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EC307 (Macroeconomic Policy in the European Union) - Notes
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Week 1: History of EuropeEarly Post-war Years (1945-1959):
- Germany: Federal Republic of Germany (FRA) (i.e. 1945-1948: FR/UK/US occupation) vs Democratic Republic of Germany
(DRG) (i.e. 1961: Construction of Berlin Wall)
- European Coal and Steel Community (ECSC6 - Treaty of Paris 1951): Establishment of common market (i.e. coal/steel) in order
to avoid further weapons production
- European Economic Community (EEC6 – Treaty of Rome 1957): Establishment of basis of European Union
- European free Trade Association (EFTA7 1960) Response of the United Kingdom (UK)
Contextual History:
- Swinging Sixties’ (1960-1969): Social Liberalism: Youth Culture (e.g. The Beatles), May 1968 (i.e. Revolutionary Tendencies in
France), Pragues Spring (1968) (i.e. desire of Liberal Reforms with mass protest in Czechoslovakia but suppressed by Soviet
Union), Common Agricultural Policy (CAP 1962) (i.e. Establishment of cooperation on agricultural production), EEC9
Enlargement (i.e. Denmark/Ireland/UK in 1973)
- Community growth (1970-1979): Unification (1973: EEC9 with Denmark, Ireland, UK), First Oil Crisis (i.e. Yom Kippur War 1973:
Arab-Coalition/Israel War), Dictators End (i.e. 1968: Salazar Death POR, 1975: Franco Death SPA)
- Changing Europe (1980-1989): Single European Act (SEA 1986): Establishment of basis of Common Markets, Unification (1986:
EEC12 GREE, POR, SPA), Democratisation (i.e. 1979: First European Parliament Elections, 1991: Fall of Berlin Wall),
Borderless Europe (1990-1999):
- Maastricht Treaty (1993): Establishment of economic pillars (e.g. Inflation rates = 1.5%, Government Deficit = max 3%/GDP,
Debt/GDP = max 60%)
- European Single Market (ESM28 – 1993): Establishment of the Customs Union through Freedom of Movements (i.e. Goods,
Services, Labour, Money)
- Amsterdam Treaty (1999): Establishment of Political Institutions (e.g. Common Foreign and Security Policy), Clubs within the
Club (e.g. Schengen Agreement (1995): visa/police/immigration cooperation amongst limited members)
Further Expansion (2000-2010):
- Nice Treaty (2003): Enlargement Preparation (e.g. 2004: +10 East European Countries, Romania in 2007) but Constitutions-
Making failure (i.e. wait for Lisbon Treaty)
- Lisbon Treaty (2009): Establishment of democratic institutions through European Constitutions (e.g. European Court of Justice,
Increase Parliament Seats, Increase European Commission Power)
Week 2: What Does the European Union (EU) do?
MAIN TREATIES:
- European Economic Community (EEC6 – Treaty of Rome 1957): Goods/Services Movement: Custom Union (i.e. elimination of
barriers to entry amongst states whilst same barriers to entry towards outside states), Legislation (i.e. harmonisation of
production restrictions), Labour Movement: Legislation (i.e. harmonisation of social rights), Money Movement: Exchange rate
mechanism (i.e. harmonisation of currencies value)
® GOALS: Competition (i.e. Commission destruction of monopolies/Suppression in State Aids/Domestic Barriers), Agriculture (i.e.
Common Agricultural Policy (CAP 1962: Establishment of cooperation on agricultural production) (e.g. France/1950: Agriculture
= 1/3 Population, 2000s: 5%), Social Policies (i.e. political costs of harmonisation of social policies too high for common policy)
- Maastricht Treaty (Second Foundation Treaty - 1993): Sets background for Financial Integration (e.g. Inflation rates = 1.5%,
Government Deficit = max 3%/GDP, Debt/GDP = max 60%)/Monetary Integration (e.g. Price stability to prepare Currency)
- Budget (2017): Investments in Sustainable growth (37%)/Economic, social and territorial cohesion (34%)/Competitiveness
(14%)/Administration (6%) = Member-states 1% GDP contribution
MAIN INSTITUTIONS:
- European Council (Political leaders of each member state amongst which its president determines treaties after six-month
mandates rotation but no formal role in law-making) (i.e. Charles Michel president from 2019-Present)
- Council of Ministers (Political leaders of each member states in specific areas which it determines coordination of national
policies through unanimity or Qualified Majority Voting of 80% to adopt new laws concerning budget/international
agreements/general economic policies)
- European Commission (Executive team chosen from national governments during five years which holds legislative
proposal/surveillance/enforcement powers through majority vote and provides surveillance as “guardian of treaties”) (e.g. Vs.
Microsoft: anti-competitive behaviour fined EUR 497Million in 2004)
- European Parliament (Elected representatives which hold legislative proposal power through majority vote, 751 MEPs in EU28,
number of members varies with national populations, meets at Strasbourg and Brussels, elections dominated by local issues)
- Court of Justice (Legislative team chosen from national governments during six years which solves disputes amongst
individual/members/institutions but no policy-making and enforcement power of decisions)
La Porta et al. (The Economic Consequences of Legal Origins 2008):
- Legal Origin Theory: assumption of a correlation between a country’s historical system of law-making choices and its current
regulation and economic outcomes (i.e. civil law vs common law: civil law current less secure investor rights/stricter
regulation/inefficient governments in comparison to common law) ® legal structures implementation through conquest or
colonization (i.e. French civil law vs English common law)
® OR: Culture: religions/ethnics are not important determinants of legal origins/Politics: Not permanent effect on institutions
(e.g. Continental European countries formed alliances between families that controlled firms/win elections to secure the economic
rents/write legislation to benefit themselves)/History: No evidence of lack of change (e.g. minimal shareholder protection in UK
at the beginning of the twentieth century),
, Week 3: Economic Integration, Labour Markets and Migration (+GRAPHS)
- Lindbeck, Assar and Snower (The Insider-Outsider Theory of Employment and Unemployment 1989): Labour market: market
with the characteristics of collective wage bargaining through negotiation and regulation (e.g. minimum wage/employment
conditions) ® insiders (i.e. incumbent employees with market power and whose jobs are protected by various labour turnover
costs) & outsiders (i.e. uninvolved potential employees who are either unemployed or work in the informal sector) ®
Unions/Industries coordination conflicts: 1. Increase unions monopoly power 2. Forces unions to internalise negative effects of
higher wages in one sector on the purchasing power of workers in the other sector
- Economic Integration Effects (i.e. Free-Trade): Winners/Losers until equilibrium (i.e. Previously import-protected industries fall
such that wages fall/Current export industries increase such that wages rise) (e.g. without social harmonisation: workers in old
member states (EU15) might see workers in the new states as a threat to their level of social security)
- Migrations: Pre-1980s (i.e. PIGS towards North Europe), 1980s (i.e. Africa/Latin America towards PIGS), Low labour mobility
within union (i.e. barriers = Restrictions for new members’ national mobility/Differing pension systems/Unemployment
benefits/Regulated professions…)
- Docquier et al. (The Wage Effect of Immigration and Emigration): Common-Belief Paradox: Emigration Decreases outbound
country Local Wages (i.e. because of brain drain)/Immigration Does not affect inbound country local wages (i.e. no empirical
evidence) ® positive effects of immigration
Week 4: The Cost of a Common Currency (+GRAPHS)
- Mundell (A Theory of Optimum Currency Areas 1961): Optimum Currency Area (OCA): situation in which economies share the
same currency which enables the same monetary policies (i.e. experience the same shocks) and free capital movements (i.e.
adjust similarly to shocks) which ultimately maximises economic efficiencies despite the loose of relative instruments (e.g.
exchange rate de-/re-valuations/interest rate setting) ® costly if adjustment mechanisms not much available (e.g. low wage
flexibility/low labour mobility)
- “international disequilibrium”: leads to symmetric shocks (economic shock that affects all regions/sectors equally) & asymmetric
shocks (economic shock that affects regions/sectors equally uniformly) (SEE FRANCE-GER GRAPH EX.) ® asymmetric = costs of
monetary union compared independence / symmetric shocks = costs of independence compared to monetary union
- Insurance mechanisms: national insurance mechanisms that aim to solve asymmetric shocks back to equilibrium and which
does not prevent the adjustment mechanism (i.e. wages/mobility changes) through Public insurance systems (︎functions with a
centralised budget that allows for automatic transfers between countries of monetary union) (e.g. France allows
deficit/Germany allows surplus/Integrated capital markets redistribute purchasing power) and Private insurance systems
(︎functions with fully integrated bonds/equity markets between countries that allows for monetary transfers through capital
markets) (e.g. French firms make losses pushing down French stock prices/German residents hold French stocks so pay price of
their fall/French residents holding German recover from positive shock in Germany)
- OTHER ASYMMETRY SOURCES: Different fiscal systems/inflation and unemployment preferences/labour market institutions
(centralised vs. decentralised wage bargaining)/growth rates (trade imbalances/inflation rate differentials)
- Existence of Nation-States = source of Asymmetric Shocks (i.e. not same production structures/economies of scale lead to
agglomeration effects/not-strong-enough correlation between business cycles despite increase/not same government budgets)
- IT-GER EXAMPLE BELOW: If Italy kept the Lira and (only) announces that it will fix its exchange rate with the German mark,
there will again be incentives to move from F to G by surprise devaluations of the Italian lira︎ → no stable equilibrium. Only by
abolishing the Italian central bank and by adopting the German Mark can Italy escape from the high inflation equilibrium.
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