European Economics Questions Flashcards
Inflation became one of the central concerns of policymakers in the EU and around
the world.
a) Recently what have been the drivers of inflation and the monetary policy responses?
- The accumulated savings during the pandemic and increased demand followed the lifting of restrictions.
- Lock-downs and supply disruptions during and after the pandemic.
- The burst in food prices and, especially, in energy prices because of the conflict in Ukraine.
Inflation became one of the central concerns of policymakers in the EU and around
the world.
b) What are the trade-offs of the Euro-system’s monetary policy in the current situation?
- The prolonged use of expansionary policies, combined with an expansionary fiscal policy during the pandemic, led to the accumulation of public debt sustained under a low-interest-rate environment.
- Interest rates went up to curb inflation.
- The interest rate increase puts the government, firms, and families under financial pressure, which could trigger relevant losses in bank portfolios and fuel financial instability.
Inflation became one of the central concerns of policymakers in the EU and around
the world.
c) What has been the role of European and country-level fiscal policies in this context?
The increase in the aggregate demand from implementing the RRF is likely to sustain high inflation rates.
- European: gas price cap and diversifying gas imports
Inflation brings positive and negative impacts to the fiscal balance. The increase in inflation raises the nominal tax collection and decreases the nominal debt/GDP ratio. But the increase in interest rates implies a rise in debt servicing costs, which requires some financial prudence.
- Country-level: Cash transfers for the most vulnerable families, lowering VAT on essential items, and lowering energy costs.
The conflict in Ukraine is a reminder of the massive costs of war and how economic
integration is a contributor to peace and stability.
a) Why have the enlargements brought both more stability and difficulties to the EU?
Benefits:
- larger common market with harmonized common policies based on the four main freedoms: labor, capital, goods, and services.
- more trade -> increase in welfare, higher
competitiveness, and productivity -> higher economic growth
Difficulties:
- a higher volume of funds may be needed to guarantee convergence
- more difficult to ensure compliance with common fiscal rules
- lengthier decision-making process
How is the EU institutional architecture designed to reach compromise and integrate different views?
- The Commission, the Council of the European Union (intergovernmental) and the European Parliament (federalist) engage in a co-decision process.
- From unanimity to majority voting
What were the arguments put forward by Brexit supporters? How do you assess them?
Brexit was based on the UK’s previous reluctance to be part of the EU. Previously the country had preferred other types of trade agreements, demanded compensation for losses on lost Commonwealth trade, and never wanted to be part of the monetary union.
Reasons for wanting to leave:
1. Trade and compliance with common European policies
2. The need to contribute to the European budget
3. The will to decrease migration flows
- The macroeconomic supervision in the EU and structural recommendations are undergoing a revision process.
a) What is the rationale for the existence of fiscal rules in the EU, and how have they
performed? Please explain.
Expansionary fiscal policy in some countries may undermine the monetary policy’s goal of price stability, thereby creating pressure to increase the common monetary policy rate.
The lack of fiscal discipline and lack of a clear
framework for crisis management makes it difficult to prevent contagion.
In this context, the Stability and Growth Pact (SGP) was established with the single currency to ensure sound public finances. However, as shown during the sovereign debt crisis, its existence did not prevent the emergence of severe and recurring fiscal imbalances in some Member States. The rules were therefore reformed through the “Six Pack” and the “Two Pack,” as well as by the “Treaty on the Stability, Coordination and Governance in the Economic and Monetary Union” (TSCG). Although the above-renewed framework has not yet been sufficiently tested, it does not seem to have a robust enforcement mechanism, thus maintaining initial fragilities. Furthermore, the EU’s fiscal rules were lifted to face the current pandemic crisis, remaining temporarily suspended considering recent events (e.g., the war in Ukraine).
Why does the Macroeconomic Imbalances Procedure incorporate imbalances beyond the fiscal dimension?
- The Macroeconomic Imbalances Procedure (MIP) aims to identify, prevent and address the
surge of potentially harmful macroeconomic imbalances that could adversely affect economic stability in a particular EU country, the euro area, or the EU as a whole. The MIP covers a broad range of macroeconomic imbalances beyond the fiscal dimension, including issues related to external imbalances and competitiveness, internal imbalances, and employment indicators. This comprehensive approach ensures that policymakers know the various economic risks and vulnerabilities and can take appropriate measures to address them. - The MIP is designed to detect economic imbalances that could lead to a crisis before they become too severe. By identifying imbalances at an early stage, policymakers can take corrective action before they become materialized in an economic and financial crisis. The MIP was created as the response of the European Union to the failure of the Stability Growth Pack and the surge of macroeconomic imbalances, notably in the current account, that fueled the sudden stop in external financing during the sovereign debt crisis.
What was the main economic building block put in place at the initial stage of the european integration?
1951 - The European Coal and Steel Community (ECSC) signed in Paris by France, West Germany, Italy, BENELUX - (1952)
Objective: strengthen Franco-German cooperation and banish the possibility of war.
1957 - Treaty of Rome - ECSC members - European Economic Community (EEC) - (1 January 1958).
Objective:
better trade through:
- removal of tariffs and quotas
- harmonizing trade rules with the rest of the world
- preconized the 4 fundamental freedoms: Goods, Services, Labor, and Capital
3 supranational Institutions were formed:
- European Parliament
- ECJ
- European Commission.
What are the two perspectives on the European project?
Two main perspectives:
- federalism: transfer some sovereignity over to supranational
- intergovernmentalism: cooperation among countries, unanimity and institutions where all represented.
What supranational institutions ware formed by the treaty of Rome?
3 supranational Institutions were formed:
- European Parliament
- ECJ
- European Commission.
What are the EU’s supranational institutions?
The supranational institutions are:
- European Commission, the executive body. It has legislative initiative, makes proposals, implements policies, supervises the application of EU laws and treaties.
- European Parliament, the legislative body. It shares legislative powers with the Council of the EU / Council of Ministers (co-decision process), voting on proposals from the European Commission, and it supervises the EU institutions.
- European Court of Justice, the judicial body. It is in charge of applying legislation and resolving conflicts between member-states, EU institutions and citizens.
What are the EU’s intergovernamental institutions? What do they do?
The intergovernmental institutions are:
* Council of the EU / Council of Ministers, the decision-making body. It includes representatives of member-states and its composition changes according to the subject matter. Alongside the European Parliament it votes on proposals from the European Commission, as well as having a say on the EU budget.
* European Council, the political body. It provides guidelines and orientations. It is comprised by representatives of member-states (usually the head of government), the President of the European Commission, and a President elected for 2.5 years. Its presidency rotates every 6 months – not to be confused with the President itself; the presidency is headed by one of the countries (not a person) and is who establishes the policy orientation for 6 months.
What effects did the war in Ukraine have on
Europe’s economies?
- Geopolitical (including the future of the EU project)
- Energy and food markets (higher prices and supply shortages)
- Supply chains and international trade (disturbances, protectionism)
- Migration flows (refugees)
- Fiscal (reconstruction expenditure, war effort)
- Inflation -> monetary policy decisions -> economic activity
- Fiscal: By February 2024 the cost of reconstruction and recovery in Ukraine was estimated at $411 billion (equivalent to €383 billion)
