union

The European Union consists of 25 member states. Six members were founding members of the European Economic Community, which sought to create a "Common Market" in Europe that would allow the free passage of goods, services, capital and labor across national borders of each member with the same ease and consistency as would occur if they carried goods within a single state. The six members are Belgium, France, Germany (which, at that time, was called West Germany since a portion of today's Germany was separated from West Germany after World War II and became a separate state known as East Germany, which was part of the Soviet Bloc), Italy, Luxembourg and the Netherlands [2].

The European Economic Community continued to develop until it became the European Union in 1993. At that time, six additional members had already joined the European Economic Community, bringing its membership to 12. These new members were Denmark, Ireland, Great Britain, Greece, Portugal and Spain. Three additional members joined the EU in 1994, bringing its membership to 15. These new members were Austria, Finland and Sweden. Finally, 10 new members joined the EU in 2004, bringing its present membership to 25. These newest members were Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia [3].

The European Economic Community continues to exist as part of the European Union. It represents the "single market" that has been achieved among its members. The European Union is a broader term representing additional developments in areas such as political union, legal rights and infrastructure.

It is also important to understand that the Euro is an important development that is intended to further solidify political and economic union within the European Union. The Euro is the "single currency" that replaces currencies previously issued by the central banks of the 13 EU members that choose (and qualify) to issue the Euro. These members are: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain [4]

Defining the European Union as an Entity

The preceding "hard facts" about the European Union are not difficult to understand, although they are essential for doing business in the EU. The greatest area of confusion for business executives seems to involve the current political status of the EU. Even business executives who understand basic elements of the EU believe that it is merely the fulfillment of the economic plan to create a Common Market in Europe. This plan originated in the 1950s and has been quite successful, but the economic market that has been created remains only one aspect of the European Union.

It is more accurate to understand the EU as a political entity with a government, laws, an economic market and much more. The political, legal and governmental aspects of the EU are a mystery to most business executives. Most are unaware of the advancements that the EU has made toward becoming a nation-State. Most business executives are not aware that EU leaders are committed to making it a permanent political union that replaces national governments and parliaments as the highest level of lawmakers and regulators of business in Europe. Some are surprised to learn that, at least for now, this situation already exists with respect to most business activities in Europe.

In order to understand the full political nature of the "Union" that the European Union has formed, one must understand what a political union is. Independent entities form a political union when they create a new government with authority to act for the previously independent entities [5]. In some cases, such as the Russian Federation, portions of the political union can have autonomous governments or even be republics. In other situations, such as the union of England and Scotland in 1707, the previously independent entities are simply subordinate provinces or regions of the new political union (e.g., Great Britain). This was also done by the 13 American colonies in 1789 after achieving independence from Britain. These colonies remained independent of Britain and each other for over a decade until they chose to create a political union known as the United States of America [6].

In each case, the political union is formed when the previously independent entities relinquish important sovereign powers to the government of the newly created union.

The distinction between the nation and a political union must be understood in order to understand the European Union or any other entity that is, or seeks to be, a political union. A nation has been defined as a "people, or aggregation of men, existing in the form of an organized rural society, usually inhabiting a distinct portion of the earth, speaking the same language, using the same customs, possessing historic continuity, and distinguished from other like groups by their racial origin and characteristics, and generally, but not necessarily, living under the same government and sovereignty [7]. Therefore, the Sikh nation exists in the Punjab region of India, the Kurdish nation exists in Turkey, Iraq, Iran and Syria, various Native American nations exist in the Americas, and a wide variety of other nations exist within political unions that people colloquially call nations. This is understandable. After all, a world organization called the "United Political Unions" just wouldn't seem the same as one called the "United Nations".

The phrase "nation-state" is meant to refer to political unions as well as nations that possess final sovereignty over the people and land they govern. Therefore, while Kurdistan does not exist as a nation-state, we may refer to it is a nation. Ireland may be spoken of both as a nation-state and a nation. The United States is a political union, a nation-state, but its people are diverse and lack the distinct racial origin and characteristics of a nation.

For our purposes, the word "State" can be used interchangeably with "nation-state." A State has been defined as "a people permanently occupying a fixed territory bound together by common-law habits and custom into one body politic exercising, through the medium of an organized government, independent sovereignty and control over all persons and things within its boundaries, capable of making war and peace and of entering into international relations with other communities of the globe" [8]. Therefore, a State or nation-state includes both political unions and nations that have achieved sufficient sovereignty to satisfy this definition. Canada, Italy, Brazil and all other members of the United Nations satisfy this definition. Again, the name United Nations explains this organization to the average person with a certain clarity that the phrases "United Nation-States" or the "United States" would not.

With these definitions in mind, we can examine various questions related to the political and legal status of the European Union. For example, is the European Union a political union? Should the European Union be regarded as a nation-state? And what is the status of the nation-states in the European Union? Are they still nation-states? Can a nation-state like Germany continue to be a nation-state if is part of a greater political union?

In order to answer these questions, we must explore a number of issues related to law and governmental power in the European Union. For example, it is important to know who makes the laws that govern and influence the daily lives of people who live in the 25 nation-states that comprise the EU. It is also important to know whether the nation-states in the European Union have legal sovereignty over the EU, or whether the EU has legal sovereignty over its member nation-states. Further, it is important to know whether the law of the EU supersedes the law of its member nation-states if there is a conflict between them. Another important issue is whether the European Union can make war and peace since these are very important powers of nation-states. Finally, it is important to know whether the European Union has the power to enter into relations with other nations or communities in the world and, in doing so, whether the EU has the same influence as a nation-state.

Is the European Union a Political Union?

The question whether the European Union is a political union has been ignored, avoided and understated for more than a decade. In part, this was done by EU government leaders, who feared negative political backlashes by citizens of their home countries. Suppression of this matter was facilitated by the fact that this is a very theoretical issue when presented to the average citizen of a European Union nation. Until 2004, European Union member nation-states had a long history of being stable democracies. People who live in stable democracies assume that their legal and political systems will not change significantly without the general public being aware of the impact such changes would have on them. They assume that the laws that govern them are made by the governments of their nation-states. They expect to be able to elect the people who make these laws. They believe that if they do not like the laws that govern them, they can defeat the politicians who passed the laws and remove them from office. It was a surprise to most European Union citizens when they realized that these assumptions were not true.

At the turn of the millennium, citizens of the 15 nation-states who comprised the European Union at that time suddenly confronted these issues, as the EU prepared to include 10 new member nation-states, eight of which had significantly less recent experience with democratic government. European Union citizens, and a growing number of the politicians they supported, began to raise questions about the effects this expansion would have on them [9].

As the 2004 expansion approached, European Union citizens focused on the legal and political issues that had long been ignored. They wanted to know who made the EU laws that increasingly affected them. They wanted assurances that they and their nation-states were being treated fairly and respectfully by EU laws. They demanded to know their rights and recourse when EU laws were harmful to them. In essence, European Union citizens wanted to know if the EU was a political union and, if so, the role its government would have on them as citizens of their nation-states.

European Union citizens became increasingly alarmed as they learned more about the process and scope of EU lawmaking. Political discussions began to focus on the fact that laws made by the government of the EU control most of the business activities of people in the member nation-states, as well as many other areas of their societies. This was especially alarming to European Union citizens who did not realize that laws governing their daily lives were being made by citizens of many other European EU nation-states, and that most of the EU law-makers who voted to pass these laws were not elected by them [10]. Many European Union citizens were particularly alarmed to learn that some of the most significant law-making positions within the EU were held by people who were political appointees, and who were not elected by any nation-state's citizens to serve in this capacity.

The reaction of many European Union citizens was that the development of a European Union political union should be slowed or abandoned. In some countries, citizens attempted to derail political union development by preventing the passage of a new European Union "Constitution" in 2005. The debate about all of these issues rages on, and there is a general confusion now about the future of the European Union [11].

This disruption in the European Union's development was not a surprise. It was caused by the decision of EU leaders to advance and implement elements of a European Union political union without fully involving or informing the citizens of the nation-states that belonged to EU. A significant form of political union was established by the "Maastricht Treaty on European Union." This treaty became effective on November 1, 1993, when the EU had only 12 members, less than half of its current 25 members. The Maastricht treaty was the culmination of many years of work to develop a European Union political union but, since then, the EU has added additional elements of political union to support and govern the much stronger economic and market integration that it has achieved today.

Despite these developments, many European Union citizens remain uncertain of its political status. European Union citizens seem to understand issues related to economic and market integration much better. They understand what the European "single market" is, and that it is designed to allow the free flow of goods, services, capital and labor across the borders of the European Union nation-states. They understand the workings of the Euro, the common currency of the European Union that is authorized by the European Central Bank to be the local currency of 13 European Union nation-states.

The reason that European Union citizens understand issues involving commerce and business much better than political issues is because these people experience commerce and business in their everyday lives. Issues of law and government often are not recognized by most citizens until the power of the law or government affects them directly. To make matters worse, very few people have the expertise or desire to understand what a political union is, to assess its stage of development, or to evaluate its effect on sovereignty of the nation-states involved. Finally, it should be recognized that the development of a European Union political union was intended to achieve a type of political union that had never existed previously in the world--the political union of a continent with dozens of nation-states that had separate cultures, languages and societies for hundreds or thousands of years. All of these reasons explain why the European Union's development of a political union was ignored for so long and continues to be somewhat of a mystery.

The unique nature of the European Union's political union is responsible for a great deal of the confusion about its nature and scope. Many people will not recognize or accept the reality of the European Union as a political union unless the individual nation-states are stripped of nearly all the powers they possess as sovereign states. This is unlikely to happen in because the European Union has taken a multifaceted approach to sovereignty. Some sovereign powers have already been transferred to the EU by the nation-states, others are shared, some are in transition and some will be retained by the nation-states. This is very similar to the development of political union in the United States. Ultimately, only political developments will decide which powers remain with nation-states, and which become the domain of the government of the European Union.

It should also be understood that there is no particular line that is crossed when a political union is formed. In practice, some political unions have many aspects that differ significantly from other political unions. Although it can be said that some are "more developed," "stronger," or "deeper," the presence or absence of some possible characteristics of political union does not prevent those that are less sophisticated from qualifying as political unions.

Sovereignty as an Element of Political Union

The issue of sovereignty is a very important element of political union. The resulting political union of nation-states must have a certain degree of sovereignty in order to be a political union.

"Sovereignty" has been defined as the supreme, absolute, and uncontrollable power by which any independent state is governed [12], and as the supreme power by which any citizen is governed; it is the person or body of persons in the state to whom there is politically no superior [13]. Sovereignty's requirement that a government possess the "supreme" power within a state has some surprising implications for those who believe that this power must be absolute. For example, the states within the United States have certain powers which are reserved only for themselves and which are not possessed by the federal government. Other powers are shared by state governments and the federal government of the United States. Nonetheless, the federal government of the U.S. has sufficient power to qualify as a political union. Canada also qualifies as a political union, although its provinces possess even greater powers.

The unique nature of the European Union makes analysis of its political union particularly difficult. All EU nation-states have been unquestionably sovereign for a number of years, some for centuries, before entering the European Union. It seems clear that these nation-states remain sovereign, although this issue has sparked a great deal of debate in the European Union during the last few years, based on the fear that their nation-states have lost, or are losing, sovereignty to the central government of the EU [14].

In the past, leaders of the European Union avoided controversy and debate over sovereignty issues by emphasizing development related to economic union while avoiding or understating developments related to political union. This ended after the 2004 expansion of the EU to 25 members, and the sovereignty issue became the focus of many EU politicians. This issue exploded in 2005 as attempts were made by European Union leaders to adopt a new constitution for the EU. Since prior constitutional agreements of the EU required the new constitution to be approved by all 25 European Union members, debate raged about the effects of this constitution on the sovereignty of each nation-state [15].

Citizens of new member states began to ask questions about sovereignty that should have been carefully considered before these member-states became part of the EU. Citizens of nation-states that were EU members before the 2004 expansion suddenly realized the potential impact that the ten new members could have on their daily lives, and began to worry whether important government decisions would be made by an increasingly uncontrollable central European Union government.

In retrospect, it is hard to imagine how these issues were ignored for so long. They were often raised by lawyers and other analysts of the European Union, who are largely ignored by the general public. This was welcomed by EU leaders, who preferred to promote the political development of the European Union with as little difficulty as possible.

The preference of EU leaders to avoid debates about sovereignty is understandable. In the past, European leaders who promoted a European political union repeatedly met with failure, while their attempts to promote economic integration were much more welcomed by Europeans.

It may surprise some, but an attempt had been made for European political union a few years after World War II, well before the European Economic Community came into existence in 1958. This initiative proposed the establishment of a European Political Community in France, Germany, Italy, Belgium, Luxembourg, and the Netherlands. After receiving preliminary governmental approvals, it failed in 1952 because French citizens worried that their sovereignty would be lost and that Germany would eventually dominate this political union.

Despite this failure to achieve political union, these same six nations went on to create the European Economic Community in 1958, which later evolved into the European Union. Even during the early stages of the European Economic Community, fears about the loss of sovereignty kept a number of European nation-states from joining. Iceland, Liechtenstein, Norway and Switzerland declined EU membership, and still do so. The United Kingdom, Austria, Denmark, Malta and other current EU members originally refused to join the European Economic Community because of sovereignty concerns. Citizens and politicians of some of these countries continue to be sensitive about sovereignty issues.

Conclusion: Elements of EU Nationhood

Since a political union is created when the union achieves the status of a sovereign nation-state, the development of a political union can be measured by its possession of elements of nationhood.

Following is one of the best descriptions of the European Union's possession of various essential elements of nationhood: "It has an integrated economy and commercial market, a common political system and government, a common legal and regulatory system, and an increasingly common society ...: a union constitution (the latest version being the 2003 Treaty of Nice); superiority of union law over State law; an independent supreme court; political parties operating on a union-wide basis; free movement of goods, services, capital and labor; a common external tariff; union passports and citizenship; equal treatment under each State's laws; political homogeneity; a national flag and anthem; a special national celebration day (May 9); an independent national government; a union parliament, executive and judiciary; union source labels for products; and an absence of internal tariffs. The EU now has a common currency, the Euro, representing thirteen EU nations. Its common foreign policy mechanism already exists despite a clumsy implementation procedure which is scheduled for improvement. An EU army also is being developed, although the European Command of NATO and the Western European Union already operate functionally as an EU army" [16].

Increasingly, world organizations and governments have recognized the developing sovereignty and political development of the European Union. The EU negotiates as one political entity before the World Trade Organization and other world bodies.

The United States Central Intelligence Agency recognized the European Union's national characteristics in 2005 when it began listing the European Union as a separate entity from its members in its "World Factbook." The World Factbook stated that the European Union has "many of the attributes associated with independent nations," and that the European Union "continues to accrue more nation-like characteristics for itself and so a separate listing was deemed appropriate."

References

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10. International Business and Law, page 57.

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12. Chisholm vs. Georgia, 2 Dall, 2 U.S. 419, 2 Dall. 419, 1793 WL 685 (U.S.Ga.), 1 L. Ed. 440 (1793).

13. Whitlock, C. "France Rejects European Constitution: Voters Say No by Wide Margin, Defying Leaders and Endangering Unification Plan," Washington Post Foreign Service, 7, Monday, May 30, 2005, page A01.

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16. International Business and Law, page 63.

L. V. Kurylo (1)

S. J. Maffei (2)

(1) L. V. Kurylo received a law degree from Lvivskyi Natsionalnyi Universytet imeni Ivana Franka in the Ukraine, and now specializes in litigation and banking issues.

(2) S. J. Maffei practices law in New York, specializing in business law and regulation.