EUROPEAN UNION

MEANING

A treaty-based organization that was set up to manage economic and political cooperation among 15 European member countries. The European Union began in the 1950s with six countries: Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. Their theory was that by creating communities that shared sovereignty in matters of coal and steel production, trade, and nuclear energy, another war in Europe would be unthinkable. Since then, common EU policies have evolved in a number of other sectors. The members of the EU are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, and the United Kingdom. During 2003, ten new countries were undergoing the process of becoming a member of the EU. Those countries are the Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.

The European Council makes the decisions to define and implement common foreign and security policy and coordinates the activities of member states, including police and judicial cooperation in criminal matters. The council is made up of the heads of the member-country governments and meets at least twice a year. The president of the council organizes meetings and works out compromises to resolve difficulties. The presidency rotates every six months.

INTRODUCTION

Background to the EU

1957 Treaty Of Rome established the EEC between 6 original members

1960 EFTA between UK, Aus, Den, Nor, Port, Swis and Swe

1973 UK, Ireland and Denmark join EC

1999 Creating of Euro single currency.

Community Institutions

1. European Commission, this is the civil service of the EU

2. Council of Ministers from different countries make decisions on policy

3. European Council. Meets twice a year to make decisions which fundamentally alter EU

policy

4. European Parliament directly elected body of 626 members

5. The Court OF Justice. Is based in Luxembourg

Single European Act 1986

This was an attempt to “relaunch” the EU by attempting to create a Single Market.

It was necessary to drop unanimous decision making with an increase in Qualified

Majority Voting.

The SEA also committed the EU Economic and Monetary Union (EMU)

Treaty of Maastricht 1992

1. Economic, social and Political extensions to the EU

2. Common foreign and security policy

3. Intergovernmental cooperation on justice and home affairs

Economic Integration

Preference Areas. The Lome conference of 1975 gave preferential treatment to certain

developing countries

Customs Union. This is s free trade area with a common external tariff

Single Market. – European Union

This occurs when the member countries act as a single economic area with the free

movement of labour and capital

This involves:

1. No Tariffs on trade between member states

2. Elimination of border controls

3. Free movement of People

4. Mutual recognition of qualifications

5. Harmonization of taxes and other industrial and economic laws

Monetary Union is a single market plus

1. A common currency

2. N0 internal exchange Rates

3. Common monetary policy

Obstacles To Completing the Single Market in the EU

1. Customs Formalities

2. Different Tax Rates, especially on Alcohol and tobacco

3. State Subsidies to domestic industries, or tax breaks to encourage inward investment. This

creates unfair competition within the EU

4. Different regulations added to the cost of business

5. Different currencies (until the Euro was launched)

6. Until 1994 there were restrictions on the movement of capital, but these controls have been

abolished and gradual liberalization has been made on other aspects of financial services.

 Benefits of A Single Market

Trade Creation. Exploitation of comparative adv allows lower prices and costs. Leading to

higher output and more employment

Reduction in the direct costs of barriers

Economies of scale from specialization

Greater competition

Costs of a Single Market

Structural Change due to increased specialization

Adverse Regional multiplier effects. The creation of a single market tends to attract capital

and jobs away from the periphery areas to the centre.

Development of Monopoly/ Oligopoly power

Trade Diversion. If external barriers remain high countries could lose out

EU Competition Policy

The EU competition has the power to examine mergers to see whether they are in

the public interest. They are not always opposed to mergers because they can have

benefits such as

1. Economies of scale

2. Greater international competition.

However the abuse of market power can cause problems such as higher prices,

unfair competition.

A merger could be referred to the commission if

1. New Firm has greater than £3.6 billion

2. Less than 2/3 of the new firm comes from one member state (therefore there is still a role for

national commissions)

Other unfair business practices include

1. Price fixing and market sharing Cartels. In 1994 the major steel manufacturers

were fines 7% of their turnover for fixing prices

Social Aspects of the Single Market

The Social Charter

This aimed to give greater protection to workers in the EU it included the following:

Free movement of labour

Min wages

Max working week

Right to paid holidays

Freedom to join in trades union

Vocational training for all EU citizens

Equal treatment between men and women

Protection for elderly and disabled

Health and Safety at work

The creation of Eur ES, this is a European information network for job vacancies

 Criticisms of the EU

Agricultural subsidies inefficient

Bureaucracy

Lack of democracy

Euro has led to widespread unemployment across Europe

EXPANSION OF EU

The European Union (EU) was created by six founding states in 1958 (following the

earlier establishment by the same six states of the European Coal and Steel

Community in 1952) and has grown to 27 member states. There have been five

enlargements, with the largest occurring on May 1, 2004, when 10 states joined, and

the most recent on January 1, 2007, when Bulgaria and Romania joined.

Currently, accession negotiations are underway with several states. The process of

enlargement is sometimes referred to as European integration. However, this term is

also used to refer to the intensification of cooperation between EU member states as

national governments allow for the gradual centralising of power within European

institutions.

In order to join the European Union, a state needs to fulfill the economic and political

conditions generally known as the Copenhagen criteria (after the Copenhagen

summit in June 1993). That basically requires a secular, democratic government,

rule of law and corresponding freedoms and institutions. According to the EU Treaty,

each current member state and also the European Parliament have to agree to any

enlargement.

The present EU Treaty – the Treaty of Nice – does not provide for the voting

arrangements to be adopted for more than the present 27 members. Although the

proposed European Constitution did provide such a mechanism, the ratification of

this Treaty is currently on hold. New arrangements would therefore be needed to be

agreed prior to any expansion.

HISTORY OF EUROPEAN UNION

The European union (EU) was created by the Maastricht Treaty on November 1st 1993. It is

a political and economic union between European countries which makes its own policies

concerning the members’ economies, societies, laws and to some extent security. To some,

the EU is an overblown bureaucracy which drains money and compromises the power of

sovereign states. For others, the EU is the best way to meet challenges smaller nations

might struggle with – such as economic growth or negotiations with larger nations – and

worth surrendering some sovereignty to achieve.

Origins of the EU

The European Union was not created in one go by the Maastricht Treaty, but was the result of gradual integration since 1945, an evolution when one level of union has been seen to work, giving confidence and impetus for a next level.

In this way the EU can be said to have been formed by the demands of its member nations.

The end of the Second World War left Europe divided between the communist,

Soviet dominated, eastern bloc, and the largely democratic western nations. There

were fears over what direction a rebuilt Germany would take, and in the west

thoughts of a federal European union re-emerged, hoping to bind Germany into pan-

European democratic institutions to the extent that it, and any other allied European

nation, both wouldn’t be able to start a new war, and would resist the expansion of

the communist east.

The First Union: the ECSC

Europe’s post war nations weren’t just after peace, they were also after solutions to

economic problems, such as raw materials being in one country and the industry to process

into another. War had left Europe exhausted, with industry greatly damaged and their

defences possibly unable to stop Russia. In order to solve this six neighbouring countries

agreed in The Treaty of Paris to form an area of free trade for several key resources

including coal, steel and iron ore, chosen for their key role in industry and the military. This

body was called the European Coal and Steel Community and involved Germany, Belgium,

France, Holland, Italy and Luxembourg. It began on 23 July 1952 and ended on 23 July

2002, replaced by further unions.

France had suggested the ECSC to control Germany and to rebuild industry; Germany wanted to become an equal player in Europe again and rebuild its reputation, as did Italy; the Benelux nations hoped for growth and didn’t want to be left behind. France, afraid Britain would try and quash the plan, didn’t include them in initial discussions, and Britain stayed out, wary of giving up any power and content with the economic potential offered by the Commonwealth.

Also created, in order to manage the ECSC, were a group of ‘supranational’ (a level of governance above the nation state) bodies: a Council of Ministers, a Common Assembly, a High Authority and a Court of Justice, all to legislate, develop ideas and resolve disputes. It was from these key bodies that the later EU would emerge, a process which some of the ECSC’s creators had envisaged, as they explicitly stated the creation of a federal Europe as their long term goal.

The European Economic Community

A false step was taken in the mid 1950s when a proposed ‘European Defence Community’ among the ESSC’s six states was drawn up: it called for a joint army to be controlled by a new supranational Defence Minister. The initiative had to be rejected after France’sNational Assembly voted it down.

However, the success of the ECSC led to the member nations signing two new treaties in 1957, both called the treaty of Rome. This created two new bodies: the European Atomic Energy Community (Euratom) which was to pool knowledge of atomic energy, and the European Economic Community. This EEC created a common market among the member nations, with no tariffs or impediments to the flow of labour and goods. It aimed to continue economic growth and avoid the protectionist policies of pre-war Europe. By 1970 trade within the common market had increased fivefold. There was also the Common Agricultural Policy (CAP) to boost member’s farming and an end to monopolies. The CAP, which wasn’t based on a common market, but on government subsidies to support local farmers, has become one of most controversial EU policies.

Like the ECSC, the EEC created several supranational bodies: a Council of Ministers to make decisions, a Common Assembly (called the European Parliament from 1962) to give advice, a court which could overrule member states and a commission to put the policy into affect. The 1965 Brussels Treaty merged the commissions of the EEC, ECSC and Euratom to create a joint and permanent civil service.

Development

In the late 1960s a power struggle established the need for unanimous agreements on key decisions, effectively giving member states a veto. It has been argued that this slowed union by two decades. Over the 70s and 80s the membership of the EEC expanded, allowing Denmark, Ireland and the UK in 1973, Greece in 1981 and Portugal and Spain in 1986. Britain had changed its mind after seeing its economic growth lag behind the EEC, and after America indicated it would support Britain as a rival voice in the EEC to France and Germany. However, Britain’s first two applications were vetoed by France. Ireland and Denmark, heavily dependent upon the UK economy, followed it in to keep pace and attempt to develop themselves away from Britain. Norway applied at the same time, but withdrew after a referendum said ‘no’. Meanwhile member states began to see European integration as a way to balance the influence of both Russia and now America.

The development of the union was slowed in the 70s, frustrating federalists who

sometimes refer to it as a ‘dark age’ in development. Attempts to create an

Economic and Monetary Union were drawn up, but derailed by the declining

international economy. However, impetus had returned by the 80s, partly as the

result of fears that Reagan’s US was both moving away from Europe, and preventing

EEC members from forming links with Communist countries in an attempt to slowly

bring them back into the democratic fold.

The remit of the EEC thus developed, and foreign policy became an area for

consultation and group action. Other funds and bodies were created including the

European Monetary System in 1979 and methods of giving grants to

underdeveloped areas. In 1987 the Single European Act (SEA) evolved the EEC’s

role a step further.

Now European Parliament members were given the ability to vote on legislation and

issues, with the number of votes dependant on each member’s population.

Bottlenecks in the common market were also targeted.

The Maastricht Treaty and the European Union

On February 7th 1992 European integration moved a step further when the Treaty on

European Union, (better known as the Maastricht Treaty) was signed. This came into force

on 1 November 1993 and changed the EEC into the newly named European Union. The

change was to broaden the work of the supranational bodies, based around three “pillars”:

the European Communities, giving more power to the European parliament; a common

security/foreign policy; involvement in the domestic affairs of member nations on “justice and

home affairs”.

In practice, and to pass the mandatory unanimous vote, these were all compromises away

from the unified ideal. The EU also set out guidelines for the creation of a single currency,

although when this was introduced in 1999 three nations opted out and one failed to meet

the required targets.

Currency and economic reform were now being driven largely by the fact that the US

and Japanese economies were growing faster than Europe’s, especially after

expanding quickly into the new developments in electronics.

There were objections from poorer member nations, who wanted more money from the union, and from larger nations, who wanted to pay less; a compromise was eventually reached. One planned side effect of the closer economic union and the creation of a single market was the greater co-operation in social policy which would have to occur as a result.

The Maastricht Treaty also formalised the concept of EU citizenship, allowing any individual from an EU nation to run for office in their government, which was also changed to promote decision making. Perhaps most controversially, the EU’s entrance into domestic and legal matters – which produced the Human Rights Act and over-rode many member states’ local laws – produced rules relating to free movement within the EU’s borders, leading to paranoia about mass migrations from poorer EU nations to richer ones. More areas of members’ government were affected than ever before, and the bureaucracy expanded. Although the Maastricht Treaty came into effect, it faced heavy opposition, and was only narrowly passed in France and forced a vote in the UK.

Further Enlargements

In 1995 Sweden, Austria and Finland joined, while in 1999 the Treaty of Amsterdam came into effect, bringing employment, working and living conditions and other social and legal issues into the EU remit. However, by then Europe was facing great changes caused by the collapse of the Soviet dominated east and the emergence of economically weakened, but newly democratic, eastern nations. The 2001 Treaty of Nice tried to prepare for this, and a number of states entered into special agreements where they initially joined parts of the EU system, such as the free trade zones. There were discussions over streamlining voting and modifying the CAP, especially as Eastern Europe had a much higher percentage of the population involved in agriculture than the west, but in the end financial worries prevented change,

While there was opposition, ten nations joined in 2004 (Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia) and two in 2007 (Bulgaria and Romania). By this time there had been agreements to apply majority voting to more issues, but national vetoes remained on tax, security and other issues. Worries over international crime – where criminals had formed effective cross border organisations – were now acting as an impetus.

The Lisbon Treaty

The EU’s level of integration is already unmatched in the modern world, but there are people who want to move it closer still (and many people who don’t). The Convention on the Future of Europe was created in 2002 to create an EU constitution, and the draft, signed in 2004, aimed to install a permanent EU president, a Foreign Minister and a Charter of Rights. It would have also allowed the EU to make many more decisions instead of the heads’ of the individual nation states. It was rejected in 2005, when France and the Netherlands failed to ratify it (and before other EU members got the chance to vote).

An amended work, the Lisbon Treaty, still aimed to install an EU president and Foreign Minister, as well as expand the EU’s legal powers, but only through developing the existing bodies. This was signed in 2007 but was initially rejected, this time by voters in Ireland. However, in 2009 Irish voters passed the treaty, many concerned of the economic effects of saying no. By the winter 2009 all 27 EU states had ratified the process, and it took effect. Herman Van Rompuy, at that time Belgium Prime Minister, became the first ‘President of the European Council’, and Britain’s Baroness Ashton ‘High Representative for Foreign Affairs’.

There remained many political opposition parties – and politicians in the ruling parties – which opposed the treaty, and the EU remains a divisive issue in the politics of all member nations.

mnngkhxglcgg

COMMON AGRICULTURAL POLICY

1:1 Why Governments have often intervened in Agricultural Markets in the EU

1:2 Extract B mentions 4 objectives of CAP as mentioned in the treaty of Rome.

These include

i) ensure a fair living standard for farmers

ii) Stabilise markets

iii) Assure availability of supplies (and reduce dependence on imports)

iv) Ensure reasonable prices for consumers

1:3 The farming sector has often experienced lower incomes, causing relative

poverty within national economies. One reason for this is that foodstuffs have a low

income elasticity of demand. Therefore farmers do not benefit from rising incomes,

as people do not buy more food

1:3 Farmers incomes can easily fluctuate due to variations in supply conditions.

Demand for food is inelastic therefore an increase in supply can lead to a fall in

revenues

1:4 Farming is more susceptible to problems caused by factors such as disease and

bad weather. Disease such as BSE can wipe out a farmers income therefore

requiring intervention (extract C)

1:5 Agricultural goods are essential goods for every one therefore govts often

intervene to prevent shortages or prices rising too high.

2:0 What CAP intended to achieve

2:1 The main aim of CAP was to give farmers a target price for foodstuffs. This

would enable them to gain a certain level of income from products which often had

low prices.

2:2 Extract A explains how the CAP operated. To maintain these target prices it was

necessary to do two things:

i) EU was to buy the surplus of food at the target price

ii) A variable import tariff was imposed on cheap imports to make imports as

expensive as the target price

2:3 The diagram illustrates how the CAP worked in practice

2:4 At the target price the Supply was much greater than demand therefore there

was a surplus of Q2 – Q1 this is the amount that the EU had to buy. This is what led

to the creation of stocks of food such as “butter mountains”.

2:5 The target prices actually encouraged farmers to supply more through intensive

farming methods. Therefore the amount of surplus often increased in different years.

3:0 Costs of CAP

3:1 Higher Prices encouraged extra supply, this resulted in a surplus of food. The EU

had to buy this surplus. This is very inefficient and expensive. In 2000 CAP

expenditure cost 36 billion Euros. In addition with the expansion of the EU it is likely

to increase the cost to the EU budget

· However the cost of CAP has reduced as a % of the EU budget from 66% to about

46% now (Extract D)

3:1 To increase incomes of farmers consumers have had to pay higher prices. This

is allocatively inefficient and also it increases inequality because low income groups

pay a higher % of their income on food

3:2 CAP has caused economic difficulties for farmers in other countries

Firstly the excess supplies were dumped onto world markets. This caused prices to

fall and lower revenues. Secondly the EU bought less imports because of the

variable import levy’s Therefore demand fell from D1 to D2.

* The combined effect was to reduce farmers welfare in both the US and the

developing world.

3:4 Because of this the CAP has been a major stumbling block to trade at the WTO.

The US has retaliated against EU exports in response to the high degree of

protection given to agriculture.

* However the EU is not the only place where large subsidies to farming occur.

Extract D states that countries such as Japan and Korea have a high amount of

subsidies given to farmers measured by Producer Subsidy Equivalents. PSE

3:5 CAP has harmed the environment as Extract B says. CAP has encouraged

farmers to increase output with the use of artificial fertilizers and pesticides causing

problems for the environment.

3:6 CAP has arguably not helped overcome poverty is some rural communities

because subsidies have been directed to output rather than need. Extract D states

that the fund primarily goes to large farmers and landowners. They have received

more than they need but small farmers are still struggling e.g. hill farmers with a low

number of sheep.

4:0 Benefits of CAP

4:1 CAP has achieved some of its original objectives such as securing food supplies

and stabilising markets.

However this could easily have been done with much less cost and distortion of the

market.

4:2 Extract C states how Agenda 2000 has helped introduce reforms to CAP to

improve its operation. Now funds can be given to land devoted to “nature

conservancy, encourage organic farming and the establishment of young farmers.

Therefore CAP is now beginning to direct funds in a more beneficial way.

* However these reforms arguably do not go far enough and there is still a lot of

economic distortion within CAP which leads to the disadvantages mentioned in

section 3:0

5:0 How CAP should be reformed

5:1 It would be very beneficial to abolish all target prices for all products. This would

have several benefits

i) It would lower prices for consumers

ii) It would help trade negotiations because EU would no longer have to impose

variable import levy and therefore farmers in other countries would be better off

iii) It would eliminates all food surpluses

iv) It would be less costly for the EU as they would not have to buy the food.

v) It would reduce over supply and therefore discourage intensive farming and

therefore improve the environment

5:2 The main disadvantage to this is that farmers would have a fall in income.

However this can be overcome by more direct aid payments. In addition these can

be more targeted to farmers who really need them rather than paying landlords who

are already well off. A ceiling could be imposed on payment to farmers.

5:3 One reason for subsidising farmers mentioned in section 1 is that farming can

have positive externalities therefore it makes sense for subsidies to be directed to

these positive externalities . Therefore there could be an extension to aid for

environmentally friendly measures such as organic farming.

5:4 A major advantage of these proposed reforms is that it should enable a reduction

in the cost of CAP to the EU. Some farming pressure groups may be unhappy but

there can be a clear gain to the EU because the money saved can be spent on more

worthwhile projects such as subsidising depressed areas both rural and urban.

5:% CAP is still 44% of the EU budget therefore this is a potentially very significant

policy for the EU. It is especially important given the expansion of the EU into the

east.

BENEFITS OF EU MEMBERSHIP

The Euro is the single European countries adopted by 18 /28 EU countries. (though

not the UK). It is the second largest reserve currency in the world, after the US

Dollar. Euro notes and coins came into circulation on January 1st 2002. It was hoped

that the Euro would confer many benefits on member countries.

1. Transaction costs

With a single currency, there will be no longer a cost involved in changing

currencies; this will benefit tourists and firms who trade within the Euro area. It has

been estimated that this benefit will be equal to 1% of GDP so will be quite

significant. (this is sometimes known as frictional costs) Some studies have

suggested that the Euro has led to a 6% increase in tourism, (though many other

factors may be at work.)

2. Price transparency

With a common currency it will be easier to compare prices in different European

countries because they would all be in Euros. This enables firms to source cheaper

raw material and consumers to buy cheaper goods For example, arguably new car

prices are higher in the UK than elsewhere, a single currency could help reduce

these price differentials or make it easier for UK consumers to buy from the

Eurozone. Within the Eurozone, there has been a degree of convergence in car

prices since the Euro was introduced.

3. Eliminating exchange rate uncertainty.

Volatile swings in the exchange rate can destroy the profitability of exports (e.g. a

rapid appreciation). This exchange rate uncertainty undermines business confidence

in investing. Therefore with a single currency business confidence should improve

leading to greater trade and economic growth.

4. Improvement in inflation performance

The ECB which sets interest rates for the whole Eurozone area will be committed to

keeping inflation low; countries with traditionally high inflation should benefit from this

greater inflationary discipline. EU inflation has been low.

However this point is debatable as countries outside the Euro have maintained low

inflation, and arguably the ECB have concentrated too much on low inflation to the

detriment of growth and unemployment.

5. Low interest rates

It was hoped membership of the Euro would help reduce bond yields as there was

greater security belonging to a stronger currency. Initially this occurred with bond

yields in Greece, Spain and Ireland converging on German bond yields.

But the credit crisis of 2008-12, saw Euro bond yield rise to record levels, suggesting

that the Euro could be very destabilising for interest rates. (EU bond yields)

6. Inward investment

Inward investment may increase from outside the EU as firms take advantage of

lower transaction costs within the EU area. Some firms have said they prefer to

invest within the Eurozone area.

7. Benefits to the financial sector. The introduction of the Euro appears to have

reduced the cost of trading in bonds, equity, and banking assets within the eurozone.

DISADVANTAGES OF EU MEMBERSHIP

Disadvantages of EU Membership to UK include:

1. Cost. The  costs of EU membership to the UK is £15bn gross (0.06% of GDP) – or

£6.883 billion net. See UK government spending. (UKIP claim that the cost of EU

membership in total amounts to £83bn gross if you include all possible costs, such

as an ‘estimated’ £48bn of regulation costs – or  £1,380 per head [1]

2. Inefficient policies. A large percentage of EU spending goes on the Common

Agricultural Policy. For many years this distorted agricultural markets by placing

minimum prices on food. This lead to higher prices for consumers and encouraging

over-supply. Reforms to CAP have reduced, but not eliminated this wastage.

3. Problems of the Euro. Membership of the EU doesn’t necessarily mean

membership of the Euro. But, the EU has placed great emphasis on the Single

Currency. However, it has proved to have many problems and contributed to low

rates of economic growth and high unemployment across the EU. See: Problems of

Euro

4. Pressure towards austerity. Since 2008, many southern European countries have

faced pressure from the EU to pursue austerity – spending cuts to meet budget

deficit targets, but in the middle of a recession these austerity measures have

contributed to prolonged economic stagnation.

5. Net Migration. Free Movement of Labour has caused problems of overcrowding in

UK cities. The UK’s population is set to rise to 70 million over next decade, partly

due to immigration. This has pushed up house prices and led to congestion on

roads. The concern is that the UK is powerless to prevent large scale immigration

because EU rules allow free movement of labour. See: Impact of immigration on UK

economy

6. More bureaucracy less democracy. It is argued that the EU has created extra

layers of bureaucracy whilst taking away decision making process further from local

communities. For example, the British Chambers of Commerce has estimated that

the annual cost to the UK of EU regulation is £7.4bn. The introduction of Qualified

majority voting (QMV) mean that on many decisions votes can be taken against the

public interest of a particular country.

 

Evaluation of these problems

The cost of the EU is a relatively small percentage of overall UK government

spending.

The UK does receive a rebate from the EU (€ 3.8 billion a year) because it gets a

relatively small amount from CAP – though there is pressure to reduce this rebate

from other EU members. The UK has also received regional funds over the years.

The CAP and other policies are being reformed. If the UK stays in the EU it can help

to promote policies which work in the long-term interest of the UK.

An estimated 3.5 million jobs are linked to membership of the EU.

Some EU bureaucracy has been very beneficial, e.g. forcing mobile phone networks

to limit charging when using mobiles abroad.

Issues like farming and fishing and the environment are global issues which need to

be tackled within a European framework, it is insufficient to have just a national

policy on fishing and the environment.

The EU Health Insurance Card enables EU citizens to receive emergency healthcare

on the same terms as the citizens of the EU country they are visiting (often free).

(Euro-movement)

By staying out the Euro, the UK has retained independence over monetary policy, 

fiscal policy and the exchange rate. The UK doesn’t have the same pressure to

pursue austerity as countries in the Eurozone have. This shows that the UK can

combine membership of the Euro with flexibility over economic policy.

Migration works both ways. Many British people have emigrated to take advantage

of opportunities elsewhere in Europe. An estimated 748,010 Britons live or work in

the European Union (link). However, net migration has been running at around

200,000 a year.

The free movement of labour enables a more flexible labour market, with immigrants

able to fill gaps in the UK labour market, such as nursing and plumbing. Also the

additional labour increases UK productive capacity and helps increase real GDP.

(see impact of rising population)

BENEFITS OF EU MEMBERSHIP FOR EASTERN EUROPEAN COUNTRIES

1. Political Stability and greater integration amongst European states

2. Increased Trade.

This will lead to advantages such as lower prices for consumers and more exports

for industries with a comparative advantage.

3. Increased competition

4. Increased Inward Investment.

This will be because of greater stability in the economy, lower trade costs and

greater harmonization. The benefits of this include a positive regional multiplier and

greater technical assistance

5. Social Policy’s and subsidies. New countries will benefit from Regional, Social

and CAP.

6. These gains may be increased by the multiplier effect

7. The extent of the gains may depend upon the existing infrastructure of the

economy. For example if transport links are inefficient and under developed then the

gains from trade will be lower. The infrastructure of the economy will also affect the

success of attracting inward investment

8. The large disparities between the East and West may require subsidies to even

out the imbalance, this would make integration more successful

9. Recent economic developments have been encouraging, with many economies

growing at a fast rate in the East, but with low rates of inflation

10. Some progress toward greater harmonization has been made, Tariffs on

manufacturers have been cut. However because of CAP there are still high tariffs on

imports from eastern europe

PROBLEMS OF EURO

Problems with the EuroThe Euro is a bold experiment to create the largest currency area in the World. However, the current Euro crisis have revealed deep flaws in the structure of the single currency

The Euro involves:

1. A single currency within the Eurozone area.

2. A common monetary policy. Interest Rates are set by the ECB for the whole Eurozone area.

3. Growth and Stability Pact. In theory there are limits on government borrowing, national debt and fiscal policy. However, in practice member countries have often violated the strict limits on government borrowing.

Problems of the Euro Interest rates not suitable for whole Eurozone. A common monetary policy involves a common interest rate for the whole eurozone area. However, the interest rate set by the ECB may be inappropriate for regions which are growing much faster or much slower than the Eurozone average. For example, in 2011, the ECB increased interest rates because of fears of inflation in Germany. However, in 2011, southern Eurozone members were heading for recession due to austerity packages. The higher interest rates set by the ECB were unsuitable for countries such as Portugal, Greece and Italy.

The Euro is not an optimal currency area. If a state in the US, such as New York ,was in recession, workers in New York could move to New England and get a job. However, in the Eurozone this is much more difficult; it involves moving country and possibly learning a new language. There are more barriers to the movement of labour and capital within a diverse region like Europe. Therefore, an unemployed Greek can't easily relocate to Germany. see: Two Speed Europe

Limits Fiscal Policy. With a common monetary policy it is important to have similar levels of national debt, otherwise countries may struggle to attract enough buyers of national debt. This is a growing problem for many Mediterranean countries like Italy, Greece and Spain who have large national debts and rising bond yields.

Lack of Incentives. It is argued that being a member of the Euro protects a country from a currency crisis. Therefore, there is less incentive for countries to implement structural reform and fiscal responsibility. For example, in good years Greece was able to benefit from very low bond yields on its debt because people felt Greek debt would be secured by rest of Europe. But, this wasn't the case, and Greece were lulled into a fall sense of security.

No scope for Devaluation. Since the start of the Euro, several countries have experienced rising labour costs. This has made their exports uncompetitive. Usually, their currency would devalue to restore competitiveness. However, in the Euro, you can't devalue and you are stuck with uncompetitive exports. This has led to record current account deficits, a fall in exports and low growth. This has particularly been a problem for countries like Portugal, Italy and Greece.

This shows the effects of Eurozone members becoming uncompetitive. Very high current account deficits.

No Lender of Last Resort. The ECB is unwilling to buy government bonds if there is a temporary liquidity shortage. This makes markets more nervous about holding debt from eurozone economies and precipitates fiscal crisis. See: Problems of Italy - why Italian bonds increased despite having a much lower budget deficit than UK.

Italy bond yields rose despite a primary budget surplus

Deflationary Bias I would argue there is a deflationary bias in the Eurozone which increases the risk of recession and higher unemployment

Eurozone members have seen a rise in unemployment

Divergence in bank rates. In theory, the Eurzone creates a common interest rate. However, in the credit crisis of 2010-13, we see rising bank rates for peripheral Eurozone countries, like Italy and Spain. Small and medium sized firms faced higher borrowing costs than in 2005, even though the ECB cut the main base rate. This suggests that the ECB was unable to loosen monetary policy when needed. See more on credit policy

Experience of EU Fiscal Crisis

The great recession of 2008-11 showed the vulnerability of Euro member countries to a common monetary policy. Because they can't devalue and also ask the Central Bank to buy government securities they are at much greater risk of a liquidity crisis.

Because of fears over liquidity crisis, bond yields rose from Ireland, Spain, Portugal and Greece. As a result these eurozone countries were forced into pursuing spending cuts, and accepting higher interest rates. But, this led to a vicious cycle of lower growth and lower tax revenues.

Problems for UK EconomyUK economy has additional problems which make joining the Euro a bad idea.

Housing market. Many in the UK have a mortgage which is a big % of their disposable income. This is related to the high cost of buying houses in the UK.

Variable Mortgages In the UK more homeowners have variable mortgages. These two factors means UK consumers are very sensitive to changes in the base rate. If the ECB kept interest rates higher than the UK needed it would create serious problems in the UK. Arguably to join the UK would need to reform its housing market and reliance on variable mortgages.

TRANSITION TO A MARKET ECONOMY

Basic Requirements

1. Macro Economic stability

2. Deregulation of Prices

3. Liberalization of Trade

4. Privatisation of state owned assets

5. Establishment of market supporting institutions such as property laws

6. Social Security e.g. unemployment benefits

7. External Assistance

 

Macro Econ Stabilization

When prices were deregulated, rampant inflation was often a problem. However the

problem with reducing inflation is that it can exacerbate the problem of falling Real

GDP.

Falling Real GDP poses meant problems for governments there will be extra

pressure put on the governments budget, there will be less taxes collected but

increased need for spending

Liberalization of Trade

This is important for exploiting comparative advantage however in the short term the

developing economies may struggle to compete.

Privatisation

Many state owned industries were very inefficient, with poor quality goods,

overstaffing, and lack of incentives etc IN the Short term privatisation caused many

problems such as

1. an increase in unemployment and a negative multiplier effect

2. Many industries were so bad no body wanted to buy them

3. Working practices were not relevant to the free market

4. Problem of corruption. Many state managers converted assets into their private

property

5. There was also a need to privatise the elaborate state admin system

External Assistance

 

As a % of GDP East Germany got the most and it was the most successful. Russia

got the least and struggled the most

Problems Faced by Russia and other countries making the change

1. GDP fell by 50% between 1989 and 1998

– However GDP was previously overstated

2. Collapse of the value of the rouble led to a fall in confidence and deterred foreign

investment

3. Crime and Corruption increased

 

If Planning was so bad why did things get worse?

1. Statistics misleading

2. Austere macro economic policies needed to prevent hyper inflation in wake of price

liberalization

3. Failure of corporate control. Workers and managers not used to incentives of free

market

4. Lack of Entrepreneurs

5. Lack of Trade with Russia

6. Inefficient nature of the economy

7. Poor infrastructure

8. Corruption meant many taxes not collected

Benefits of European UnionThe European Union is a political and economic union of 28 countries. Originally formed in 1958 by six countries (then the EEC), the EU has expanded in terms of size and integration. The aim of the EU is to promote European harmony through creating a single market, enabling the free movement of goods, services and people.

Some of the benefits of the European Union include:

Broad political and legal benefits1. European harmony - European Union countries are no longer at loggerheads like they were in the past. With the exception of civil war in Yugoslavia (which wasn't in the EU at the time), Europe has managed to heal the divisions which were so painfully exposed in the two World Wars in the Twentieth Century. The EU was awarded the Nobel Peace Prize in 2012 for helping to promote peace and international co-operation. Many Eastern European countries are keen to join the EU because they feel it will help promote economic and political stability.

2. Legal and human rights. The EU has a strong commitment to human rights, preventing discrimination and the due process of law. This makes the EU attractive to countries, such as the Ukraine who wish to share in similar legal and human rights.

3. Prospect of membership has helped modernise countries, such as Turkey. The Copenhagen Criteria for EU membership enshrine commitment to human rights, rule of law and market economy. The prospect of gaining membership of the EU, encourage countries to implement human rights legislation.

Economic benefits 

1. EU is one of strongest economic areas in the world. With 500 million people, it has 7.3% of the world's population, but accounts for 23% of nominal global GDP.

2. Free trade and removal of non-tariff barriers have helped reduce costs and prices for consumers. Increased trade to the EU creates jobs and higher income. Over 52% of UK exports are to the EU. Trade within the EU has increased 30% since 1992.

3. According to one study - over ten years (1993-2003), the Single Market has boosted the EU’s GDP by €877 billion [£588 billion]. This represents €5,700  [£3,819] of extra income per household.

4. A paper, Campos, Coricelli, and Moretti (2014) used the synthetic counterfactuals method (SCM) pioneered by Abadie and Gardeazabal (2003). The red dotted line shows estimated GDP if the country had not been a member of the EU. This shows that even more prosperous EU countries, such as the UK have benefited from higher GDP as a result of being in the EU.

5. Removal of customs barriers mean 60 million customs clearance documents per year no longer need to be completed, cutting bureaucracy and reducing costs and delivery times

6. Countries in the EU, are amongst the highest positions in the Human Development Index(HDI)

7. Poorer counties, such as Ireland, Portugal and Spain have made significant degrees of economic development since they joined the European Union. A report suggests that  over the period of the 1980s and 2004 enlargement, there are substantial positive pay-offs of EU membership, with a gain in per capita GDP of approximately 12% for poorer countries. (Vox - how poorer countries benefit from EU)

8. Social cohesion fund. This has invested in poorer areas of the EU to help reduce regional disparities. For example, Ireland benefited from the EU social cohesion fund (over €6 billion of investment in education and infrastructure spending)

9. EU structural funds to help Eastern European economies develop will benefit the UK in the long term because as they become more affluent, they will be able to buy more UK exports.

10. The European Union has attracted greater inward investment from outside the EU. Inward investment grew from €23 billion  [£15.4 billion] in 1992 to €159 billion [ £106.5 billion] in 2005. The UK is the 5th largest source of inward investment in the world, and being a member of the single market is an important factor in encouraging Japanese firms.

he European Social Fund (ESF)

Labour and free movement of people1. Free movement of labour and capital have helped create a more flexible economy. For example, UK and Ireland have benefited from the immigration of Eastern European workers to fill labour market shortages in certain areas, such as plumbing, nursing and cleaning. 

2. Far from 'taking jobs', migration has helped increase productive capacity and makes a net contribution to tax revenues. (see impact of net migration)

3. Free movement of labour also enables British people to live and work in Europe. Roughly 1.6 million British citizens live in the EU outside the UK (UNCTAD World Investment Report 2010)

4. EU has enabled people to travel freely across national boundaries making trade and tourism easier and cheaper. According to the European Commission, more than 15 million EU citizens have moved to other EU countries to work or to enjoy their retirement.

5. 1.5 million young people have completed part of their studies in another member state with the help of the Erasmus programme. The possibility to study abroad is considered positive by 84% of EU citizens. (benefits of EU)

6. Easier to use qualifications in different member countries. This makes it easier to work abroad without having to retrain in different national qualifications.

7. Mutual recognition of safety standards and rules have helped reduce costs for firms. This has encouraged the development of small and medium business who rely on low cost of exports.

8. Social charter enshrines protection for workers such as maximum working week, right to collective bargaining and fair pay for employment. 

9. European Arrest Warrant (EAW) scheme has made it easier to track criminals across the European continent.

Environmental benefits of the EU The EU have raised the quality of sea water and beeches, by implementing regulations on water standards 'Bathing Water Directive'. 92% of tourist locations now meet minimum water quality standards. (Clean water at Europa.eu)

Tackling global warming. In 2006, the (EU) committed to reducing its global warming emissions by at least 20 percent of 1990 levels by 2020. The EU has also committed to spending $375 billion a year to cut greenhouse gas emissions by at least 80 percent by 2050 compared to 1990 levels. (global warming pdf)

Tackling acid rain. Environmental treaties which have sought to deal with European wide environmental problems such as acid rain. The EU has set strict restrictions on emissions of pollutants, such as sulphur, and other causes of acid rain. (BBC Link)

Consumer benefits of the EU EU competition policy has harmonised regulation of monopoly and cartel power within Europe. The EU competition policy seeks to avoid abuses of cartels / monopoly / dominant market power and protect the interest of consumer. There has been successful deregulation of airlines, electricity and gas markets.

The EU has reduced the price of making mobile phone calls abroad. In 2007 EU legislation set maximum charges for making and receiving calls.  The EU also agreed with 14 mobile phone manufacturers to create standard design for chargers from 2011 in order to make life easier for consumers and reduce wastage. In 2014, it is has voted to scrap roaming charges which will drastically reduce the cost of using a mobile phone abroad. (BBC link)

Consumers are free to shop in any EU countries without paying any tariffs or excise duties when they return home.

SOLUTIONS FOR EU CRISIS

It is a difficult question to answer. The dynamics of the single currency mean that

many of the conventional solutions to economic problems cannot be used. The

difficult task is to reduce levels of government borrowing whilst also managing to

target economic recovery and lower unemployment.

Problems Facing EU

If you looked at an economy such as Ireland, Greece Portugal, or Spain. They face

these problems

High unemployment

Stagnant economic growth, and chance of prolonged recession.

Very large current account deficit due to loss of competitiveness.

High government borrowing. Higher interest rates on government bonds because of

fears over default.

The obvious solution is to devalue the currency. This helps to regain

competitiveness, reduce the budget deficit, reduce unemployment and help the

economy recover. Economic recovery is an essential ingredient in reducing the

budget deficit. Yet, devaluation is not an option. Countries could leave the Euro, but

this would be very damaging and lead to capital flight  (see: leaving the Euro). It is

not like devaluing in a fixed exchange rate (ERM)

Therefore, countries like Ireland, Greece and Portugal are currently facing internal

devaluation. They are trying to restore competitiveness by reducing wages, costs

and inflation. But, this deflationary process (spending cuts, higher taxes) is causing

lower growth and higher unemployment.

Solutions to EU Crisis

Problem of Government Debt.

1. Debt Consolidation. Greece is bankrupt. They will need a partial debt default. The

EU shouldn’t try to prop up Greece when there is no chance of repayment. They

should allow Greece to default, then they should concentrate on strengthening

position of countries like Italy which should be able to repay debt, but may face

liquidity constraints (temporary shortage of money due to market fears)

2. Growth. the EU and ECB have to see the importance of economic growth. At the

moment, the only policy recommendations seem to be spending cuts and austerity,

but this is pushing countries into a negative spiral of lower growth, higher

unemployment and lower tax revenues.

3. ECB should pursue monetary easing. Target a higher inflation rate, pursue

quantitative easing. Give peripheral countries some monetary stimulus in face of all

the deflationary pressures they face. The ECB have the wrong attitude to inflation. 

(pursing wrong objective) e.g. faced with prospect of double dip recession, they

increased interest rates  because inflation was temporarily above target.

4. Supply side policies to improve competitiveness and efficiency. Important for

economies like Portugal and Greece

Economic Problems of European UnionSince 2007, the EU has experienced a deteriorating economic situation. This has been most concerning for southern members of the Eurozone, such as Greece, Italy, Portugal and Spain.

Economists fear that with the current EU economic problems, we could see a lost decade of high unemployment, low economic growth and deteriorating social conditions.

Main Problems Facing European Union 

1. Unemployment. Unemployment in the EU has reached a critical point. In Spain, unemployment has increased to over 25%, and youth unemployment rates have reached 50%. The recent rise in EU unemployment is primarily due to the prolonged recession. Long term structural unemployment is also a problem.

2. Prolonged Fall in GDP

 

After the deepest recession since the 1930s, Europe has still not been able to recover. Weighed down by austerity measures and a weak global economy, the EU economy has fallen back into recession. The concern is that structural problems and the current monetary and fiscal policies will create several years of below trend economic growth. (Evaluation of EU Policies for economic growth)   

3. Competitiveness Problem. The Euro has caused a divergence in competitiveness. Countries who face higher labour costs cannot regain competitiveness in the usual way through depreciation. Prices become uncompetitive, leading to lower domestic demand, and high current account deficits. Since 2011, current account deficits have fallen in countries like Ireland and Spain, but it has been at the high cost of reducing domestic demand and rising unemployment. Countries are seeking to regain competitiveness through internal devaluation (lower demand, pushing down prices) But, this is much more damaging to the economy than the traditional approach of depreciating exchange rates. more on EU competitiveness.

4. The ECB is too concerned with low inflation The ECB has been accused of giving too much priority to the goal of low inflation. It is argued they have sought to maintain low inflation at the expense of lower growth. The ECB have rigidly stuck to an inflation target of 2%, despite the rise in unemployment and poor performance of nominal GDP.

5. Bond Yields. Membership of the Euro, has created a tendency for bond yields to rise much more quickly. After concerns were expressed over Greece, market fears soon spread to other Eurozone countries, like Ireland, Spain and Portugal. This increased borrowing costs and also put countries under pressure to pursue austerity measures to reduce budget deficits. However, these austerity measures have been implemented when the economy is already weak, causing a big negative multiplier effect and causing the economic downturn. Countries with their own currency and ability to print money have been able to maintain low bond yields, which reduces borrowing costs and gives them more time to reduce budget deficits. See more at Euro Debt crisis  - Note - although bond yields fell in last half of 2012, they are still higher than they should be, and there is concern without strict austerity, the ECB may be unable to prevent rising bond yields in the future.

6. Stability and Growth Pact. This is a constraint on expansionary fiscal policy because in theory it limits governments borrowing to 3% of GDP. In a recession a European government is unable to use monetary policy (ECB set rates for whole Euro zone) but also they are unable to reflate the economy through higher spending and borrowing. 

7. Inflexible Labour Markets. This is frequently held up as a constraint on economic growth and a cause of structural unemployment. In particular rigidities in the labour market discourage investment from abroad. For example in France there are laws which makes it difficult to fire workers once they are hired. This discourages firms from expanding and investing. Both the IMF and OECD have argued that further labour market liberalisation is needed to regain competitiveness. Even many of the European leaders acknowledge it is a necessity. However such reforms often face stiff opposition from powerful interest groups who wish to protect the interests of their members. Thus reform has proved very difficult and exceedingly slow. As Luxembourg’s Mr Juncker once said.”We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

8. Demographic Changes. Countries like Germany and Italy have a declining birth rate. This means that the population structure is becoming weighted towards those who are over 50. The traditional population pyramid is being inverted. The increased demands placed on benefits and decline in tax revenue is a serious burden for government spending. It is reflected in burgeoning public debt. As of 2006 Italy’s public debt stood at 105%. German and France just below 70% of GDP. Such high levels of debt are argued to cause crowding out of private sector spending. Unfortunately this problem is likely to be exacerbated as the 1960s baby boomers retire. Again there is much opposition to the reform of generous state pensions.