Week 1: History of European Integration

Question 1

What were the consequences of WWII that motivated European integration?

Answer 1

Economic devastation, millions of deaths, and recurring conflicts between France and Germany created the need for a unified Europe to prevent further wars.

Political reasons:
*Achieve lasting peace in Europe after the wars
*Economic dependency reduces possibility of wars

Economic welfare–> clear objective

Question 2

What was the Schuman Plan, and why was it important?

Answer 2

The Schuman Plan led to the creation of the European Coal and Steel Community (ECSC), integrating coal and steel industries of six nations to ensure economic interdependence and reduce the risk of war.

Question 3

Prime question in 1945: How can we prevent another war?

Answer 3

–>blame Germany
‘Neuter’ Germany to avoid any future aggression (deindustrialize and demilitarize Germany)
–>blame capitalism
Adopt communism: communist parties were quite strong in post-war elections.
–>blame nationalism
Pursue economic integration

Question 4

First steps in European integration: Marshall Plan

Answer 4

–>New view: trade liberalization could be pro-growth and pro-industrialization.

*It provided $12 billion (US assistance) in aid, leading to the formation of the Organization for European Economic Cooperation (OEEC), trade liberalization, and the eventual push for deeper integration.
*The European Payment Union (EPU) facilitated payments and fostered trade liberalization

Question 5

What were the Treaties of Rome (1957)? Describe importance.

Answer 5

1. EEC Treaty: Created a customs union and promoted free labor mobility and trade.
2. Euratom Treaty: Focused on peaceful nuclear energy cooperation​

Riding on the success of the ECSC, the ‘Six’ committed to form a customs union, promise free labour mobility, capital market integration, free trade in services, and a range of common policies. –>Discrimination of non-European countries (UK).

Question 6

What are the two key stands describing European integration?

Answer 6

1. Federalism: Advocates for supranational institutions with shared sovereignty.
2. Intergovernmentalism: Focuses on national sovereignty with international cooperation

Question 7

What made countries switch from EFTA to EEC?

Answer 7

GDP of EEC was much larger than EFTA (larger market size) and faster growing incomes.
Because of POLITICAL PRESSURES (more attractive market for exporters) more countries joined EEC.

Question 8

How were disadvantages treated for EFTA countries against EEC?

Answer 8

“trade diversion effect”
*EFTA industries pushed their governments to address this situation;
*set of bilateral free trade agreements (FTAs) between each remaining EFTA nation and the
EEC.

So–> Trade agreements

Question 9

What delayed trade integration?

Answer 9

Euro-pessimism
*political shocks (enlargement)
*economic shocks (failed monetary union, oil prices & stagflation, technical barriers to trade)

bright spots->
*democracy increase
*EU parliament estblishment
*Monetary system

Question 10

European monetary system (EMS)

Answer 10

ERM (exchange rate mechanism) is at the heart of EMS.
Linking national currencies of EU to euro (those outside of Eurozone).

Question 11

ERM’s (exchange rate mechanism’s) main elements

Answer 11

• the European Currency Unit (ECU, an “artificial basket currency” for inner EMS reference only);
• fixed bilateral exchange rates; fluctuation of ±2.5 percent;
• the mutual financial support of the member countries (in case of the necessity of foreign exchange interventions)
• the possibility of realignments of the bilateral exchange rate (unanimous agreement between member states).

Question 12

Explain “Single Market Program”(SMP)

Answer 12

Area without internal frontiers in which the free movement of goods, persons, services and capital is ensured–> 4 freedoms
Institutional changes: majority voting instead of unanimous

“Investment diversion” effect–>as increased direct investment in certain countries and diminished direct investment in others within the region

Question 13

Elements of SMP

Answer 13

1. Goods trade liberalization
   * streamlining or elimination of border formalities;
   * harmonization of VAT rates within wide bands;
   * liberalization of government procurement;
   * harmonization and mutual recognition of technical standards in production, packaging and
   marketing.
2. Factor trade liberalization
   * removal of all capital controls;
   * liberalization of cross-border market-entry policies
3. Increasing cross-border supply chains as a result.

Question 14

What is the Maastricht Treaty?

Answer 14

It established the EU, introduced EU citizenship, strengthened cooperation in non-economic areas (justice and defence), and set the stage for monetary union. Strengthened power of European parliament.
–>To achieve monetary union and single currency

Question 15

Copenhagen criteria

Answer 15

To integrate CEEC (central European and easter European) countries into EU:
1. Political stability
political stability of institutions that guarantee democracy, the rule of law, human rights and respect for and protection of minorities.
2. Functioning market economy
Functioning market economy capable of dealing with the competitive pressure and market forces within the Union.
3. Accepting EU law
Acceptance of the Community ‘acquis’ (EU law in its entirety) and the ability to take on the obligations of membership.

Question 16

What happened after CEEC wanted to join EU?

Answer 16

Problem of enlargement–> EU needs to reform institutions, voting system in parliament etc.
Every change helped some EU members but hurt others.
Reason for all the failed treaties.

Question 17

Lisbon Treaty

Answer 17

Much of the Constitutional Treaty is taken up in the Lisbon Treaty but ‘rephrased’:
* all the grandiloquent language and gestures to supra-nationalism were dropped;
* all references to symbols of European statehood were eliminated;
* the word ‘constitution’ was banished.

Question 18

EU Legal foundation

Answer 18

*European Union law is a system of rules that are operating and binding within its member states.
*“legal personality”: it
can sign agreements with nations and international organizations.
*Today’s EU’s legal foundations are (i) the Treaty on European Union (TEU) and (ii) the Treaty on the Functioning of the European Union, (TFEU) currently unanimously agreed on by the governments of 27 member states.
TEU–>forms the basis of EU law
TFEU–>functioning economic community

Question 19

European Sovereign Debt Crisis

Answer 19

After GFC started in the US.
“doom loop”:
–>Commercial Banks were ‘encouraged’ to buy public bonds as a means of upholding their value.
–>share of public national debt in the portfolios of banks continuously increased
So:
Banks depended on forgiving government supervision, but also on their countries’ public debt reputation;
Governments needed banks to support their bonds and were highly motivated to help them.

–>Interest rates on several Eurozone government debts started to diverge b/c of risk premia.

The divergence between public bond rates reflects two risks:
1. the fear that some governments could default, introducing a risk premium;
2. the fear that some countries could leave the Eurozone and restore their own
currencies: the redenomination risk.

Question 20

Consequences (solutions) to help European Sovereign Debt crisis

Answer 20

*European Sovereign Debt Crisis led to the creation of the European Financial Stability Fund (EFSF), transformed into the European Stability Mechanism (ESM).
*Emergency Lending to European States (but lending is conditional to policy actions, such as structural reforms in the economy)
*Creation of the European Banking Union to carry out regulation, supervision and resolution of
Banks on a European level in a uniform manner.

Question 21

Origin for the idea of European Banking union.

Answer 21

–still in process
A single financial market would seem to require a single regulator and a single supervisor. Instead:
* regulation largely designed at EU level (common regulation);
* but de-centralized (national) supervision.

Crisis showed that:
* National supervisors did not share information with one another;
* ECB, tasked with the function of lender of last resort, was not any better informed of the true
situation of stressed banks.

Question 22

Finacial market regulators, supervisors in Eurozone

Answer 22

European System of Financial Supervision (ESFS) has been created, which includes five new institutions:
1. European Banking Authority (EBA), which is charged with collecting detailed information on all EU banks;
2. European Securities Market Authority (ESMA), which brings together all EU bond and stock
market regulators and supervisors;
3. European Systemic Risk Board (ESRB), which looks at the overall picture and can issue binding recommendations;
4. European Insurance and Occupational Pensions Authority (EIOPA), focusing on insurance
companies and pension funds;
5. Joint Committee of the European Supervisory Authorities (ESA), which brings national supervisors together to improve transparency.

Question 23

Brexit: withdrawal agreement’s following elements

Answer 23

• Citizens’ Rights –
  safeguards the acquired rights of EU and UK citizens and their family members who moved to the UK and EU Member States before Brexit.
• Financial provisions –
  commits the UK to meeting all financial commitments it made as an EU member and defines the obligations.
• Separation issues –
  ensures the orderly winding-down of arrangements made when the UK was a member, including continued protection for intellectual property; orderly conclusion of cases involving police and judicial cooperation; establishing a dispute settlement mechanism.
• The Northern Ireland Protocol- Brexit raised the possibility of restoring a land border between
  Northern Ireland and the Republic of Ireland – thus disrupting the unity of the island-wide economy. The Northern Ireland Protocol ensures that this will not happen.

Question 24

EU—UK Trade and Cooperation Agreement (post Brexit)

Answer 24

*Free Trade Agreement
*Tariff- and quota-free trade in most industrial goods and some (but limited) liberalization of services
and investment flows.
*Rules-of-Origin.
*Regulatory barriers.
*No passporting, i.e., no guaranteed access to the EU market for UK-based financial firms.
*No free movement of labour
*Provisions against regulatory divergence in competition policy, state aids, behaviour of state-owned
enterprises, and taxation as well as labour, social and environment standards.