European Economics Content

Question 1

What are the three main approaches were used to try and implement integration within Europe? To what extent are the three main approaches to integration present in the EU?

Answer 1

1) Intergovernmentalism – countries get together to decide/vote on key decisions but each country gets to keep independence in the key aspects.
2) Federalism – countries transfer power to a supernational authority where they feel represented.
3) Functionalist Approach – integrated but only in specific areas/functions. It is based on the functions you want to integrate rather than on a broader project.

Question 2

To what extent are the three main approaches to integration present in the EU?

Answer 2

1. Intergovernmentalism is present today in the EU Council. This is a key player in decision process where
   countries sit and vote on procedures.
2. Federalism - For example, the ECB (responsible for monetary policy) is a federalist entity. There is no way for a country to control what the ECB is doing. Governors that are in ECB’s council are not representatives of their countries nor are bound politically to fulfill any obligation to their countries – they are supposed to decide as individuals, in the interest of EU and not of their respective countries. The EU Parliament constitutes another valid
   example.
3. Functionalism was dropped

Question 3

What are the advantages of enlargement?

Answer 3

The market increases (which is good for trade) and greater stability (accepting more unstable countries so that they become better managed – for example Portugal joined whilst still with a young and fragile
democracy, with the USA fearing that it would succumb to the communism).

Question 4

What are the disadvantages of enlargement?

Answer 4

The more countries, the greater the heterogeneity in the Union, which leads to a higher probability of have blockages and things not moving. So there is the need to promote convergence, cohesion, which cost a lot of money.

Question 5

What is the genesis of the EU?

Answer 5

1948 - Set up of the OEEC

1951 - ECSC

1957 - Treaty of Rome

1975 - the EU Parliament is created

1979 - the European Monetary System

1986 - The Single European Act

1989 - Fall of the Berlin Wall

1991-1992 – Maastricht Treaty

1997 – Treaty of Amsterdam

1999 – Monetary Union was created

2000 – Treaty of Nice

2001 – Treaty of Venice

2007 – Treaty of Lisbon

Question 6

What did the treaty of Rome entail?

Answer 6

1957 → Treaty of Rome - committed the Six to 4 fundamental liberties: free movement of goods, services, capital and labor. In addition to forming a customs union with removal of tariffs, quotas and non-tariff barriers to trade.
- Creation of EURATOM
- Common policies established: CAP, Competition policy, mechanism for macroeconomic coordination.
- Supranational institutions established: European Parliamentary Assembly (forerunner of the European Parliament), ECJ, European Commission.

Question 7

What did the Single European Act entail?

Answer 7

The Single European Act (1986) aimed to create a fully integrated internal market within the European Community by 1992. Key elements included:

• Internal Market: Removed barriers to allow free movement of goods, services, people, and capital across member states.
• Qualified Majority Voting: Expanded this voting method in the Council, making it easier to pass legislation.
• New Policy Areas: Strengthened cooperation in areas like environmental protection, research, and technology.
• Institutional Reform: Enhanced the powers of the European Parliament, giving it a more active role in the legislative process.

Question 8

What did the Fall of the Berlin Wall mean for the European project?

Answer 8

1989 - Fall of the Berlin Wall – a total game changer. Germany is now much more powerful when united. Jacques Delor tries to integrate Germany even more in the European project. They accept the unification, but Germany has to give up the mark. The idea of a shared currency was quickly championed by French President François Mitterrand and German Chancellor Helmut Kohl. After extensive negotiations, the EU committed itself to a target of forming a monetary union by 1999 and adopting a single currency by 2002. This commitment was made in the Treaty of Maastricht.

Question 9

What did the treaty of Maastricht entail?

Answer 9

1992 - The Maastricht Treaty

• Purpose: Establish the EU and prepare for a Monetary Union by 1999 with a single currency by 2002.
• Key Achievements:
  1. Nominal Convergence: Aligning inflation rates for the monetary union.
  2. Subsidiarity Principle: Decisions could be made at either the EU or national level as appropriate.
  3. Three Pillars of Focus:
  Economic and Social Policy Foreign Policy Justice and Police Coordination

Question 10

What did the Treaty of Nice entail?

Answer 10

2000 – Treaty of Nice - had the goal to prepare institutions for new enlargements in 2004 and defining the new concept and criteria for the voting procedures → qualified majority.

Question 11

What did the Treaty of Venice entail?

Answer 11

2001 – Treaty of Venice - voting and co-decision procedures.

Question 12

What did the Treaty of Lisbon entail?

Answer 12

2007 – Treaty of Lisbon

• Creates positions: President of the European Council, High Representative for Foreign Affairs
  -Solidifies decision process from unanimity to qualified majority voting.
• Enhances co-decision procedure between the European Parliament and the Council of Ministers.

Question 13

What was the OEEC?

Answer 13

1948 → Set up of the OEEC (Organization for Economic European Cooperation), which was established to manage the Marshal Plan (‘west of the Urals’), if they could agree to a joint program for economic reconstruction.

Question 14

What is the timeline of EU enlargements?

Answer 14

1957: Founding Members – Belgium, France, Italy, Luxembourg, Netherlands, West Germany.
1973: Denmark, Ireland, UK join.
1981: Greece joins.
1986: Spain, Portugal join.
1995: Austria, Finland, Sweden join.
2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia join.
2007: Bulgaria, Romania join.
2013: Croatia joins.
2020: UK exits (Brexit).

Question 15

What did the treaty of Amsterdam entail?

Answer 15

The Treaty of Amsterdam (1997) aimed to make the EU more effective and closer to citizens by:

Strengthening Policies: Enhanced focus on employment, citizens’ rights, and justice.
Enhanced Cooperation: Allowed groups of member states to integrate more closely on specific issues.
Reforming Institutions: Prepared the EU for enlargement by reforming voting procedures and the role of the European Parliament.

Question 16

What does the European Commission do?

Answer 16

1. Initiate and implement policies once approved
2. They draft everything
3. They are the ‘Guardians of the Treaties’

Question 17

How is the European Commission organized?

Answer 17

The European Commission consists of one Commissioner per EU member, including a President and two Vice-Presidents, all appointed for five-year terms. Commissioners are nominated by their national governments but must be approved by the European Parliament. Although independent of their home governments, they often consider national concerns. Each Commissioner oversees a specific EU policy area, similar to a national ministry, through Directorates-General (DGs), such as DG Trade and DG Ecfin (economic and financial affairs).

Question 18

Who chooses the European Commission’s President?

Answer 18

The EU Commission President is chosen by the EU Council and approved by the EU Parliament, though tensions exist between these bodies over the process.

Question 19

How are decisions made in the EU Commission?

Answer 19

The Commission decides, in principle, on the basis of a simple majority. The ‘in principle’ proviso is necessary because the Commission makes almost all of its decision on the basis of consensus. The reason is that the commission usually has to get its actions approved by the Council and/or the Parliament. A Commission decision that fails to attract the support of a very substantial majority of the Commissioners will almost surely fail in the Council and/or Parliament.

Question 20

How is the Council of the European Union composed?

Answer 20

It’s composed by representatives of the member states that are organized in Councils of Ministers.

Question 21

What is the European Council?

Answer 21

The European Council consists of the leaders of each EU member plus the President of the European Commission. The European Council provides broad guidelines for EU policy and thrashes out the final compromises necessary to conclude the most sensitive aspects of EU business, including reforms of the major EU policies, the EU’s multi-year budget plan, Treaty changes and the final terms of enlargements.

The presidency of the Council is held by a different country every semester. The country in the wheel is supported by the one that was there before and also the one that will hold it in the next semester.

Question 22

What is the role of the European Parliament?

Answer 22

The Parliament has two main tasks:
- Voting laws along with the Council of Ministers and the Commission
- Overseeing all EU institutions, but especially the Commission.

• The European Parliament (EP) has 732 members who are directly elected by EU citizens in special elections organized in each Member State. The number of MEPs per nation varies with population, but the number of MEP’s per million EU citizens is much higher for small nations than for large.

Question 23

What is the European Court of Justice?

Answer 23

The role of the ECJ is to settle disputes between Member States, between the EU and Member States, between EU institutions, and between individuals and the EU.

• How is it organized?
  The European Court of Justice, located in Luxembourg, consists of one judge from each Member State. Judges are appointed by common accord of the Member States’ governments and serve for six years. The Court also has eight ‘advocates-general’ whose job is to help the judges by constructing ‘reasoned submissions’ that suggest what conclusions the judges might make. The Court reaches its decisions by majority voting. The Court of First Instance was set up in the 1980s to help the EU Court with its ever-growing workload.

Question 24

What are the three pillars of the EU?

Answer 24

1ST Pillar – Social and Economic Coordination
2ND Pillar – Foreign Policy Coordination
3RD Pillar – Police and Justice Coordination

Question 25

Describe the co-decision process in the EU.

Answer 25

CO-DECISION PROCESS – (under the ToA)

The commission initiates the process (a draft proposal). Then Parliament and Council state opinions on it and goes to be voted and decided via Quality Majority Voting in the Council.

Then a series of revisions and amendments and, in the end, it only goes forth if both EU Parliament and Council are in agreement on it.
The Commission is not deciding anything – they just propose and draft. European Parliament is more and more important in the process, together with the council. More than 90% of the legislation go through this co-decision procedure where the different institutions participate.

The co-decision procedure aims at having legislation that gets the green light from the Council, the Commission and the Parliament.

Question 26

Where do the EU’s money come from?

Answer 26

1. GNI - own resources - 69
2. Customs duty - 17
3. VAT - 12.4

Question 27

What factors should exist for Open Currency Areas to be successful?

Answer 27

• Labor mobility
• Production diversification
• Openness
• Fiscal transfers
• Homogeneous preferences
• Solidarity vs Nationalism
• Nominal convergence criteria

Question 28

Why is labor mobility important for OCAs?

Answer 28

This is important because this is a mechanism to smooth asymmetric shocks that affect members of MU. If people are freely allowed to move, then they will move from recession areas to booming areas. This would smooth unemployment in recession countries and also smooth wage growth in booming countries. This is possible, for example, in the US. Such a mechanism helps economy smoothing the impact of the cycles.

Question 29

Do we have labor mobility in Europe?

Answer 29

We have some migration but it’s not
something that actually leads to cycle smoothing. There are obstacles to labor mobility – language barriers; legislation (even with some effort to solve this point); services directive not put in place (countries have resisted it very strongly). Also, a big obstacle is the housing market → if people have the tradition of buying a house, then they are linked to a place – they don’t move. It’s very hard to sell everything and buy somewhere else. It’s a very powerful force preventing people from moving.

There is also the risk that things don’t exactly play out as expected with labor mobility. If people are moving to a region, that region would grow even more. Then, richer regions get richer and poorer regions get poorer. These dynamics would actually increase the gap. We also see this happening inside countries, with rural vs urban areas.

Question 30

Why is production diversification important for OCAs?

Answer 30

If a country is specialized in something, then it might be affected by something and be really hurt by a shock – only him. Since policies are not tailored to any one country, then that country is left to deal with the problem by its own. However, the argument here that diversification is good is counteractive to something we vouched for before: trade. This production diversification would be harmful to trade, seeing that, from a trade perspective, we would want specialization, in order to take full advantage of comparative advantages. Hence, we can find counterarguments that expose how this might be bad for the project as a whole. What countries should actually do is find an optimal balance.

Question 31

Why is openness important for OCAs?

Answer 31

It is necessary in order to have trade between the regions and countries.

Question 32

Why are fiscal transfers important for OCAs?

Answer 32

Structural policies take a long time to produce results, so fiscal policies become of major importance. The idea is not to have a fully centralized fiscal policy but having automatic transfers/stabilizers at the country/state level fiscal policy. With this you can smooth the impact of the shocks since you collect from all the other countries and transfer to the ones in trouble, according to some rules (This exists clearly in the US but doesn’t exist in the Euro Area).

Question 33

What is the BICC?

Answer 33

• The budgetary instrument for convergence and competitiveness.

BICC will be a fund that member states can tap
for reform and investment plans every Spring. It is important to note that this is not a stabilization mechanism in times of crisis as the size of the fund and the decision to activate the money will not be related to the economic cycle.

Question 34

Why are homogeneous preferences important for OCAs?

Answer 34

For example, preferences toward inflation. Some countries have more resistance to inflation than others (people may have embodied in their mind that inflation is a big problem). So, what would then be the “normal” or “good” inflation rate (or interest rate, for example)? We might have problems achieving a compromise → countries might end up disagreeing on what the mandate of the ECB should be. If homogeneous preferences are present, it is easier to reach an agreement and move on.

Question 35

Why is solidarity important for OCAs?

Answer 35

The more solidarity exists between countries, the more cooperation can be achieved.

Question 36

What is the Euro Area’s nominal convergence criteria?

Answer 36

1. Inflation level not far from the best performing countries in the union.
2. Interest rate not far from the one in the best performing countries in the union in terms of inflation.
3. Exchange rate stability versus the euro.
4. The fiscal balance as a percentage of GDP should be lower than 3% (low fiscal deficits).
5. Public debt should be close to 60% of GDP.

Question 37

What is real exchange rate?

Answer 37

The Real exchange rate is a measure of price competitiveness and R (real exchange rate) is such that:

real exchange rate (R) = (nominal exchange rate (e) * foreign price level (Pf) ) / domestic price level (P)

If R increases, you have a real depreciation and your competitiveness increases.

In terms of growth rates, change R = change e + inflation foreign - inflation domestic. Within the monetary union ê is equal to 0, so we cannot expect changes in price competitiveness coming from the nominal exchange rate.

• But we can from inflation changes!!

Inflation differentials are the ones that drive price competitiveness. Hence, we don’t want countries with big inflation differentials, otherwise, macro-imbalances appear.

Question 38

What is the Fisher equation?

Answer 38

Fisher Equation: nominal interest rate = real interest rate + expected inflation → 𝒊 = 𝑹 + 𝝅𝒆

So, when countries have similar inflation rates and as the real interest rate tends to be closer to each other for the different countries, the nominal interest rates will be closer between countries.

Question 39

Why does migration exist?

Answer 39

• Economic factors and the situation in the labor market.
• Low pay or being below the poverty line, even whilst having a job.
• You can have a job, but you don’t see social mobility and an opportunity of improving your living conditions.
• Also, and very importantly, if your freedom is constrained or the political system is oppressive another big factor.
• Other non-economic reasons – persecution, disaster, diseases, wars → refugees.

Question 40

Set a structure for talking about migration.

Answer 40

• Why does migration happen?
• Forces pushing in and forces pushing out.

Labor:
- Snowball effect
- Emigration leads to a decrease in labor, pressure on increasing wages. The reverse is expected if we have immigrants. But there are minimum wages,
unemployment benefits, skills miss-match and informal economies that make things a lot more complicated.

Current account:
- Remittances
- Changes in trade patterns

Public Finance:
- Immigrants usually come at a young a young age so they are net contributors to social security.

Long-term economic growth:
- immigrant are less risk-averse
- overall production potential increases