The EU and the World Economy Flashcards
(128 cards)
1
Q
The question after WWII was “How can Europe avoid a new war”, so how could this be avoided?
Additionally, what could be said of Europe a few years after the War?
A
could be avoided by European integration
in Europe there was large amounts of poverty til the mid 1950’s—politically Western Europe struggled democratically, hunger and refugee camps were common
2
Q
What was the question European countries were faced with–post WWII and at the beginning of reconstruction?
A
Capitalism or not?
3
Q
What was the “driver” of economic integration?
A
the Cold War
4
Q
What can be said of the Marshall plan?
A
- one part of the plan the OEEC (organization for European Economic Cooperation) created in 1948
- it divided financial aid among members to promote economic integration–reduce intra-European trade barriers
5
Q
How much did the Marshall Plan entail to European reconstruction?
A
- $12 billion USD
6
Q
What was the intergovernmentalist vision of European economic integration?
A
- nation states should be sovereign to make policy decisions
- cooperation and coordination b/w Euro states both fiscal and monetary policies
- everyone must agree
7
Q
What did the Schuman Plan do for economic integration?
A
- created the European Coal and Steel community
- France and Germany would place both their coal and steel sectors under control of a supranational authority
– so that a war between France and Germany would be impossible - it implied pricing, imports, exports and production of all national coal and steel were placed in hands of the ECSC’s high authority
8
Q
Who were the 4 other countries that joined the ECSC/Treaty of Paris after France and Germany?
A
- Belgium
- Luxembourg
- Italy
- Netherlands
9
Q
What did the Treaty of Rome do in 1957?
A
- created the EEC (European Economic community)
– idea was to expand the economic integration from coal and steel only to the whole economy - as well as form a customs union and a common market b/w 6 members of the EEC
10
Q
What was the objective of the Treaty of Rome?
A
- a common market in Europe with free trade b/w 6 members–free mobility of workers, and money liberalization
11
Q
What did the common customs union do?
A
- remove tariffs and quotas b/w members of the EEC but have common tariff policy for non-members
12
Q
What did the Bretton Woods System do for economic integration?
A
- ensured fixed exchange rates against the USD($) and a fixed $ price of Gold
- the creation of the IMF, and World Bank
- now the world-wide monetary stability fully depended on the $ and on U.S. monetary policy
13
Q
What was a problem with the idea that the World-wide monetary system post WWII depended on U.S. monetary policy?
A
- the U.S. monetary policy became too expansionary and the price of Gold decreased
- led to a gradual breakdown of Global fixed exchange rates based on Bretton Woods Agreement between 1971 and 1973
14
Q
What was the standard price of USD/oz of Gold that was the exchange rate for early integration?
A
- $35/1 oz of Gold
15
Q
What happened to the exchange rate in the 1960’s?
A
- very high inflationary policy from U.S. central bank for Vietnam War–the USD depreciated
–the reactions were that German, French, and other central banks converted their $ into Gold - this led to high instability with the exchange rates
16
Q
Who brought forward the “solution” for the problems with exchange rate instability?
A
- Pierre Werner-created the Werner Plan (adopted in 1971) to create an Economic and Monetary Union by 1980
17
Q
What happened to the Werner Plan?
A
- it failed to create a monetary union
– fixed exchange rates b/w member states’ currency
18
Q
What did the 2 oil shocks of the ‘70’s do?
A
- the shocks in 1973, and 1979 created stagflation–high inflation and decreasing incomes
–so a series of exchange crises followed
19
Q
What is stagflation?
A
- low growth rates (stagnation) + increasing inflation
20
Q
What was true about Germany’s monetary position early ‘60’s?
A
- the Germans were able to keep inflation rates low–very competitive, but France and Italy were loosing competitiveness
- their currencies were losing value compared to the Deutschmarks
- German central bank-price stability kept the currency strong
–it was appreciating compared to other Euro currencies (Francs, Lira-Italy)
21
Q
What is the idea “European snake”?
A
- connect currencies together
22
Q
What are some details about the European Monetary system?
A
- created in 1979–revived the idea of closer cooperation on monetary policy b/w the central banks of the EEC countries
23
Q
What was the aim of the EMS (European monetary system)?
A
- to establish the Exchange Rate Mechanism (ERM) with European Currency Unit (ECU)
to reduce exchange rate variability and achieve monetary stability within the EEC
24
Q
What was the ECU?
A
- the European currency unit–combined 8 member states currencies in the ERM
- the U.K. didn’t participate
**it’s a fictitious currency
25
What could be said of the second half of the 1980's?
- stability of Euro currency
- Jacque Delors-president of European Commission suggested complete internal market
- single market program
- policy published in 1985, by '87 all member states had ratified
26
What did the Single European Act do?
- reinforce 4 freedoms of the Treaty of Rome
- free trade of goods and services, free mobility of workers
- focused on capital mobility--**financial liberalization**
-- it threw out all restrictions on capital movement by 1988
27
What was one aspect of the monetary integration tricky for some member states?
- if countries adopted a fix rate exchange, they had to switch to the common EU monetary policy
-- no longer a national monetary policy
28
What could be said of the Maastricht treaty in relation to economic integration?
- Jacque Delors proposed creating a monetary union with the fall of the Soviet Union
- a single currency would lead to economic integration, political, and cultural integration
- signed in 1992 transformed the European Economic Community into the European Union
29
When was the Euro created?
1999
30
Who decided to move the EU towards a monetary union?
- French President François Mitterand, and German Chancellor Helmut Kohl
31
What are some other things to note about the Maastricht treaty's influence?
- created the EU citizenship
- strengthened EU cooperation in Defense and Security Policy as well
- Maastricht Law is part of every member's national law
- votes by parliament
- or referendums: votes by population in country
- ratification of the treaty took place in November 1993
32
When did Euros begin circulating?
- 2002 coins, banknotes began replacing national currencies
33
How many member countries of the Eurozone are there?
20 member states
34
What can be said of the 2004 enlargement?
it was the largest enlargement with Cyprus, Czech Republic, Poland, and many others
- an enlargement to the east
- very difficult enlargement because of the troubles with each countries currencies
- because of the troubles with enlargement the Lisbon treaty needed to be adapted in December 2009
35
What is true about exiting the Euro zone?
- to leave the Euro zone you have to leave the EU
36
What exists based on Economic integration of European countries?
- free trade of goods, services, mobility of workers
- common trade policy with the rest of the world
- macroeconomic coordination--single currency and fiscal coordination
- common policy on agriculture
37
How much global trade does the EU account for? (%)
30%
38
When was the Customs Union created, and what did it help with?
- created in 1957
- was a first big step of Political coordination--the Treaty of Rome granted power to the EU
39
What is the EU's common commercial policy?
- Nations cannot conclude trade agreements with other international member states
-- it would undermine other international member states--and undermine the common market
40
What did the Lisbon treaty do to Commercial policy?
- the common commercial policy expanded to include trades in service to regulate capital movements
41
Who are the biggest EU trading partners?
- other non EU countries in Europe
- U.S.
- U.K.
- China
42
What is the EU's tariff policy?
- Common External Tariffs (CET)
- dairy products are the highest %
- the average tax rate is 5%
43
What is true about the EU commissioner and anti-competitive practices by firms?
- the Commissioner regulates the policies of restructuring firms in case of anti competitive practices
44
What is a cartel?
- an organization formed by a group of producers who consult each other in order to reach a formal agreement-usually on illegal prices
-- they raise prices generally 20% higher and decide on a price floor for producers
- cartels don't increase efficiency
- it is a "zero-sum" game
- undercut other firms via creating secret agreements
45
What is an Oligopoly?
- there are many firms on the market
- profit is lower than when it is a monopoly situation
-- monopolies have fewer firms but have higher profit
46
What is the correlation between an Oligopoly and a cartel?
- cartels/firms. get together in an oligopoly situation but set price like if it was a monopoly situation-to increase profit
47
What is consumer surplus?
- what consumers are ready to pay --(minus) the price they have to pay
- a fictitious gain
48
What is producer surplus?
- market price -- (minus) production costs
49
What is the market cost for a cartel?
- the production costs
50
Are cartels harmful to market efficiency?
- Yes
51
What do cartel participants agree on?
- joint fixing of a price floor (most common)
- geographical market division--exclusive territories
- eliminating a potential competitor
- production quota for each cartel participant
52
What is considered a "dominant position"?
- firms with largest market share
53
What are some examples of "abuse of a dominant position"?
- bundling sales
- exclusivity agreements
- rebates
- denigration of competitors
- refuse to supply-give competitors access to an essential input (margin squeeze)
- excessive prices
- price discrimination
54
What is an exclusivity agreement?
- contractual agreement b/w producers and consumers to buy a certain amount of sales/goods/services from 1 particular producer
55
What is a rebate?
- price reduction for consumer to only be able to buy from that producer
- "price reduction"
- normal
- beneficial to consumers
56
What is denigration of competitors?
- discriminate products of new competitors
- pharmaceutical companies
- original drug producers vs new producers
57
What is the definition of price discrimination?
- apply dissimilar conditions to equivalent transactions with other trading parties
-- placing them at competitive disadvantages
58
What is true of mergers and acquisitions?
- a firm with a technology gap can benefit from the advance of its new partners
- M&A likely to generate some dynamic efficiency most common argument is the existence of economies of scale
- producing more can be done by merging with another company or buying it outright
59
What is economies of scale?
- reduce unit cost of production by increasing production
60
What are the costs of mergers and acquisitions?
- main cost is likely to increase market concentration and reduce competition in the market
- the short term=problematic for consumers, because they bear a higher price
61
What is true about State aid within the EU?
- subsidies provided by the national gov'ts to companies is forbidden in EU law--and can be seen as distorting competition
- gov't's seeking to prevent job losses, bankruptcies--seen as industrial restructuring=not good for workers/consumers
- tax payers pay the costs of subsidies, and state aid
***Subsidies create Market distortion***
62
Who enforces the EU Competition rules (Article 101-109 of the Treaty on the Functioning of the EU (TFEU)
--the New Treaty of Rome?
- the European Commission with national competitive authorities
63
What can the commission do when enforcing the EU competition rules?
- power to prohibit anti-competitive practices
- use injunctions to seize/stop abusing practices
--can impose fines
64
What is the recourse if firms/states don't follow the European Commission?
- they can be taking to the European Court of Justice
65
What do the horizontal agreements in Article 101 of the Treaty on the functioning of the EU say?
- agreements b/w firms that produce the exact same good
66
What can be said about the vertical agreements in the Article 101 of the Treaty of the functioning of the EU?
- agreements b/w firms of different stages of production process
67
What is the "European Union Merger Regulation"?
- came into force in 1990 aims to control mergers and acquisitions
- defines anti-competitive behavior-concentration-significantly impede effective competition in common market or in a substantial part of it
68
What is predatory pricing?
- a company sets a price too low (below the unit cost of production)
69
What can be said about the COVID crisis and state aid?
- states were allowed to provide aid to help businesses
70
What are some facts about the Common Agriculture Policy (CAP)?
- could be said it was the "first European Policy" (common policy)
- created in 1962
- first policy in terms of budget
- accounts for 40% of budget
- has a federating rule
- allowed Europe to become the World's agriculture power
- increased farmers incomes post WWII
71
What can be said about the CAP, in terms of policy, relations intra-EU?
- the enlargement in 2004 has exacerbated conflicts between EU member states
- the costs for the program has only grown since its inception
- the CAP is intended to support farmers/producers and not consumers
72
How has the CAP become controversial?
- agricultures' share of the EU member states' GDP has decreased, and its' share of employment
- food security, terms of supply, production of healthy food for consumers
- quantities vary a lot
73
What can be said about Gregory Kings Law?
- demand for agriculture goods-relatively stable; insufficient or excess supply produces price variation
- supply is very volatile, and uncertain
74
How can the continuous deterioration of farm incomes be explained by?
- it's the 2nd specificity
- fixity of the production factors obliging farmers to produce a lot
- low income elasticity of demand translates to a very small increase in demand for ag products in long run
- excess supply of ag products leads to a fall in price of agricultural products over time--leads to decline in farm incomes
75
What are the stated objectives of the CAP?
- stabilizing agricultural markets
- ensuring a fair standard of living for the farmers
- ensuring security of supply-guarantees food independence for food producers
- ensuring reasonable prices for consumers
- increasing agricultural productivity--introducing technical progress and specialization-while preserving family farms
76
What are extra-economic reasons for the CAP?
- political reasons:
- supporting agriculture well regarded by the population
- farm income support has electoral motives
- strategic reasons:
- search for food independence
- commercial argument
- promote exports
77
What did the Stresa Conference of 1962 do?
- unicity of markets--one large Europe Ag market
- community preference (protectionist argument) (preference of European goods, than foreign goods)
- financial solidarity
- common community budget
78
What is the CAP's main policy instrument (or the EU's economic instrument)?
- the price floor
- set a price level for farmers which is above the world market price
- it is a real guaranteed price for farmers which supports EU producers and markets from world markets
- the price floor is 50-100% above world market prices
-- it can be said the farmers are guaranteed to sell all their production at this price floor
79
How can the EU intervene in the CAP--or direct market intervention?
- they can intervene in case of production shortages
- over production
-- in this case EU authorities buy the extra product at the price floor then resells at the World market price to foreign countries
80
What can be said about European countries (and the European community) shortly after WWII?
- they were an importing "country"
81
What can be said about the EU from the '70's and '80's onwards?
- they became an exporting country
- may not necessarily be a good thing
-- created a budget problem-so not the best thing
82
How did EU countries become an exporting bloc in the 1980's?
- as a result of guaranteed prices
- due to an increase in domestic supply of agricultural products resulting from high guaranteed prices
- no more uncertainty about prices and incomes
- technology increases
83
What is the substitution phenomenon?
- substitute domestic products with high prices with other products
84
What can be said about the CAP reform in the 1980's?
- several objectives set out in the Treaty of Rome had been achieved
- food self sufficiency
- the European supply rate increased
- strong development of intra trade in 1960's
- from 1973 to 1990 prices were still ~20% higher than the U.S. so price stabilization was sought
- technology improvements led to productivity increases while increasing unemployment of farms/farmers
85
Was self sufficiency the main problem of the CAP? If so why?
- yes, it can be said when self sufficiency was achieved there became a problem of overproduction
- overproduction came from too high of price floors and the community began exporting the large amounts of surplus
86
How did the CAP distort competition?
- penalizing for consumers: loss of surplus de to the transfer of resources from consumers to producers
- there was criticism at the International level--EU agriculture became excluded from the trade negotiations
87
At the international level how was the CAP, and EU criticized?
- during the renegotiations of the GATT Uruguay round (1986-1994) the U.S. called for elimination of support measures for European agriculture by 2000 and the opening of European markets to foreign producers
88
What was the "Cains group"?
- U.S., Australia, New Zealand, Canada, Argentina, Brazil, Chile, Indonesia, Thailand
89
What is true about the CAP's guaranteed financial assistance?
- more beneficial to large firms
- only 20% of the firms receive 80% of the funds
90
True or False, the CAP increases the risk of environmental abuses?
true
91
What did the Mac Sherry reform do (1992)?
- EU trade partners discussed reform during GATT Uruguay round
- introduced early retirement
- European prices moved closer to world prices
- rather favorable trend in farm incomes
**the Mac Sherry reform only effective til 1999
92
What did the Agenda 2000 reform do?
- deepened the reforms/measures from 1992
- aimed to prep for enlargement of the EU to the Central Eastern Euro Countries (increased the budget of the CAP)
- new pillar of CAP created: rural development
- subsidiarity--decentralizing the CAP
-- countries to contribute more financially to their farmers and rely on less public intervention
93
What are the 2 pillars of the CAP?
- first pillar: direct payment to famers
- conditional on adaption of sustainable farming practices, and wildlife protection
- second pillar: rural development
- encourage innovation, boost competitiveness, encourage development of low-carbon economy and Econ development in rural areas
94
What are the main challenges to the CAP?
- farmers only get about half of the CAPS support, rest goes to non-farming landowners and to agro-chemical firms
- relative decline in farm incomes
- society's expectation of the non market functions of agriculture--more pressing on environmental, and health issues
95
What can be said now that food security exists?
- a shift from quantity to quality
** quality>quantity
96
What's the definition of an economic and monetary union?
- an agreement between 2 or 3 more states based on 3 elements:
- irrevocable fixation of the exchange rate
- full capital mobility
- a common monetary policy
97
What is the "impossible trinity" that Robert Mendel talked about?
- sovereign national monetary policy
- free capital mobility
- fixed exchange rates
98
Explain what Mendel meant by the impossible trinity?
- with national sovereignty, monetary policies, different interest rates existed--different demands of currencies
99
What could be said about the Bretton Woods system (facts, ideas)?
- Bretton Woods conference 1944 led to establishment of international monetary system with the dollar as the "anchor" with its value connected to gold
- all other international currencies defined in "dollars"
- 1960's U.S. inflation led to the dollar devaluing
- 1971 Nixon ended the gold reserve system
- 1973 the fixed exchange rate system with the dollar as an anchor was abandoned
100
What is the European Snake?
- in response to the Bretton woods collapse and dollar devaluing, Europe sought to limit fluctuations in intraeuropean exchange rates
- European countries decided to limit the fluctuation range of bilateral exchange rates within a "common fluctuation band" of +/- 2.25%
101
What happened to the European Snake?
- due to the oil shock in 1973 European national central banks reacted differently
- it failed and was abandoned in 1978
102
Who led the creation of the European Monetary system?
- German chancellor Helmut Schmidt, and French president Valery Giscard
103
What can be said of the European monetary system after its inception?
- at its center were jointly managed fixed adjustable exchange rates
- all ERM currencies tied to one another-band of fluctuation of +/- 2.25% defined against newly defined common policy - The European Currency Unit (ECU)
104
Why was the ECU strong?
- appreciated against other currencies because it was fixed to the Deutschmark
105
What could be said about the years from 1979-1985 economically?
- inflation rates varied differently
- Germany wasn't competitive during this time
- uncompetitiveness existed due to inflationary pressures between different national monetary policies
- some countries had to implement restrictive monetary policies to bring down high prices-and inflation rates to around 2%
106
What were the 3 sparks which led to the EMS crisis of 1992-93?
- German reunification had economic consequences: this created inflationary pressures in other countries
- inflation was above 5%--the Bundesbank increased restrictive policy
- Denmark referendum to the Maastricht treaty
- with the Maastricht treaty came the monetary union
- due to internal problems Denmark voted against the monetary union
- but Europe ignored Denmarks decision
- there were speculative attacks against other currencies
-- some too strong for operations to continue in medium/long term
--- some currencies needed to be developed up like Ireland, Portugal
107
When was a floating exchange rate system adopted in Europe?
- around 1993
- to uphold the ERM principles monetary authorities adopted new ultra large bands of fluctuation +/- 15%
- to end the speculative attacks
108
What is the entry criteria into the Maastricht treaty?
- inflation rates shouldn't exceed an average of 3 lowest inflation rates achieved by EU member states by more than 1.5%
- long term nominal interest rte shouldn't exceed by more than 2% the average rates observed in 3 lowest inflation rate countries
- the country must have taken part in the ERM for at least 2 years without having to devalue its currencies
- budget deficits shouldn't exceed 3% of GDP
- public debt shouldn't exceed 60% of GDP
109
What can be said about the criteria for the Maastricht treaty?
- the first 3 criteria try to deal with inflation
- the last 2 criteria try to decrease incentives for high inflation
- and the last criteria about GDP public debt not exceeding 60% of GDP was changed to say "moving towards 60% of GDP
110
What are principles of the European monetary union?
- Germany feared the new currency wouldn't be strong
- a priority was given to price stability
- Central bank independence
- fiscal discipline
111
What is the European Central Bank's definition of price stability?
- year on year increase in the harmonized index of Consumer Price (HICP) for the eurozone of close to 2%
112
What is true about restrictive monetary policy?
- raises interest rates to decrease demand
113
What is expansionary monetary policy?
- lower interest rates, print more money
114
Is the European Central Bank independent?
- Yes
- however 20 gov'ts can have pressure on it
115
What did the ECB do during the sovereign debt crisis?
- they caved in to pressure from the gov't's specifically Greece and printed money--because governments can't borrow money because rates are too high
-- so inflation results in the short term, demand increases so does inflationary pressures
116
What are the functions of the Eurosystem?
- implementation of the monetary policy
- management of the official foreign exchange reserves
- supervision of the payment system
- prudential supervision of credit institutions and the financial system
117
What's the difference between the European system, and the Eurosystem?
- the European system: the ECB and the 27 national banks
- the eurosystem: ECB and 20 national central banks of the eurozone
118
What are the organizations of the ECB?
- Governing counci (RUNS THE EUROSYSTEM) l: comprised of executive board, and Governors of NCB's of EMU countries
- Executive board: comprised of the President and Vice President, and four experts
- General Council: comprised of Governors of NCB (national central banks of non-EMU countries), the President and VP of the ECB, and Governors of NCB's of EMU countries
119
Describe the General council of the ECB
- 27 governors of national central banks of the European Union members
- plays a "linking role" b/w those who haven't joined the Eurozone and the ECB
120
What do governors do?
- make decisions as it pertains to the eurozone situation--not their own national interests
121
What is the Eurosystems main characteristic? How does it obtain this? And what is the eurosystems main policy objective?
main characteristic: independence
- independence based on:
- the status of their officials
- policy objectives and investments
- financial independence
- main policy objective: price stability-inflation rate in euro area close to 2%
122
What is the Eurosystems main monetary policy instrument?
- open market operations are the Eurosystems main instrument
- usually weekly auctions--the "main refinancing operations" the means by which the Eurosystem provides liquidity to the commercial banks on interbank market
123
What can be said about the Eurosystems main refinancing interest rate from 1999-2024?
- the first 2 years of the ECB:
- tightening--contractionary policy, at first high rates
- 2006: decided to normalize interest rates ~2%
- increased interest rates applying expansionary policy
124
If the interest rate is zero what does the ECB do?
- implement nonconventional policies
- normalize interest rates--increase interest rates to protect against global crisis
--- reaction to the 2007/08 global crisis--the eurosystem decided to decrease interest rates
-- 2022 Russia's invasion of Ukraine
- led to inflationary pressures
- at 0% interest rate--have to pursue quantitative easing
125
What can be said about national fiscal policies and their relationship to the European Monetary union?
- fiscal policies--decentralized-are important for stabilizing shocks--smoothing national output and employment fluctuations
- a gov't can't decide to change its fiscal policy when it deems necessary
- monetary policy are easier to implement by NCB's and are more efficient in neutralizing shocks
126
In what ways does the fiscal policy of the ECB work?
- automatic stabilizers: doesn't require decisions by the gov't or any approval by parliament
-- negative shocks: individual incomes decline & fiscal revenues
- discretionary fiscal policy on contrary requires explicit action by government to change taxes or spending
***fiscal policies are automatically expansionary during crises
127
What are the "fiscal spill overs in a monetary union"?
- intra EMU trade:
- reducing taxes to pursue expansionary policy leads to increased demand-higher exports to country affected
- threat of a gov't defaulting on public debt
- undermines credibility of a monetary union-in fight against inflation and viability
128
What can be said about the EU's next Generation EU plan?
- July 2020 800 billion Euros
- recovery for COVID crisis
- member states share similar debt--fiscal solidarity
