EU economic

challenges/opportunities

Economic Integration

• Definition (negative, positive)

• Why is economic integration important?

• Stages of integration

– Free trade agreement

– Custom union

– Common market

– Economic and monetary union

– Political union

Effects of integration are said to include:

• Static effects: – trade creation

– trade diversion

• Dynamic effects: – specialisation,

– increased competition,

– economies of scale,

– technological progress,

– increased bargaining power at an international level, and

– more rapid growth.

The First Pillar The European Community

The Single Market

The Common Agricultural Policy

Economic and Monetary Union

The Structural Funds

The Common Commercial Policy

Competition policy etc

The European Union – before the Lisbon Treaty

The Third

Pillar Justice and Home

Affairs, which

became Police and

Judicial Co-

operation in

Criminal Matters

The Second

Pillar The Common Foreign

and Security Policy

Exclusive competence

The Union has exclusive

competence to make directives and

conclude international agreements

when provided for in a Union

legislative act.

Shared competence

Member States cannot exercise

competence in areas where the

Union has done so.

Supporting competence

The Union can carry out actions to

support, coordinate or supplement

Member States' actions.

the customs union

the establishing of the competition

rules necessary for the functioning

of the internal market

monetary policy for the Member

States whose currency is the euro

the conservation of marine

biological resources under the

common fisheries policy

common commercial policy

the internal market

social policy, for the aspects defined

in this Treaty

economic, social and territorial

cohesion

agriculture and fisheries, excluding

the conservation of marine

biological resources

environment

consumer protection

transport

trans-European networks

energy

the area of freedom, security and

justice

common safety concerns in public

health matters, for the aspects

defined in this Treaty

the protection and improvement of

human health

industry

culture

tourism

education, youth, sport and

vocational training

civil protection (disaster prevention)

administrative cooperation

Eight enlargements

1952 1973 1981 1986

1990 1995 2004 2007

The big enlargement:

healing the division of Europe

Fall of Berlin Wall – end of Communism EU economic help begins: Phare programme

Criteria set for a country to join the EU: • democracy and rule of law • functioning market economy • ability to implement EU laws

Formal negotiations on enlargement begin

Copenhagen summit agrees enlargement

10 new EU members: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia

41989

41992

41998

42002 42004

42007 Bulgaria and Romania join the EU

Candidates Croatia, Former Yugoslav Republic of Macedonia, Turkey, Iceland

© R

eud

ers

The acquis communautaire

The acquis communautaire is literally ‘what the Community has achieved’. It consists of the body (sometimes called ‘patrimony’) of EU legislation, practices, principles, and objectives accepted by the member states.

• The Treaties (the Treaties of Rome (1958), the Single European Act (1987), the Maastricht Treaty (1993), the Amsterdam Treaty (1999) and the Treaty of Nice (2003);

• Legislation enacted at the EU level and judgements of the European

Court of Justice;

• Foreign and Security Policy;

• Police and Justice Co-operation on Criminal Matters; and

• Treaties of the EU with third countries.

The treaties – basis for democratic

cooperation built on law

1952 The European Steel and Coal Community

1958 The treaties of Rome:

The European Economic Community The European Atomic Energy Community

(EURATOM)

1987 The European Single Act: the

Single Market

1993 Treaty of European Union

– Maastricht

1999 Treaty of Amsterdam

2003 Treaty of Nice

2009 Treaty of Lisbon

Chapters of the acquis

Criticisms?

The single market: freedom of choice

Since 1993:

4 2.5 million new jobs

4 prices of phone calls

and airfares halved Four freedoms of movement: 4 goods

4 services

4 people

4 capital

© G

etty

Imag

es

European Commission: the main non-tariff

barriers to be eliminated were:

– frontier controls;

– differences in technical specifications and standards;

– restrictions on competition for public purchases;

– restrictions on providing certain services (in particular financial and transport services) in other EC countries; and

– differences in national tax systems.

Free to move

“Schengen”:

No police or customs checks at borders

between most EU countries

Controls strengthened at EU external

borders

More cooperation between police from

different EU countries

You can buy and bring back any goods for

personal use when you travel between EU

countries

© C

orb

is

Labor mobility

Going abroad to learn

Over two million young people have studied or

pursued personal development in other European

countries with support from EU-programmes:

Comenius: school education

Erasmus: higher education

Leonardo da Vinci: vocational training

Grundtvig: adult education

Youth in Action: voluntary work and

non-formal education

© G

ett

y Im

ages

The EU programs for lifelong learning:

estimated figures for the period 2007–13.

Area concerned Name of EU

programme

Aims

School education Comenius 5 % of schoolchildren in the European

Union will participate in joint

educational activities.

Higher education Erasmus Three million students will be able to

study at universities abroad.

Vocational training Leonardo da

Vinci

Every year 80 000 people will be able

to do traineeships in companies and

training centres in another European

country.

Adult education Grundtvig 7 000 people every year will be able to

carry out educational activities abroad.

European integration

studies

Jean Monnet Support for academic research and

teaching in European integration.

Bologna Process

• European Higher Education Area:

– Named after Bologna Declaration signed in Bologna in

June 1999 by ministers of higher education from 29

European countries;

– Today: 46 countries, part of the European Cultural

Convention;

– It involves European Commission, Council of Europe

and UNESCO-CEPES, as well as representatives of

higher education institutions, students, staff, employers

and quality assurance agencies.

Bologna Process

• Reforms:

– Easily readable and comparable degrees organised in a

three-cycle structure (e.g. bachelor-master-doctorate);

– Quality assurance in accordance with the Standards

and Guidelines for Quality Assurance in the European

Higher Education Area (ESG);

– Fair recognition of foreign degrees and other higher

education qualifications in accordance with the

Council of Europe/UNESCO Recognition Convention.

How rich is the EU compared to the rest

of the world?

EU China Japan Russia United States EU China Japan Russia United States

12 508

1 326

3 329

468

9819

25 100

4 400

27 800

12 200

38 700

Size of economy: 2008 gross domestic product in billion of euros

Wealth per person: 2008 gross domestic product per person

GDP per inhabitant: the spread of

wealth

Lith

uan

ia

2008 GDP per inhabitant

Index where the average of the 27 EU-countries is 100

271

137

135 123 118

114

122 117

115 116 107

101 103

100 95 94

91 80 76 76

68 63 72 61

56 58

46 40

Luxe

mb

ou

rg

Ire

lan

d

Ne

the

rlan

ds

Au

stri

a

De

nm

ark

Be

lgiu

m

Swe

de

n

Fin

lan

d

Ge

rman

y

Fran

ce

Ital

y

Spai

n

EU-2

7

Cyp

rus

Gre

ece

Slo

ven

ia

Mal

ta

Po

rtu

gal

Esto

nia

Hu

nga

ry

Slo

vaki

a

Latv

ia

Po

lan

d

Ro

man

ia

Bu

lgar

ia

Un

ite

d K

ingd

om

Cze

ch R

ep

ub

lic

EU budget Budget resources

• The traditional own resources, which are tariffs on imports from third countries and agricultural levies on products such as sugar;*

• A percentage of VAT, fixed at 0.5 per cent from 2004

• The ‘fourth resource’. – The ‘fourth resource’ is based on the difference between VAT

levies and the Gross National Income (GNI) of a member state and can be levied up to a maximum percentage of the GNI of the Community (1.27 per cent in 2006) if the budget financing from the other three resources proves inadequate. The concept of GNI replaced the concept of GNP in 1995.

*minus a reimbursement to member states to cover the administrative costs of applying the levies.

Figure 11.5 Financing of the EU budget (2007)

traditional own resources 14,9%

VAT 15,4%

GNI-based pay ments 68,6%

Miscellaneous* 1%

Source: Nello (2009)

2010 EU budget: €141.5 billion = 1.20% of gross national income

Citizens, freedom, security and justice

2%

Other, administration 6%

Sustainable growth: jobs, competitiveness, regional development

45%

The EU as a global player: including development aid

6%

Natural resources: agriculture,

environment 41%

How does the EU spend its

money?

Factors influencing CAP reform

Four developments influenced (and continue to influence) the pace and shape of CAP reform:

• the weight of agricultural spending in the Community budget

• enlargement

• GATT/WTO commitments

• the concern of the public for safer food and more environmentally favourable agriculture

Solidarity in practice: the EU cohesion

policy

2007-2013: 347 billion euro invested for infrastructure, business, environment and training of workers for less well-off regions or citizens

Regional fund Social fund Cohesion fund

Convergence objective: regions with GDP per capita under 75% of the EU average. 81.5% of the funds are spent on this objective.

Regional competitiveness and employment objective.

© Baldwin&Wyplosz The Economics of European

Integration 28

Europe’s Economic Geography: Facts • Europe highly centralised

in terms of economic

activity.

– western Germany, Benelux

nations, N.E. France and

S.E. England have 1/7th

land, but 1/3rd of pop. & ½

GDP

• Periphery has lower

standard of living

– More unemployment

• Especially among youth

– More poverty

Periphery

Centrality of EU25

Regions

Intermediate

Core

Periphery

Centrality of EU25

Regions

Intermediate

Core

© Baldwin&Wyplosz The Economics of European

Integration 29

Geographic income inequality

• Very uneven income

distribution,

geographically

• 2002 income/pop by

nation

• Luxembourg is 207%

of EU average

• Bulgaria only 29% of

EU average

0 50 100 150 200 250

BulgariaRomaniaLithuania

LatviaEstoniaPoland

SlovakiaHungry

CzechiaGreece

SloveniaPortugalCyprus

SpainFrance

ItalyFinland

UKSwedenGermanBelgiumAustria

NLIreland

DKLux.

EU26=100

© Baldwin&Wyplosz The Economics of European

Integration 30

Geographic income inequality • Income distribution

even more uneven at

regional level.

• Within nation

economic activity is

very unevenly

distributed

• Income distribution

has become:

– More even in EU15

– Less even within

EU15 nations (by

region)

Guyane (F)

Guadeloupe

(F)

Martinique

(F)

RÈunion

(F)

Canarias (E)

AÁores (P)

Madeira

(P)

Kypros

Index, EUR-26 = 100

< 30

30 - 50

50 - 75

75 - 100

100 - 125

>= 125

no data

Source: Eurostat

0 km100 500

REGIO.A1- GIS/HP/(statmap) - m98001_uk_C_A4P - 09 Jan 01

SIG16SIG16

© MEGRIN for the administrative boundaries

GDP per head by region (PPS), 1998

< 30

30 - 50

50 - 75

75 - 100

100 - 125

>= 125

Index, EU-25 = 100

< 30

30 - 50

50 - 75

75 - 100

100 - 125

>= 125

Index, EU-25 = 100

< 30

30 - 50

50 - 75

75 - 100

100 - 125

>= 125

Index, EU-25 = 100

The euro – a single currency for

Europeans

EU countries using the euro

EU countries not using the euro

Can be used everywhere in the euro area

Coins: one side with national symbols,

one side common

Notes: no national side

Maastricht Treaty model of EMU

• Monetary arrangement = full centralization of

monetary policies represented by European Central

Bank (established 1998) and the System of

European Central Banks

• Fiscal arrangement = fiscal coordination,

regulated by Stability and Growth Pact (adopted

1997 in Amsterdam, reformed in 2005)

Benefits of EMU

• Better condition for single market, integration of markets for goods, services and factors

• More transparent prices, prices in different countries directly comparable

• In situation of stable prices, interest rates and exchange rates, decrease of volatility in trade and investments, no exchange rate risk and uncertainty

• Lower transaction costs for citizens and businesses

• Euro as a world currency, saving on national reserves of foreign currencies

Costs of EMU

• No independent monetary policy; – Ex: recession in Spain: high unemployment, falling output.

– If not part of EMU, what Spain could do?

• Size of the cost? – Symmetry of shocks:

• Shocks tend to be more symmetric if national economies are more similar;

– Integrated factor markets.

– Fiscal federalism.

• Low costs and high benefits if economies are highly integrated: – High level of trade in goods, flow of labour, integrated

fiscal administration.

The EU – a major trading power

Share of world trade in goods (2007)

Share of world trade in services (2007)

Others 53.2%

EU 17%

United States 14.5%

Japan 5.8%

China 9.5%

Others 40.6%

EU 28.5%

United States 18.2%

Japan 6.8%

China 5.9%

The EU is the biggest provider of development aid

in the world

Official development assistance per citizen, 2007

93€

44€

53€

EU Japan United States

The EU provides 60% of all development aid