Economics of the EU Flashcards
7 main EU institutions.
1) European Council
2) Council of the EU
3) European Commission
4) European Parliament
5) European Court of Auditors
6) European Court of Justice
7) European Central Bank
4 features of the European Council.
1) Consists of member state’s leaders
2) No legislative power
3) Advisory and strategic role
4) Intergovernmental
4 features of the Council of the EU.
1) Consists of 27 national ministers, depending on the question at hand (1 per each MS)
2) Co-legislates with EU Parliament
3) Oversees the budget with EU Parliament
4) Intergovernmental.
5 features of the European Commission.
1) Executive power
2) Cabinet of 27 (1 from each MS), including the President
3) Manages the budget
4) Only one to initiate laws
5) Supranational
4 features of the European Parliament.
1) Co-legislates with the Council of the EU
2) Oversees the budget with the Council of the EU
3) Elected by EU citizens
4) Supranational
3 features of the European Court of Auditors.
1) Cabinet of 27 (1 from each MS), including the President
2) Externally controls EU’s budget implementation
3) Supranational
3 features of the European Court of Justice.
1) Ensures unified application and interpretation of EU laws in MS
2) May take action against EU institutions
3) Supranational
2 features of the European Central Bank.
1) Carries out EU’s monetary policy
2) Independent
3 reasons why forming the EU failed before WW2.
1) Great depression (1929)
2) Protectionism
3) Nazism and authoritarianism
What and when was the “Marshall plan”? How were the funds allocated?
1948: USA’s economic restoration plan for Europe to keep communism at bay. Allies and industrial nations received most
What and when was the “Morgenthau plan”?
1944: an abandoned plan to partition Germany and make it a backward country
What and when was the “Organisation for European Economic Cooperation (OEEC)”? What became of it?
1948: established to administer USA’s and Canada’s aid funds. Later became the “Organisation for Economic Cooperation and Development (OECD)”
What and when was the “European Steel and Coal Community (ESCC)”?
1951: France, Germany, Italy and BENELUX combined heavy industries to make war impractical and create a supranational institution
What and when were the “Treaties of Rome”? What 2 institutions were created?
1957: aim to create a Customs Union. “Euratom” and the “European Economic Community” were created. Them and ESCC had common institutions
2 negative effects Brexit had on UK.
1) Lack of employees (especially seasonal)
2) Trade barriers with the EU (paperwork, health certificates, customs declarations)
3 countries of EU’s 1973 enlargement.
1) United Kingdom
2) Ireland
3) Denmark
1 country of EU’s 1981 enlargement.
Greece
2 countries of EU’s 1986 enlargement.
1) Spain
2) Portugal
3 countries of EU’s 1995 enlargement.
1) Austria
2) Sweden
3) Finland
10 countries of EU’s 2004 enlargement.
1) Estonia
2) Latvia
3) Lithuania
4) Poland
5) Czech Republic
6) Slovenia
7) Slovakia
8) Hungary
9) Malta
10) Cyprus
2 countries of EU’s 2007 enlargement.
1) Romania
2) Bulgaria
1 country of EU’s 2013 enlargement.
Croatia
Define “economic integration”.
Market + political integration
(elimination of economic frontiers between 2 or more countries)
2 types of “economic integration”. Explain.
Negative: elimination of obstacles to the movement of goods, services, labour and capital (tariffs, quotas etc.)
Positive: modifying existing instruments and institutions, and creating new ones at the supranational level (EU Court of Justice, the EURO etc.)
4 stages of “economic integration”.
1) Free trade area (FTA)
2) Customs union
3) Common (single) market
4) Economic and monetary union
3 features of “Free trade area (FTA)” stage of economic integration.
1) Removal of trade tariffs and quotas between area members
2) National trade barriers with third countries still exist
3) Rules of origin to prevent trade deflection (goods enter a low-tariff member and enter the trade area)
2 real life examples of “Free trade area (FTA)” stage of economic integration.
European Free Trade Association (EFTA)
North American Free Trade Agreement (NAFTA)
2 features of “Customs Union” stage of economic integration.
1) Free Trade Area (FTA) features
2) Common trade policy (including a common external tariff) for non-member countries, so trade deflection is no longer possible
1 real life example of “Customs union” stage of economic integration.
European Economic Community (EEC) 1968
3 features of “Common (single) market” stage of economic integration.
1) Customs Union (CU) features
2) Free mobility of production factors
3) Removal of non-tariff barriers
1 real life example of “Common (single) market” stage of economic integration.
EU: Single European Act (SEA) in 1987
3 features of “Economic and Monetary Union” stage of economic integration.
1) Common Market (CM) features
2) Common monetary policy and currency
3) Macroeconomic policy coordination
1 real life example of “Economic and monetary union” stage of economic integration.
EU: Treaty on European Union (TEU) in 1999
4 benefits of greater economic integration.
1) Specialisation
2) Economies of scale
3) Increase in quantity and quality of production factors
4) Peace preservation
Define “trade creation”.
Replacement of domestic production by cheaper imports from an another country
2 types of “trade creation”.
1) Production effect: gained efficiency by not having to produce goods that other country produces cheaper
2) Consumption effect: increase in consumption due to price reduction from cheaper imports
Define “trade diversion”.
Replacement of cheaper third country imports by more expensive imports from a CU member
4 types of “trade barriers”.
1) Tax
2) Physical
3) Technical
4) Public contracts
Was EU market integration achieved by 1980’s?
No, it was not achieved due to increased protectionism during the 1970’s
Define “mutual recognition” principle.
A good sold in one country of the single market can be lawfully sold in any other country of the single market
3 examples of tax trade barrier. Why is it a barrier?
Because taxes are not harmonised between single market members.
1) VAT
2) Personal income tax
3) Corporate tax
Describe “origin-based tax” and “destination-based tax”.
1) origin: taxes are levied at the point of production
2) destination: taxes are levied at the point of consumption
Define “physical trade barrier”. 4 examples.
Happen at the border.
1) Transport licences
2) Health regulations
3) Tax adjustments
4) Administrative formalities (statistics etc.)
Which EU legislation removed trade border controls within MS?
Schengen Agreement (effective 1995) and incorporated in the Amsterdam Treaty (1999)
Define “technical trade barrier”.
Technical regulations in the production of goods (when production has already begun)
2 methods of monetary integration (currency policy).
1) irrevocable fixing of currency exchange rates and cooperation between the national banks
2) a common currency under a common central bank
4 features of “flexible (floating) exchange rate”.
1) Independent monetary policy
2) Acts as a “shock absorber”
3) Automatic balance of payments
4) Speculative: negatively affects trade and investment
4 features of “fixed exchange rate”.
1) Not speculative: positive effect on trade and investment
2) Limited monetary policy
3) Requires large holdings of foreign currencies
4) No automatic balance of payments
6 pre-requisites countries should meet before forming a “Monetary Union”.
1) Be open to trade and trade heavily with each other
2) Country’s production and exports are very diversified
3) Similar inflation and economic cycles
4) High financial integration
5) High labour mobility
6) Solidarity in absorbing external shocks
Name the initial failed attempt at forming an “European Monetary Union”? When?
“Werner Report” in 1970
What and when was the “European Monetary System (EMS)”?
In 1979 it introduced fixed but adjustable exchange rates and gave way for EMS-2 in 1999
What and when was the “Delores Report”?
In 1989 it laid out the stages to create an European Monetary Union
What treaty and by when determined the creation of the EURO?
The Maastricht Treaty in 1992 (Treaty on European Union) said the EURO should be created by 1999
5 EUR entry conditions established in the Maastricht Treaty.
1) Inflation not higher than average of 3 best + 1,5%
2) Interest rates not higher than average of 3 best + 2%
3) Stable exchange rate
4) Budget deficit no more than -3% of GDP
5) Dept to GDP ratio no more than 60%
What is the difference between European System of Central Banks and the Eurosystem?
The ESCB consists of the European CB and all National CB’s, but the Eurosystem consists of the European CB and those National CB’s that form the monetary union
Who implements monetary policy in the EU: European System of Central Banks or the Eurosystem?
The Eurosystem
4 levels of the European Central Bank.
1) Executive board (President + Vice-president + 4 members appointed for 8 years by EU Council)
2) Governing Council (Executive board + representatives of Euro area CB’s)
3) General Council (President + Vice-president + 1 representative of all EU CB’s)
4) Supervisory board
What is the “European Semester”.
EU’s annual cycle of structural and fiscal policy coordination
What and when is the “European Stability Mechanism”? 3 features.
In 2012 replaced European Financial Stability Facility and European Financial Stability Mechanism.
1) A meeting held between national ministers of finance
2) Not an EU institution
3) Provides financial aid to MS (grants conditional money if a set of reforms are implemented)
What and when was the “Six Pack”?
Reinforced the Stability and Growth pact in 2011 after the Eurozone crisis. Essentially a package of sanctions if SGP is not abided
4 reasons “Common agricultural policy (CAP)” was initially needed.
1) Ensure better life for farmers
2) To stabilise the market
3) Create food reserves
4) Ensure good prices for consumers
What did CAP initially politically imply for EU members?
A common agricultural policy instead of different national policies
Define “Intervention price”.
Price at which authorities would intervene and start buying domestic produce for storage or export with an export subsidy. It is a minimum guaranteed price to producers whatever happens
Define “Target price”
A price that is considered desirable for the domestic market (higher than the world price)
Define “Threshold price”.
Minimum price at which imports reach the EU common market = target price - internal distribution costs
Define “Variable levy”.
Threshold price - lowest world price (calculated daily)
Define “Export subsidy”.
Intervention price - world price
Describe CAP expenses during 1980’s.
Increasing rapidly, growing from 50% to 65% of the EU common budget
Explain the “Guarantee” and “Guidance”part of the EAGGF name. How much money was allocated to both (%)?
1) Guarantee: money for interventionism (~90%). It was mainly regulated by market mechanisms.
2) Guidance: money for rural development/investment (~10%). Goals and actions were defined manually.
3 initial problems of CAP.
1) Self-sufficiency became permanent surplus
2) Financial and economic expenses
- financial (too expensive): as expenses of EAGGF
- economic: benefited big producers, but consumers and taxpayers paid for it
3) World market distortion and conflicts with other countries on GATT (General Agreement on Tariffs and Trade) of WTO
Describe 2 CAP reforms in the 1980’s. Why and when were they passed?
Attempts to reduce production.
1984 reform: introduced quotas (at certain production level authorities don’t buy the excess surplus)
1987 reform: introduced a ceiling to CAP budget (no more than 74% of GNP growth)
3 features of the MacSharry CAP reform. Why and when was it passed?
1992, it was caused by CAP distorting the global market.
1) Lowered intervention price closer to world price
2) Introduced coupled direct payments based on production
3) CAP expenses were now more on taxpayers and less on consumers
3 features of the 2003 CAP reform. When was it to be enforced?
To be enforced in 2005.
1) Introduced Single Payments Scheme (decoupled from production and based on 2000 - 2002 payments. EU members could still provide coupled support if needed)
2) Environmental objectives: cross compliance (if you received support, you had to be sustainable)
3) Modulation: transferring funds from Pillar I (intervention prices) to Pillar II (rural development) and reduction on all direct payments
6 positive effects of CAP so far.
1) Single agricultural market in the EU
2) Modernisation
3) Stabilisation of the local market
4) Guaranteed stockpiled supplies
5) Reasonable prices (depending how to look at it)
6) Increased EU integration
5 negative effects of CAP so far.
1) Permanent surpluses
2) Distorted world markets and conflicts
3) Costly and unequal farmer support
4) Environmental impact
5) Fraud risks on support payments
What was the CAP Agenda 2000?
A deepening of MacSharry (1992) reform. Keep reducing price support, ensure environmental goals and income parity.
Describe the evolution of CAP budget throughout 1980’s until nowadays in % of EU budget (3 stages).
Rapid growth during 1980’s (up to 65%)
Decline during 1990’s (around 60% to 50%)
Continuous decline since 2000’s (around 50% to 35%)
CAP post 2013 instruments (3 compulsory and 3 voluntary).
Compulsory (for all EU members):
1) basic payment scheme (BPS), which defines active farming and non-included activities (max 70% and min 40% of the national envelope) + mandatory min 5% reduction to support over 150’000 EUR per recipient + optional higher payments for first 30 hectares
2) “green” payment (30% of national envelope)
3) young farmers scheme (max 2% of national envelope)
Voluntary (EU members can choose):
1) coupled support
2) support in natural constraint
3) redistributive payment
In what treaty and when was the “Common agricultural policy (CAP)” first laid out?
Treaty of Rome in 1957
What CAP institution was laid out in the Treaty of Rome in 1957?
European Agricultural Guidance and Guarantee Fund (EAGGF)
When and in what 2 institutions was the “European Agricultural Guidance and Guarantee Fund (EAGGF)” split?
In 2007:
1) European Agricultural Guarantee Fund (EAGF)
2) European Agricultural Fund for Rural Development
2 main frameworks of economic activity.
1) Neoclassical
2) Agglomeration
3 features of “Neoclassical” framework of economic activity.
1) Market balances itself
2) Regional disparities are corrected in the long term
3) No intervention needed, but need to eliminate production factor mobility barriers
3 features of “Agglomeration” framework of economic activity.
1) Market does not balance itself
2) Creates disparities where accumulation of production factors is
3) Intervention is needed
2 forces that determine the degree of agglomeration.
1) Dispersion forces
2) Agglomeration forces
Define “Dispersion forces”. 3 examples.
Economic activity moves to less dense areas:
1) Trade protectionism (state policy)
2) Real estate prices
3) Overpopulation, noise, pollution etc.
Define “Agglomeration forces”? 3 examples.
Economic activity concentrates in one area:
1) High demand
2) Economies of scale
3) Transportation costs
3 things that could justify CRP in EU.
1) Ethics: income & unemployment balance
2) Politics: EU is united
3) Long-term financial gain: spill-over effect
CRP phase I. Time frame and 3 features.
[1958 - 1974]
1) Treaty of Rome (1957) did not emphasise CRP
2) Little disparities between founding members (south of Italy and France)
3) Belief in the neoclassical model
2 instruments created in CRP phase I.
1) European Social Fund (ESF)
2) European Investment Bank (EIB)
3 objectives of the “European Social Fund (ESF)”.
Objective was to promote employment:
1) Re-skilling workers
2) Anti-discrimination
3) Improve job searching process etc.
2 objectives of the “European Investment Bank (EIB)”.
1) Modernise
2) Provide loans to less developed regions and small/medium companies
CRP phase II. Time frame and 3 features.
[1975 - 1987]
1) 1973 oil crisis and increasing protectionism
2) UK, Ireland and Denmark (1973), Greece (1981), Spain and Portugal (1986) join the EU
3) Single European Act (1986) and its effect on agglomeration
What and when was the “Thompson report”?
A 1973 report about uneven regional development and the need for rural and industrial restructuring
Instrument created in CRP phase II. When?
European Regional Development Fund (ERDF) in 1975
Objective of the “European Regional Development Fund (ERDF)”.
Support less developed rural and declining industrial regions
CRP phase III. Time frame and 4 features.
[1988 – 2006]
1) Structural fund reforms (ESF + ERDF + EAGGF)
2) EU spending only complements national spending
3) Doubled money allocation (40% of EU budget)
4) Shift towards post 2004 states
CRP phase IV. Time frame and 4 features.
[2007 – 2013]
1) Consolidation of phase 3 actions
2) No increase in money
3) Emphasis on “Renewed Lisbon Strategy”
4) Higher concentration
CRP phase V. Time frame and 2 features.
[2013 – 2020]
1) Europe 2020 alignment
2) Digitalisation, competitiveness etc.
5 CRP objectives for 2020.
1) 75% of people from 20 to 64 y/o employed
2) 3% of EU’s GDP for R&D
3) Climate goals
4) School drop-out rate under 10%
5) 20 million people less in poverty
Criteria for CRP funds (2000 - 2006 and 2007 - 2013) for regions and nations.
1) REGIONS: GDP p/c < 75% of EU-27 avg. OR EU-15 avg. for phasing out regions
2) NATIONS: GNI p/c < 90% of EU-27 avg. OR EU-15 avg. for phasing out countries
[the phasing out criteria was introduced post 2007]
Criteria for CRP funds (2014 - 2020) for regions and nations.
1) Less developed regions = GDP p/c less than 75% of EU-27 avg. & max co-financing of 85%
2) Transition regions = GDP p/c 75-90% of EU-27 avg. & max co-financing of 60%
3) Developed regions = GDP p/c more than 90% of EU-27 avg. & max co-financing of 50%
4) Countries = GNP p/c less than 90% of EU-15 avg.
Has CRP been successful? If so, in what 3 ways can it be measured?
1) Infrastructure (e.g. km of roads built, internet, clean water)
2) Impact on GDP p/c & employment
3) Some disparities decreased, but not all / everywhere (1/4 of money spend on poorer regions also benefits wealthy regions as spill-over effect)
What does the principle of “additionality” mean?
EU CRP funds only complement national spending
What does the principle of “concentration” mean?
EU CRP funds are primarily allocated to regions that need it most
Has the CRP been historically as relevant as CAP?
No. CRP became relevant quite after CAP
What are Cohesion funds, why and when were they created?
CRP funds to help NATIONS with The Maastricht Treaty (1992) convergence criteria
3 reasons why EU needs a common budget.
1) Fix market failures (CAP, healthcare, education)
2) To redistribute resources (CRP)
3) To stabilise business cycles
How large is the EU budget?
~1% GNI of member states (1.23% at its maximum)
3 principles of the EU budget.
1) Equilibrium (revenue = spending), but has been broken recently with Eurobonds
2) Transparency (minimise effect of corruption, etc.)
3) Good management (ex-ante & ex-post analysis)
EU budget (revenues) phase I. Time frame and 2 features.
[1958 - 1970]
1) Treaty of Rome introduced quotas to be paid by member states
2) Council of the EU as authority, Parliament consulting
EU budget (revenues) phase II. Time frame and 4 features.
[1971 - 1988]
1) Since 1975 Council and Parliament share power
2) Traditional own resources (TOR): customs duties, agriculture, sugar levy
3) VAT 1979 - 1988 as a balancing resource (max 0.3% rate nowadays)
4) UK’s rebate 1984 (now contributing ~66% less)
EU budget (revenues) phase III. Time frame and 3 features.
[1988 - 2020]
1) Single European Act (1986) and CRP needs
2) 1988 - 1995 a % of GDP as the new balancing resource
3) since 1995 a % of GNI as the balancing resource (1,2% max, ~70% of EU budget nowadays)
How many stages does the EU budget go through to be accepted? Briefly describe them.
4 stages:
1) Elaboration (EU Commission makes a draft)
2) Approval (Council of the EU revises and approves the draft, EU Parliament makes suggestions, the Council takes into account the suggestions, the Parliament accepts or rejects the budget)
3) Implementation (Commission)
4) Control (Parliament, Court of Auditors)
How has the % of EU’s revenues changed with time?
1) Increasing until 2000’s (reaching ~1.2%)
2) Declining since 2000’s (~1%)
EU budget (revenues) phase IV. Time frame. Explain Next Generation funds (3 features).
[2021 - now]
1) Financed through Eurobonds (allowed by TFEU articles 310 and 311)
2) 750 billion EUR (~7% of EU GDP) appear under CRP categories
3) Available as grants and loans
Do EU’s revenues come from member states proportionally?
No. There was the UK’s rebate. Germany, Austria, Netherlands, Sweden and Denmark also pay less (1/4 of GNI and 0.15% instead of 0.3% max of VAT)
What are “Multiannual Financial Frameworks”? When were they implemented?
In 1988, they are 5 year budgetary plans
2 ways EU’s NextGen grants are split.
1) 70% based on member states’ population, inverse GDP per capita (1:GDP per capita) and avg. unemployment 2015 - 2019 compared to EU-27 avg.
2) 30% based on observed loss in REAL GDP in 2020 & cumulative loss in REAL GDP 2020 - 2021
What is the maximum amount of EU’s NextGen loan?
6.8% of member states’ 2019 GNI
In what time frame are the largest EU’s NextGen payments planned?
2021 - 2024
Top 5 receivers of EU’s NextGen funds.
1) Spain, 20%
2) Italy, 20%
3) France, 12%
4) Germany, 7.5%
5) Poland, 7%
3 problems EU faces regarding its revenues.
1) EU is not financially autonomous
2) Benefits and costs to member states are not evenly distributed
3) The system is not transparent for EU citizens
What and when was the alternative proposal for EU’s revenue system?
Monti Group report (2017):
1) Simplify VAT
2) New OR: 20% from emission rights (CO2), 3% on taxable corporate tax, 0.8 EUR per kilo of non-recycled plastic bottles
What is “Operating budgetary balance”? Does it objectively portray benefits and costs of being an EU member state?
An EU member state’s balance of contributed and received funds. It is not objective for many reasons, e.g., spill-over effect, global peace, free trade etc.
What was the political consensus regarding revenues (therefore spending) in the 1990’s and 2000’s?
In 1990’s relative spending increased and in 2000’s decreased due to austerity and individualism
3 largest EU’s revenues net contributors in absolute terms.
1) Germany
2) France
3) Italy
Largest net contributors and receivers of EU’s funds in relative terms.
1) Contributors: DE, BE, NL, FR, NI (Western Europe)
2) Receivers: LT, EE, HU, LV, PL, BG (Eastern Europe)
To summarise, name 3 sources how EU obtains its revenues (as of 2014 - 2020).
1) Traditional own resources (TOR): customs duties and sugar levies
2) VAT (0.3%): except Germany, Netherlands, Sweden
3) GNI (~0.7%): except Austria, Netherlands, Denmark, Sweden
