11 The Economic Consequences of the European Union
THE MAKEUP OF THE EU
TABLE 11.1
Selected Macroeconomic Indicators for EU Members
GNI
Real
GNI
per capita
GDP Growth %
Inflation
Population per capita
PPP
GDP
per annum
% per annum
Millions
(2000)
(2000)
billions (1999) (1990-1999)
(1991-2001)
Germany
United Kingdom
France
Italy
Spain
Netherlands
Greece
Belgium
Portugal
Sweden
Austria
Finland
Denmark
Ireland
Luxembourg
European Union
82
60
59
58
39
16
11
10
10
9
8
5
5
4
0.438
376.438
$25,050
$24,500
$23,670
$20,010
$14,960
$25,140
$11,960
$24,630
$11,060
$26,780
$25,220
$24,990
$32,020
$22,960
$44,340
$23,819
$25,010
$23,550
$24,470
$23,370
$19,180
$26,170
$19,640
$27,500
$16,880
$23,770
$26,310
$24,610
$27,120
$25,470
$45,410
$25,231
$2,112
$1,442
$1,432
$1,171
$596
$394
$125
$248
$114
$239
$208
$130
$174
$93
$19
$8,497
1.00
2.10
1.10
1.20
2.00
2.10
1.80
1.40
2.30
1.20
1.40
2.00
2.00
6.10
3.80
2.10
SOURCE: World Development Report 2002, Human Development Report 2001.
2.0
3.4
1.7
4.1
4.4
2.4
10.0
2.1
6.2
2.8
2.1
2.2
2.4
3.3
2.5
3.0
THE WELFARE EFFECTS OF THE COMMON MARKET
The theory of the economic consequences of the creation of the EEC, and its successor the European
Union, is well developed. The impact can be divided into static effects, which are examined formally
next, and the longer-term dynamic effects, looked at in the following section.
Static
Effects
P
Supply
Trade creation
a
Pt
Pb
Pc
O
Dynamic Effects
t
Trade Diversion
b
e
g
Q1
c
d
i
j
Consumption
Effect
f
h
Demand
Q
Q2 Country A
Q3
TABLE 11.2
Openness of EU Economies, 1960–1994 (average of imports and exports of goods as a percentage of GDP;
intra-EU trade is given as a percentage of total trade)
1960–1967
1991–1994
World
Intra-EU
World
Intra-EU
Belgium and Luxembourg
37.5
64.8
53.3
70.0
Denmark
27.0
52.3
25.4
53.0
Germany
15.9
44.8
20.7
52.2
Greece
12.7
50.6
17.0
59.2
Spain
8.1
47.8
15.2
62.9
France
11.0
45.8
18.7
63.3
Ireland
33.6
72.2
50.3
68.8
Italy
11.7
42.9
15.9
56.4
Netherlands
37.7
62.7
43.9
65.9
Portugal
19.8
48.3
28.5
73.3
United Kingdom
16.0
26.7
20.2
52.1
EU-12
8.8
45.0
8.9
58.6
Austria
—
—
25.6
66.1
Finland
—
—
22.4
46.7
Sweden
—
—
23.6
54.9
Note: For the member states, these figures include intra-Union trade; for EU-12, intra-Union trade has been
excluded.
SOURCE: Eurostat. [Loukas Tsoukalis, The New European Economy Revisited, 182.]
THE EXTERNAL TRADE POLICY OF THE EU
Developed Nations
Lower tariffs
Compliant with rounds
Member of WTO -- accepts Uruguay accords – problem with CAP.
TRADE WARS.
POLICY TOWARD DEVELOPING NATIONS.
LOME
NOT VERY HELPFUL BECAUSE OF TARIFF STRUCTURE.
LOWER ALL ROUND TARIFFS MORE HELPFUL.
THE ECONOMICS OF A SINGLE CURRENCY
The biggest recent change in the European Union is the adoption of a single currency. This must surely
be ranked one of the most important events of the late 20th century, both for its ramifications for the
global system of finance and for its impact on the policies of the member countries of the EU. The single
currency remains, however, a controversial issue. While on balance most studies have found economic
gains from the creation of a single currency, there are attendant costs that must be balanced against them.
Economic and Monetary Union, EMU
In March 1971 -- Snake
1979, European Monetary System (EMS) and the European Currency Unit (ECU).
In June 1989, the European Council adopted the proposal of the Jacques Delors, then president of the
Commission, to embark on a three-stage program leading to a single currency.
In late 1992, progress to monetary union was set back by the consequences of German reunification
Higher rates – strong DM
Strain on parities – requies raising domestic rates, or devaluatiuon or leave.
France stayed (high U)
.
Maastricht:
1. Its inflation rate did not exceed by more than 1.5 percent that of the average of the three member
states with the lowest inflation.
2. Its long-term interest rate did not exceed by more than 2 percentage points that of the three best states
in terms with the lowest inflation rates.
3. Its current public sector deficit was less than 3 percent of GDP.
4. Its public sector debt was less than 60 percent of GDP, or approaching 60 percent at a satisfactory
pace.
5. Finally, a member state’s exchange rate must have been stable over the two preceding years, showing
no more than “normal variation.”
The Benefits of a Single Currency
1. The most obvious is the elimination of currency conversion, releasing substantial resources in the
banking sector.
2. Another is from the end of exchange rate uncertainty, which should encourage trade and allow more
efficient allocation of resources within the EU, through specialization and economies of scale.
3. A third benefit is that the participating nations can largely eliminate their holdings of international
currency and bullion reserves. The combined reserves of the members of the EU in 1990 was about ECU
200 billion, while the United States with an economy similar in size had reserves of only about ECU 40
billion.
The Costs of a Single Currency
1. the elimination of exchange rate policy as a means of accommodating shocks and balancing the
external accounts.
.The size and openness of the economy determines the seriousness of losing currency flexibility. Small
countries have relatively large propensities to import and therefore are able to achieve external balance
through proportionately small changes in GDP. Larger countries, which are generally more closed,
require a larger movement of output to rectify external imbalances. As a rule therefore small countries
have lower costs of joining a fixed-rate system and especially a monetary union.
exposure of a national economy to an asymmetric shock, one affecting it more severely than the rest of
the monetary union. If all parts of the union are hit similarly by an economic shock, it can be
accommodated by coordinated union-wide monetary, and possibly fiscal, policy.
TABLE 11.3
European and American Industrial Structure: Europe by Nation, United States by State
European Community
United States
Mean Percentage
Mean Percentage
Sector
Share
Variance
Share
Variance
Food, beverages, and tobacco
11.2
11.3
8.3
3.9
Textiles, clothing, and leather
8.1
25.9
4.8
15.9
Wood and wood products
3.8
1.4
4.3
3.1
Paper and paper products
7.4
5.9
8.8
8.6
Chemical and chemical products
17
5.8
17.1
33.9
Nonmetallic mineral products
4.8
1.4
2.7
0.3
Basic metals
6.2
2.4
4.1
3.7
Metal products
9.3
2.9
7.4
5
Nonelectrical machinery
10.1
12.9
19.8
27.2
Electrical machinery
10.5
8.6
10.3
9.6
Transport equipment
11.7
7.5
12.5
26.4
Totals
100.1
8.4
100.1
18.0
SOURCE: Bini Smaghi, and L. and S. Vori, “Rating the EU as an Optimum Currency Area,” Banca D’Italia
Temi do Discussione, January 1982.
The degree of factor mobility also affects the desirability of a currency union.
Who Gains and Who Loses from a Single Currency?
TABLE 11.4
Estimates of Net Benefits of EMU Membership EU of 12
Benefits
Costs
Net Benefits
Belgium/Luxembourg
44.5
1.39
43.11
Denmark
13.65
6.47
7.18
Germany
14.35
1.81
12.54
Greece
13.25
14.01
-0.76
Spain
8.95
2.07
6.88
France
12.95
0.71
12.24
Ireland
38.85
8.48
30.37
Italy
9.7
2.02
7.68
Netherlands
34.2
5.14
29.06
Portugal
24.55
10.31
14.24
United Kingdom
10.7
8.4
2.3
Benefits: Intra-EC trade as a percentage of GDP.
Costs: Difference between nation’s economic structure and the EC average.
SOURCE: D. Gros and N. Thygesen, European Monetary Integration (New York: Addison Wesley, 1998),
258.3D. Gros and N. Thygesen, European Monetary Integration (New York: Addison Wesley, 1998), 258.
The Growth and Stability Pact
It therefore insisted on the stability and growth pact. The pact stipulates that all EU countries will run
balanced budgets in normal times. And if any of the 12 that have adopted the euro ever lets its budget
deficit exceed 3% of GDP, it will be forced back into line with the threat of huge fines. However, tough
times have cut central government tax revenues and standard “Keynesian” economic theory insists that
the correct way out of a recession is to increase the size of the deficit. Portugal became the first to break
the deficit limit by notching up 4.1% for the 2001 tax year. Italy and France are getting dangerously near
the trigger point and Germany has accepted that it will cross the 3% threshold during 2002.
In the fall of 2002, the President of the Commission, Romano Prodi, an Italian former economics
professor, publicly characterized the pact as “stupid”. When the EU recovers from this iconoclasm it is
probable that some form of flexibility will be built in to take account of the need for deficit based
reflation in tough times.
There are three main suggestions for reform.
1. The first is that countries who have low debt to GNP ratios (like Germany) may be allowed to exceed
the limit;
2. re-classifying public outlays into “current” and “investment” expenditures, and allow some latitude
for the latter. This would allow extensive public works projects to escape the guillotine.
3. The final possibility is to recognize that 3% was too low and raise it to 5% while still insisting on
balancing budgets over a longer-term (10 year) horizon.
The Independence of the European Central Bank
The Union Budget
The European Union has a surprisingly modest budget, but it does not provide many services. In 2002 it
amounted to €96 billion Euros ($97 billion at the current exchange rates), little more than 1% of total
GDP of the member states. Expenditures averaged 2.4 percent of total public expenditure of member
states—€314 per head per year.
FIGURE11.2
Sources of EU Revenue, Budget 2001
SOURCE: Eurostat.
Agricultutural Levies (1.78%)
Misc (2.10%)
Customs Duties (14.83%)
urth Resource (43.02%)
VAT (38.27%)
FIGURE 11.3
Expenditures of the EU, Budget 2002
SOURCE: Eurostat
Other Foreign Aid (5.28%)
Pre-accession aid (3.17%)
Administration (5.26%)
R and D (4.12%)
Internal Policies (2.38%)
CAP (45.23%)
tructural Operations (34.56%)
THE COMMON AGRICULTURAL POLICY
The German Commissioner for Agriculture, Franz Fischler, outlined his proposals for CAP reform in
July 2002. His chief proposal was to de-link the subsidies from production and direct instead toward the
income support of poor farmers and to investment in rural development. He was strongly backed by
Britain, the Netherlands and Germany, which, although they receive substantial CAP aid, are net losers
to the scheme because of their high contributions to the EU budget. Predictably France and Spain, big
net gainers, protested and French President Jacques Chirac was able to extract support from the Germans
to maintain the system in place until at least 2007. After that, when the accession of east Europe is
complete, the aid to the new members will be limited to just 20% of the total. Given the poverty and
heavy dependence on agriculture of the newcomers this is far from what would appear to be fair.
The success of CAP as a policy is debatable, and one’s conclusion depends largely on one’s viewpoint.
One objective was to stabilize prices with the Community, and this has been achieved. There has been
less price volatility in the Community than found in world markets or even within the United States,
which also has an extensive and expensive system of supports. However, the cost of stability has been
the most expensive food in the world, except perhaps in Japan. A second goal was certainty of supply.
Since the EU is now self-sufficient, this target has been met. However, one might question the value of
the objective itself. Food is easily available from a variety of producers, most of whom can reasonably
be expected to remain politically friendly to Europe. Therefore it is hard to make a case for strategic selfsufficiency. (This contrasts with, say, the energy sector, which has fewer supply points, many of which
are constrained with political problems.) Moreover, self-sufficiency has been more than achieved;
overproduction, and the disposal of excess, has become a major preoccupation of the EU. A third
objective was to raise agricultural productivity in Europe. The existence of CAP has coincided with a
sharp improvement in agricultural productivity, though a cause-and-effect relationship is unclear. All
developed countries have seen in the last forty years an increase in both yield per acre and labor
productivity. It can be argued that by guaranteeing the incomes of marginal farmers, CAP has shielded
producers from market discipline, an effect that will become stronger when CAP’s emphasis shifts from
price support to income guarantee.
Thus CAP’s success lies in the eye of the beholder. Farmers like the policy, and consumers have in
general suffered, but in a surprisingly uncomplaining manner. The policy has contributed to the
cohesion of the EU, by winning the support of the poorer nations at the periphery. It is no coincidence
that Ireland, a significant gainer from CAP, was the first country to enthusiastically embrace the
Maastricht Treaty in a popular referendum. Moreover, CAP is instrumental in preserving an economic
pulse in depressed regions. However, it may not have this cohesive effect if agricultural aid to the
twelve countries due to join between 2004 and 2007 are subject to a different and less generous formula
than the current membership. That would be a recipe for festering resentment and disunity.
THE STRUCTURAL FUNDS
The structural funds have clear objectives:
1. To promote development and economic adjustment in regions whose GDP per head is less than 75
percent of the EU average1
2. To radically improve the economic base of regions most seriously affected by industrial decline
3. To combat long-term unemployment
4. To address the labor market problems of young people
5. To promote rural development and structural adjustment in agriculture and fisheries
6. To assist regions with an extremely low population density
Expenditure on the structural funds will necessarily rise with the accession of the poorer countries of
eastern Europe. While the Czech Republic and Slovenia are relatively prosperous, their per-head income
is less than 50 percent of the EU average, even when measured in purchasing power terms. Other
potential entrants have incomes as low as 20 percent of the average.
1
This single objective absorbed three-quarters of total regional expenditure in 1999, and practically all goes to Portugal, Spain, Southern
Italy, Eastern Germany, and the overseas departments of France.
INDUSTRIAL POLICY
Although much smaller than the agricultural or the structural funds, the next largest item in the EU
budget is expenditure on internal policies, embracing research and development, industrial subsidy, and
transportation. Together these activities take almost 6 percent of the total budget.
General Trends in European Industrial Policy
National Industrial Policy and the Era of National Champions
The Industrial Policy of the EU
.
Competition Policy
The GE Honeywell Merger
In 2001, the EU Competition Directorate headed by its Italian Commissioner Mario Monti earned
the distinction of squelching the world’s largest ever industrial merger – the $42 billion offer of
General Electric for Honeywell. These companies, both of which had considerable markets in
aviation-related industry, were set to merge and already had secured the approval of American
authorities. However, the European authorities saw in the merger strong anti-competitive elements
and produced a series of theories of how the merger might harm competition. One was that the
merged entity would enjoy dominance in avionics; another was that the “bundling” of GE’s
financial might with Honeywell’s expertise in instrumentation would force customers to buy
packages of products rather than supporting independent suppliers.
The American attitude was that the competition agency’s antagonism lay more in seeking to protect
European producers than in protecting European consumers. GE offered to divest a substantial part
if the avionics production of the merged firm, but balked at the amount demanded by the EU. In
the end GE walked away from the deal to the dissatisfaction of Honeywell shareholders and giving
ample proof of the effectiveness, though perhaps not the benefits, of EU competition policy.
SOCIAL POLICY
two “Cs,” cohesion versus competitiveness.
The Problem of Unemployment
TABLE 11.5
Employment and Unemployment in the EU, 1985-2001
1985
1991
1
Labor Force
151.0
167.0
2
Employment
136.0
154.0
3
Unemployment
15.0
12.9
4
Unemployment rate (%)
9.9
7.5
SOURCE: OECD
1996
168.8
151.5
17.3
10.3
2001
178.2
164.7
13.5
7.6
Causes of Unemployment in Europe
Public expenditure on social protection averages 22% of GDP in EU-15 on the basis of 1990
data, approaching 35% in some Northern European countries, as opposed to 15% in the U.S. and
only 12% in Japan). The difference in the amount spent by governments is reflected in different
popular expectations; a very large majority of Europeans seem to expect their governments to
provide a basic income for all, including income support for the unemployed . . . . Solidarity has
become a key word in the political culture of European societies; is it likely to change in the new
economic environment characterized by high rates of unemployment and the growing financial
pressures on the welfare states.2
The System of Collective Bargaining.
High Reservation Wages.
Non-wage Costs.
Table 11.6
Total Taxes on Labor in the EU
Income
Tax
Employee
Belgium
21.4
10.5
Denmark
32.4
11.7
Germany
17.3
17
Greece
1.8
12.4
Spain
9.3
4.9
France
10.4
9.6
Ireland
13.6
4.6
Italy
14.2
6.9
Luxembourg
11.2
12.1
Netherlands
5.3
25.3
Austria
7.4
13.8
Portugal
5.4
8.9
Finland
21.4
5.6
Sweden
19.5
5.3
United Kingdom 14.5
7.2
Employer
24.7
0.4
17
21.9
23.4
28.1
10.7
25.3
12
13.9
24
19.2
20.6
24.7
8.5
Total
SSCs
35.2
12
34
34.3
28.3
37.7
15.2
32.2
24
39.2
37.7
28.1
26.2
30
15.8
Total
56.6
44.4
51.3
36.1
37.6
48.1
28.8
46.4
35.2
44.5
45.1
33.5
47.5
49.5
30.3
EU15
11.4
19.6
31
45
7.2
9.1
7.1
9.4
14.3
18.5
30.9
24.8
14
United States 16.6
Japan
6.3
SOURCE: Eurostat
2
Tsoukalis, The New European Economy Revisited, 115.
FRAGMENTED LABOR MARKETS.
TABLE 11.7
Output, Productivity, and Capital Labor Substitution (annual percentage rates)
1961–1973
1974–1985
1986–1995
1986–1990
1991–1995
1. Technical Progress = TFP Growth
European Union
2.8
1.0
1.2
1.5
1.0
United States
0.6
0.9
0.8
0.6
0.9
Japan
6.3
1.1
0.9
2.3
-0.5
2. Macroeconomic Capital-Labor Substitution = Labor Saving Growth (2 = 3 - 1)
European Union
1.5
1.0
0.7
0.4
1.1
United States
0.3
0.1
0.1
0.0
0.2
Japan
1.8
1.6
1.1
1.2
1.1
3. Apparent Labor Productivity Growth (3 = 5 + 2)
European Union
4.4
2.0
1.9
1.9
1.9
United States
1.9
0.5
0.8
0.6
1.1
Japan
8.2
2.7
2.0
3.6
0.6
4. Employment Creating Growth (4 + 5 = 3)
European Union
0.3
0.0
0.4
1.3
-0.5
United States
1.9
1.8
1.7
2.1
1.2
Japan
1.3
0.7
0.9
1.0
0.7
5. Actual GDP Growth (5 = 1 + 2 + 4)
European Union
4.7
2.0
2.3
3.3
1.4
United States
3.9
2.3
2.5
2.8
2.3
Japan
9.7
3.4
2.9
4.6
1.3
SOURCE: European Commission. “The Presidency Conclusions” of the European Council Meeting, Essen,
December 1994, can be located at http://www.europarl.eu.int/dg7/summits/en/ess1.htm#emplIn
In short, Europe has grown at a slow pace, and such growth as has occurred is biased toward
economizing on labor, and the result has been growing joblessness. The data of Table 11.7 are merely an
accounting of this process; the causes have already been itemized—the system of collective bargaining,
the high reservation wage brought about by generous social protection, high non-wage costs, and
fragmented labor markets. To this should probably be added another factor: the shift to more restrictive
fiscal policy occasioned by trying to match the Maastricht criteria. Sine the inception of the Euro area
this factor becomes the deflationary aspect of the growth and stability pact, which has resulted in a
contraction in government service expenditures.
The EU Program on Unemployment
The Commission and the European Council are aware that unemployment is a threat to social cohesion,
despite the paradox that joblessness has been created by an attempt to promote social cohesion through
highly redistributive policies. At the 1994 meeting of the European Council in Essen, an outline plan to
address unemployment was presented, building on a 1990 White Paper on Employment and Growth. The
plan envisaged five sets of policies to tackle the joblessness problem.3
“The Presidency Conclusions” of the European Council Meeting, Essen, December 1994, can be located at
http://www.europarl.eu.int/dg7/summits/en/ess1.htm#emp1In
3
Some of these are rather “old hat” and represent the repetition of long-held beliefs rather than a true
change in policy. Among these is a faith in vocational training and life-long education, and aid for
groups most hard hit by unemployment. There is also a commitment to “increase the employmentintensiveness of growth.” However, there are also more innovative ideas. One of these consists of a
wages policy that encourages labor-intensive investment by moderating wage increases to a rate below
the growth of productivity. Another is a series of initiatives, particularly at regional and local level, that
create jobs in the environmental and social services spheres. The European Council also attempted to
come to grips with some of the root causes of unemployment—high non-wage labor costs and income
support policies that are “detrimental to readiness to work.”
REDISTRIBUTION AMONG NATIONS IN THE EU
TABLE 11.8
Net Transfers through the EU Budget, 1994-2000
(receipts minus contributions expressed in millions of Euros and as percentage of national GDP)
1994
1997
2000
Share of
ECU
ECU
ECU
Total EU
millions
Percentage millions
Percentage millions
Percentage Receipts
Austria
-886.1
-0.49
-543.5
-0.27
2.5
Belgium
-138.6
-0.07
-505.5
-0.24
-327.3
0.13
4.0
Denmark
388.7
0.32
61.8
0.04
169.1
0.10
2.0
Finland
-12.4
-0.01
216.9
0.17
1.5
France
-1,900.9
-0.17
-1,486.7
-0.12
-1,415.3
-0.10
16.7
Germany
-11,302.2
-0.65
-8,962.7
-0.48
-9,273.2
-0.47
24.4
Greece
3934.4
4.68 4,3012.5
4.05
4,373.9
3.61
1.6
Ireland
1,938.8
4.65
2,788.0
4.40
1,674.6
1.83
1.4
Italy
-1,881.3
-0.23
-1,888.2
-0.18
713.4
0.06
13.0
Luxembourg
-64.5
-0.46
-62.8
-0.39
-65.1
-0.35
0.2
Netherlands
394.5
0.32
1150
0.6
-1224
-0.38
6.5
Portugal
—
—
514.9
1.45
2675.4
3.07
1.5
Spain
3354.1
0.81
5512.2
1.15
5,055.9
0.86
7.7
Sweden
-1210.2
-0.60
-1,177.4
-0.50
2.7
United
Kingdom
1078.3
0.13
-3,547.7
-0.05
-3,506.8
-0.25
14.3
Total
-3,143.8
-0.05
-3,802.9
-0.05
-3998.5
-0.05
100.0
Note: Approximately 5% of all expenditure is absorbed by administrative costs or is used for development aid. These outlays cannot be
apportioned among the member states and consequently the aggregate of member states’ contributions to the EU budget exceeds the
total for receipts.
SOURCE: Court of Auditors, accessed at http//:europa.eu.int/comm./pubfin/data
The European Union is a redistributive organization. A variety of programs redistribute income among
individuals and nations. Table 11.8 gives some estimates of the extent of that redistribution. Because of
administrative costs and the provision of foreign aid, the costs of the EU outweigh the allocated benefits
by about 5%. Some countries benefit from administrative more than others. Belgium has the benefit of
the Commission being located in its capital, a considerable gain to the economy of the Brussels region.
Luxembourg and France also gain from the Court of Justice and the Parliament, respectively. Given
these limitations we can see that there are six consistent gainers – Greece, Ireland, Portugal, Spain and
Denmark. The first four are the poorest nations in the Union at present. The gains of some of these
countries are considerable, with between two of five percent of national income coming from Brussels.
Denmark is relatively well off but gains disproportionately because of its higher share of subsidized
agriculture in its GDP. There are also five consistent payers – these are Germany, Britain, France,
Austria and Luxembourg. The other five members drift between being receivers and givers.
The entry of the additional twelve countries in 2004 and 2007 will change this balance. All of the
newcomers are poor and most are highly agricultural. Although the deal on agricultural aid cut between
the Germans and The French will limit agricultural aid to the new members they will inevitably be net
gainers, and the countries in the middle will doubtless have to contribute more.
KEY TERMS AND CONCEPTS
Basic Research in Industrial
Technology (BRITE)
cohesion
Common Agricultural Policy (CAP)
Common External tariff (CET)
consumption effect
Economic and Monetary Union
(EMU)
employment intensiveness
European Central Bank (ECB)
European Currency Unit (ECU)
European Economic Area (EEA)
European Monetary Institute (EMI)
European Monetary System (EMS)
European Research Coordinating
Agency (EUREKA)
European Strategic Programme
for Research in Information
Technology (ESPRIT)
laissez faire
life-long education
Lomé agreements
Maastricht criteria
market for corporate control
most favored nation principle
optimum currency area
reservation wages
stability and growth pact
structural funds
trade creation effect
trade diversion effect
vocational training
QUESTIONS FOR DISCUSSION
1. Do you think that the creation of regional organizations like the EU will hasten or impede moves to freer
global trade?
2. Why does the trade creation effect enhance welfare, while trade diversion lessens it?
3. Are you surprised that the openness of the EU with respect to the rest of the world has not changed since
the 1960s? What accounts for this?
4. Why was it thought necessary to improve the Maastricht criteria on potential entrants of the EMU?
5. How is the convergence issue to be handled after the creation of the EMU?
6. Is Europe an optimum currency area?
7. Why is it important to have an independent central bank for Europe?
8. Has the common agricultural policy been a success? How would you reform it?
9. Why is cohesion now the most important issue in the EU? How will enlargement change it?
10. Discuss the evolution of competition policy in the EU. Why is the EU concerned at the merger of two U.S.
firms like GE and Honeywell?
11. What have been the root causes of growing unemployment in the EU? Are they the result of the economic
system?
RESOURCES
BOOKS AND ARTICLES
Britton, Andrew, and David Mayes. Achieving Monetary Union in Europe. London: Sage Publications, 1992.
Buiter, Willem, Giancarlo Corsetti, and Nouriel Roubini. “Excessive Deficits: Sense and Nonsense in the Treaty
of Maastricht.” Economic Policy, April 1993, 58–100.
Devinney, Timothy M., and William C. Hightower. European Markets after 1992. Lexington, Mass.: D.C. Heath
and Co., 1991, 52.
El-Agraa, Ali M., ed. The Economics of the European Community. 3rd ed. New York: St. Martin’s Press, 1990.
Fossati, Amedeo, and Giorgio Panella, eds. Fiscal Federalism in the European Union. Vol. 9 of Routledge
Studies in the European Economy. New York: Routledge, 1999.
Frieden, Jeffrey, Daniel Gros, and Erik Jones, eds. The New Political Economy of EMU. London: Rowman and
Littlefield, 1998.
Molle, Willem. The Economics of European Integration (Theory, Practice, Policy). Aldershot, England:
Dartmouth Publishing, 1990.
Nevin, Edward. The Economics of Europe. New York: St. Martin’s Press, 1990.
“A Survey of Business in Europe: Present Pupils.” The Economist, 23 November 1996, 1–16.
Swann, Dennis. The Economics of the Common Market, 6th ed. London: Penguin Books, 1988.
Tsoukalis, Loukas. The New European Economy Revisited. Oxford: Oxford University Press, 1997.
United Nations. Economic Commission for Europe Annual Reports.