european union booklet

6
Examinaon Quesons on the EU 1. France and Germany would like the EU to have ‘the power to impose an EU-wide fiscal policy on all member states and not just the eurozone’. Assess the possible economic consequences for the UK economy of an EU-wide fiscal policy requiring all member states to balance their budgets (25 Marks) 2. The impact of the increased government borrowing arising from budget deficits across the EU is of concern amongst some economists’. Assess the impact on the UK economy of increased government borrowing by EU governments (25 Marks) 3. ‘A more ambious set of common macroeconomic policies would help speed recovery in the EU’. Assess the impact on the UK economy of a recovery in the EU as a whole. (25 Marks) 4. UK adopon of the euro at such an economically unstable me remains highly unlikely, whatever the potenal benefits’. To what extent do you agree with the view that the UK economy would benefit if the euro were to be adopted by the UK at some point in the future? (25 Marks) 5. The EU, including the UK, may need to rely on an external economic smulus to improve macroeconomic performance’. Assess the possible effects on UK macroeconomic performance of an external economic smulus, whether arising from other EU members or from other parts of the world. (25 Marks) 6. Discuss the view that the UK cannot adopt the single currency unl the economy converges with other Eurozone members (25 Marks) The European Union and Eurozone The European Union The European Union was established as the European Coal and Steel Community in 1951 before becoming the European Economic Community (EEC) in 1958. What started out as 6 naons has grown into an internaonal economic and polical union between 27 member states across Europe. It’s monetary arm is the Eurozone which comprises of 17 member states . The Treaty of Rome established the EEC and the Treaty of Maastricht established the EU as it is today. The EU has established a single market across all the member states territory and has negoated several Free Trade Agreements with other countries such as Switzerland and Norway. Economy of the European Union This includes all countries within the Eurozone and all member states. The economy of the EU generated €12.629 trillion in 2011 which made it the largest economy in the world. Key Stascs for the Economy: World GDP Ranking 1st Current Account €-26.983 billion Nominal GDP €12.629 trillion Public Debt €10,421.9 billion GDP Growth 1.5% (2011) Populaon 501 million Inflaon 3.1% (2011) % of Populaon in Poverty 17% Labour Force 239.3 million Biggest Employment Sector Services with 69.5% Unemployment 10.6% (Sept 12) Key Concepts : European Union: Economic and Polical Union between 27 countries of Europe known as Member States. It is known for its single market across all members. Eurozone: The economic and monetary union of 17 member states of the European Union established in 1999. They hold the Euro as the currency of all areas. European Central Bank: This is the Central Bank for the Eurozone and is centred in Frankfurt. It is responsible for Monetary Policy within the Eurozone

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Booklet on the EU for ECON4

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Page 1: European Union Booklet

Examination Questions on the EU

1. France and Germany would like the EU to have ‘the power to impose an EU-wide fiscal policy on all

member states and not just the eurozone’. Assess the possible economic consequences for the UK

economy of an EU-wide fiscal policy requiring all member states to balance their budgets (25 Marks)

2. The impact of the increased government borrowing arising from budget deficits across the EU is of concern

amongst some economists’. Assess the impact on the UK economy of increased government borrowing by

EU governments (25 Marks)

3. ‘A more ambitious set of common macroeconomic policies would help speed recovery in the EU’. Assess

the impact on the UK economy of a recovery in the EU as a whole. (25 Marks)

4. UK adoption of the euro at such an economically unstable time remains highly unlikely, whatever the

potential benefits’. To what extent do you agree with the view that the UK economy would benefit if the

euro were to be adopted by the UK at some point in the future? (25 Marks)

5. The EU, including the UK, may need to rely on an external economic stimulus to improve macroeconomic

performance’. Assess the possible effects on UK macroeconomic performance of an external economic

stimulus, whether arising from other EU members or from other parts of the world. (25 Marks)

6. Discuss the view that the UK cannot adopt the single currency until the economy converges with other

Eurozone members (25 Marks)

The European Union and Eurozone

The European Union

The European Union was established as the European Coal and Steel Community in 1951 before becoming the

European Economic Community (EEC) in 1958. What started out as 6 nations has grown into an international

economic and political union between 27 member states across Europe. It’s monetary arm is the Eurozone which

comprises of 17 member states . The Treaty of Rome established the EEC and the Treaty of Maastricht

established the EU as it is today.

The EU has established a single market across all the member states territory and has negotiated several Free

Trade Agreements with other countries such as Switzerland and Norway.

Economy of the European Union

This includes all countries within the Eurozone and all member states. The economy of the EU generated €12.629

trillion in 2011 which made it the largest economy in the world.

Key Statistics for the Economy:

World GDP Ranking 1st Current Account €-26.983 billion

Nominal GDP €12.629 trillion Public Debt €10,421.9 billion

GDP Growth 1.5% (2011) Population 501 million

Inflation 3.1% (2011) % of Population in Poverty 17%

Labour Force 239.3 million Biggest Employment Sector Services with 69.5%

Unemployment 10.6% (Sept 12)

Key Concepts :

European Union: Economic and Political Union between 27 countries of Europe known as Member States. It is

known for its single market across all members.

Eurozone: The economic and monetary union of 17 member states of the European Union established in 1999.

They hold the Euro as the currency of all areas.

European Central Bank: This is the Central Bank for the Eurozone and is centred in Frankfurt. It is responsible

for Monetary Policy within the Eurozone

Page 2: European Union Booklet

Member States of the European Union

Flag Country Population (millions) GDP (€millions) Currency Gini

Austria 8.4 300,712 Euro 29.1

Belgium 10.8 369,836 Euro 33.0

Bulgaria 7.6 38,483 Lev 29.2

Cyprus 0.8 17,979 Euro 31.2

Denmark 5.5 240,453 Krone 24.7

Estonia 1.3 15,951 Euro 36.0

Finland 5.3 189,368 Euro 26.9

France 63.3 1,996,583 Euro 32.7

Germany 81.4 2,592,600 Euro 28.3

Greece 11.3 208,532 Euro 34.3

Hungary 10.0 99,819 Forint 30.0

Ireland 4.4 156,438 Euro 34.3

Italy 61.5 1,579,659 Euro 36.0

Latvia 2.2 20,211 Lats 65.7

Lithuania 3.2 30,807 Litas 35.8

Luxembourg 0.5 42,625 Euro 30.8

Malta 0.4 6,544 Euro 25.8

Poland 38.2 369,666 Zloty 34.9

Portugal 10.6 171,040 Euro 38.5

Romania 21.5 131,327 Leu 31.5

Slovakia 5.4 69,108 Euro 25.8

Slovenia 2.0 36,172 Euro 31.2

Spain 46.0 1,063,355 Euro 32.0

Sweden 9.3 387,596 Krona 25.0

The Czech Republic 10.5 156,217 Koruna 25.8

The Netherlands 16.6 601,973 Euro 30.9

United Kingdom 62.6 1,750,396 Pound Sterling 36.0

Key Terms on the EU

Term Definition

Convergence Criteria Macro economic conditions which must be met before

a country is allowed to join an Economic and Monetary

Union

Stability and Growth Pact Limit placed on government budget deficit for countries

belonging to the European Single Currency.

Social Chapter Section of the Maastricht Treaty which commits EU

countries to guarantee certain legal rights of workers in

the Labour Market

Working Time Directive Regulation setting a maximum number of hours per

European Union Institution of European member states which aims to

European Commission Main executive branch of the European Union which

initiates policy and proposes EU legislation in its areas

of competence

European Central Bank (ECB) The independent central bank responsible for monetary

EU Enlargement Process whereby the established members of the

European Union are widening its membership to new

European Countries

Economic Data from the Eurozone

GDP €9.4 trillion

Interest Rate 0.75%

Inflation 1.6%

Unemployment 11.7%

Trade Balance €81.8 billion surplus

Page 3: European Union Booklet

Eurozone Current Account Balance (Millions of Euros)

EURO to US DOLLAR Exchange Rate

ECB Interest Rate Countries in the EU

EU Future Members

Currently Croatia is becoming part of the EU

Iceland, Macedonia, Montenegro, Serbia and Turkey are all candidates, as are Bosnia and Herzegovina and

Kosovo, although these two have yet to apply for EU Membership. Albania has submitted an application and is

waiting to be given candidate status.

Question: Using economic arguments, evaluate the view that EU expansion will be

good for the economies of the EU Member States

Page 4: European Union Booklet

The Single Market A single market is designed to promote economic competitiveness between nations. The Treaty of Rome (1957)

set out its goals that would make Europe more economically competitive.

1. Free movement of capital

2. Free movement of people

3. Free movement of goods

4. Free movement to provide services

The European Commission since the creation of the European Monetary Union has sought to liberalise the

European Market, to help further these aims set out in the Treaty of Rome. The Eurozone and single currency has

arguably made this far easier.

In an exam you will be asked questions on the EU, and you should be able to argue the benefits and the

drawbacks of the Single Market

Benefits Drawbacks

Economies of Scale - Larger Consumer base, but also a

larger pool of labour talents which firms can use to

achieve economies of scale

Some firms may not be able to compete with the

expansion of the market, so may close

Increased dynamic efficiency - larger competitive

environment will mean an end to monopoly power

Single Market doesn’t cover all areas such as transport,

energy, IP rights for example.

Increased liberalisation - lead to the creation of budget

airlines such as RyanAir or Jet2. This would not have

been possible without a single market which reduced

overall costs to firms

EU Services sector has opened up, but not to the scale

which was originally envisaged, monopolies have

simply spread across the countries

Creation of a Larger Domestic Market—the removal of

trade barrier has effectively led to the European

Market becoming one which is a domestic market.

The disparities between nations fiscal policy means the

market still has large differences

Key Information on the ECB

Eurozone Unemployment Rate

Eurozone Inflation Rate

Eurozone GDP Growth Rate

Page 5: European Union Booklet

The European Central Bank

The European Central Bank is the Central Bank for all the Eurozone

Countries, those which have accepted the Euro as a Currency. It was

established by the Treaty of Amsterdam in 1998 and is headquartered in

Frankfurt. It has main objective is to maintain the purchasing power of the

Euro currency. It is run by a President which is currently Mario Draghi. The

President is the chair of a board of governors which is comprised of the

Governors of the Former Central Banks, which the ECB replaced.

Main Functions of the ECB:

Main price stability—target inflation level is 2% at which it wants to keep inflation close to

Create and carry out Monetary Policy for the Eurozone

Support Economic Policies of the Eurozone Members

Foreign Exchange operations with regards to Euros

Issue Bank notes

Ensure smooth operation of the banking system across the Eurozone

The European Commission

The Eurozone

Eurozone Members

Austria Greece

Belgium Ireland

Bulgaria Italy

Cyprus Luxembourg

Demark Malta

Estonia Netherlands

Finland Portugal

France Slovakia

Germany Slovenia

Spain

The Eurozone is the term for the countries which have adopted the Euro as their

national currency. The Eurozone is controlled by a strict convergence criteria

and all members of the EU are obliged to join the Eurozone, except if they have

opt outs such as the UK. Once member states have complied with the conver-

gence criteria they should join the Euro Currency. In an exam you may get asked

to evaluate whether or not the UK will join the Euro. You should know the ad-

vantages and the disadvantages

Advantages Disadvantages

Eliminates currency conversion costs Transition costs (changing ATMs etc)

Eliminates exchange rate volatility

between UK and Eurozone

Sterling may swing more against the

Dollar

Price transparency will reduce prices Shocks may destabilise the economy e.g.

loss of national control may cause

problems (one size doesn’t fit all)

FDI inflows are encouraged Lack of convergence in housing market

(UK more sensitive)

Increased trade as a result of the above ECB has lower inflation targets which

may cause UK deflation

No devaluation option which increased

long run competiveness

Political Union moves closer

Political union moves closer

This is the main executive of the EU and represents the interests of the EU as a

whole. It’s main responsibilities is for ensuring that the laws and policies are

carried out correctly. The Commission has a cabinet government and the 27

members all sent commissioners to the Commission, but they represent areas not

the home state.

The Commission was established in 1958 and is currently chaired by it’s

President, José Manuel Barroso. The UK’s commissioner Catherine Ashton

currently holds the Vice Presidency of the Commission.

The Commission itself implements the policies agreed by the Council of Ministers

and the European Parliament. It often decides on what policies will be put before

the Council of Ministers and Parliament.

José Manuel Barroso

President of the Commission

Page 6: European Union Booklet

Euro Convergence Criteria Convergence criteria (valid for February 2013)

Country Inflation Rate Budget Deficit to GDP

Debt to GDP ERM II Membership Long Term Interest

Rates

Reference values max. 2.7% max. 3.0% max. 60%, or

declining min. 2 years

max. 5.74%

EU members outside of the Eurozone

Bulgaria 2.4% 1.0% 18.9% No 4.33%

Czech Re-public

3.4% 5.2% 45.5% No 2.68%

Denmark 2.2% 4.0% 45.6% 1 January 1999 1.39%

Hungary 5.4% 2.4% 78.6% (decreasing) No 7.62%

Latvia 2.0% 1.5% 41.9% 2 May 2005 4.35%

Lithuania 3.1% 3.2% 41.1% 28 June 2004 4.72%

Poland 3.5% 3.5% 55.8% No 4.85%

Romania 3.6% 2.9% 38.0% No 6.59%

Sweden 0.9% 0.2% 37.7% No 1.60%

UK 2.8% 6.3% 89.8% (increasing) No 1.73%

Candidates for EU membership

Croatia 3.6% 4.6% 53.6% No 6.10%

Iceland 6.0% 1.7% 96.2% (decreasing) No 6.81%

Macedonia 3.4% 3.8% 31.0% No No data

Montenegro 4.1% 4.0% 52.0% No No data

Serbia 7.3% 6.4% 59.2% No No data

Turkey 8.7% 1.9% 36.3% No 8.35%

Potential candidates for EU membership

Albania 2.0% (2012) 3.5% 63.8% (increasing) No No data

Bosnia and Herzegovina

2.2% (2012) 2.8% 43.7% No No data

Kosovo 0.6% (2012) 2.8% 17.6% No No data

Questions:

1) For each column identify which countries are able to join under that criteria

2) Are there any countries which could join now potentially?

Countries in the Eurozone

Eurozone Future Members

All members for the EU except for Denmark, Sweden and the UK are obliged to join the Euro when they meet

the criteria outlined in the Stability and Growth Pact.

Latvia plans to adopt the Euro in 2014 and Lithuania in 2015. The other states within the Union; Romania,

Bulgaria, Poland, Czech Republic and Hungary are all expected to join the Euro in 2016-2020.

Question: Using economic arguments, evaluate the view that Britain will one day

join the single European Currency