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Summary of Economics of the European Union
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Lecture 1: History of the EUEarly Post War Period: climate for radical change → Europe has experienced horrifying wars
and was in ruins after WWII:
● Mainly as an effect of governmental failures.
● During the Second World War, millions of people died.
● The war also caused enormous economic damage: GDP levels dropped -> people are
less rich and therefore can consume less.
The main question in 1945 was: ‘How can Europe avoid another war?’
What caused the war? Three schools of thought were in evidence and the answers implied 3
very different solutions:
● blame Germany → ‘Neuter’ Germany to avoid any future aggression;
● blame capitalism → adopt communism;
● blame nationalism → pursue European integration (this vision prevailed, but this was
far from clear in the late 1940s).
Emergence of a divided Europe → The economic, political and military situation in Europe after
WWII:
● Germany was divided into the US, UK, French, and Soviet zones.
● The Soviet Union led communism spread in East Europe quite aggressively.
● America and Britain rejected the Soviet vision and this confrontation led to the ‘Cold
War’ - the division ruled European realities for a half century.
● The US, UK, and French zones merged in 1947/8 → This was a defining moment in
Europe and a precursor of European integration.
● ‘Berlin Blockade’ and ‘Berlin air bridge’ in 1948.
● The Federal Republic of Germany was established in 1949.
First steps in European integration
Marshall Plan (1948)
The USA offered financial assistance if countries agreed on a joint programme for economic
reconstruction: Marshall Plan aid amounted to $12 billion, with half of this going to the UK,
France and West Germany.
● The Organisation for European Economic Cooperation (OEEC) administered this aid
and prompted trade liberalization.
- The OEEC (which in 1961 became the OECD) started in 1948 with 13 western
members of today’s EU plus Norway, Iceland, Switzerland and Turkey.
- It advanced European integration.
1
, ● The European Payment Union (EPU) facilitated payments and fostered trade
liberalization.
→ Trade liberalisation was impulsed by the concept of comparative advantage.
→ New view: trade liberalization could be pro-growth and pro-industrialization.
The drive for deeper European integration
● The OEEC was an economic success boosting income, but would it prevent another war
between France and Germany?
● The OEEC and EPU produced booming imports and exports, and rising incomes. But
some OEEC members felt that European integration would have to be much deeper to
make a new war unthinkable.
● Problem → European nations disagreed sharply on how European integration should
move beyond the OEEC and EPU: fundamental disagreement about the depth of
European integration.
● The debate over whether we need ‘more Europe’ or ‘less Europe’ has been going on
since the 1950s until today.
Two strands of European integration:
Federalism vs Intergovernmentalism → The two concepts display the disagreement about the
depth of European integration. They describe the trade-off between European integration and
national sovereignty.
→ The centralizers are called 'federalists'; the de-centralizers are called
'intergovernmentalists'.
● Intergovernmentalism: nations retain all sovereignty with only international
cooperation.
Institutional examples: OEEC (1948), Council of Europe (1949), Court of Human Rights (1950),
and EFTA (1960).
● Federalism: supranational institutions.
Institutional examples:
- ECSC (1951): Belgium, France, Germany, Italy, Netherlands, and Luxembourg (the ‘Six’)
place their coal and steel sectors under the control of a supranational authority
(Schuman Plan);
- EEC (1957): riding on the success of the ECSC, the ‘Six’ committed to form a customs
union, promise free labour mobility, capital market integration, free trade in services,
and a range of common policies;
→ but also failures: European Defence Community (EDC) and European Political Community
(EPC).
2
,The two non-overlapping circles: Situation by the late 1960s → European countries either
joined the EEC or the EFTA with economic discrimination between the two groups:
Evolution of the two circles → domino effect I
● Falling trade barriers (= trade liberalisation) within the EEC and within EFTA (but not
between) led to discrimination.
● The GDP (i.e., potential market size) of the EEC was much larger than that of EFTA (and
EEC incomes were growing twice as fast).
- Thus, the EEC club was far more attractive to exporters and this led to new
political pressure for EFTA nations to join the EEC.
● The UK applied for membership in 1961 and Denmark, Ireland, and Norway also
followed - as they would otherwise face even stronger discrimination with the UK
joining EEC.
● Other EFTA nations did not apply because of political reasons such as neutrality
(Switzerland), lack of democracy (Portugal) or relative independence from the EEC
market (Iceland).
● Charles De Gaulle stopped UK membership twice. Denmark, Ireland, and the UK joined
in 1973 while Norwegians said no in a referendum.
● Firms based in the remaining EFTA states would suffer a disadvantage (trade diversion
effects):
- EFTA industries pushed their governments to address this situation;
- Resulted in a set of bilateral free trade agreements (FTAs) between each
remaining EFTA nation and the EEC.
3
, Trade diversion is an economic term related to international economics in which trade is
diverted from a more efficient exporter towards a less efficient one by the formation of a free
trade agreement or a customs union. Total cost of goods becomes cheaper when trading within
the agreement because of the low tariff.
Euro-pessimism (1973-1986)
● Political shocks:
- ‘Luxembourg Compromise’ + enlargement = decision-making jam;
The Luxembourg Compromise (or "Luxembourg Accord") was an agreement reached in
January 1966 to resolve the "Empty Chair Crisis" which had caused a stalemate within the
ECC.
In July 1965, intergovernmentalist Charles de Gaulle boycotted European institutions due to
issues he had regarding new political proposals by the EC. This event, known as the "Empty
Chair Crisis", affected the European Community. Several issues regarding European political
integration led to the confrontation. De Gaulle believed that national governments should
move towards integration and did not agree with the Commission's attempt to create a shift
towards supranationalism (federalism), extending powers beyond national borders.
- unanimity was the typical rule in EEC decision-making procedures: the insistence on
consensus radically reduced the EEC’s ability to make decisions.
● Economic shocks:
- Bretton Woods falls apart, 1971-1973;
- EEC failed to establish monetary union (Werner Plan was put on hold);
- 1973 and 1979 oil price shocks with stagflation;
4
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