[MUSIC] Now that we know what the European Union is entitled to do, at least on paper, lets explore what the European Union actually does. In other words let's contrast the theory with the reality. I will try to provide you with an overview of the multifarious policy actions undertaken by the European Union. Let's learn a bit more about some European actions and policy initiative, which have a daily impact on the lives of millions of citizens living both within and outside the European Union. As you surely remember from our introductory class, the European founding fathers decided to entrust the realization of the political objective of peace, and prosperity to an essentially economic project. The creation of an internal market. This remains the building bloc, and largely the major achievement of the European Union. The European internal market is the heart of Europe, and it's engine. It consists of one area in which goods, such as cars, foods as well as waste, workers, services and capitals circulate freely. Thanks to the internal market, the European Union looks as if it were one country, and not 28 different ones. Why did the European Union to decided to bet its future on the realization of this market? To what extent the creation of such a market could deliver and ensure both peace and prosperity across the continent? The original idea was that countries who trade with one another, become economically interdependent, and so more likely to avoid conflict. In other words, the internal market meant peace. But how the creation of such a peaceful market may lead to prosperity? The founding fathers found an answer to this question through the theory of comparative advantage. Formulated by David Ricardo back in the 19th century. This holds that each country can gain by specializing in the product where it has a comparative advantage, and trading that good for another. Thus, even if one country is most efficient in the production of all goods than another, both countries will still gain by trading with each other, as long as they have different relative efficiencies. To let this theory play in full swing, it is necessary to eliminate all potential obstacles to the free movement of the various factors of production. This is what the EU and its internal market are about. An endless struggle towards the elimination of obstacles to trade generated by both governments and companies. To unleash Europe's potential, we need to ensure that everything can move freely across borders. Not only goods, such as, computers and cars, but also services, such as, banking and financial products, as well as capitals and of course people. The European machinery was and remains invested with this authority by the origin of trading. But how the EU actually builds this internal market and make it work today? How did they EU turn the Schumann idea, a sort of recipe for peace and prosperity into reality? Where would you start to build a common market among different states? The recipe is pretty simple, and draws on pragmatism. Let's identify the obstacles that stifle free movement in Europe and eliminate them. Back in the 1950s, the major obstacles obstructing the free movement of goods. Such as agriculture and mechanical products, there were two types. These two types of obstacles consisted of: taxes on imports and exports. We call them tariffs, and import limitations, so called quotas. Thus if you were BMW, the car maker, and you wanted to export your cars to France you had to pay a tariff at the border. And above a certain number of cars, you could not even enter the market. Under the leadership of an international agreement, the General Agreement on Tariffs and Trade, called GATT for short, from 1947. Which was replaced by the WTO in 95, all parties to these treaties, promised to reduce these barriers to trade. The member states of the European Union, then it was still called the European Community, wanted however to do more. Through the creation of a customs union,they established an area in which tariffs and quotas were abolished in their mutual trade and a common external tariff would have been set up for the whole European Union. You may remember my graph, my sketch from the first class. As a result, trade across the new frontiers grew rapidly. However, as soon as the EU succeeded at eliminating obstacles to trade, more hindrances appeared. This time, they were appearing beyond the border. And they mainly consisted of technical regulations and standards. Thus, for instance, the French government not being allowed any more to impose tariffs and quotas on the imports of foreign cars such as BMWs, It began introducing regulatory requirements that rendered difficult the placing into the market of these cars in France. These barriers take the form of regulatory, legal or technical measures, having the effect of restricting trade, and may consist of minimum size for tires. The shape of the driver seats and many others. You can think of different regulations and standards. Most based on concerns about safety, health, the environment and consumer protection, differing from one state to another. Thus, Italy allowed only pasta made with durum wheat. In France, only foie gras made in France, thus hindering the free movement of these products in Europe. Foie gras or pasta which were not made according to the regional recipe of these countries, could not be placed into the market of France or Italy. But while it was relatively easy to eliminate tariffs and quotas, being barriers appearing at the border,pretty visible to eye, it appears more complicated to identify and address the obstacles to trade, stemming from divergent regulatory standards. There are two main options to do so. One possibility is to scrutinize each national standard and determine its compatibility with the EU, the European internal market. But there's another possibility, which is to create common European standards. One size for tires, one shape for seeds, one for wheat, and another one for foie gras. Well, the European Union did both, and I would like to show you how it did both. In order to reach its political objective of peace and prosperity, the European Union decided as you know, to create an internal market. And in order to create this internal market, the European Union decided to determine a set of rules that we call negative integration provisions. Telling member states that they cannot impose particular obstacles such as taxes or quotas, or to discriminate the treatment, in the treatment of the different factors of production. But at the same time, it was necessary to also create some possible common rules, and that's what I call, the European recipe laws. A standard for tires, a standard for pastas, a standard for pizzas placed into the European market and why not, also beers. However, it would have been a Herculean task to set up Euro standards for everything on the European market. To create and to actually agree on how our beers should be made, how our bread should be made, what kind of ingredients should it contain. Each country has its own recipe, each country has its own traditions. And this lead to the emergence of a so-called third way. A new approach to address the problem raised by regulatory obstacles. And a possible way to strike a balance between regulatory divergence and regulatory convergence. This approach was developed by the European court of justice of the EU in one of its most celebrated decisions. A supermarket chain called Rewe-Zentral, decided to import the French fruit based liquor called Cassis de Dijon, into its own market, Germany. This liquor was having a great success in France and is generally mixed with white wine to prepare a cocktail called kir, or sometimes with champagne, that makes it a kir royale. Why not bring it to the German consumers too? The German authorities blocked the import of this liquor, as all alcohol products whose alcoholic content was between 15 and 25 percentage volume were prohibited in the country. Cassis makes around 17%. The Court of Justice believed that the German standard infringed the free movement of alcoholic products. With no justification whatsoever, he declared that once a product has been placed and marketed in one country of the EU, it should circulate freely in all other European countries, despite the fact it does not meet their standards. This is what is generally called the principle of mutual recognition. Under this principle, a product made and sold legally in one member state cannot be barred from another member state. So thanks to the EU, a French alcohol company, a German car maker, or a Dutch cheese manufacturer can be sure to sell their products to all other European countries without having to worry about the import, import taxes quarters, or different national standards. This principle made a corner stone in the single market program. By making sure that member states mutually recognize each other's product standards. We don't need to adopt Euro recipes for every single thing. This in turn, radically reduced the impediment to trade between them, and enable the EU to achieve its declared goal. Which is, of course, the creation of an internal market. This principle is epitomized by the European motto, unity in diversity. Which suggests it is possible to have national regulatory standards. Coexisting one with another. This may be contrasted to the U.S. motto E Pluribus Unum. Which suggests instead that one standard must prevail over the others. The EU in the U.S. present very different regulatory philosopies.