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European Economics - Coggle Diagram
European Economics
CHAPTER 1: EUROPEAN ECONOMIC INTEGRATION
Theory of economic integration according to Balassa (1961)
Economic integration is defined as the “abolition of discrimination within and area”, process of economic integration in 5 stages
Free trade area: Enabling unrestricted exports and imports among participants but allowing them to have their own agreements with non-participants
Customs union: it allowed free trade internally but imposes a common external policy vis-à-vis non-participants.
Common market: adding freedom of movements of factors and production and depending on the natur of the more basic models, the trade in services
Economics union: There are more common rules and more extensive coordination of national economic policies (members have to find rules of national economic policies)
Monetary and economic union: Adding a single currency
The first important step was the European Coal and Steel Community (ECSC) signed in 1951 and six Europeans states agreed to work towards integration
It set up an executive knew as the “High Authority”, a Parliamentary Assembly, a Council of Ministers, a Court of Justice and a Consultative Committee
Intention about the treaty: the common coal and steel market was an experiment
The aim of the European Economic Community (EEC): Establish a common market based on the four freedoms of movement (goods, persons, capital and services)
European Communities= ECSC + EEC + EUROTAM
Customs union: Removing all trade barriers, tariffs and quotas on intra-EEC trade and adopting a common tariff on imports from non-members nations
Free labour mobility, capital market integration, free trade in services
Series of supranational institutions: European Parliamentary Assembly, the European Court of Justice and the European Commission
Treaty of Rome
The 1965 Crisis and the Luxembourg Compromise
Serious crisis when at the third stage of the transition period, voting procedures were to change (unanimity to qualified majority voting)
Social harmonization is very difficult politically for at least two reasons: nations held different opinions and social policies held very directly touch citizen's lives
Social policy harmonization tends to be viewed as either an upward harmonization (ex. all adopt 35h week) or a downward harmonization
The Treaty was ambitious with respect to economic integration but it was noticeably silent on two politically sensitive areas: harmonization of social and tax policies
The question of harmonization of social policies
Does economic integration demand harmonization of social policies?
The harmonize-before-liberalizing school: International differences in wages and social conditions (more laissez-faire social policies)
If nations initially have very different social policies, then lowering trade barriers will give nations with low social standards an unbalanced advantage, assuming that exchange rates and wages do not adjust
The no-need-to-harmonize school: Wages adjustements will counter and argue that social policies tend to converge as all nations get richer
European economic integration
Fearing the discrimination and marginalization, seven of « outsiders » reacted by forming their own block in 1960 : European Free Trade Assocation (EFTA), led by the UK = a free trade area NOT a custom union (no trade policy in common)
A free trade area: It eliminates tariffs and measures having equivalent effect for goods and services traded between the member state (but the members state don't have the same policy regarding tariffs)
A customs union: It is a free trade union with a common policy regarding tariffs and measures having equivalent effect (same tariffs fot all the member state)
Free trade principle
The orthodox theory of free trade
Superiority of free trade: International specialization : comparative advantages (Smith, Ricardo) and factor theory endowment (Ohlin and Samuelson) to explain comparative advantage of countries
Tariffs must be differenciated from subsidies and dumping policy which are consired to be anti-competitive
Trade in EU is not based on comparative advantages since countries trade intra-industry (single market didn't give countries incentives to specialize Cf Krugman)
Monopolistic competition theory explains intra-industry trade in EU: the role of product differenciation, vertical and horizontal differenciation, the role of demand and of returns on scale
EU trade policy is based on free trade for industry and on a relative protectionnism in the agricultural field
It is the first world exporter (14.7% of the world market) and first importer (15.4%) before China and the US
Evolution and enlargement
Domino theory of economic integration: the preferential lowering of some trade barriers creates new pressures for outsiders to join the trade block and as the trade block becomes bigger, the pressure to join grows
In 1961, the UK applied for EEC membership, then Ireland, Denmark and Norway
1973 – 1986 : political shocks, failure of money integration and Euro-pessimism period
70s: as tarriff barriers fell, Europeans erected new trade barriers: technical regulations and strandards = technical barriers to trade
The European Monetary System (EMS): 1979 arrangement between several European countries which links their currencies in an attempt to stabilize the exchange rate (Bretton Woods system collapse)
The Single Market Programme (1985) under the EC Presidency of Jacques Delors: the most important increase in European integration
1987: the Single European Act: the Community legislation which implemented the Single Market measures
The Single Market Programme
In 1985, EU firms enjoyed duty-free access to each other’s markets but there was a list of trade-inhibiting barriers such as differing technical standards and industrial regulations
The key changes in the Single Market Prog were designed to reinforce the ‘four freedoms: free movement of goods, services, people and capital promised by the Treaty of Rome
Important change: Decisions concerning Single Market issues would be adopted on the basis of majority of voting
EEA European Economic Agreement (1989): extension of the Single Market to EFTA economies (apart from agriculture).
Maastricht Treaty (1992)
It adds monetary union to EU economic integration
Committing members to a transfer of national sovereignty over monetary power to a supranational body (European Central Bank), and abandonment of the national currencies for the euro
Locked in the free movement of capital
Strengthened EU cooperation in non-economic areas (security, defense policy, law enforcement, criminal justice, civil judicial matters, asylum, immingrations policies)
Created EU citizenship; this included the right to move and live in any EU state and to vote
Enshrined the principle of subsidiarity in order to control the transfer of responsibilities from member states to EU
Strengthened the European parliament’s power over EU legislation
Introduce the ‘Social chapter’
Only 51,4% of the French voted ‘yes’ and Denmark voted ‘no
Principle of subsidiarity
The principle of subsidiarity:Determining the level of intervention that is most relevant in the areas of competences shared between the EU and the EU countries
Maastricht and the three pillars as fire breaks
The Maastricht Treaty: Clear line between supranational and intergovernmental policy areas by creating “three-pillars” organizational structure
The deep economic integration (European Community): Supranational first pillar (Treaty of Rome, Single market, european citizenship)
Second pillar:Common foreign and security policy
Justice and Home affairs
MT put Member States clearly in control in second and third pillars
A long process to enlarge and to adapt institutions
Central and eastern European countries wanted to join EU
Copenhagen criteria for membership (1993):
A market economy capable of dealing with the competitive pressure
Acceptance of the community ‘acquis’ (EU laws and treaties)
Political stability of institutions (democracy)
Enlarge and to adapt institutions to work with 15 members: Amsterdam (1997), Nice (2000) (Treaty refused by Ireland)
Constitutional Treaty (2005) that ended in the adoption of the Lisbon Treaty in 2009
Lisbon Treaty (2009)
The Lisbon Treaty simplified the EU’s structure. To understand
The supranational decision making procedures (majority voting, authority of European Court) created two related problems: the old opposition between federalists and intergovernmentalists and integreation that was taking place outside the EU's structure
It abolishes the European Community, replacing the term ‘community’ with ‘Union’
The three-pillars-and-a-roof organization is replaced: the third pillar is integrated in the first one
New laws in third pillar area are made by majority voting instead of unanimity. The Commission has monopoly on the right of initiative
CHAPTER 3: THE MAASTRICHT TREATY AND THE EUROPEAN MONETARY UNION
The European Monetary System (EMS)
1972: agreement of the “monetary snake”: first attempt at European monetary cooperation to limit fluctuations
The tunnel collapsed in 1973 when the US dollar floated freely.
1973: end of the Bretton Woods system
System (EMS) was an arrangement established in 1979 under the Jenkins European Commission: Most nations of the European Economic Community linked their currencies
In March 1979, the European snake was replaced by the European Monetary System and the European Currency Unit (ECU) a basket of the currencies of the EC, each currency being weighted according to its economic power
Introduction
From 1979 to 1998, the purpose of the EMS was to support the stability of exchange rates
It was a transitory system before the introduction of Euro the 1st of January 1999
At the international level, two exchange rate regimes coexist:
Floating exchange rate regime: fluctuating exchange or flexible exchange rate is a type of exchange-rate regime: Currency's value is allowed to fluctuate
Fixed exchange rate regime: type of exchange rate regime where a currency's value is fixed against either the value of another single currency for ex but with a fluctuation margin
The European Monetary System (EMS, 1979-1998)
The purpose was to avoid monetary disorders: Threat to the Common Market
The European Exchange Rate Mechanism: Fixed currency exchange rate margins
A grid (known as the Parity Grid) of bilateral rates was calculated on the basis of these central rates expressed in ECUs
The efficiency of this system was mainly due to this “fixed but adjustable parity”
The deutschemark imposed itself quickly as the reference currency which gave to the German Central Bank a central role in interventions
The deutschemark was characterized by the best performances in terms of price stability
The crisis of 1992-1993
Bundesbank decided to stop its support and some currencies exit the exchange rate mechanism which provoked a contagion
In order to save face and to uphold the EMS, the monetary authorities adopted new ultra-large bands of fluctuation so that European currencies started to evolve
The impossible trinity principle
Also called Mundell’s Triangle
Only two of the following three features are compatible with each other
Fixed exchange rates
Autonomous monetary policy
Full capital mobility
Maastricht Treaty (1992)
It adds monetary union to EU economic integration
Committing members to a transfer of national sovereignty over monetary power to a supranational body (European Central Bank) and abandonment of the national currencies for the euro
Locked in the free movement of capital
Strengthened EU cooperation in non-economic areas: security, defense policty, law enforcement
Created EU citizenship; this included the right to move and live in any EU state and to vote in European
Enshrined the principle of subsidiarity in order to control the transfer of responsibilities
Strengthened the European parliament’s power over EU legislation
Introduce the ‘Social chapter
The European Monetary Union (EMU)
It's an umbrella term for the group of policies aimed at converging the economies of member states of the European Union at three stages and it covers 19 eurozone states
Each stage of the EMU consists of progressively closer economic integration
Only once a state participates in the third stage it is permitted to adopt the euro as its official currency
An important element of this is participation for a minimum of two years in the European Exchange Rate Mechanism ("ERM II")
The 3 stages of the Maastricht Treaty
1990-1993: liberalization of capital flows
The objective was the convergence of economic performances of state members. The treaty entered into force on the 1 November 1993
1994-1998: The creation of the European Monetary Institute (EMI) was a precursor to the European Central Bank
Prepare the establishment of the European System of Central Banks
Prepare the introduction of a single currency in stage 3
Coordinate monetary policies and ensure price stability
Examine the achievement of economic convergence among EU states as established by the Maastricht Treaty
At the end of this stage, eleven countries have been admitted to euro: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland. Denmark, Sweden and the UK
Third (Final) Stage (from 1 January 1999 to 31 June 2002): The exchange rates were irrevocably fixed
Convergence criteria (SGP)
A country can join the union only if:
Interest rate convergence: For the preceding year the average long-term interest rate must not exceed that of the best three states by more than 2% (Fischer principle)
Budget discipline: Government budget deficit must be less than 3% of GDP and Government (Public) debt cannot exceed 60% of GDP
Price stability:For the preceding year the average inflation rate must not exceed that of the three best-performing states (more than 1.5%)
Why budget deficit criteria?
Inflation is typically the result of large budget deficits: as a government borrows to finance its budget deficits, its debt rises
But what limit?
Germany had long operated a ‘golden rule’ which specifies that budget deficits are only acceptable if they correspond to public investment spending
"Golden rule": Public investment typically amounts some 3% of GDP
Public debt
Much as inflation can be lowered temporarily, deficits can be made to look good in any given year
Thus it was decided that a more permanent feature of fiscal discipline ought to be added: a maximum level for public debt
But what limit?
The ceiling was set at 60% of GDP because it was the average debt level when the Maastricht Treaty was being negociated in 1991
Requiring that the debt-to-GDP ratio be either less than 60% or ‘moving in that direction’ (called the Belgian clause).
Motivation for the Maastricht Criteria:
Impose fiscal prudence and prevent free riding
Eliminate threat of national governments seeking bail-outs from the ECB
Increase stability of the EMU and the common currency
The Stability and Growth Pact (SGP)
Excessive deficits: above 3% of GDP. The pact also stipulates that participants in the EMU commit themselves to a medium term (3 years)
The preventive arm: the principle of mutual surveillance designed to submit Finance Ministers to a collective discussion (Budgetary discipline)
The corrective arm: when a country does not meet the requirements of SGP, gradually peer pressure is applied
Sanctions: The sanction takes the form of a non remunerated deposit at the Commission
Automatic stabilizers: In macroeconomics, automatic stabilizers are features of the structure of modern government budgets (income taxes and welfare spending)
Fiscal policy has the advantage to be spontaneously countercyclical: It means that tax collection declines
The automatic response of budget balances to cyclical fluctuations is a source of difficulty for the SGP: Much of its machinery, including the sanction mechanism focusing on the 3% limit
When the economy slow down, the budget worsens: To avoid it the government could have to cut its spending or raise taxes
The Pact response is the preventive arm: the budget should be brought into surplus in good years
The SGP entered into force in a favorable economic period
Only 8 countries over 12 used it to equilibrate their budget, while France, Germany, Spain and Portugal preferred to decrease taxes and to increase spendings
In 2003, France and Germany made pressure on the European council: the were supposed to enter in a sanction procedure
In 2005, the multiplication of the procedures for excessive deficit (10 countries over 20) called into question the Pact
2005 SGP introduced two elements: It admitted that a negative growth rate might be considered as exceptional and taking into account of all other relevant factors
the State members had to implement countercyclical policy to stimulate demand
Some countries had to add to this boosting demand policy a policy to support banks in difficulties in order to avoid their bankruptcy.
CHAPTER 2: EUROPEAN ECONOMIC INTEGRATION
Cecchini’s report on « The costs of non-Europe »
In 1988, Paolo Cecchini is in charge of writting a report on the potential economic gains from further completion of the European Single Market: “The cost of non Europe in the single market”
to evaluate the untapped potential of the European Single Market due to its incomplete implementation
Mains deficits and barriers
Infringements of single market regulations: incorrect or incomplete application of EU legislation
Existence of "home bias:inherited norms, cultural preferences and differences in economic and political organisational systems
Delays or differences in the adoption of harmonised rules
Trade barriers in the common market
Tariffs which are supposed to have disappeared have been reintroduced in the agricultural sector (monetary compensation payments)
Production quotas have been reintroduced on steel and agriculture markets
Market fragmentations due to customs procedures, regulatory and sanitary rules and norms which are heterogeneous among countries
Market restrictions for public procurement: many barriers prevent the EU public procurement market to function as a Single Market
Expected economic effects of market integration
Cecchini describes the microeconomic effects which are supposed to decrease inflation and the fragmentation of the European productive system
Decrease in costs: the single market is supposed to decrease the risk of inflation, through demand effects
With European integration, demand effects are supposed to disappear since national demand is not only satisfied through national, but through European supply
Expected economic effects of market integration
Market structure is the central point of interest in Cecchini’s report: the focus is on increasing market competition
Returns to scale: the Single Market is a source of returns because of the increase in market size
Expected economic effects of market integration
The simulations presented in Cecchini’s report were based on very favourable assumptions accommodating monetary policy and a neutral budget policy.
A controversial assessment of the Single Market
The years 1992-1993 have been characterized by the EMS crisis and by restrictive monetary policy
The European goods market increased significantly up to 25%, It represents 75% of intra-Europe trade and is based on normalization process
The service sector is more problematic: : services are immaterial, the public sector used to represent an important part of the sector
Services in the Internal Market 2006
To liberalise the service sector implies to eliminate a lot of trade barriers
Barriers to entry are linked to the existence of national monopoly and quantitative restrictions on the number of providers
The Services in the Internal Market Directive (Bolkestein Directive) :It's an EU law aiming at establishing a single market for services within the European Union (EU).
The Bolkestein Directive was harshly criticised by left-wing European: it would lead to competition between workers in different parts of Europe "Polish plumber"
2004 original proposal: the first draft of the Services Directive propounded several important changes in the EU services market
Directive required member states to justify all existing legislation on the grounds
The changes proposed in the Directive would have not affected the profession: "Country of origin principle"
A Polish plumber could work in France under Polish labour law, would the changes have affected social legislation or health and safety at work
the Posting-of-Workers Directive requires that short-term social protection,
Critics also charged that the Directive was a sign that "Anglo-Saxon" economic policy EU and claimed that the Directive would inevitably lead to "social dumping" as companies and jobs were relocated to the lower-cost and less regulated economies of eastern Europe
On 22 March 2005 EU leaders agreed on a "far reaching" revision of the Directive to preserve the European social model. French President Jacques Chirac (Changes by the directive were unacceptable)
On 16 February 2006 MEPs (Members of the European Parliament) voted in favour of a proposed revision to the Directive
With the Services Directive however, the Commission takes a sweeping horizontal approach to all services, making no distinction between private sector and public service obligation
A problem of common definition
The revised Directive changed in two important points:
The following sectors have been excluded: social services, public health, culture, audiovisual and gambling
Social norms, security and control of activities, contract and responsibility are governed by the rules of the country where the services are provided
The problem of the liberalization of public services remains, the TISA (Trade in Service Agreement) is in negociation since 2013 and the central issue is the lack of common definition of public services in EU law
The term ‘public services ‘ not used in EU law, the Commission uses the term Services of General Interest’ (SGIs)
There is no reference to SGIs either in the Treaties or secondary legislation
Treaties do refer to Services of General Economic Interest – Treaty of Rome 1957 (Article 86(2)), now Article 16 of the Amsterdam Treaty
SGI/SGEI differentiation :
SGI is a non-economic service which is not traded on the market
SGEI is an economic service that operates in a market environment
INTRODUCTION
The European Union started with 6 countries and nowadays there are 27 countries
EU enlargement
2002: Copenhagen summit agrees to a big enlargement of 10 new countries
2004: Ten new EU members: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia
1992: Criteria set for a country to join the EU
Democracy
Functioning market economy
Ability to implement EU laws
2007: Bulgaria and Romania join the EU
1989: Fall of Berlin Wall- end of Communism
Treaties
1952: The European Coal and Steel Community
1958: The treaties of Rome
The European Economic Community
The European Atomic Energy Community (EURATOM)
1987: The European Single Act (The Single Market)
1993: Treaty on European Union- Maastricht
1999: Treaty of Amsterdam
2003: Treaty of Nice
2009: Treaty of Lisbon
EU Population
Heterogeneity of the EU: Purchase power, social security system which are the main difficulties.
History and foundation of the EU integration
The post-war period: Refugees, hunger and political instability
How can Europe avoid another war? The answer depends on belief's about the cause of the war
The answer that prevailed was the Nationalism was to blame so the solution suggested was tighter integration of all European Nations
Winston Churchill's speech 1946: Remedy to re-create the European family, build a kind of United States of Europe
The context of the Cold War: the emergence of a divided Europe
America and Britain rejected the Soviet’s world vision and it created an East-West confrontation called the Cold War
To the west of the “iron curtain” the post war was built on a multi-party democracy, social market economy and European integration
European integration is the process of industrial, political, legal, economic, social and cultural integration of states wholly or partially in Europe
Perspective of European integration: the most important result of the Western European effort to resist communism was the Marshal Plan and the Organization for European Economic Cooperation (OEEC)
Europeans would cooperate in their mutual economic recovery and it was established in 1948 with 13 members
It worked, it reduced intra-European trade barriers and improved the intra-European system of payments (established the European Payment Union EPU)
The OEEC trade liberalization was important: there was a rapid growth of trade and incomes which affected the thinking of policy makers and opened the door to the Treaty of Rome
Even today this debate is still active
Federalism: To prevent another cycle of recovery and national rivalry that might lead to a Third World War
Other European lead by Britain continued to view nation-states as the most effective and stable form of government: inter governmental basis (the power would remain in the hands of nationals officials and any cooperation would have agreed unanimously: idea of cooperation)
Intergovernmentalism initially dominated the first three organizations (OEEC, the council of Europe and the court of human rights)
The first big federalist step came in 1952 with Schuman Plan inspired by the father of the European integration: Jean Monnet
Robert Schuman: he provided the political for the European Coal and Steel Community (ECSC, 1952) which is considered as the wellspring of the European Union
Jean Monnet: He joined Charles de Gaulle’s provisional French government and was responsible for the Monnet Plan (it helped France’s post-war industrialization
Schuman proposed that France and Germany should place their coal and steel sectors under the control of a supranational authority: Coal and steel were seen as the pillars of an industrial economy and crucial to a nation’s military and industrial strenght
Trade and production were placed in the hand of the hight authority of ECSC composed of official appointed by the six members states