European Union Flashcards
Define European Union
The European Union is a unique partnership between 27 European countries, known as Member States, or EU countries. Together they cover much of the European continent.
Define monetary union
This is a monetary union. Members of a monetary union share the same currency. This is more economically integrated than a customs union and free trade area.
What monetary policy is formed when a monetary union is formed
A common central monetary policy is established when a monetary union is formed. The single European currency, the Euro, was implemented in 1999 to form the Eurozone.
What is special with interest rates in monetary unions
Monetary unions use the same interest rate. The Euro, for example, floats against the US Dollar and the Pound Sterling.
What are the 4 rules a country must follow when in the EU
Member nations are required to control their government finances, so budget deficits cannot exceed 3% of GDP.
The other 3 rules you must follow to join the EU union is
- Gross National Debt must be below 6% of GDP
- Inflation must be below 1.5% of the three lowest inflation countries
- The average government bond yield must be below 2% of the yield of the countries with the lowest interest rates
Define optimal currency area
Optimal currency area is a geographical region where it is thought a single currency would help to maximise welfare and enhance macroeconomic performance.
Member countries must respond similarly to external shocks or policy changes. There must be flexibility in product markets and labour markets to deal with shocks.
What does the ECB do
The European Central Bank (ECB) manages the euro and implements EU economic & monetary policy.
Its main aim is to keep prices stable, thereby supporting economic growth and job creation.
What problems do more economically developed countries have
MEDCs have the following economic problems
Slow economic growth
Income inequality
Aging population
Environmental sustainability
What problems do less economically developed countries have
LEDCs have the following economic problems
Unemployment
Resource Curse
Poverty & income inequality
International trade (protectionism)
What are the advantages of being a member of the EU
Reduced transaction costs for trade (no protectionist measures)
Increased economies of scale
Increased more efficient competition (More incentive to innovate)
Countries may benefit from more flexible labour markets.
What are the disadvantages of being a member of the EU
Free movement of labour can cause friction and concerns about overpopulation and demands on housing.
Cost. The costs of EU membership to the UK is £15bn
Countries in south, e.g. Greece, Spain and Italy, have struggled to cope with Euro and common monetary policy.
How has the EU recently expanded
In recent years the EU has expanded by adding many countries in Eastern Europe such as Turkey.
What are the benefits of EUs expansion
- Larger trade area, provides new markets and potential for growth
- Free movement of labour makes labour markets more flexible
- New countries benefit from EU funds, such as regional aid, and agricultural funds – helping to promote economic development.
- Membership of the EU encourages international investors – both short term and long term.
What are the Drawbacks of EUs expansion
- Harder to make agreements, with more countries
- Given different levels of economic development, new eastern countries have different attitudes to agricultural policy and laws of migration.
- Some existing EU members would feel poorer, not richer
When do optimal currency areas work well
It tends to work well when
Countries within it are highly integrated with each other, for instance a high percentage of trade in goods and services is done with fellow currency union members.
Where each economy has a sufficiently flexible labour market to cope with external shocks.
What are the advantages of using the EURO
- Lower transaction costs. If the UK joined the Euro, firms and tourists would not have to pay the cost of converting currencies
- Eliminate exchange rate fluctuations. If the exchange rates are fixed, firms can invest in export capacity with more confidence.
- Lower inflation. The ECB has a strong tradition of keeping inflation low.
What are the disadvantages of using the EURO
- Countries will lose the ability to set interest rates.
- Lack of exchange rate flexibility. If the UK joined the Euro at an exchange rate that is too high, it would make UK exports uncompetitive
- Low inflation may conflict with other objectives. It is argued that the ECB is too concerned with low inflation
Define Globalisation
Globalisation refers to the process of how national economies are becoming increasingly interdependent and integrated.
In practice, globalisation refers to the increased flow of labour, capital and trade between different countries
What are the characteristics of globalisation
- Growth in free trade between countries
- Growth in movement of labour and capital across national borders
- Growth of multinational companies who operate around the world
What are the causes of globalisation
- Growth of free trade. Trade is increasingly important to the global economy. Economies increasingly rely on importing raw materials and exporting goods.
- Multinational companies. There has been a growth in the number of multinational companies who have an influential cross-border presence.
- Technology. The development of technology, such as the internet, has helped improve communication and made it easier to connect to all corners of the world.
- Transport. Improved transport, especially air transport and shipping, has helped to make trade cheaper, and also made it easier for labour to move between different countries.
What is the impact of globalisation
- Global trade cycles. Because economies are more closely linked, a recession in a major economy is likely to push many economies into recession.
- On the other hand, countries can benefit from growth in other countries through selling more exports.
- International co-operation. Globalisation has increased the importance of reaching global agreements.
- Countries are increasingly interdependent. China has become reliant on Africa for raw materials.
What is the impact of globalisation on workers
- New opportunities. Some workers have benefited from globalisation, e.g. finding new opportunities to work abroad However, this migration has caused housing shortages.
- Wages. Globalisation has also helped equalise wages across the world. However, only a small percentage of workers in developing countries can benefit
- Foreign direct investment has created manufacturing jobs in developing countries. However, there has been criticism of firms, exploiting workers
What is the impact of globalisation on businesses
- Uncompetitive domestic firms. Some local firms may be pushed out of business by large multinationals that can use economies of scale.
- Multinational companies have been able to reduce costs by outsourcing labour-intensive work to countries with low labour costs. However, there are also costs to outsourcing bad potential publicity
- Economies of scale. Global scale production has enabled greater economies of scale and lower costs, but some havent gained this
Impact of globalisation on the environment
- Environmental costs. Globalisation has meant goods are increasingly imported from across the planet, rather than using local produce.
- globalisation enables firms to switch production to countries with weaker environmental legislation.
- Globalisation has slowly raised the importance of global co-operation to deal with environmental challenges.
- Some aspects of globalisation have helped to improve the environment, e.g. the media can make us more aware of the environmental costs
What are the characteristics of an optimal currency area
Similar economic cycles
Good labour mobility
