europe, euro and brexit 2022

Question 1

what is a preferential trading agreement?

Answer 1

Member countries agree to erect lower barriers to trade between them than with non-member countries

Question 2

what is a free trade area?

Answer 2

Eliminating barriers to intra-group trade while allowing each country to maintain its own barriers to trade with non-members

Question 3

what is a custom union?

Answer 3

Intra-group trade faces no barriers and members maintain a common external tariff (CET) on trade with non-members.

Question 4

what is a common market?

Answer 4

Extends free trade among members to the ‘four freedoms’: labour migration and capital flows, as well as to goods and services.

Question 5

what is an economic union?

Answer 5

Most extensive form of economic integration:common economic policies; common currency

Question 6

what are trade creation effects?

Answer 6

Free trade between member countries of the union generates more trade,greater specialisation, economies of scale and increased incomes

Question 7

what are trade diversion effects?

Answer 7

The common external tariff (CET) means trade is diverted away from partners outside the customs union in favour of internal partners. Some of this trade will be switched away from more efficient non-member countries to less efficient producers within the union. (Britain buys more expensive European sugar, fruit, veg, etc.,rather than cheaper Commonwealth produce.)

Question 8

what are the criteria for a sucessful customs union?

Answer 8

competing but not complementary economies
low CET
more members
homogeneity
flexible technology; mobile labour and capital
FDI

Question 9

what is the worlds largest custom union?

Answer 9

the european union is the worlds largest customs union. it has 27 current member countries with various candidate nations. most of EU trade is member to member trade

Question 10

what was the european coal and steel community (ECSC)?

Answer 10

it was signed in 1951 and was the first step in European integration. the goal of it was to rebuild European economies after world war 2 and to foster political cooperation through economic intergration

Question 11

what was the european economic community (EEC)?

Answer 11

it was launched in 1958 from the treaty of rome as a customs union with the goal to create a single integrated market for goods, services,labour and capital. the central aim was to promote ever closer union and thus to prevent any possible return to conflict between European nations that had bedevilled relations between them for a millennia.

Question 12

what is the common currency of the European union?

Answer 12

the euro

Question 13

what is the european exchange rate mechanism?

Answer 13

it was a system intoduced by the European community in march 1979 to reduce exchange rate variability and achieve monetary stability in preparation for eventual introduction of a single currency. the member countries fixed their currencies in withing 2.25% narrow bounds the UK joined in 1990

Question 14

what was the maastricht treaty?

Answer 14

it was established in december 1991 and set out strict criteria for the currency union. the convergence criteria was:
price stability - no more than 1.5% above the three lowest members average
budget balance - annual deficits no greater than 3% of GDP
low levels of sovereign debt- it was limited at 60% of GDP
fixed exchange rate - all tied to the ERM and not devalued for the last two years
a common interest rate - long term rate no higher than 2% above the lowest three members average.

Question 15

what was the issue with the fall of the berlin wall in 1989 on the ERM?

Answer 15

the berlin wall was a major exogenous asymmetric shock. this caused german interest rates to become too high and the EU to become a non homogenous union.

Question 16

what is an optimal currency area?

Answer 16

Countries with:
* A high percentage of tradeable goods compared to other parties
* Flexible labour and capital markets – high mobility; flexible wages
* Economic symmetry (freedom from exogenous, asymmetrical shocks)
* An internal transfer mechanism
in summary economies with a greater potential to converge rather than diverge

Question 17

is the EU an optimal currency area regarding labour mobility?

Answer 17

the percentage of people changing their county of residence in the USA in 1980 was 6.2% (3.2% between states); however, it was only 1.1% in England and wales and only 1.3% in Germany. comparing regional income variation, there is greater variation in Europe which is both a greater incentive to move yet represents greater immobility. regional unemployment rates adjust about 20% more rapidly in the US then in the EU. this makes the EU a much less optimal currency area then the USA as labour is less flexible.

Question 18

is the EU an optimal currency area regarding capital mobility?

Answer 18

from 1971 to 1991, Eichengreen found that share price movements between stock markets in pairs and dusseldorf were 5 times more volatile then between english speaking toronto and french speaking Montreal. this unlike in Canada, share prices moved in Europe because capital did not. this shows that capital is not very flexible in the EU

Question 19

is the EU an optimal currency area regarding the vulnerability to asymetric shocks?

Answer 19

Eichengreen argues that the greater the regional variation in the relative price levels, the greater it illustrates variation in industrial structure. comparing the 1970s with the 1980s in all cases real price differentials across the US continent were far less than across Europe. the comparison in 1997 also showed no evidence of European convergence so a strong case to maintain exchange rate variability.

Question 20

what occured to interest rates after the 2008 financial crisis?

Answer 20

the interest rates have spread between european countries

Question 21

what would britain prefer from Brexit?

Answer 21

no ever closer union
free trade with europe
no customs union (free trade with external partners)
no hard border in Ireland
no free movement of labour
no common policies ( agriculture, fisheries, laws, euros)

Question 22

what occured in the 2007/8 world financial crisis?

Answer 22

an immense exogenous asymmetric shock:
property sectors and financial sectors all around the world were distressed
banks holding billions of innocent customers deposits cannot be allowed to fail so governments had little option other than to bail them out converting the private bankers debt into sovereign debt.

Question 23

what was the issue with greece?

Answer 23

greece didnt have enought money to pay its bills. since the financial crisis, the economy had shrunk by more than any other rich country. national income fell by 22%
house prices were down by 40% since 2008. the bailouts to greece just shifted the debts to new creditors but did little to lower them. in 2015 it owed around 315 billion or 175% of GDP.

Question 24

what was the policy solution offered to greece?

Answer 24

austerity was the policy that was recommended. EU bail outs come with conditions aimed at stabilising greeces finances such as increasing taxes, cuts to minimum wage and pensions, lay of civil servants, privatisation of assets such as ports . these classic supply side policy were aiming to make greece more competitive and thus spur economic growth as well as generating a budget surplus to be used to pay down debt.

Question 25

were the policies reccommended to greece sucessful?

Answer 25

no, the debt to GDp ratio was increasing and the policy recommendations forced greece to suffer in a depression for as long as the USA in the 1930s
the deflationary policies were neither necessary nor sufficient to end the crisis, Japan had a far higher debt and debt/GDP ratio than any European country

Question 26

what is the issue with the Euro area and financial crisis?

Answer 26

the euro area has stripped away the shock absorbers most economies rely on to reduce the negative effects of demand shocks and saddled the monetary union with a central bank that is politically unable to respond in dramatic fashion to an economic downfall in the absence of obvious defaltionary pressures

Question 27

why is it difficult to understand the true effects of brexit?

Answer 27

It is difficult to disentangle the impacts of Brexit and COVID on the UK economy with precision.

Question 28

what is the estimated effect of brexit on the UK according to the office of budget responsibility?

Answer 28

the uk economy is expected to end up 4 per cent smaller than it would otherwise have been (100bn a year hit to prosperity) leaving the public finances less sustainable in part due to a significant adverse impact on UK trade.

Question 29

why does mr tony danker argue britain needs to negotiate a better relationship with the EU?

Answer 29

to allow greater immigration from europe to ease the tight labour market
to reduce non tariff barriers
to solve the northern Ireland probelm