Occasional Paper Series

Ettore Dorrucci,
Demosthenes Ioannou,
Francesco Paolo
Mongelli, and
Alessio Terzi

30

The four unions PIE on

the Monetary Union CHERRY:
a new index of European Institutional
Integration

No 160 / February 2015

6E
E

3,5E

6E

E
80

100% 53%

6E

7,5E

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The views expressed are those of the authors and do not necessarily reflect those of the ECB.

Acknowledgements
The authors would like to thank Ad van Riet, Marta Wieczorek, Benot Cur, David Clarke, Iigo Arruga Oleaga,
PhilippeMoutot, Carmelo Salleo, Gilles Noblet, and Michaela Posch for helpful comments. We also received useful feedback
at the 2013 Villa Mondragone Seminar in Rome, the CES Conference in Washington D.C. in March 2014, and the 45th Meeting
of the ECB Committee on Financial Integration in September 2014. We would like to thank Rita Sapage and Sabine Prennig
for helpful assistance. Theviews expressed in this paper do not necessarily reflect those of the European Central Bank, and we
remain responsible for any errors or omissions. This paper is in memory of Tommaso Padoa-Schioppa, a scholar and architect of
European integration.

European Central Bank, 2015

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C O N T E N TS

contents

Abstract

NON-TECHNICAL SUMMARY

1 INTRODUCTION

AN INSTITUTIONAL NARRATIVE OF EU ECONOMIC INTEGRATION 

12

FOUNDATIONS OF THE EURII INDEX

14

3.1 Some basic definitions

14

3.2 The EURII index and the Balassa framework of institutional integration

15

Box 1 Five stages of Regional Institutional Integration: The Balassa framework

15

3.3 At the roots of the EURII index: The first-generation Index of Regional
Institutional Economic Integration (IRIEI) 

16

METHODOLOGY TO CONSTRUCT THE EURII INDEX 

18

4.1 EURII captures institutional reforms

18

4.2 Looking at the not-too-distant future 

19

4.3 a new governance framework is emerging. 

19

4.4 The structure of the EURII index 

19

4.5 Reasons to prefer this methodological approach to alternative approaches 

20

(RE-)MEASURING THE COMMON MARKET ERA

22

5.1 Free Trade Area (FTA) and Customs Union (CU) 

22

5.2 Indicators used for the Internal Market (IM) 

22

5.3 Indicators used for the coordination of monetary and exchange policies (CME)

25

5.4 Indicators used for the development of Supranational Institutions

and Decision-making Bodies (SID)

26

MEASURING THE UNION ERA

28

6.1 Indicators used for the Economic Union (EUN)

28

6.2 Indicators used for the Monetary Union (MU) 

29

6.3 Indicators used for the Financial Market Union (FMU)

30

6.4 Indicators used for the Fiscal Union (FIU)

31

6.5 Indicators used for democratic legitimacy and accountability

34

MAIN FINDINGS OF THE EURII INDEX

37

Final remarks 

41

References42

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Abstract
This paper presents a European Index of Regional Institutional Integration (EURII), which maps
developments in European integration from1958to2014on the basis of a monthly dataset. EURII
captures what we call: (i) the Common Market Era, which lasted from1958until1993; and (ii) the
first twenty years of the Union Era that started in1994, but gained new impetus in response to the
euro area crisis. The paper complements the economic narratives of the crisis with an institutional
approach highlighting the remedies to the flaws in the initial design of Economic and Monetary
Union (EMU). In fact, since2010, EMUs institutional framework has been substantially reformed.
While work on EMUs new governance is still in progress, the broad contours of a genuine union
have been outlined in the Four Presidents Report of December2012. The report envisages a more
effective economic union, a fiscal union, a financial union, and a commensurate political union.
The aim of the EURII index is threefold: (i) to provide a tool to synthesise and monitor the process
of European institutional integration since1958and, in particular, track institutional reforms
since2010; (ii) to expand a previous integration index by showing that monetary unification which
was initially understood as the cherry on the Internal Market pie implied a major discontinuity
in the process and nature of European integration, that is, a new pie on the cherry; and (iii) to
offer a tool for further research, policy analysis and communication.
JEL codes: F33, F42, N24.
Keywords: Economic and Monetary Integration, Euro, Institutions and Governance, Financial
Deepening and Integration, Sovereign Crisis, Four Presidents Report, Optimum Currency Area.

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NON-TECHNICAL
SUMMARY

NON-TECHNICAL SUMMARY
This paper presents the second generation of the European Index of Institutional Integration
(in short, EURII), which was initially developed in Dorrucci et al. (2002). The second vintage of
this index has been motivated by the global financial crisis and the sovereign crisis in the euro area.
Both have exposed and exacerbated the weaknesses in the architecture of Europes Economic and
Monetary Union (EMU). EMU was established on the basis of the blueprint of the Treaty of
Maastricht in the early1990s, which itself was conceived in the late1980s. Europe and the wider
world were very different places at that time, for example, in terms of the degree of globalisation,
as well as financial depth and sophistication. Yet, even then there was an awareness of the need
to fill diverse institutional and governance gaps. Diverse recommendations in the1989Delors
Report were watered down in the less ambitious compromise signed by the EU Member States
on7February1992. The view of the so-called monetarist field that the common currency would
harmoniously act as a catalyst for further economic and political integration proved to be only
partly true.
A catalyst for strengthening EMUs governance arose with the financial crisis, which became
severe in the euro area in2010. The prolonged and evolving crisis revealed several vulnerabilities
in EMUs political economy, such as an inability to discourage excessive macroeconomic and
financial intra-area imbalances or to have them smoothened out through policy tools and market
forces such as those predicted by a theoretical optimum currency area model. Moreover, the euro
area and the rest of the EU did not have a crisis management toolkit, which meant an escalation
of the costs involved in dealing with the crisis. Even though the crisis is not over at the time of
our writing, the institutional response to these developments in the euro area/EU may one day be
considered remarkable by historical standards, in terms of both scope and pace. What is more,
a broader assessment of the future of EMU has made progress at the highest policy level, thus
providing some understanding of what a new EMU steady state might look like in the future.
Against this backdrop, the paper presents a quantitative index of the path of EMU-relevant
institutional integration in Europe since the late1950s. This novel monthly dataset takes account
of the institutional responses to the euro area crisis from2010until2014 (see summary chart
below). It is articulated along two overarching periods of institutional integration: (i) the Common
Market Era, from1958until1993; and (ii) the Union Era thereafter. The vertical blue line marks
the boundary between eras. For reasons explained in the paper, a maximum score of50points
is assigned to each of these periods, with the index starting at0on1January1958 (when the
Treaty of Rome entered into force) and then making progress up to the current cumulated value of
around78.8as at1January2015. The gap between100points i.e., the maximum total score that
would be assigned in the index if all objectives of the Common Market and Union Eras were fully
accomplished and the current score, gives an indication of the distance still to be covered until
a new perceived steady state is achieved in the process of European economic integration under
EMU.
Concerning the Common Market Era, the most prominent achievements are the European Internal
Market also referred to as the Single Market alongside various supra-national institutions and
laws. EURII draws on previous research, such as the traditional Balassa classification of regional
economic integration recognising five stages of integration. Regional economic integration
starts with a free trade area and customs union (stages1and2, which the six founding members
of the European Economic Community had already accomplished by1968), as well as the gradual
build-up of the European Internal Market (stage3, which to a significant, but not full extent was
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finalised in1993). During these35years, some degree of coordination of, for instance, monetary
and exchange rate policies was also set up (stage4) alongside a number of institutions, laws and
decision-making processes which can be defined as though to different degrees supranational
in nature (stage5). Given the final goal of a fully-fledged common market, this process was not too
far from being completed in the early1990s, though additional work needed (and still needs) to be
done to complete the Internal Market.
However, the start of Stage Two of EMU in1994and, even more, of EMUs Stage Three in1999,
implied a major discontinuity in the integration process. The introduction of the euro was not just,
as some would have argued, a cherry on the pie, with the pie being the completion of the EU
Internal Market. It rather implied what in this paper we call a new and gigantic pie on the
cherry. This is because the initial version of EMU, despite including some mechanisms for the
coordination of national economic policies, proved unable to cope with the shocks emanating from
the global crisis and even contributed to endogenously creating some of the preconditions for the
euro area crisis.
In the Union Era, a new set of goals in the process of European integration were broadly identified
in the Four Presidents Report of December2012 (Van Rompuy2012), which sees the need to
complement the monetary union with a more effective economic union, a fiscal union, a financial
union, and a commensurate political union. The contours of the first three unions have been
defined, though to different degrees. A series of detailed legislative acts including a new Treaty
on Stability, Coordination and Governance in the Economic and Monetary Union, better known as
the Fiscal Compact have been adopted in the past few years. Alongside legislation changing the
nature of integration (e.g. Bank Recovery and Resolution Directive), new institutional structures
have also been set up (e.g. Single Supervisory Mechanism and Single Resolution Mechanism under
the financial/banking union). While not all goals identified in the Four Presidents Report have
been implemented, progress made in the first three unions has been tangible, with the European
banking union probably being the most notable achievement so far.
European Index of regional Institutional Integration (EUrII)
fiscal union (FIU)
co-ordination of monetary and exchange rate policies (CME)
monetary union (MUN)
democratic legitimacy and accountability

free trade area (FTA) and customs union (CU)

internal market (IM)
supranational institutions and decision-making (SID)
economic union (EUN)
financial market union (FMU)
100

Common Market Era

90

90

80

80

70

70

60

60

Index - maximum score

50

50

40

40

30

30

20

20

10

10

0
57

100

Union Era

62

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67

72

77

82

87

92

97

02

07

12

NON-TECHNICAL
SUMMARY

Concerning the political union, the European Council Conclusions of December2012state that
any new steps towards strengthening economic governance will need to be accompanied by further
steps towards stronger legitimacy and accountability, and that this should be ensured at the level at
which decisions are taken and implemented. Political union remains, therefore, broadly undefined
as it is seen in this context as the complement needed to be able to achieve the accountability and
legitimacy of the economic governance developed in the other three unions, rather than as a process
on its own. This explains the relatively low score given to political union in the EURII index. Not
to deny that, despite its predominantly economic content, the European Union is an eminently
political construct. Even readers primarily interested in economics would hardly understand
the euro if they ignored its political dimension. We do concur with this statement by Tommaso
Padoa-Schioppa, to whose memory this paper is dedicated.
As for where the integration process currently stands after entering the Union Era in1994, the index
suggests that a major institutional quantum leap has taken place especially in the last few years.
It is a leap which probably very few would have anticipated when the Maastricht Treaty was signed.
This partly explains why there are benefits to measuring the integrative developments undertaken
under the two main blocks of the index, that is, the Common Market Era and Union Era.

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Europe will be forged in crises, and will be the sum of the solutions adopted for
thosecrises.Jean Monnet (1978)
Despite its predominantly economic content, the European Union is an eminently political
construct. Even readers primarily interested in economics would hardly understand the euro if
they ignored its political dimension. Tommaso Padoa-Schioppa (2004)

1 INTRODUCTION
The crisis of the euro area1 has exposed and exacerbated several weaknesses and gaps in the
architecture of Europes Economic and Monetary Union (EMU), which are often lumped together
as flaws in EMUs design. EMUs political economy could not impede and in part, it has
been argued, endogenously fuelled2 the accumulation of substantial private and/or public debt
in a number of its member countries. Nor could it prevent significant losses in competitiveness.
Incentive structures proved to be poorly designed and badly implemented. When the sovereign
crisis erupted in2010, there were no financial backstops for either sovereigns or banks to counter
the sudden stop in financial flows to some member countries. Several financial market segments
collapsed. Then, adverse feedback loops built up between weak sovereigns, weak banks and weak
economies (Schambaugh (2012)). This brought a risk of financial implosion in some countries,
with Greece, Ireland and others experiencing bank runs. The deep trade, financial and monetary
links within EMU became a vehicle of contagion, and break-up risks came to the fore.
However, these adverse developments have also spurred a rethinking and reshaping of institutional
integration in Europe. Questions have been addressed, such as: What would render a regional
institutional framework such as EMU stable? What is needed for the euro area to become resilient
to major financial and economic shocks, and display its benefits? In replying to these questions,
the crisis has taught hard lessons about the reforms needed. Since2010we have seen some of
the most important institutional reforms in the60years of EU integration, including: enhanced
fiscal governance, procedures to keep macroeconomic imbalances in check, a crisis management
and resolution framework with financial backstops for sovereigns centred on the European
Stability Mechanism, five far-reaching adjustment programmes, and the establishment of banking
supervision (Single Supervisory Mechanism) and resolution (Single Resolution Mechanism, Bank
Recovery and Resolution Directive, etc.). These institutional adjustments and, in some cases,
innovations are covered in detail in this paper. The paper also shows how the euro area is being
re-forged in line with Jean Monnets prediction above.3
The aim of the paper is to present the European Index of Regional Institutional Integration
(EURII), which maps developments in European integration from1958to2014. EURII is a
second-generation index arising from previous work,4 and is organised into two main eras of
European integration:
The Common Market Era, which displayed most of its effects between1958, when the
Treaty of Rome entered into force, and1993. This era comprises the progressive construction
1 For a chronicle of the crisis, see Drudi, Durre and Mongelli (2013), and Durre, Maddaloni and Mongelli (2014).
2 See e.g. Fernndez-Villaverde et al. (2013) and de Grauwe(2013).
3 The paper mainly focuses on the global financial crisis that started in 2007 and the euro crisis that started in 2010, not on earlier crises,
such as the Bretton Woods collapse in 1971-73, the ERM crisis of 1992 and other past events that also forged Europe.
4 The first-generation Index of Regional Institutional Economic Integration (IRIEI) presented in Dorrucci et al. (2002, 2004) and Mongelli
et al. (2007) is discussed later in this paper.

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1 i n t r o d u c t i o n
of a free trade area and customs union, and then of an internal market, coupled with increasing
harmonisation, coordination and even unification of several policies, as well as with European
institutions and laws. These components have proven resilient throughout the crisis. Euro area
countries remain very integrated and interdependent; and
The Union Era that started in1994with Stage Two of EMU and continued in1999with
Stage Three. A description of the three Stages of EMU is provided in Chart1.
The main argument of this paper is that the launch of EMU in the1990s represented not only a
substantial new step in the process of European integration. But EMU also implied a transformation
whose consequences and implications were not fully understood at the time. A major discontinuity
indeed materialised when Europe shifted from the Common Market Era to the Union Era in1994.
That is, the moment when the preparatory work for the launch of the euro started becoming more
credible and binding. The nature of European integration changed in that moment.
As we see it, the introduction of the euro was not just as some believed a cherry on the pie, with
the cherry being the need to give up monetary autonomy and move to a monetary union in order to
solve the impossible trinity implied by the EU Internal Market and fixed exchange rates. It rather
implied a new pie on the cherry, as monetary unification could not survive without economic,
chart 1 the three stages of EMU

STAGE THREE
1 January 1999
STAGE TWO
1 January 1994
STAGE ONE
1 July 1990

Establishment of the
European Monetary
Institute (EMI)

Complete freedom for

capital transactions

Ban on the granting of

central bank credit to the
public sector

Increased cooperation
Free use of the ECU
(European Currency
Unit, forerunner of the )
Improvement of
economic convergence

Increased coordination of
monetary policies
Strengthening of
economic convergence

Start of preparatory work

for Stage Three

NCBs become fully

independent, with price
stability as their primary
objective

Maastricht Treaty enters

into force (Febr. 1992)

Preparatory work for

Stage Three

Irrevocable fixing of
conversion rates
Introduction of the euro
in 11 EU Member States
Founding of the
Eurosystem and transfer
of responsibility for the
single monetary policy to
the ECB
Entry into effect of the
intra-EU exchange rate
mechanism (ERM II)
Entry into force of the
Stability and Growth
Pact

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fiscal, financial and, ultimately, political unification. Such a discontinuity in the history of Europes
regional institutional integration was in turn exacerbated by two additional factors. First, euro area
countries have become more interconnected and interdependent than ever before; they are each
others direct stakeholders. The crisis has shown that events in any euro area member can rapidly
spill over to the others through diverse channels of transmission. Second, EMUs governance was
weak even when assessed against the original blueprint of the Delors Report (Delors et al. 1989).
Although it included some mechanisms for the coordination of national policies, it proved unable to
cope with the shocks emanating from the global crisis.
Thus, just updating the first-generation index of institutional integration as developed by Dorrucci,
Firpo, Fratzscher and Mongelli (2002) would not have been enough. The new index needed to:
(i) be recalibrated to take account of the significant functional dissonances set in motion by the
monetary union, and (ii) incorporate the new dimensions of the Union Era.
The second-generation EURII index brings a change in perspective: it takes stock of the pillars of
European integration but also anchors its scoring to the elements of a genuine union that are within
reach, and can secure a robust and beneficial economic and monetary union.
In the Union Era, the framework on the way forward for European economic integration is
outlined in the Four Presidents Report of December2012. The Report was commissioned at
the June2012European Council where, inter alia, the euro area Heads of State or Government
requested the work to begin on banking union. A second draft of the Report was then presented at the
October2012European Council before being concluded in time for the December2012European
Council summit. Given that there were some differences between the Reports, we take all of them
as reference for the index (as well as potential next steps that may be taken).
The Four Presidents Report (but also the Commission Blueprint of2012) embed some important
steps towards a genuine EMU that will be characterised by four main elements: (i) an integrated
economic policy framework (Economic Union), (ii) an integrated budgetary framework going
beyond the previous fiscal governance (Fiscal Union), (iii) a Financial Union comprising a Single
Supervisory Mechanism, plus a shared resolution framework for the banking system, and (iv) a
Political Union engaging citizens more deeply in European decision-making.
The advice of the Four Presidents Report is to progress with the four unions in parallel.
Nevertheless, as seen in practice in the past two years, the contours of such a Genuine Union
are progressing at different speeds and are defined to different degrees. In some cases, a series
of detailed legislative acts including a new Treaty on Stability, Coordination and Governance
(TSCG) signed by25of the (then) 27EU Member States, better known as the Fiscal Compact and
lying outside the Treaty on the Functioning of the European Union, TFEU have been adopted
since2010, which deepen economic and fiscal integration. In other cases, new dimensions have
been added to the process of integration and the rules of the Internal Market, for example, with the
Bank Recovery and Resolution Mechanism. Some new institutional mechanisms have also been set
up, notably the European Stability Mechanism (ESM), which is an intergovernmental body, and
the Single Supervisory Mechanism under the Financial (or more narrowly Banking) Union. Indeed,
although not all the goals identified in the Four Presidents Report have been implemented yet,
it can be confidently stated that the progress made in the first three unions has been tangible, with
the European banking union probably being the most notable achievement so far.

10

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1 i n t r o d u c t i o n
Concerning the Political Union, the European Council conclusions of December2012state that
any new steps towards strengthening economic governance will need to be accompanied by
further steps towards stronger legitimacy and accountability, and that this should be ensured
at the level at which decisions are taken and implemented. Given the nature of the Report, Political
Union remains broadly undefined as it sees such a Political Union as the necessary complement to
achieving the accountability and legitimacy of the economic governance developed in the other
three unions, rather than as a process on its own. This also explains the relatively low score given to
Political Union in the EURII index.
These four unions have limitations, concerning the extent by which they have been implemented
and the extent by which they foresee all elements indispensable for a genuine EMU. Yet, they
provide a broad map for the way forward in terms of further integration. They help constructing an
index for, and quantify, EU institutional integration in this paper.
The index of EU Regional Institutional Integration (EURII) is thus anchored by the new building
blocks of EMU under the Union Era, the contours of which is now taking shape, and builds on the
Common Market Era. A maximum score of50is assigned to each era, and thus the index can reach
a maximum score of100. Following a rapid rise in the past few years, the index stands at78.8as
of 1January2015. Only decisions that have already been taken enter the index. It is foreseen in the
Four Presidents Report, even if in a vague manner, and not yet implemented or even decided upon
is not included. Is seen as what could become operational to reach a maximum score of100. Indeed,
the gap in institutional integration to be filled under the Union Era is, currently, greater than the gap
of the Common Market era in1993.
The paper is organised a follows. Section2briefly recalls what went wrong in the run-up to the euro
area crisis and what had to be addressed by the EMUs governance reforms. Some of the roots of the
euro area crisis are very old. Section3discusses the theoretical foundations of our EURII index, and
the Balassa stages of integration. Section4describes the methodology behind the new EURII index,
and explains why simply updating the original index was not an option. Instead, the index had to be
fully reconsidered and recalibrated and enriched with several new components. Section5presents
the scoring for the Common Market Era in a step-by-step way and the distribution of nearly all
of the50points of the EURII index. Section6then presents the scoring of the Union Era in a
step-by-step way: about half of the50points are assigned unevenly across the various components/
stages. Section7brings together the main findings and scores for both the Common Market Era and
the Union Era. Section8qualifies these findings and offers some final remarks.
Several caveats apply to our analysis. Ratification and transposition into national law does not
guarantee immediate application or enactments of the various steps; thus, there can be differences
between de jure and de facto institutional integration. Also, our measure of legitimacy and
accountability is necessarily limited. Moreover, the impact and effectiveness of institutional
reforms may have long and varying lags which are only partly captured by the index. Finally,
EU integration is a process and, as such, may not only lack some envisaged steps, but during critical
phases it may even lack coherence (see Haas (1958), Meade (1958) and Sapir (2011)).

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11

2 AN INSTITUTIONAL NARRATIVE OF EU ECONOMIC INTEGRATION

The EURII index allows us to complement the economic narratives of the crisis i.e., the fiscal,
competitiveness and banking narratives with an institutional narrative.5 Starting from the economic
narratives, early on during the crisis a fiscal narrative prevailed, prompted by the public finance
crisis in Greece. A number of authors noted that the preventive arm of the Stability and Growth
Pact had failed to thwart persistent budget deficits and encourage significant reduction in existing
debt, in good times. Then the corrective arm was unable to force fiscal corrections where necessary
(seeSchuknecht, Moutot, Rother and Stark (2011)). Such flaws in fiscal governance were then
coupled with macroeconomic imbalances going beyond what public finances could account for.
To ensure that structural convergence efforts would not stop with the launch of the euro, the EU Lisbon
Strategy was introduced into the economic policy coordination framework in2000to encourage
product and labour market reforms and spur competitiveness where it was eroded.6 However, these
mechanisms did not prevent certain euro area countries from experiencing continuous erosions of
competitiveness, leading to the accumulation of current account deficits in the presence of rigid labour
and product markets, low growth in productivity and innovation, and excessive private borrowing.
Thus, a competitiveness narrative of the crisis also developed, according to which divergences in
unit labour costs were the ultimate reason behind the formation of current account imbalances across
the euro area (see e.g. Sinn and Valentinyi (2013) and, for a critique, Wyplosz (2012)).
Over time, a banking narrative has also gained ground. Real estate and other asset bubbles
fuelled by excessive credit growth and capital inflows, which artificially supported demand in
several countries, were indeed a key explanatory factor of the crisis in countries such as Spain
or Ireland. Excessive private and public leverage laid the ground for the sudden capital stops
experienced since2010. This narrative stresses that it was the banking system inside the single
financial market that enabled imbalances to accumulate for a long period by providing cheap
financing across the euro area (see e.g. Constncio (2013)). In particular, factors such as the
low-yield environment and the liberalisation of European and international capital markets had
ushered in an era of unprecedented capital mobility and credit growth which was not accompanied
by appropriate regulation and supervision either in the EU/euro area or in the global economy.
At the same time, financial market self-discipline also failed. Banks and other financial market
participants, such as credit rating agencies, did not sufficiently discriminate between debt issuers
with different debt sustainability prospects. In fact, in the initial years after adoption of the euro, the
cost of sovereign borrowing converged to an unprecedented degree.7
5 EMUs political economy raised concerns even before the launch of the euro. There were warnings about sharing a single market and a currency
while national fiscal, economic and financial policies remained weakly coordinated (see Padoa-Schioppa (2000) and (2004b), and the review
by McNamara (2013)). Sims (1999) presciently asked if EMUs institutions could deal with stress. Krugman (1993 and 1998) and Feldstein
(1998) doubted that the euro area could ever function because of, among other reasons, a lack of supranational fiscal arrangements, such as the
US federal budget, and a low degree of political union. For a review of the critical stance of US academic, see Jonung and Drea (2009).
6 This strategy was based on the open method of coordination as the main economic and employment policy coordination mechanisms
of the Treaty (Articles 121 and 148). Under the Maastricht Treaty the coordination of economic policies should have been treated as
amatter of common concern, but it proved to be ineffective.
7 The critical role of the banking sector in the Internal Market was for a long time underestimated in both the academic and the policy
debate an exception being Padoa-Schioppa (2001). Apart from the provision of cheap financing through rising cross-border financial
activity throughout the Union, a specific problem that emerged during the euro area crisis was that the single monetary policy still had
to be transmitted in a regime of national banking supervision, coupled with wide discrepancies in the European financial regulation
and national deposit insurance frameworks. Against this backdrop, academics such as Eichengreen, Obstfeld, Rogoff, Bordo and Kenen
pointed to various flaws in EMUs architecture and, specifically, to a lack of centralised banking supervision and lender of last resort
for sovereigns. Another important issue was heterogeneity across banks. Financial fragmentation was one of the manifestations of the
crisis, which in turn implied uneven transmission of the single monetary policy across stressed and non-stressed euro area countries.
The so-called financial trilemma (Schoenmaker (2005), (2011)) of European financial integration, European financial stability and
national prudential supervision had not been addressed.

12

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Against the background of these three main economic narratives, the index developed in this paper
proposes a complementary institutional narrative of the crisis. The index shows that European
institutions and rules did not keep pace with developments in the economic and monetary sphere.
The Treaty of Maastricht was agreed in the late1980s and then ratified by all EU Member States in
the early1990s, when both Europe and the world were very different and real and financial linkages
were looser. The crisis showed how decentralised economic, fiscal and financial policies entailed
problematic incentive structures that amplified the imbalances under the previous narratives:
i.e.,systemic risks were to some extent endogenous.

2 AN INSTITUTIONAL
NARRATIVE OF
EU ECONOMIC
INTEGRATION

Moreover, no crisis resolution mechanism or financial backstops for either sovereigns or banks
existed prior to the crisis. Why this omission? Probably it was considered that market forces
would by themselves play a disciplinary role across the single financial market, underpinned by
the prohibition of bailing out public creditors. With hindsight, EMUs institutional framework was
based on the assumption that countries could keep their own houses in order (as some did) and that
in a crisis the necessary adjustments would be possible through market mechanisms.
The implications were severe and could have been even more devastating if a crisis management
framework had not been deployed with, at its centre, the European Financial Stability Facility
(EFSF) in2011and the European Stability Mechanism (ESM) in2013. The euro area found itself
on the verge of a financial meltdown on several occasions (see e.g. Durre et al. (2013)). The euro
areas governance shortcomings in the face of the crisis have elicited efforts to strengthen the
foundations of EMU and, more generally, the EU. A new European governance framework, whose
contours are not yet completely defined, is now taking shape.
Whichever narrative one adopts, the crisis showed that EMU needed to be completed in one way
or another, requiring a number of institutional integration steps. Subsequently, the metaphor of
EMU and the euro in particular being initially understood just as a sort of cherry on the pie,
with the pie being the EUs Internal Market, did not seem to hold any longer. This would
have been the view of the Committee chaired by the President of the European Commission,
Jacques Delors, which prepared the ground for the Maastricht Treatys EMU architecture. His
report presented the roadmap for EMU in April1989. It called, for example, for EU rules and
procedures in the macroeconomic and budgetary field to become binding.8 All in all, the report
concluded, countries would have to accept that sharing a common market and a single currency
area imposed policy constraints (Delors et al. 1989). These recommendations were not sufficiently
mirrored either in the Maastricht Treaty or in ensuing Treaty revisions (at Nice, Amsterdam or even
Lisbon). In addition, initiatives such as the Stability and Growth Pact (SGP), which was added
in1997in an attempt to correct the shortcomings of the Maastricht Treaty, or the Lisbon Strategy
of2000, did not provide for an appropriate governance to avoid the global financial crisis from
taking a stronghold in the EU. Macroeconomic and fiscal governance eventually proved inadequate
while the expected market discipline also did not provide an adequate substitute for the institutional
gap.9 In the end, the crisis initiated a number of integrative steps that are captured under the pillars
of the Four Presidents Report and reflected in the index.
8 According to the Delors Report, the ECOFIN Council, in cooperation with the European Parliament, should have had the authority to take directly
enforceable decisions, i.e. to impose constraints on national budgets to the extent to which this was necessary to prevent imbalances that might
threaten monetary stability. The report also proposed discretionary changes in Community resources () to supplement structural transfers to
Member States or to influence the overall policy stance in the Community, as well as multilateral surveillance of economic developments and
policies based on agreed indicators () and recommendations so as to promote the necessary corrections in national policies.
9 Both the preventive and corrective arms of the Stability and Growth Pact (SGP) did not encourage faster deficit and debt reduction. As Mayer
(2012) observes, even the Werner Plan of 1970, which was never implemented, had envisaged the establishment of a centre of decision
for economic policy, politically accountable to the European Parliament, and exerting decisive influence over countries economic policies
(Werner et al. 1970). On the SGP failing to stem excessive deficits and debts in EU Member States, see Ioannou and Stracca (2012).

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3 FOUNDATIONS OF THE EURII INDEX

3.1 Some basic definitions
The EURII index measures regional institutional integration in the EU/euro area context.
Before focusing on this specific context, however, a more general discussion is required of the
concept of regional institutional integration.
We define regional institutional integration as the joint policy decisions which two or more
governments of countries belonging to the same geographic area take in order to deepen and/
or widen the spheres of common economic10 interest under the terms of an agreed arrangement,
such as a pact or a treaty. According to this definition, arrangements could vary widely in form,
ranging from narrow intergovernmental cooperation agreements (e.g. a preferential trade area) to
fully-fledged unions with (partial and/or full) transfer of sovereignty to supranational institutions,
as is the case in todays EU.
Regional institutional integration can be seen as part of a broader spectrum of policies designed
to enhance economic integration11 with one or more countries. Such policies, which can be named
preferential arrangements (PAs), may or may not be regional in nature since they may be:
multilateral (e.g. WTO-based Doha Round of multilateral trade negotiations),
inter-regional (e.g. Yaound/Lom Convention),
regional (e.g. EU),
sub-regional (e.g. euro area as compared with the whole EU, Andean Community and
MERCOSUR as compared with the whole Latin American region, etc.),
bilateral (e.g. Chile approach to PAs, and free trade agreements between the EU and several
individual countries), and
possibly even unilateral in nature, at least according to a broad definition of PAs12 (e.g. a country
either unilaterally anchoring its currency to a third currency or dollarizing/euroizing).
The above spectrum of PAs relates to the choice of the partners, i.e. the scope of PAs or their
horizontal dimension. But there is also a vertical dimension of PAs, which pertains to their
depth, defined as the final objectives being pursued. According to the Balassa classification
discussed in Section3.2, such objectives consist of a wide spectrum ranging from Free Trade
Arrangements (FTAs) to full unification of economic policies.
In conclusion, each country, regional arrangement, or territorial entity faces, at a given moment of
its history, a menu of options pertaining to the scope and depth of PAs. Experience shows that such
options are not necessarily mutually inconsistent, i.e. that several options may be adopted at the
10 Please note that we focus here on the economic dimension of regional institutional integration, but there are of course several other
dimensions to which the general definitions in this sub-section would equally apply.
11 The notion of economic integration in turn comprises real (i.e., related to trade, services and FDI), financial and monetary (including
exchange rate) integration.
12 The definition adopted in this paper is broad as PAs usually take the form of mutual agreements instead of unilateral decisions. However,
a unilateral initiative may as well be designed to enhance economic integration with one or more countries.

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same time. For instance, the EU is regional in nature, but also involved in multilateral, inter-regional,
bilateral and sub-regional (e.g. Schengen, euro area) PAs, each presenting a different level of depth.

3 FOUNDATIONS OF
THE EURII INDEX

3.2 The EURII index and the Balassa framework of institutional integration
Regional institutional integration across the EU/euro area partner countries has been a process that
has developed in several stages, and displayed its effects over time. An index of institutional
integration is meant to capture both the main features and timeline of such a process. The secondgeneration Index of EU Regional Institutional Integration (EURII) presented in this paper builds
in part on the first-generation Index of Regional Institutional Economic Integration (IRIEI)
presented in Dorrucci et al. (2002, 2004) and Mongelli et al. (2007). Both the IRIEI and the EURII
indices are based on the Balassa framework of institutional integration (Balassa, 1961): its five
stages are the building blocks of IRIEI and EURII. These stages are a Free Trade Area, a Customs
Union, a Common Market, an Economic Union, and Total Economic Integration, and they are
described in Box1.13
13 For a survey of various other indicators and indices of institutional integration and their applications to various geographic areas,
see De Lombaerde et al. (2008).

Box1

Five stages of Regional Institutional Integration: The Balassa framework

Bela Balassa is often cited for his work on the relationship between purchasing power parity
and cross-country productivity differences, also known as the Balassa-Samuelson effect. Yet,
when working at the World Bank he also made important contributions in the sphere of regional
integration. In a seminal article of (1961) he identified five stages of regional institutional
integration (RII), as follows:
Stage1. Free Trade Area (FTA) An area where tariffs and quotas are abolished for
imports from area members, but which retains national tariffs and quotas against third
countries. Examples are ASEAN and NAFTA;
Stage2. Customs Union (CU) A FTA setting up common tariffs and quotas (if any) for
trade with non-members. An example is the European Economic Community since1968;
Stage3. Common Market (CM) A CU abolishing non-tariff barriers to trade i.e.,
promoting the integration of product and service markets as well as restrictions on
factor movement (i.e., promoting the integration of capital and labour markets). Examples
are the Andean Community and the European Community since1993, i.e. following the
establishment of the European Internal Market. It is noteworthy that the CM was already
identified as an objective under the1957Treaty of Rome (so-called four freedoms);
Stage4. Economic Union (EUN) A CM with a significant degree of coordination of
national economic policies and/or harmonisation of relevant domestic laws. An example is
the European Union nowadays; and
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 Stage 5. Total Economic Integration (TEI) A EUN with all relevant economic policies
conducted at the supranational level. To this end, both supranational authorities and
supranational laws need to be in place. There are no concrete examples of TEI, though the
euro area (comprising, from 2015 onwards, 19 out of the 28 EU member states) has a number
of relevant features, including, for instance, a single monetary, trade and competition policy,
as well as supranational authorities (European Central Bank (ECB), European Court of
Justice (ECJ)) and legislation.
3.3 A t the roots of the EURII index: The first-generation Index of Regional Institutional
Economic Integration (IRIEI)
In the first-generation IRIEI by Dorrucci et al. (2002, 2004) and Mongelli et al. (2007), the overall
degree of institutional integration achieved within the European Union at a given point in time
was quantified by assigning scores to each relevant integration event (e.g. the entering into force
of a Treaty or directive, the start of a new institution, an important ECJ ruling, etc.). This kind
approach, based on a monthly database starting with the entering into force of the Treaty of Rome
in January1958, is the same as the one now implemented for the EURII index.
In the IRIEI index, the sum of all scores indicated the overall level of integration recorded, for
each of the five Balassa stages, from1958onwards. Scores were assigned in parallel along
four main headings, each one ranging between0and up to a maximum of25: Free Trade
Area/Customs Union (jointly considered); Common Market; Economic Union; and Total
Economic Integration.
Concerning what is measured, in line with the general definitions provided in Section3.1, the
index measured both the depth of integration or vertical integration and its geographic scope,
or horizontal integration. In each regional arrangement, a group of partner countries sets the upper
limit to vertical integration at a given point in time. Within the EU, these countries were the six
founding members (Belgium, France, Germany, Italy, Luxembourg and the Netherlands, or EU6)
from the1950s onwards. All of them joined the euro area in1999 (see Chart2). Given this upper
limit, it was then possible to reconstruct the path followed by each individual member of the EU/
euro area over time (horizontal integration). Dorrucci et al. (2002and2003) illustrated the outcome
of this exercise for each of the EU15 Member States, i.e. the countries which participated in the
enlargements of the EU prior to those in2004and thereafter.
Turning to the process of calibration of the scores to be assigned to each integration event, the
first step consisted in properly assigning them to the right stage (e.g. to the free trade area,
common market or total economic integration). This made it possible to create a structure for
the index.
The second step involved the weighting, with a top-down approach (i.e. ensuring that the index can
range from0to100) of each relevant joint policy decision. To the extent possible, the authors assigned
scores on the basis of the year and month when such a decision started being actually implemented.
Projects which were never implemented e.g., the Werner Plan are not taken into account.
Finally, the third step consisted of summing up the scores achieved in each moment in time.
We used monthly data. As mentioned, the index could range between0 (no economic integration
at all) and100 (representing full economic integration as understood when the Rome Treaty was

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3 FOUNDATIONS OF
THE EURII INDEX

chart 2 the first-generation Index of regional Institutional Economic Integration (IrIEI)

(index of Institutional Integration for the EU-6 (i.e., BE, DE, FR, LU, IT, NL), 1957 2007)
overall index of integration
sub-index of monetary and financial integration
100

100

Monetary Union (1999)

Common Market (1993)

80

80

40

EMS (1979)

Customs Union (1968)

60

60

Monetary Union (1999)

CAP (1962)

20

0
1957

20

Currency Convertibility

Notes and Coins

EMS (1979)

1960

1963

1966

1969

1972

40

1975

1978

1981

1984

Capital Market Liberalization

1987

1990

1993

1996

1999

2002

2005

0
2008

approved). In the European case until the early1990s, the final objective of economic integration
had been identified already in the1957Treaty of Rome as the common market (subsequently
called internal market). In parallel, however, two other Balassa stages of integration were also
pursued, which needed to be captured in the index: (i) harmonisation of national economic policies
(for example, the Common Agricultural Policy); and (ii) co-existence of the intergovernmental
method for example, through the Council with supranational authorities (for example, the
European Court of Justice, the European Parliament) and laws.
The resulting measure of the first-generation IRIEI index was used either by itself or to conduct
econometric analysis: for example, to gauge the interaction between Regional Institutional
Integration (RII) and the actual degree of economic and financial integration that has been
achieved by two or more countries belonging to the same arrangement.14 This complementary
perspective which is not pursued in this paper resembles and further extends what Balassa
referred to as the state of affairs of regional integration15. In this setting, Dorrucci et al.
(2002, 2004) found a two-way interaction between institutional and economic integration.
In the introduction we explained that the preparation for the euro and then the launch of the euro
implied a moment of discontinuity in the EURII process: the final objective of the RII process
has fundamentally changed in the EU, thus calling for a recalibration of the index. Thus, simply
updating the first-generation index up to2014was not an option. Instead we had to fully rethink
and recalibrate it by adding several new components.
14 Such Regional Economic Integration (REI) can be captured by a number of economic, monetary and financial indicators at a given
point in time: e.g. business cycle synchronisation, dispersion in real GDP per capita and price levels, trade integration, labour mobility,
correlation of inflation and interest rates, financial market integration, etc. A high degree of REI implies, not surprisingly, the fulfilment of
the basic Optimum Currency Area (OCA) criteria.
15 Regarding economic integration as a state of affairs, Balassa defined it as the absence of various forms of discrimination between
national economies (Balassa 1961). Our definition is broader in nature, since we look at the actual data for economic and financial
integration, i.e. regional economic integration (REI). We prefer this broader definition because the absence of economic discriminations
within a region is a necessary, but not sufficient, condition to attain economic integration. Regarding the absence of discriminations, we
consider it as a component of regional institutional integration (RII).

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4 METHODOLOGY TO CONSTRUCT THE EURII INDEX

There are elements of continuity and discontinuity between the first original index of regional
institutional integration recalled in the previous section, and the enhanced new second-generation
EURII index proposed here. To start with, what is measured, and how it is measured, remain
unchanged, i.e. the general criteria for the measurement are the same.
4.1 EURII captures institutional reforms
A fundamental change resulting from the crisis has been a crisis management and crisis resolution
framework. The economic adjustment programmes for Greece, Ireland, Portugal, Spain and Cyprus
were supported financially by the European Financial Stability Facility (EFSF) and later also by
the permanent European Stability Mechanism (ESM). The EUs new crisis framework drew on the
crisis management framework of the IMF. The funding of the ESM comes from paid-in capital plus
joint and mutual pledged guarantees in proportion to the share of ECB capital.
Such risk-sharing in turn requires a strengthening of the governance framework to counter the
moral hazard inherent in such an insurance scheme. This is what we have witnessed since2010.
The governance of the euro area has been strengthened. There is a new governance to restore fiscal
sustainability and prevent or correct macroeconomic imbalances. The Stability and Growth Pact
has been tightened up by the so-called six-pack of economic governance measures, including
the Macroeconomic Imbalance Procedure (MIP). They in turn have been complemented by the
two-pack.
Something new emerged at the June2012summit of euro area leaders: glimpses of a shared
European vision for a coherent and viable architecture of EMU. The Presidents of the European
Council (Herman Van Rompuy), the European Commission (Jos Manuel Barroso), the Eurogroup
(then Jean-Claude Juncker) and the ECB (Mario Draghi) drew up thereafter what is known as the
Four Presidents Report. The report puts forward a proposal for a new architecture of Europes
Economic and Monetary Union in the shape of four unions over the next decade:
1. a banking union comprising an integrated financial framework, including three main arms:
the Single Supervisory Mechanism (SSM), a common deposit insurance scheme and a shared
resolution framework;
2. a fiscal union comprising an integrated budgetary framework that will go beyond the fiscal
compact;
3. an economic union comprising an integrated economic policy framework; and
4. a political union enhancing the democratic legitimacy and accountability of all decisionmaking bodies within the EU.
These four unions are envisaged to mesh and engage with each other. Like cogwheels in
a clockwork in which the turning of one wheel sets the others in motion. Conversely, when the
momentum of one decreases the others follow suit (Mersch (2014)). The banking union, the fiscal
union, the economic union, and the political union can transmit and reinforce the dynamics of
European integration, boosting the overall resilience of EMU to endogenous and exogenous shocks.

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4.2 Looking at the not-too-distant future

For the purposes of our EURII index, this means that we have recalibrated it so as to capture the
aforementioned discontinuity in the final goal:
Concerning the Common Market Era and until1993, the main goal of European integration
was to set up a fully-fledged integrated market to secure the benefits from trade in goods and
services and free movements of people and capital. This block now receives a score of50in our
index. As we will see, this process was quite advanced already in the early1990s;
Concerning the Union Era, as of the start of Stage2in1994, however, the new goal of the
process of European integration is identified ex ante by the contents of the Four Presidents
Report of December2012 (Van Rompuy et al. 2012).
4.3 a new governance framework is emerging.
The new governance, crisis management and financial backstops can support a viable euro area.
Further progress towards the four unions should instead make them more resilient and stable
over the next decades. The Four Presidents Report, while not having the standing of a Treaty,
is one of the most advanced efforts by policy-makers thus far to identify and implement the
institutional steps towards a viable EMU, or in other words a leap towards a genuine EMU.
As a result, from1994onwards the maximum score that our RII index can achieve is doubled
from50to100. This implies that the institutional integration gap to be filled out under the Union
Era has widened, quite significantly, in comparison with the concluding years of the Common
Market Era (as we shall see below). Therefore, it was decided to double the scale of the index
in1994.
4.4 The structure of the EURII index
The EU index of regional institutional integration (EURII) follows a balanced quantitative structure
between the Common Market Era and the new Union Era, as displayed in Table1below.
The maximum score for EURII is100, which is split equally between the two eras. Each era is in
turn partitioned in various stages that are illustrated below and covered in detail in the next two
sections of the paper as well as the appendix. Every distinct stage and step of the integration falls
under one of the categories and contribute to the full score.
table 1 the main building blocks of the EUrII index
Common Market Era (1957-1993)
Components

Maximum
Score
Aggregate
Maximum
Score
Total

Free Custom
Trade
Union
Area

12.5

Union Era (1994-Today)

Intern. Coordination of Supranat. Monetary Economic Fiscal Financial

Democratic
Market
Monetary & Institutions
Union
Union Union Market Legitimacy &
Exchange Rate & DecisionUnion Accountability
Policies
making
20

12.5

12

50

10

10

12

50
100

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4.5 Reasons to prefer this methodological approach to alternative approaches

Being an institutional index, methodologies such as the Principal Components Analysis (PCA)
cannot be implemented as our weights cannot be determined statistically. The same applies to
other possible approaches, such as factor analysis and Unobserved Component Models (UCM).
These methodologies might certainly be more objective than the a priori weighting which we
adopt for our institutional index EURII. However, as OECD (2005) argues, no matter which
method is used, weights are essentially value judgements. While some analysts might choose
weights based only on statistical methods, others might reward (punish) the components that are
deemed more (less) influential depending on expert opinion to better reflect the policy priorities
or theoretical factors (p. 21).
It could be further objected that the majority of institutional indices (e.g. Human Development
Index, IMF Financial Index) use an equal weighting policy. This means that every dimension or
component of such indices, or even all the individual variables which make up such indices, are
assigned equal weighting. There are cases in which it is important that the dimensions of a certain
object of research are chosen in such a way that they are all equally important. Yet, this is not
necessarily the case in point here. Assigning equal weighting to different events in the process of
institutional integration would often just give the impression of a lack of understanding of their
relative importance.
When constructing the EURII index, efforts were taken to account for the relative merits of both
the equal weighting and the judgemental approach. As a result, it made sense that the main building
blocks of our index the Common Market Era and the Union Era be given equal weights.
After careful reflection, this seems indeed to be the least arbitrary solution. In the same vein, equal
weight has also been given to some components of these two building blocks. But not to all of them:
it would indeed not be meaningful, for instance, to give the same weight to the European Monetary
System and to Economic and Monetary Union. Nor would it be reasonable to assign the same
weight to each of the institutional steps and decisions entailed in the index. Yet, the construction
of the index, and the underlying list of events, is fully transparent and available upon request,
thus enabling further research to experiment with different weightings.
It is particularly important to stress that the dimension Democratic Legitimacy and Accountability
(DLA) in our index is the least developed of all sub-components of the index for a precise reason,
namely our purpose to keep track of the actual steps in the process of institutional integration.
As such, the index is not the proper tool to reflect the extensive debate about legitimacy and the
democratic deficit in the EU (see e.g. Siedentop (2000) and Scharpf (2011)). Instead, EURII is
intended to capture those steps that have been already taken, plus those which are envisaged in the
Four Presidents Report and are specifically relevant to the steps taken under the other pillars. Since
such steps are still defined in a rather limited way, this part of the index is identified as DLA rather
than political union.
Indeed, as several streams of academic discourse (e.g. European integration studies, traditional
political philosophy and political science, fiscal federalism etc.) as well as historical precedents
show, a true political union in Europe may still take very different shapes along different time
horizons in Europe:
First, state-building can take a variety of forms that, as some have argued, comes about through
historical accident rather than precise intention;

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4 METHODOLOGY
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Second, advanced forms of political integration would not necessarily imply full centralisation
of institutions and policies. In the EU, a basic principle enshrined also in the Treaty is indeed
that of subsidiarity. At the same time, subsidiarity does not necessarily mean just greater
decentralisation. It rather means allocation to the appropriate level of governance of the powers
and tools required to conduct the policies assigned to that level. And in line with this, another
basic principle in the EU is that accountability exists at the level at which such policy is
conducted; and
Third, differentiated integration seems to continue to characterise the European process
(see,for example, Leuffen, Rittberger and Schimmelfennig (2012)). Yet even if a very advanced
form of political union were to materialise in a core group of countries, a significant degree of
decentralisation could still characterise the related institutional set-up.16
To sum up, the EURII index has both a backward-looking component and a forward-looking
component which takes the not implemented parts of the Four Presidents report as an anchor.Its
most complex component pertains to the dimension of the political union. Since the latter is not
being pursued per se, but DLA has to be commensurate with the other three unions as currently
envisaged, the total maximum score (6) assigned to it is, very low.

16 According to Padoa-Schioppa (1995), for instance, federalism would supplement the horizontal division of government functions
legislative, executive, judicial with a vertical division, whereby government powers have to be distributed at various levels (ranging
from the village to the regional arrangement to the whole world) based on the principle of subsidiarity. This is defined as the rule that the
functions of higher levels of government should be as limited as possible and be secondary to those at lower levels. At the same time, the
euro area crisis has clearly shown that a number of crucial powers need to be shifted to the supranational level, while at the same time
filling the democracy gap.

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5 (RE-)MEASURING THE COMMON MARKET ERA

This section explains in a step-by-step way the construction of the Common Market Era component
of EURII.
5.1 Free Trade Area (FTA) and Customs Union (CU)
Changes over time of tariffs and quotas on trade within the area (FTA) and vis--vis third
countries (CU) are used to measure the progress made in the establishment of the FTA/CU by
the six founding Member States (MS) of what is now called the EU (EU6). This process evolved
from January1958until July1968, when it was completed for the EU6, thereby setting the upper
bound for the subsequent integration of the22other EU Member States in the subsequent decades.
Compared with the other components of the index, this one has the advantage of being the most
easily measurable and unbiased, as shown in Table2.
Using these indicators, a fully-fledged CU (i.e., incorporating a FTA) obtains a score of12.5.
As shown in the Table2, the final step toward a FTA/CU obtains a much higher weight than each
intermediate step, marking the completion of the FTA/CU. The same non-linear approach applies
to the other dimensions of the EURII index described hereafter.
5.2 Indicators used for the Internal Market (IM)
a) Completion of the free movement of goods through the progressive abolition of non-tariff barriers
The creation of a CU did not automatically imply the full integration of product markets among the
participating countries. A further step was needed, namely the abolition of all residual barriers with
table 2 construction of the EUrII: Free trade Area and customs Union components

1) Free Trade Area (FTA) and Customs Union (CU)

a) FTA:
1
2
3
4
5
6
7
8
9

Intra-EU6 quotas cut by 20%

Intra-EU6 quotas cut by 20%
Intra-EU6 tariffs are reduced by 20% (10% January 59, 10% July 60)
Intra-EU6 quotas cut by 20%
Intra-EU6 quota restrictions lifted (with a few exceptions)
Intra-EU6 tariffs reduced by 30% (10% January 61, 10% January 62, 10% July 62)
Intra-EU6 tariffs reduced by 20% (10% June 63, 10% January 65)
Intra-EU6 tariffs reduced by 20% (10% in January 66, 10% in July 67)
FTA completed: all remaining internal tariffs abolished

b) CU:
1

22

Scores

Max score
possible under
the 4PR

12.50

12.50

7.50

7.50

0.50
0.50
0.50
0.50
1.00
0.50
0.50
0.50
3.00
5.00

The difference between average external tariffs in individual countries and the
Common External Tariffs (CETs) is reduced by 30% (both agriculture and industrial
products; for the latter, reduction had taken place already in 1961)
The difference between average external tariffs in individual countries and the
Common External Tariffs (CETs) is further reduced by 30% (both agriculture
and industrial products; for the latter, reduction had taken place already in 1963)
National customs duties in trade with the rest of the world replaced by the Common
External Tariffs (CETs)

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0.50

1.00

3.50

5.00

5 (RE-)MEASURING
THE COMMON
MARKET ERA

an effect comparable to that of tariffs and quotas. Two important, preliminary steps in that direction
were the attribution of strong powers to the Commission for competition policy (1962, 0.75additional
point) and the harmonisation of VAT on trade of goods (1967, 0.75additional point).
In1974, the European Court of Justice defined non-tariff barriers as all trading rules enacted
by Member States which are capable of hindering, directly or indirectly, actually or potentially,
intra-Community trade (Dassonville case8/74). Since in the years thereafter some progress was
made as a result of repeated rulings of the Court of Justice, 0.5point is assigned for the year1974.
Another0.5point was assigned in1979, when the Court issued a particularly important ruling
(Cassis de Dijon).
However, there is no doubt that in Europe the key step towards the abolition of non-tariff barriers
was the1985White Paper a programme abolishing non-tariff barriers which, by the end of1992,
was estimated to have been95% completed. The White Paper was put into effect with the European
Single Act of1986, which entered in force in1987 (2.5additional points). As it would be extremely
difficult (and possibly arbitrary) to quantify the intermediate steps between1987and the official
launch of the European Single Market on1January1993, the methodology assigns2.5points just
on the occasion of the latter event. In our EURII index, we consider the free movement of goods to
have been accomplished on that date (see Table3).
b) Measures taken in order to liberalise capital movement17 The role of capital movement in
the European process of regional integration has changed over time. On the one hand, in most EU
countries until the mid-1980s restrictions on capital movements were tolerated and in fact helped
to preserve some degree of intra-regional exchange rate stability coupled with some degree of
monetary policy autonomy. On the other hand, the liberalisation of capital movements became
one of the key drivers of monetary union for those EU member countries that wanted to preserve
intra-regional exchange rate stability.
The ultimate condition for securing intra-regional exchange rate stability in a sustainable way
is intra-regional economic convergence. While capital flow restrictions can well play a role in
preserving intra-area exchange rate stability in the early stages of integration, in the longer run
they jeopardise this objective since they allow policy-makers to postpone those policy measures
that eventually create the preconditions for both economic convergence and greater exchange rate
stability. As the European experience since the early1990s clearly illustrates, free capital movement
was a key disciplining factor that forced policy-makers to pursue economic convergence as one
of the key objectives of economic policy in Europe.
Consequently, in our EURII index all steps towards the liberalisation of capital movements
obtain a positive score, whereas all restrictive measures receive a negative one. Emphasis is given
to those measures which were taken at the regional level, since liberalisation in one individual
country does not per se imply increased integration. In the EURII index, the free movement
of capital is considered to have been virtually accomplished with the launch of the common
17 In the EURII index, technology is not treated as a separate production factor. This choice is based on the assumption that foreign direct
investment (FDI), which is an important component of capital movements, is a major instrument of technology transfer. Opening a
branch, setting up joint ventures and acquiring foreign companies in order to horizontally or vertically extend the production structure
are indeed significant components of capital movement. However, some recent studies suggest that FDI fails to transfer technology and
that improvements often remain confined to the headquarters. This would imply that technology should be measured as a separate factor.
Hence, although this is not the case for the time being, more advanced versions of this paper may include technology as a separate item,
using additional indicators such as the EU patents policy.

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market for capital in1993, although we take also account of the impact of the Payment Services
Directive of2007 (see Table3).
c) Measures taken to liberalise the movement of services The establishment of a truly functioning
internal market for services is vital, as today services account on average for about70% of EU
GDP. They are the most important source of foreign direct investment (FDI), and they are the only
source of net job creation in the EU. We can track the progress made in this field in six key steps:
1. A
ttribution of strong powers to the European Commission in the area of competition policy
(1962);
2. Harmonisation of VAT on services trade (1967);
3. Council Directive on the abolition of restrictions on the freedom of establishment and freedom
to provide services in respect of self-employed activities of banks and other institutions (1973);
4. Official launch of a single market for services in1993, as part of the European Single Market; and
5. Payment Services Directive (2007); and
6. The Directive on services in the internal market, which is commonly referred to as the Bolkestein
Directive (2009).18
However, as the Monti Report of May2010 A New Strategy for the Single Market has
clearly pointed out, in the case of services, Europe is still in a phase of market construction
that requires breaking down barriers to cross-border activity, cutting the dead wood of national
administrative and technical barriers and overcoming corporatist resistances (Monti (2010),
p. 37).19 For this reason, out of a possible maximum score of5, we cumulatively give3.6points
to the services dimension of European integration, indicating that more needs to be done in the
coming years. The blueprint for such additional action is provided by the Monti report itself (see in
particular Monti (2010), Section2.6).
d) Measures taken to liberalise the movement of people and workers This is another key
indicator, in line with Mundells seminal paper on optimum currency areas (OCA, Mundell (1961)).
However, achieving a truly single labour market is far more complex and elusive than integrating
product, capital and services markets.
In the Treaty of Rome, this objective was initially envisaged by entitling workers to accept job
offers within the internal market, and by removing any discrimination based on nationality between
workers (Art. 48). By1968this rule was, at least in principle, already enforced (one point).
However, this de jure approach to labour mobility was clearly insufficient. It left disincentives to
move across EU borders in place. Such obstacles would involve that a number of supplementary
measures be taken at the regional level, such as: (i) promoting the mobility of pension rights;
18 The Bolkestein Directive named after the former European Commissioner for the Internal Market aims to establish a single market for
services within the European Union (EU). It was seen as an important kick-start to the Lisbon Agenda of 2000.
19 For example, telecommunications services and infrastructures in the EU are currently still highly fragmented along national borders
(p. 44); further regulatory action is required to ensure the quick uptake of new technologies and greater efficiency through competition
in energy services (p. 47); the market for rail freight services is still not yet functioning due to incorrect or incomplete transposition of
Community law by Member States (p. 51); and, more generally speaking, services markets remain strongly fragmented with only 20% of
the services provided in the EU having a cross-border dimension (p. 53).

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MARKET ERA

table 3 construction of the EUrII: Internal Market component

2) Internal market (IM)

a) Free movement of goods (abolition of non-tariff barriers)
b) Free movement of capital
c) Free movement of services
d) Free movement of people

Scores

Max score
possible under
the 4PR

16.85

20

5.00
5.00
3.60
3.25

5
5
5
5

(ii) making information on cross-border job opportunities transparent; (iii) recognising professional
qualifications across different countries; and (iv) harmonising national labour market regulations.
Although since1993the EU is supposed to have had an internal market for labour, these measures
are far from being fully implemented. Also for that reason20, less than3% of the working age
population of the EU consists of people from one Member State working in another. This explains
why the maximum score possible for this indicator cannot be given to EU countries in this field
(ascore of3.25is reached), despite the fact that, following the Amsterdam meeting of the European
Council in1997and the Action Plan elaborated by the Commission in the same year, policies in the
area of labour mobility have been gaining momentum. Four additional steps have, however, been
selected for our index: (i) the Reyners ruling of June1974 (half a point); (ii) a directive of1989on
mutual recognition of higher education diplomas; (iii) the full implementation in an increasing
number of Member States, since1998, of the Schengen convention of1990 which does not apply
to all EU Member States on the free circulation of people; and (iv) the introduction, in2004,
of the right of permanent residence, coupled with a reduction in the administrative formalities.
On the whole, the Internal Market as such (i.e. without considering the other stages of regional
integration) could obtain a maximum score of20points. There remains a gap: the score we assign
is16.85, in order to signal that more remains to be done in the areas of free movement of services
and labour mobility (see Table3).
5.3 Indicators used for the coordination of monetary and exchange policies (CME)
We now turn to the degree of coordination of national exchange rate and monetary policies prior
to the launch of the euro: i.e., until end-1998. There are various ways to incorporate this dimension
of regional integration in our EURII index. The avenue taken in this paper is that such policies should
become an integral part of the index, despite the fact that the European Monetary System (EMS)
has not been in place since the irrevocable fixing of exchange rates on1January1999. The rationale
for this choice is that EMU would probably have been impossible without the previous experience
of exchange rate and monetary policy coordination. This building block, moreover, constituted a
fundamental bridge between the collapse of the Bretton Woods System which, until1971/73, had
provided a monetary anchor for the European process of regional integration and the launch of the
euro in1999. Finally, membership without significant tensions in the Exchange Rate Mechanism II
(ERM II) for two years at least remains a key convergence criterion to be fulfilled by EU members
without derogation before they can adopt the euro (Art. 140TFEU).
20 There are of course additional factors explaining scarce labour mobility which are very difficult, if not impossible, for policy-makers to
deal with, such as: differences in language and culture, life style and preferences, and different housing markets.

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table 4 construction of the EUrII: coordination of monetary and exchange rate

policies component
Scores

3) Co-ordination of monetary and exchange rate policies (CME)

Max score
possible under
the 4PR
5

a) Monetary and exchange rate policy:

5.00

1 Establishment of the Monetary Committee

2 Council Decision on cooperation between the central banks of the Member States
of theEuropean Economic Community (64/300/EEC)
3 Establishment of the Committee of Governors
4 Council Decision on the strengthening of cooperation between the central banks
of the Member States of the European Economic Community (71/142/EEC)
5 Launch of the snake
6 Crisis of the snake
7 Launch of the EMS the ECU is first defined
8 Strengthening of the EMS, with the Basel-Nyborg agreements

0.30

0.10
0.50
0.10
1.00
-1.00
3.00
1.00

The first key events we identify start back in1958, when the Monetary Committee was set
up, thus providing a forum for discussing monetary and exchange rate issues. The Committee
of Governors was established in1964with more formalised cooperation among the relevant
national central banks. Following the collapse of the Bretton Woods regime, the short-lived
experience with the Snake in the1970s is also captured, initially with a positive sign and then
with a negative sign when that experience ended. The EMS was launched in March1979and
strengthened in1987with the Basel-Nyborg agreement. The ERM I crisis of September1992is
not marked with a negative score because, with the benefit of hindsight, that crisis played a
crucial, positive role in pressuring Member States towards greater convergence ahead of
euro adoption.
On the whole, the coordination of monetary and exchange rate policies obtains a maximum, as well
as an actual, score of5points (see Table4).
5.4 Indicators used for the development of Supranational Institutions
and Decision-making Bodies (SID)
We conclude the first part of the EURII index with the crucial component of the setting-up of
supranational institutions and decision-making processes, as well as the structuring of the
process of regional integration through laws issued and enforced at the supranational level.
In the EU experience, supranational institutions and laws were set up at the very outset of the
process. Although they have been strengthened over time, there is little doubt that the basic
supranational framework was already available with the Treaty of Rome (1957). This implies the
assignment of7points back in1958, when the Treaty of Rome came into force. Out of several
subsequent developments, five have been selected: (i) the establishment in1974of the European
Council as a permanent forum providing political impulses; (ii) the introduction of Qualified
Majority Voting (QMV) on Single Market issues with the Single European Act (1987); (iii) the
extension of QMV with the Maastricht Treaty (1993); (iv)-(v) the subsequent Treaties of Nice
(2003) and Lisbon (2009), with further extension of QMV.
As a residual item, we included in this component of the index also the start of structural policies
in the Common Market Era. Here we identify the launch of the Common Agricultural Policy (1962)

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MARKET ERA

and its strengthening in1966, as well as the establishment of the European Regional Development
Fund, which in1975started the provision of structural and cohesion funds.
To sum things up, on the whole, this component of the index obtains a maximum, as well as an
actual, score of12.5points (see appendix). The reason for this is that we separate this component
of the index, which focuses on the years preceding the euro area crisis, from the subsequent parts
of the index.

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6 MEASURING THE UNION ERA

In line with the Four Presidents report, we think of EMU throughout the process of European
integration as any agreement or governance framework at supranational level that promotes growth
and employment, in line with the EU objective of generating sustainable development [] based
on balanced economic growth and price stability, a highly competitive social market economy,
aiming at full employment and social progress (Art. 3, (3)).
All indicators discussed in the next subsections and the related scoring are summarised in the
appendix at the end of the paper.
6.1 Indicators used for the Economic Union (EUN)
A multitude of steps could be identified under this heading. However, in line with the rationale
behind the RII, which continues to apply to the EURII, we only assign scores to nine developments
that we believe mark significant advances in European integration.
In chronological order, the first significant step was the decisions taken in1988to recalibrate and
increase the firepower of the EUs Structural Funds, modulating them towards a more effective
enhancement of a convergence in productivity levels across the Union. This was followed, in1997,
by the Luxembourg Process, reinforced by the Amsterdam Treaty, which established a European
Employment Strategy. The year after, in1998, at a European Council meeting in Cardiff, the
Cardiff process for product market reform was introduced as a way to improve peer review of
economic reforms. One year later, when the European Council met in Cologne, these processes
were complemented by a Macroeconomic Dialogue of social partners at European level. The aim
was to improve cooperation on wage formation among all stakeholders.
All these processes were based largely on existing Treaty provisions essentially the socalled Broad Economic Policy Guidelines and the Employment Guidelines of todays TFEU
Articles121and148) which later converged into the so-called Integrated Guidelines and in
essence relied on an open method of policy coordination. They had limited effectiveness and we
assign very small scores of0.10to each of them.
The Lisbon Strategy of2000 (and its revamped version in2005) also enters our index as a form of
strategic and comprehensive approach to policy coordination. The aim was to provide a top-down
framework to stimulate competitiveness from the centre. However, it too relied on the open method
of coordination and the above-mentioned economic and employment guidelines of the Treaty. It did
not result in an adequate form of economic coordination especially from a euro area perspective,
and enters the index with a small score. Another pact which had the potential to prove significant,
but with practically no elements of additional shared sovereignty and enforcement methods, was
the Euro Plus Pact adopted in the early stages of the crisis. As a consequence, it had limited results
and also takes a very small score in the index.
The latest, and most substantial, attempt at putting in place a shared mechanism that would
monitor and foster policies aimed at boosting macroeconomic stability and competitiveness is the
Macroeconomic Imbalances Procedure (MIP) embedded in the European Semester established
by the so-called six-pack in2011. Although with definite shortcomings, the MIP, with its
macroeconomic scoreboard and objective thresholds, allows for much less discretion than, say,

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the country-specific recommendations of Article121TFEU when assessing a countrys

macroeconomic performance, and it includes the possibility for preventive and corrective measures
to be taken with respect to countries found on imbalanced or unsustainable paths. Since the MIP also
includes an Excessive Imbalances Procedure (EIP) that can ultimately also lead to pecuniary fines
similar to those of the SGP, it marks a notable departure in the economic sphere from the peer support,
pressure and OMC-type of surveillance and thus deserves a higher score than its predecessors.
All in all, throughout the history of European integration several steps have been taken to strengthen
economic coordination: their impact was modest. Perhaps, due to the sensitivity of this dimension,
which goes to the very heart of national sovereignty, these steps were, until recently, solely
grounded in very loose coordination and mutual discussion. As such, we currently judge the overall
level of Economic Union as being far from that required for a genuine EMU of the sort discussed
today. It is assigned an overall score of2.2out of a maximum of10.
As discussed in section3above, for this latter part of the EURII, the Four Presidents Report sets
an ambitious benchmark. This implies that, in order to reach the maximum score, integration would
have to be pursued along the lines of creating a stronger system that incentivises structural reforms
in low-productivity countries, thereby improving the overall stability of EMU to macroeconomic
shocks. One possible form for this, as detailed in the report, would be a system of national reform
contracts, to be signed with EU institutions, in exchange for financial support.
The other crucial milestone that would be needed, according to the Four Presidents Report, in order
to complete the Economic Union pillar, would be the establishment of some sort of pre-condition to
pass strong economic reforms promoting competitiveness and economic convergence in order to be
part of a European macroeconomic stabilisation mechanism (which is discussed further in the fiscal
section, below). In the words of the Report itself, [] setting up risk-sharing tools, such as a
common but limited shock absorption function, can contribute to cushioning the impact of countryspecific shocks and help prevent contagion across the euro area and beyond. However, this needs to
be complemented with a mechanism to induce stronger economic convergence, based on structural
policies aiming at improving the adjustment capacity of national economies and avoiding the risk
of moral hazard inherent to any insurance system.
6.2 Indicators used for the Monetary Union (MU)
The ECB shall have the exclusive right to authorize the issue of bank notes within the Community.
[] The bank notes issued by the ECB and the national central banks shall be the only such notes
to have the status of legal tender within the Community. With this wording, Article105a (1) of
the Maastricht Treaty was effectively establishing a full monetary union (MU). However, the steps
that eventually led to a full MU were manifold and some had even started before the ratification of
the Treaty. In January1990, Stage One of EMU was launched. This involved the implementation
of decisions on multilateral surveillance (objective of economic convergence) and on strengthening
the task and role of the Committee of Central Bank Governors (monetary cooperation). It also called
for the complete abolition of barriers to the movement of capital for eight Member States by1994
(Spain, Greece, Ireland and Portugal received some temporary derogations). In1994, Stage Two of
EMU commenced, involving, among other things, the creation of the European Monetary Institute,
the forerunner of the European Central Bank. As discussed above, we consider this as a crucial
moment which necessitates a recalibration of the scale of the index, as the Union moved from the
Common Market Era to the EMU Era.
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In June1998, the ECB and the Eurosystem formally started their operations, managing a single
monetary and exchange rate policy for the whole euro area from1999. The Eurosystem was set up
with fully federalized decision-making, and with the Governing Council granted independence in
respect of its objective(s) and instruments. This implied a significant step in terms of sovereignty
transferred to the euro area level and European integration (see Jung and Mongelli, 2009). The euro
was then officially launched in January1999, when also the TARGET system (later to be replaced
by TARGET2) began operating. At the same time, the European Exchange Rate Mechanism (ERM
II) replaced its predecessor, as a full part of the overall EMU framework and a requirement for euro
accession. Finally, perhaps more symbolically but still importantly, in January2002, euro notes and
coins entered into circulation, very quickly replacing the legal tender in each country.
Today the Monetary Union is highly credible and widely deemed to be one of the most federalized
elements of European decision-making. It is also the most integrated headlines under our EURII
framework. The Four Presidents Report does not identify any further steps to be taken under
Monetary Union, which seems to fully justify the maximum score of12out of12which we are
assigning to it.
6.3 Indicators used for the Financial Market Union (FMU)
Financial market integration has been an integral component of European integration since the
early days of the Community: initially as part of the freedom of capital objective, later for the
establishment of the single currency. As early as1973, directives were being passed abolishing
restrictions (harmonisation) on providing services with respect to self-employed activities of
banks and other financial institutions. In an attempt to increase the degree of harmonisation of
the market, directives were also passed on banking supervision; own funds, solvency ratios, large
exposures, just to mention a few. These were all small steps, which do not enter our index with a
score. However, in2000the main pieces of legislation on banking were consolidated into a single
text the Single Banking Directive from Basel I21 to which we assign a small positive score.
In the following years several technical fora were established, including the Committee of
European Securities Regulators (CESR) in2001, followed by the Committee of European Banking
Supervisors (CEBS) and the Committee of European Insurance and Occupational Pensions
Supervisors (CEIOPS) in2003. These fora represented the predecessors of the three European
Supervisory Authorities, the European Banking Authority (EBA), the European Securities
Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority
(EIOPA) at the centre of the European System of Financial Supervisors (ESFS), together with the
European Systemic Risk Board (ESRB), which was set up in2011to provide analysis, warnings
and recommendations on macro-prudential policy, following the aftermath of the2008financial
crisis. The last step identified as substantive was the entry into force, in July2013, of the Capital
Requirements Directive (CRD) IV and Capital Requirements Regulation (CRR), implementing the
Basel III agreement.
However, as described in Section1, at the origin of the crisis there were also persistent financial
imbalances (see Constncio (2013) intermediated mostly by banks.22 Such large intra-euro area
capital flows were not matched by a common supervision and resolution scheme for financial
institutions. Then, in June2012, the European Council agreed to advance with centralised European
21 Directive 2000/12/EC.
22 Chen, Milesi-Ferretti and Tressel (2012) argue that sustained cheap financing was provided from banks in core euro area
countries mostly France and Germany to the largest net debtors (stressed/program countries).

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banking supervision which was confirmed following the presentation of the Interim Four Presidents
Report in October2012. Since then, substantial progress has been made, with the approval of the
Council Regulation on the SSM entering into force on3November2013, and supervisory tasks
under Article127(6) TFEU to the ECB.
The financial markets union has in the meantime become the most advanced of the four unions
in terms of integration, with the so-called banking union at its core. The ECB took up fully its
supervision of credit institutions under the SSM on4November2014. An EU Regulation,
co-decided by the EU Council and European Parliament, has set up a Single Resolution Mechanism
(SRM), with a Single Resolution Board (SRB) and a bank-levy funded Single Resolution Fund
(SRF). Parts of this SRF are based on an Intergovernmental Agreement because of (politically
perceived or legally viewed) national obstacles relating to the possibility of supranational fiscal/
financial transfers). The SRM is set to become operational on1January2015, while the SRF
will be built up gradually. In the meantime, it will be buttressed by national financial backstop
arrangements. Moreover, the Bank Recovery and Resolution Directive (BRRD), with the senior
bail-in provisions entering into force on1January2016, has also been adopted. Moreover, in
August2013, the Commission updated its rules concerning state aid for the assessment of public
support of banks. A Deposit Guarantee Schemes Directive (DGSD) has been adopted, ensuring the
protection of deposits across Europe up to 100,000.
Finally, Direct Recapitalisation Instrument (DRI) by the ESM, for the direct recapitalisation of
banks through European public funds as an ultima ratio and in line with the bail-in provisions
of the BRRD, SRM and ESM conditions, has also been agreed and is set to enter into force
on1January2016 (together with the bail-in of senior creditors).
Various financial market segments going beyond the banking sector should also integrate further.
These cover the financing of the European economic through capital markets or more broadly nonbank financing.23 Ultimately, far-reaching decisions in a number of financial market dimensions also
of a structural nature are likely to be warranted to ensure that the financial trilemma is adequately
resolved. For example, as a follow up to the so-called Liikanen proposals, the Commissions
(2014) proposed a draft Regulation on bank structural reforms similar as regards issues to the
Volcker rule in the USA. This could entail inter alia a more integrated solution than the DBR of the
ESM, the harmonisation of bankruptcy law, improving the markets for high quality securitisation,
harmonising the rules pertaining to market infrastructures and so on.
As such, under our index, the FMU pillar is roughly30% complete, with a total score of3.55out of
a maximum of12.
6.4 Indicators used for the Fiscal Union (FIU)
The need for stronger of fiscal coordination was already recognised at the time EMU was set up.
In the Treaty of Maastricht, the need for Member States to avoid excessive government deficits
was articulated in the text as the Excessive Deficit Procedure (EDP). The EU Commission was
to monitor public finance developments and the Council could issue warnings and potentially
even impose fines, if deemed necessary. This mechanism was deemed vague and unsatisfactory
23 At the time of publication, the debate on the stable equilibrium in this policy domain is in some ways advanced as compared to the other
unions but nevertheless remains inconclusive and in fact attempts are being made to define what a capital markets union might entail; see
for example, N. Veron (2014).

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and, as such, in the mid-1990s, it was further articulated in the Stability and Growth Pact.24
We recognise both steps in our index. However, the SGP has been breached on a number of occasions,
most notably by France and Germany, which in the ECOFIN Council of November2003rejected
the Commissions proposal to open the sanctions procedure foreseen under the EDP against them.
The SGP was subsequently revised and weakened in2005, allowing for more flexibility,
extending the definition of exceptional and temporary circumstances that would allow
above-threshold deficits and debts without falling under the EDP. This development was, especially
in retrospect, one of the most sensitive during the Union Era. Arguably, it also tolerated the
type of profligate public finances that contributed to the debt crisis in some euro area countries
that erupted in May2010following Greeces exclusion from the international capital markets
(see Durre, Drudi and Mongelli (2013) and Durre, Maddaloni and Mongelli (2014)). The reform of
the SGP in the mid-2000s thus enters our EURII index with a negative sign, illustrating a setback
for the integration of fiscal policies.
A large part of the initial crisis response by2010focused on the index fiscal side. The considerable
advances thereafter are captured also quite visibly by the EURII. In December2011, the SGP was
once again strengthened as part of the so-called six-pack legislation containing two Regulations
updating the SGP Regulations of1997 (as amended in2005), as well as a Directive on national fiscal
frameworks (see below for the other three Regulations). Furthermore, with the so-called fiscal
compact, a new Treaty on Stability, Convergence and Governance (TSCG) was ratified, leading
most notably to the embedding of a balanced-budget rule of constitutional status at national level.
Interestingly, the Treaty was not only signed by euro area members; in fact, 25of the then27EU
Member States were signatories (Croatia did not join until1July2013).
Last but not least, the fiscal framework for the euro area has been significantly strengthened through
the two-pack. These two Regulations applying to euro area members only, allow for subjecting,
initially by the Commission, the draft budgets of member states to European surveillance in order to
comply with the rules of the SGP. This entails enhanced/semi-automatic processes that allow for
quicker decision making once the Commission has decided to apply the preventive and corrective
arms of the SGP to bring down high public deficits/debts. All these steps represent a significant
weight in our EURII.
The fiscal response to the crisis was characterised not only by a tightening of the rules and
procedures of fiscal surveillance. Significant steps were also taken on the burden-sharing side,
as euro area governments pooled resources in an effort to provide assistance to stressed partner
countries. The first such step was the creation of the Greek Loan Facility in May2010. As this
structure was effectively channelling bilateral loans to the Greek government, it is not seen as an
integration milestone under fiscal union. However, it represented an important actual first step to
the fiscal firewalls that were decided simultaneously and later set up and it thus contributes with a
small positive score to the EURII.
Indeed, in May2010, the decision was taken for setting up the EU-wide European Financial
Stabilisation Mechanism (EFSM) , allowing the Commission to borrow in financial markets up to
60billion under the implicit guarantee of the EU budget, in order to provide financial assistance
to EU Member States in need. Notwithstanding its relatively limited financial envelope, this is
considered to be a significant step in terms of integration, as a decision regarding the activation
24 Council Regulations 1466/97 and 1476/97, Council Resolution 97/C236/01-02.

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of the EFSM facility can be taken by qualified majority in the Council, and it implies a fairly
far-reaching form of pooling of fiscal resources. The EFSM mirrors the Medium-Term Financial
Assistance facility (MTFA), established in February2002to assist non-euro EU countries affected
by a balance of payment crisis.
The other major milestone at the time with regard to establishing a solid and permanent fiscal
firewall for euro area sovereigns was the European Financial Stability Fund (EFSF). This was a
euro area special purpose vehicle that came into operation soon after the inception of the first Greek
Economic Adjustment Programme. Notwithstanding its temporary nature, its strict unanimity rules,
and the fact that liabilities continued to be allocated to individual countries, the EFSF takes on an
important role in the EURII given its strong firepower (which was also increased in July2011),
allowing for an effective containment of the sovereign debt crisis and acting as the precursor to
the European Stability Mechanism (ESM). Indeed, through the ESM Treaty, the EFSF was later
effectively replaced by the ESM, a permanent international organisation with a significant lending
capacity (700billion) with80billion in paid-in capital and some620billion of callable capital.
This size is not dissimilar to that of some proposals put forward by commentators of an EMU
budget i.e. some10% of GDP. The ESM has a large toolkit of lending options and market support
facilities to assist euro area countries under the stress of financial markets. It was one of the key
elements together with banking union and the strengthening of the fiscal framework of an
effective crisis management toolkit for the euro area. The ESM represents the largest step taken
hitherto in terms of pooling of resources under the fiscal union heading.
At the same time, even though the EU Treaty (TFEU) itself was changed in the midst of the
crisis to accommodate the creation of the ESM (amendment of Article136TFEU), the ESM is
nevertheless based on an intergovernmental Treaty which is outside the acquis communautaire.
Decisions in the ESM are taken with a very high majority threshold (with only partial possibilities
for lower thresholds under emergency situations). There are many veto players and potentially
lengthy processes in case of difficult decisions e.g. for increasing financial support for economic
adjustment programmes). As such, it is assigned a high score that could nevertheless be higher if
the ESM were to acquire a more supranational dimension. One step in this direction could come
when Treaty change next takes place. This is likely to bring into the Treaty framework not only
the ESM (as committed politically after pressures by the EP when the ESM was adopted on an
intergovernmental basis) but also the Fiscal Compact, and possibly parts of the rules of the SGP
currently contained in Regulations.
In this regard, it is important to note that we do not see initial intergovernmental agreements as
steps back in the integration process, but rather as smaller steps forward. During the crisis, this
has apart from the ESM also been the case most notably for the SRF, as noted above, and the Fiscal
Compact. Thus, such steps enter the index with positive scores, yet smaller than would otherwise
be the case.
All in all, these steps bring the overall score of the Fiscal Union heading upon6.25out of10. This is
remarkable, given the short time in which most of these steps were agreed and implemented. Along
the lines of the Four Presidents Report, there are however still a number of elements missing in
order to reach a genuine EMU. These would include the creation of a euro area fiscal capacity
(linked to the discussion on automatic stabilisers presented under the Economic Union chapter),
the possibility for some sort of shared issuance of euro area debt, enhanced tax coordination and a
fiscal backstop to both the SRM and a Deposit Guarantee Scheme.
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6.5 Indicators used for democratic legitimacy and accountability

Although sometimes forgotten, a key element that sets the European Economic Community
and now the European Union apart from any other form of association of sovereign states or
international organisation is the development of democratic legitimacy and accountability
procedures and institutions at supranational level. This process started already in the early stages
of European integration, when it could still be argued that the legitimisation of the process through
national governments and parliaments was sufficient given the initial, relatively limited pooling of
sovereignty. At the same time, it should be underlined for the purposes of this paper and the EURII
index that we concentrate on accountability and legitimacy steps that relate to EMU and not other
EU policy domains, or the EU in general.
Nevertheless, we still take into account the first notable steps that involved the development of
key institutions, notably the European Parliament (EP), even if these were not always linked to
economic integration alone. The European Parliamentary Assembly held its first meeting as early
as1958. Composed of representatives of national parliaments, this body evolved into the European
Parliament (EP) in1962. Several small but significant steps towards an increasing role for the EP
followed, some of which substantially increased our EURII index,
In chronological order, the decision to grant the EP the right to have the final word on non-compulsory
expenditure through the First Budgetary Treaty is deemed significant. This1971decision was then
followed by a Second Budgetary Treaty, which granted the right to the EP to reject the Communitys
budget. In1979, the EP was directly elected for the first time, through universal suffrage. EP
elections have been held regularly thereafter and have on the whole attracted increasing attention
in the public European debate. Most recently, in the run up to the May2014EP elections, a public
debate was held among the Spitzenkandidaten of the EU political groups/parties; at the same time,
turnout has been falling from the original very high percentage of1979.
As regards the role and powers of the EP in the supranational institutional construction of the
EU, successive amendments to the Treaties have progressively expanded the use of the so-called
co-decision legislative procedure (now called ordinary legislative procedure), whereby the
EP and the Council co-decide on an equal footing on legislation proposed by the Commission.
With very few exceptions, this applies to all financial legislation for the Single Market, and to a
large degree, economic governance legislation. For example, the six-pack and two-pack were
adopted de facto through the co-decision procedure, although some elements would have required
the Council to get only the non-binding consent of the EP.
Moreover, accountability requirements vis--vis the European Parliament has gradually increased.
With the Nice Treaty, the nomination for Commission President had to receive the consent of
Parliament, while Parliament could reject the Commission Presidents proposal for the College
of Commissioners. Thus, in2009, the EP effectively brought down the Santer Commission,
and in2009and2014rejected some of the Commissioners proposed by the President of the
Commission. With the Lisbon Treaty of2009, the Heads of State have to take into account of
the result of the European elections when proposing to Parliament the Commission President.
Following the first elections under this new constitutional arrangement in2014, the EP effectively
co-decided with the European Council (the Heads of State or Government) on the nomination of
the Commission President by appointing as President of the Commission Jean-Claude Juncker,
the candidate of the European political group (in this case the European Peoples Party,) that
had obtained the highest percentage of votes in the elections, with the Heads of State voting

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6 MEASURING THE
UNION ERA

by qualified majority to propose the candidate to Parliament (two heads of state or government
voted against this nomination).
Moreover, under the Maastricht Treaty, the ECB is accountable to the European Parliament, while
the Council Regulation establishing the Single Supervisory Mechanism (SSM) under Article127(6)
of the Treaty provides for the accountability of the ECBs supervisory tasks towards the European
Parliament and the Council via the ECBs Chair of the Supervisory Board. These accountability
and reporting provisions are detailed in an Inter-Institutional Agreement between the EP and
ECB, and a Memorandum of Understanding between the Council and the ECB. They entail the
provision of confidential Records of Proceedings of the ECBs Supervisory Board to the Economic
and Monetary Affairs Committee of the European Parliament. Accountability under the banking
union has extended also to resolution: as this paper was being finalised, the Single Resolution
Mechanism was being established under the auspices of the Commission. It will be accountable to
the EP and the Council.
A number of other provisions have over the years gradually strengthened the legitimacy of EU
decisions. Perhaps most notably from an economic policy perspective and as became evident
during the crisis, the European Council, composed of the Heads of State or Government, turned
into a fully-fledged European institution in the last EU Treaty revision in Lisbon. It has a permanent
President for two and one half years and also meets in euro area composition as necessary,
reflecting the important dimension of Economic and Monetary Union for the highest level of
political executive authority in the EU and euro area. In addition, and notably also in the EMU and
four unions context, the role of the Eurogroup was formally recognised in a Protocol of the Treaty.
The Eurogroups President is appointed for a fixed term also of two and one half years (thus not
following the six-month rotation of the Council Presidency). Finally, in terms of legitimacy, the
Lisbon Treaty introduced the possibility for citizens to collect signatures and, having obtained a
specific number of signatures, to present a legislative proposal to the Commission, thus giving the
right of legislative initiative directly to EU citizens albeit under rather restrictive conditions.
As for other notable developments, the establishment already in1977of an independent European
Court of Auditors to scrutinise the budget of the Community, is worth highlighting. The ECA is
one of the seven EU institutions listed in the relevant Article13of the Lisbon Treaty on European
Union (TEU) of2009.
It should be added that the role of National Parliaments has also been somewhat elevated in the
Lisbon Treaty as a means of adding to the legitimacy of European decision making. Such moves as
well as agreements of an intergovernmental nature at European level (enumerated above) indicate
that political legitimacy and democratic accountability constraints will need to be further addressed
as integration under EMU deepens. Nevertheless, also by way of a methodological note, we see
such elements as obtaining positive scores in our index, even if their national dimension, seen from
a European, and four unions, perspective, acquire smaller scores than supranational solutions would
obtain. As an additional methodological note, it should be mentioned that depending on whether
the decisions taken for integrative steps were implemented at the time of finalising this paper,
they were included in the EURII accordingly (as expected steps). 1January2015is the effective
cut-off date. The actual way in which these and other procedures were or will be implemented in
practice has been an additional element in determining the score of steps in our index. In order to
be as clear and transparent about the steps and scores, the full list of both expected and future
steps under the Four Presidents Report, as we have accounted for them, is available upon request.
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Despite the progress in raising the democratic legitimacy and accountability of the Union, the Four
Presidents Report recognises calls for still further steps. However, these are identified only in
general terms, such as the need for deep, institutionalised cooperation between the EP and national
parliaments for law-making and accountability purposes, full SRM (including SRF) accountability,
deeper if not full involvement of the EP in the European Semester (and thereby also possible
involvement, for example, in the scrutiny of national budgets), still-to-be-determined accountability
of the fiscal capacity, just to mention a few. In light of the significant steps still to be taken, our
aggregate score for the completion of the Democratic Legitimacy and Accountability pillar comes
to23%.

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7 MAIN FINDINGS OF
THE EURII INDEX

7 MAIN FINDINGS OF THE EURII INDEX

The main findings of the second-generation EURII index are depicted in Charts3and4and Table5.
For an overall overview of the structure and composition of the index, see appendix.
The EURII index records each key step of European integration from the1957Treaty of Rome
onwards. The nature of European integration changed following the Maastricht Treaty that entered
into force in November1993, ushering in a new Union Era initially focused on monetary union,
but from the very beginning implying a major re-scaling of the process of integration, hence
of the index. Indeed, as McNamara (2014) observes, No currency union has ever succeeded
without being embedded within a broader political union with a robustly centralised fiscal system.
While it is perhaps still unclear what exactly this will imply for the institutions of EMU in the longer run,
the EURII index takes stock of the current state of affairs. This is provided by the institutional framework
that has been identified in the Four Presidents Report and (significantly) accomplished thus far, in order
to provide the single currency with the necessary degree of embeddedness over and above the single
market, and ensure economic and financial stability alongside sustainable growth in the years to come.
The introduction of the single currency was, therefore, a key moment of discontinuity in the index,
which jumped from48/100to58/100in1999-2002 (see Chart3). Jumps in the index had also
occurred previously (e.g. with the completion in1968of the free trade and customs union, which
led to a rise in the index from20/100to28/100), but they did not lead to fundamental discontinuities
in the process of regional institutional integration.
The lack of adequate institutional steps to make up for the introduction of the euro and the (initially
just implicit) start of the Union Era was one of the factors leading, after the global crisis triggered by
collapse of Lehman Brothers in September2008, to the start of the euro area crisis in2010. In response,
the reaction of policy-makers and politicians in Europe within a period of five years, from2010to2014,
has been significant not only in terms of specific measures taken within the existing national and
chart 3 European Index of regional Institutional Integration (EUrII)
free trade area (FTA) and customs union (CU)
internal market (IM)
supranational institutions and decision-making (SID)
economic union (EUN)
financial market union (FMU)
100

fiscal union (FIU)

co-ordination of monetary and exchange rate policies (CME)
monetary union (MUN)
democratic legitimacy and accountability

Common Market Era

90

100

Union Era

90

80

80

70

70

60

60

Index - maximum score

50

50

40

40

30

30

20

20

10

10

0
1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

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European governance, but also in adapting the EU institutional framework itself to cope with the crisis
and ensure the longer-term sustainability of the European project. The index thus shows another, even
more notable, jump during this more recent period, from62/100to74/100.
At the same time, the EURII index also highlights that the European process of institutional
integration process is not yet complete far from it, some would argue (see Table5and Chart4).
The process requires at least a number of elements identified in the Four Presidents Report. With
table 5 the various steps in the process of European regional institutional integration:
A backward- and forward-looking summary
(percentage)

FTA & CU Free Trade Area & Custom Union

IM Internal Market
CME Coordin. Monetary & Exch.Rate Policies
SID Supranat. Institut. & Decision-Making
EUN Economic Union
FMU Financial Market Union
FIU Fiscal Union
MUN Monetary Union
DL&A Democratic Legitimacy & Accountability
Total

Stage of
completion

Expected

Future steps

Total

100
84
100
100
22
55
63
96
44

0
0
0
0
0
17
3
4
0

0
16
0
0
78
28
35
0
56

100
100
100
100
100
100
100
100
100

76

21

100
Stage of completion

FTA
CU
Free movement of goods
Free movement of capital
Free movement of services
Free movement of people
Monetary and exchange rate policy
Creation of supranational treaties and institutions
Structural policies in the common market era
Structural policies
Micro- and macro-prudential policy
Fiscal policy coordination
Monetary policy
Accountability
Legitimacy

100
100
100
100
72
65
100
100
100
22
55
63
96
23
65
Number of steps
identified

FTA
CU
Free movement of goods
Free movement of capital
wwFree movement of services
Free movement of people
Monetary and exchange rate policy
Creation of supranational treaties and institutions
Structural policies in the common market era
Structural policies
Micro- and macro-prudential policy
Fiscal policy coordination
Monetary and exchange rate policy
Accountability
Legitimacy
Total

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9
3
5
8
5
5
8
6
3
9
15
12
7
5
9
109

chart 4 Degree of completion of the various steps of European regional institutional integration

7 MAIN FINDINGS OF
THE EURII INDEX

stage of completion
expected
100
90
80
70
60
50
40
30
20
10
0

1
2
3
4
1 FTA & CU - Free Trade Area & Custom Union
2 IM - Internal Market
3 CME - Coordin. Monetary & Exch. Rate Policies
4 SID - Supranat. Institut. & Decision-Making
5 EUN - Economic Union

6
7
8
9
6 FMU - Financial Market Union
7 FIU - Fiscal Union
8 MUN - Monetary Union
9 DL & A - Democratic Legitimacy & Accountability
10 Total

10

100
90
80
70
60
50
40
30
20
10
0

the most recent advances in the banking union having added significantly to what is considered a
well-integrated financial markets union (see the light blue component FMU in Chart3),
the main areas where progress may be expected include the economic and fiscal spheres, as
well as the necessary political adjustments to ensure appropriate legitimacy for such integration
(seeTable5and Chart4for the stage of completion of each sub-component of the index). Advances
can also be expected in other spheres. The Single Market, in particular, has yet to be completed,
while the banking union does not imply, in our understanding, the end of the necessary steps in
the financial sphere. Moreover, the third pillar of the banking union (i.e., beyond supervision and
resolution) is a common deposit insurance system, which still has to be implemented. Finally,
capital markets are arguably not integrated enough to provide deep and evenly distributed funding
across the European economy as a stable complement, if not an alternative, to bank funding
(see e.g. Juncker (2014) and Cur (2014)).
It can be expected that the steps identified here may eventually undergo a trial and error process,
not always in a consistent and coherent manner. This will possibly require more iteration before
reaching a steady or, better said, steadier institutional state, in line with the neo-functionalist
logic of integration (see Niemann and Ioannou2015). An example of such a development is the
financial markets union itself, which began with the setting-up of committees (e.g. CEBS), then
of authorities (e.g. ESAs, ESRB) and is now being complemented with centralised European
banking supervision. Moreover, elements from the different sub-components may well advance in
parallel for example, advancing in the centralisation of economic and fiscal policies as a
precondition to greater fiscal risk-sharing among countries which is in fact the recommendation
of the Four Presidents Report itself.
This process will likely to go beyond what is explicit in the Four Presidents Report (i.e., the scope
of this paper) and be closer to what might be more implicit therein, until a more complete form of
integration is achieved which ensures the sustainability of a combination of efficiency, stability and
equity under EMU. At that stage, it is not unlikely that developments may also result in negative

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scorings in our index, as happened in the past. While the broad direction, in our view, will continue
to be one of additional sharing of sovereignty in the Union Era, adjustments may likely take place
also in order to ensure both upwards and downwards subsidiarity.
Like other currency unions, EMU contains elements that are unique to it, resembling the fact that
state-building (whether unitary, federal or confederal in nature) is the result of historical
experience that does not reflect a single, universal form. Nevertheless, the functional logic in terms
of economic policy-making requires that at least the basic elements for sustainability need to be
present for currency unions to be more or less stable over much longer periods of time than EMUs
two-decade history.

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8 Final remarks
8 Final remarks
We have shown in this paper how the EURII index: (i) synthesises and monitors many diverse
institutional innovations; (ii) expands and normalises the previous-generation index; and (iii) offers
an indicator for further research and policy analysis. Yet, there are limitations, and several caveats
apply. The main one is that the EURII index is anchored by a new governance framework, whose
contours are slowly taking shape, albeit at different speeds. It remains a dynamic process at the
end of which the EU/euro area will remain different from, for example, the United States or other
sovereigns.
Moreover, ratification and transposition into national law does not guarantee immediate application
or enactments of the various steps. By the same token, there are differences between de jure and de
facto integration. The national dimensions and scorecards matter as well; they represent the biggest
challenges and our next endeavour. Our measure of legitimacy and accountability is necessarily
limited: institutional reforms are only as good as they are effectively explained, understood,
embraced and complied with. Such characteristics are not captured by our EURII index. The impact
and effectiveness of institutional reforms may have long and varying lags. Therefore, there is a
need to cross-check EURII with a variety of indicators of, say, effective financial integration and/or
confidence, and a need for econometric analysis with OCA variables.

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