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European
Economy in
Focus
2006 Edition
Author: Geoff Riley (Head of Economics, Eton College)
European Economy in Focus
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THE EUROPEAN UNION IN FOCUS 2006 EDITION
1
INTRODUCTION TO THE ECONOMICS OF THE EU
7
1.1
The population of the European Union
8
1.2
The European Union in a Global Perspective
8
1.3
Trade Patterns and Trade Blocs in the World Economy
10
1.4
The European Union Budget
13
1.5
The UK’s Trade with the European Union
15
2
TRADE AND THE EU SINGLE MARKET
17
2.1
Trade creation and trade diversion
19
2.2
The Four Freedoms in the Single Market
22
2.3
Evaluating the impact of the Single Market
23
2.4
Price Differentials within the Single Market
24
2.5
Inward Investment into the European Single Market
26
2.6
Fiscal harmonization
28
2.7
Tax dumping
30
2.8
Suggestions for further research on the single market and fiscal harmonization
30
3
EUROPEAN MONETARY UNION
31
3.1
Monetary Policy in the Euro Zone - The European Central Bank
31
3.2
Joining the Euro – Meeting the Convergence Criteria
32
3.3
The Case for UK Membership of the Euro
32
3.4
The Case against UK Participation
33
3.5
Optimal Currency Areas
34
3.6
Staying outside the Euro Zone – retaining the freedom to choose
35
3.7
Labour and the Euro - the 5 Economic Tests
36
3.8
The Importance of Economic Convergence
36
3.9
Suggestions for further reading and research on European Monetary Union
41
4
MACROECONOMIC DEVELOPMENTS IN THE EURO ZONE
42
4.1
Short Term Economic Growth
42
4.2
Macro performance of selected countries
43
4.3
Unemployment
46
4.4
Inflation and interest rates
46
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4.5
The Euro Exchange Rate
49
4.6
The Fiscal Stability and Growth Pact
50
4.7
Suggestions for further research on developments in the Euro Zone
54
5
LIVING STANDARDS AND POVERTY IN THE EU
55
5.1
Defining and Measuring the Standard of Living
55
5.2
Living Standards: The Purchasing Power Parity Adjustment
57
5.3
European Regional Policy
58
5.4
Instruments of regional policy
60
5.5
Has EU Regional Policy Worked?
61
5.6
Regional policy and infrastructure
62
5.7
Enlargement and Regional Policy
62
5.8
EU Regional Policy and the UK
63
5.9
The Importance of the regional Issue
64
6
ENLARGEMENT OF THE EU
65
6.1
The Economic Structure of the New Member States
65
6.2
Joining the European Union – Requirements for Entry
70
6.3
Advantages of Enlargement for Accession Countries
70
6.4
Disadvantages and Costs for Accession Countries
75
6.5
Advantages of Enlargement for the EU
75
6.6
Disadvantages of Enlargement for the EU
77
6.7
European Enlargement and the Labour Migration Issue
78
6.8
Enlargement and Tax Competition between Nations
80
6.9
Enlargement and the Single Currency
81
6.10
Comparative Advantage and Trade
82
6.11
Suggestions for Further Research on EU Enlargement
84
7
UNEMPLOYMENT IN THE EUROPEAN UNION
85
7.1
Economic and Social Costs of Unemployment
86
7.2
Explanations for high unemployment
87
7.3
Reforming Europe’s Labour Markets
90
7.4
Suggestions for Further Research on Unemployment in Europe
92
8
THE COMMON AGRICULTURAL POLICY
8.1
93
Background to the CAP
European Economy in Focus
93
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8.2
The Economics of Farm Support
94
8.3
Costs of the CAP – Government Failure
97
8.4
The Environmental Costs of the CAP
99
8.5
CAP and Developing Countries
101
8.6
Europe and Developing Countries - Reforming the EU Sugar Regime
103
8.7
Farm Reforms – Lessons from New Zealand
105
8.8
Reforming the CAP – the Long March
105
8.9
Costs and Benefits of CAP Reform
107
8.10
EU Enlargement and CAP reform
108
8.11
Winners and Losers from CAP Reform
108
8.12
Suggestions for further reading and research on the Common Agricultural Policy
109
9
10
11
EUROPEAN FISHERIES POLICY
110
9.1
Resource depletion - the long term decline in European fish stocks
110
9.2
The Common Fisheries Policy (CFP)
111
9.3
EU Fisheries Reform Deals
112
9.4
Controlling fish stocks – lessons from Iceland
112
9.5
Web Links for Further Research on the Fisheries Issue
113
EUROPEAN ENVIRONMENT POLICY
114
10.1
Concerns over environmental damage
114
10.2
Europe’s commitments to the Kyoto protocol
114
10.3
The main principles and instruments of EU environmental policy
115
10.4
Environmental taxation
115
10.5
The “polluter pays principle”
116
10.6
Difficulties with environmental taxation
117
10.7
Pollution Regulation – European Directives
117
10.8
Pollution Emissions Trading
118
10.9
Policies towards Waste Management
119
10.10
Web Links for Further Research on European Environmental Issues and Policy
120
EUROPEAN TRANSPORT POLICY
121
11.1
The Economic Importance of Transport
121
11.2
The main characteristics of transport
122
11.3
The growth of demand for transport in Europe
122
11.4
The European Aviation Industry
124
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11.5
12
13
Suggestions for further research on European Transport Policy
127
EUROPEAN UNION COMPETITION POLICY
129
12.1
Anti-Trust Policy - Abuses of a Dominant Market Position
130
12.2
Anti-Competitive Practices:
131
12.3
Market Liberalisation
135
12.4
State Aid in Markets
135
12.5
European Merger Policy
136
12.6
Suggestions for further research on European Competition Policy
138
REVISION ADVICE
139
13.1
The Nature of a Synoptic Paper
139
13.2
The Economist’s Toolkit
140
13.3
The AQA Exam on the Economics of the European Union
140
13.4
Strategies for scoring high marks on the European paper
141
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