05. Exam - European Union

Question 1

What is the European Union?

Answer 1

An economic union of 27 nations. It is the largest and oldest and most integrated of regional agreements.

Question 2

Explain the history of the EU?

Answer 2

• 1951 - European Coal & Steam Community formed and
• 1955 - European Atomic Energy Community
• 1957 - European Economic Community (EEC) was born out of the signing of the Treaty of Rome (1 Jan 58)
• 1958 - Free-trade area created
• 1979 - nine members of the European Community linked their exchange rates & the European Monetary System (EMS) with an Exchange Rate Mechanism (ERM) formed.
• 1987 - The EEC members sign the Single European Act (SEA)
• 1991 - The Maastricht Treaty was reached
• 1992 - The treaty on EU was signed paving the way for a common currency
• 1993 - Implementation of treaty agreements to form an economic union (EC became EU)
• 1999 - Euro was introduced.

Question 3

What was the importance of the SEA? What was it also known as and when was it implemented?

Answer 3

The Single European Act was aimed at creating a single European Identity and a single market. It was known informally as the Single Market Program and was implemented on 1 Jan 1993.

Question 4

Why in 1979 did the EC link their exchange rates?

Answer 4

to eliminate wide fluctuations among currencies. The EC wanted to prevent competitive devaluations in which one country devalues in order to capture the export markets of another country. These generate conflict and breakdown in cooperation.

Question 5

What is the European Market?

Answer 5

The largest integrated market in the world. Few countries can prosper without trade with the EU which is a powerful incentive for them to accept European leadership on international issues.

Question 6

What does subsidiarity mean with regard to the EU?

Answer 6

It describes the relationship between national and EU areas of authority and between national and EU institutions.

Question 7

The Subsidiarity principle guides what two areas? and what area is less clear?

Answer 7

• EU to tackle only issues better handled through international action than individual nations
• EU’s responsibilities (trade, competition, environment, regional development, research & technology development, economic and monetary union
• Less clear areas of authority are the social safety net, health care and labour market policy

Question 8

What is the European Commission?

Answer 8

An executive body - each country has one vote; it is the guardian of the treaties;

Question 9

What is the Council of the European Union?

Answer 9

A legislative branch; it enacts into law the Commission’s proposals and is composed of ministers from each EU nation. To pass proposals it requires a qualified majority.

Question 10

What is European Parliament?

Answer 10

Representative of popular interests in the EU and provides democratic legitimacy to the EU. It has three responsibilities:

1) passing laws
2) supervising institutions
3) passing the final EU budget.

Question 11

What was the total budget of the EU for 2012?

Answer 11

147.2b Euros - $184b AUD

Question 12

How are the EU institutions and programs funded?

Answer 12

• tariffs on goods entering the EU
• an EU share of national value added taxes
• payment from each member based on the size of its economy.

Question 13

What are the two largest EU expense categories?

Answer 13

• Agricultural support - both direct payments in subsidies and indirect payments
• Cohesion funds, which are used to support less developed regions within the EU.

Question 14

Before the Euro was created in 1999, what was the used by the Europeans?

Answer 14

Their own currencies, however the European Currency Unit (ECU) was used as a unit of account (but not as a means of payment).

Question 15

Explain the concept of the EU’s deepening and widening?

Answer 15

In the 70s and 80s the EU’s deepening came from increased cooperation between member countries eg. linking of exchange and development of monetary system; and the widening came from including new members in the union.

Question 16

What are the three waves of the EU’s deepening and widening?

Answer 16

1st wave - Increased cooperation and linking of exchange 1979
2nd wave - The EC addressed low growth rates and high unemployment by adopting the SEA in the 80s
3rd wave - The Maastrict Treaty paved the way for a monetary union in the early 90s.

Question 17

The SEA was aimed at the ‘four freedoms of movement’ what are these?

Answer 17

Goods, SErvices, capital and land.

Question 18

What were the 3 steps taken to implement the SMP?

Answer 18

1) Elimination of physical barriers (passport & custom controls)
2) Elimination of technical barriers (differences in product and safety standards)
3) Elimination of fiscal barriers (differences in taxes, subsidies & public procurement)

Question 19

What are the two primary means of economic gains expected as a result of the Single Market Program?

Answer 19

1) increase in competition

2) increase in economies of scale.

Question 20

SEA created what gains in economic efficiency?

Answer 20

1) removal of customs & passport checks
2) greater economies of scale
3) Increased competitiveness of European firms
4) overall increase in GDP growth across Europe.

Question 21

What four issues hampered the achievements of the ‘four freedoms’?

Answer 21

• the effects of restructuring
• harmonisation of technical standards
• value added taxes
• public precurement

Question 22

What were the objectives of the Erasmus Program (student exchange) in higher education (1987)?

Answer 22

• increase student mobility
• foster language acquisition
• increase the sophistication and international understanding of graduates
• develop international networks among business people, intellectuals, government workers and other educated labour

Question 23

The third wave of the deepening of the EU was the Maastrict Treaty (1992), what was this aimed at?

Answer 23

• uniform labour laws and worker rights
• rights of all residents to vote regardless of nationality
• health, education, cultural and consumer safety issues were put in the hands of the EC
• Common defence & security policies
• creation of a monetary union and a common currency under the control of the European Central Bank

Question 24

What were the three stages of the monetary union?

Answer 24

1) 1990 - lifting of controls on the movement of financial capital within the EU
2) 1994 - creation of the European Monetary Institute in Frankfurt
3) 1999 - introduction of the common currency & creation of the European Central Bank.

Question 25

To qualify to be part of the EU Monetary Union, what convergence criteria did members have to meet around their monetary and fiscal requirements?

Answer 25

1) stabilise their exchange rates
2) control inflation
3) harmonise long-term interest rates
4) reduce government deficits
5) reduce government debt.

Question 26

What are the two key benefits of a monetary union?

Answer 26

1) eliminates cost of currency conversions

2) reduce the effects of exchange rate uncertainty on trade and investment.

Question 27

What are the 4 costs of a monetary union?

Answer 27

1) - single currency does not allow individual nations to pursue an independent monetary policy
2) if labour is not fully mobile and business cycles synchronised between nations, the same monetary policy will not suit all nations
3) governments with large deficits in the wake of the financial crisis are unable to spend
4) It limits options to increase demand to increase exports, however domestic prices made goods uncompetitive in world markets so the only option was to decline domestic prices (internal devaluation)

Question 28

Why did the monetary union push ahead despite the costs?

Answer 28

• potential gains are large and the costs would lessen as countries became more integrated
• excitement of a SMP caused leaders to push for further integration
• anxiety over German reunification in some European capitals
• strategy to tie Germany more deeply to a pan-European project
• single currency was required after the removal of capital controls that took place under the SMP. This removal made it easier to speculate in foreign currency markets.

Question 29

Explain the seven steps of the financial crisis of 2007-2009 and the impact on the EU

Answer 29

1 - collapse of the real estate bubble
2 - Banking crisis
3 - recession
4 - depressed tax revenues
5 - expanded social spending and increased government budget deficits
6 - fiscal and monetary policy became expansionary to..
7 - stimulate demand to restore growth

Question 30

What was the challenges for the EU as a result of the single currency during the 2007-2009 crisis?

Answer 30

• Govt deficits exceeded agreed limit of 3% of GDP
• Bond markets were reluctant to lend except at high rates which increased the debt burden
• Fiscal policy was therefore unavailable which created the possibility of a sovereign default.
• The ECB was unable & unwilling to lend directly to sovereign governments beyond a limited amount (which was insufficient to stem the crisis); and
• the ECB is unwilling to expand the money supply beyond a limited level so monetary policy is also unavailable.

Question 31

What is fiscal policy?

Answer 31

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy.

Question 32

What is monetary policy?

Answer 32

Monetary policy is the process by which the fiscal authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

Question 33

When was the EU widened?

Answer 33

In 2004 10 countries joined and in 2007 two more joined.

Question 34

What does membership of the EU require?

Answer 34

• stable democratic government
• market-based economies
• formal adoption of the EU’s body of laws and regulations (acquis communautaire)

Question 35

What are the benefits of being part of the EU?

Answer 35

• member benefits
• gains from trade (though some already have FTA)
• voice in EU governance
• more secure set of property rights
• additional investment and trade as a result of adoption of EU laws

Question 36

What are the issues that the EU needs to solve?

Answer 36

1) the EU budget contains a shrinking but still extensive set of farm support programs (30% to farmers and 11% to rural development (2011)) administered under the Common Agricultural Program (CAP)
2) EU Governance structures were not designed for 27 members - new members add pressure to change the voting system
3) voting, democracy and governance gaps between the poorest and the richest is also widening (original 6 were more or less equal).

Question 37

What are the future challenges of the EU?

Answer 37

• continuing to create a convergence in income & living standards between poorest and most well off members
• must prepare for further widening
• must adopt its economies and social support systems to prepare for an older population.