Economics of the EU
Lecture 1
The common market: main principles
The four freedoms:
- Free movement of goods
- Free movement of services, you actually have to be located in the country where you want
to operate. Which is why you also need free movement of capital and labour. It’s not possible
without the last two.
- Free movement of capital
- Free movement of labour
Barriers to free movement of goods
When you export goods, you can just ship them to other countries. No physical presence
needed. More easy then services.
Natural barriers
• Language; culture; transportation costs ( the type of advertising that works in the NL and in
Italy is very different; cultural differences. You will have to hire different people. Railway
systems are still focused on national states, this will increase transportation costs.) a problem
but not a major problem.
Tariff barriers (= taxes on imported goods), tariff rates do not exist within the EU but they do
exist with trade outside of the EU (internal market).
Non-tariff barriers
• Specific limitations (quotas; ver’s (voluntary export restraint); subsidies; local content
requirements; buy national regulations), barriers that have been intentionally introduced by
governments to protect their own producers (quite easy to get rid of through negotiation).
Provide domestic producers with a competitive advantage. Tariffs, quotas, local content
requirements, but national regulations are not allowed.
• Non-specific limitations: these are not intentional barriers to trade
- Differences in taxation (you can try to harmonize, solutions are going to create costs in
bureaucracy) MS will have different VAT systems or indirect tax systems.
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,- Regulatory and technical standards (most important barrier, because these regulations
protect workers, environment, health, and consumers as well) Every MS tends to do these in
a different way. Think of ingredients allowed, labelling, regulations on the work floor, etc.
These regulations add to the cost as you have to meet all the requirements. EU has set up a
process, to ensure that these barriers are less problematic through harmonisation.
- Government participation in trade (governments tend to be responsible for 20% of all
production, think of hospitals. Government tend to buy from domestic producers) Roads,
airports, infrastructure.
- Exchange rate fluctuations, before the EMU there was a economic monetary system.
The principle of mutual recognition; The mutual recognition principle ensures market
access for goods that are not, or are only partly subject to EU harmonisation legislation. It
guarantees that any good lawfully sold in one EU country can be sold in another. This is
possible even if the good does not fully comply with the technical rules of the other country
(although there may be exceptions where public safety, health or the environment are
concerned).
Barriers to free movement of services
All barriers that relate to goods (see previous slide), are there for services as well.
Barriers that specifically relate to services
• Barriers to establishment
• Operational restrictions
• Restrictions on the use of foreign services
Barriers to free movement of capital:
• Exchange controls; caps on allowed sale of financial assets;
transaction taxes; minimum stay requirements; requirements
for mandatory approval; limits on amount of money private
citizens are allowed to remove from the country
Barriers to free movement of labour:
• Limitations on freedom of establishment
• Legal discrimination
• Social security and taxation
• Recognition of professional requirements
• A host of natural barriers
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,European economic integration:
The Steps:
•Free Trade Agreement: It is a territory where a group of countries sign a trade pact that
solidifies their economic cooperation. To reduce trade barriers, especially tariffs and import
quotas, and promote free trade of products and services among its members, the FTA was
established. Free trade agreements are signed by two or more countries to formalize
economic cooperation and set trading rules. The agreement specifies the charges and tariffs
to be levied on imports and exports.
•Customs Union: Unlike an FTA, a customs union imposes a common external tax on
goods imported and exported by non-members. An FTA involves more compliance
(bureaucracy) than a customs union. A Customs Union is formed when a group of countries
agrees to have free trade within the area and a common external tariff with countries outside
the zone. A customs union is a step toward a single market, but it does not include the
freedom of movement of people and products.
•Common Market: A single market encourages frictionless trade more than a customs
union. Every member acknowledges that every product made by the group is suitable for
sale, distribution, and consumption. A single market creates a fair playing field for all
members and allows individuals of all countries to labour freely throughout the territory. A
common market is an extension of the customs union concept, with the additional feature
that it provides for the free movement of labour and capital among the members; an example
was the Benelux common market until it was converted into an economic union in 1959.
•Economic and Monetary Union: In basic terms, EMU entails:
- Coordination of economic policymaking among member countries
- Coordination of fiscal policy, notably through debt and deficit ceilings.
- The European Central Bank has its own monetary policy (ECB)
- Within the eurozone, financial institutions are governed by a single set of rules and are
supervised by a single set of authorities.
- The eurozone and the single currency
•Political Union: A political union is a type of state (the current state of a system or entity, or
a regulated entity (such as a country) or sub-entity (such as a country's autonomous region)
that is made up of/or formed from lesser states. The union is recognized globally as an
unified political entity, and the member states share a central administration. A legislative or
state union is another name for a political union.
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, EUROPEAN UNION:
First stepped was skipped and we have not reached the final step.
•--
•Customs Union
•Common Market
•(Economic and) Monetary Union
• --
Step 1: the customs union (1957-
1968)
Purpose Treaty of Rome (1957):
“To eliminate all barriers that divide Europe”
In practice:
• Swift and complete removal of specific trade
barriers
• Nothing on non-specific trade barriers
Step 2: the common market (1985-
1992)
The Single European Act (1986)
Three goals:
1. Removal of non-specific barriers to free movement of goods
and services through:
• Principle of mutual recognition (regulatory and technical
standards)
• Schengen area (physical barriers)
• More specific rules against public procurement
2. Removal of barriers to free movement of capital
• Partial removal of specific barriers to free movement of
capital
• Liberalization banking sector
3. Removal of barriers to free movement of labour
• Freedom of establishment
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