1

Economic foundations of the EU

Tamara Perišin

European Public Law – introductory lecture

2

Why does the EU exist?

• Schuman Declaration• Art 3/3 TEU

The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.

3

What are the advantages of economic integration for states?

- Cheaper goods and services- A bigger selection of goods and services in the

market - Higher living standards- Peace and security…

4

Theory of absolute advantage

A (England): 4 units of wine R 4 units of cloth

B (Portugal): 6 units of wine R 3 units of cloth

R – recources, production factors (labour, capital…)Unit – e.g. ton, hectoliter, bottle...

5

A (England): 4 units of wine R 4 units of clothB (Portugal): 6 units of wine R 3 units of cloth

Enterpreneur from Portugal has R and produces 3 units of cloth

invests his R in producing wine instead and produces 6 units of wine

takes his wine to England (where 1 unit of wine buys 1 unit of cloth) and sells it, thus getting 6 units of cloth

with 1 R, instead of 3 units of cloth he now has 6 units of cloth.

6

A (England): 4 units of wine R 4 units of clothB (Portugal): 6 units of wine R 3 units of cloth

Enterpreneur from England has R and produces 4 units of wine

invests his R in producing cloth and produces 4 units of cloth

takes his cloth to Portugal (where 1 unit of cloth buys 2 units of wine) and sells it, thus getting 8 units of wine

with 1 R, instead of 4 units of wine, he now has 8 units of wine.

7

What if a state si not better in anything?

E.g.: less developed countries often are not more successful in any branch of production. Sometimes all production there (food, techology, clothes...) is more expensive than in developed countries.

Does free trade pay off for everyone even in that

case?

8

Theory of comparative advantage

A (England): 4 units of wine R 4 units of cloth

B (Moldova): 3 units of wine R 1.5 units of cloth

R – resources, production factors (labour, capital…)

9

A (England): 4 units of wine R 4 units of clothB (Moldova): 3 units of wine R 1.5 units of cloth

Enterpreneur from Moldova has R and makes 1.5 unit of cloth

invests his R in wine production and produces 3 units of wine

Takes his wine to England (where 1 unit of wine buys 1 unit of cloth) and sells it, thus getting 3 units of cloth

With 1 R, instead of 1.5 units of cloth, he gets 3 units of cloth.

10

A (England): 4 units of wine R 4 units of clothB (Moldova): 3 units of wine R 1.5 units of cloth

For the enterpreneur from England everything is still the same!!!

(Enterpreneur from England has R and makes 4 units of wine

invests his R in producing cloth and produces 4 units of cloth

takes his cloth to Moldova (where 1 unit of cloth buys 2 units of wine) and sells it, thus getting 8 units of wine.

with 1 R, instead of 4 units of wine, he now has 8 units of wine.)

11

Free trade - protectionism

• Protectionism - Preventing free trade in order to protect

domestic production;- Harmful globally as well as to the state that

relies on it.

• Then why is there protectionism in the first place?

12

What are the stages of economic integration?

1. Free trade area - SAA, WTO...

2. Customs union

3. Common market

4. Economic union

5. Monetary union

6. Economic-monetary union - EU

7. Complete economic union

13

10 %

20 %

15 %

0 %

0 %

If the EU was just a free trade area...

14

10 %

20 %

15 %

0 %

0 %

15

10 %

20 %

15 %

0 %

0 %

16

10 %

20 %

15 %

0 %

0 %

10 %

5 %FREE TRADE FREE TRADE AREAAREA

17

15 %

15 %

15 %

0 %

0 %CUSTOMS CUSTOMS UNIONUNION

Kako izgleda carinska unija?