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Summary Lectures Economic Policy in the EU
- Instelling
- Universiteit Leiden (UL)
This is an extensive summary of the lectures for the course Trade & Finance in the Global Economy. Good luck with the exam!
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© Olaf TijhuisSummary Lectures Economic Policy in the EU
Week 1:
Subject: An Economic history of the EU
Introduction:
Grades:
- Written exam: 85%, e1th aay.
- Term paper: 15%, hand in 17th aay
Today’s program:
- A brief history
- A changing agenda: what changes in the agenda when adding new member states along the
history:
Deepening
Widening: in 197e and in the 1980s widening of countries and changing of the
agenda.
- Fiscal federalism: economist try to get a grip on the queston: do you allow policies on a local
level or on a natonal state level or even European level? Looking at efciency trade-ofs and
also look at policy trade-ofs. This is also interestng when looking at the Brexit.
Brief history:
Prelude the EEC (EC, EU): Before the EU we had the European Economic Communites. But there was
a development to the EEC:
- We had a few corporatons which came from devastaton afer WWII rebuilding economies
afer WWII.
- For this rebuilding the countries received help through:
aarshall aid (1947-1951), this was quite substantve, it helped:
Liquidity: credits helped the liquidity as well.
Credits: providing the Europeans money to rebuild economics, this is important
because afer a war there is no income. Credits were also used to import from the US
America also helped itself.
But the US gave a conditon for the aid: OEEC coordination (intergovernmental):
European countries had to cooperate in spending the money. The organizaton which
was created to administer the aarshall aid across the European countries. Countries
would get the aid if they joined the OOEC and worked together on
intergovernmental level to spend the money. This was the frst type of European
cooperaton.
- Council of Europe (1949): not relevant for this course.
- European Payment Union (1950-1958): A cooperaton which helps to facilitate internatonal
trade. We are used to using the banking system for our payments. At this moment this
system was not there and there was no cash. The creaton of a payment union is creatng an
administratve payment system. The BOP defcits and surpluses can be canceled out against
one another through the system of cashless payment.
The Union allowed countries to trade with each other without creatng a balance Bop for
each individual country, you can balance out your defcit and surpluses with other countries
against each other.
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,© Olaf Tijhuis
- European Community for Coal and Steal (1952-2002), supragovernmental: this is the three
Benelux countries, Germany, France and Italy founding members which later became EEC
and then EU. This community submitted sovereignty from the country to the higher
authority. It provides the basis for the supragovernmental authority which the EU later
became, it can decide over the countries. At frst this was only about coal and steal. They
wanted to create a check and balances in these industries, because they are important for
the war industry.
Importance: level of authority which was higher than the natonal level, which the natonal
governments were subject to for the frst tme in European cooperaton.
Economic integration: basis theory about economic this before we go to European integraton:
Steps into economic integraton:
1. Free Trade Area: least far going trade agreement: countries allow free fows of goods
between the countries. aost famous one is now NAFTA. Free trade among these countries.
2. Customs Union: one step further is the customs union, free trade agreement but adding
common exterritorial tarif: all the countries in the union have the same trade tarif for
countries not in the union. External countries pay the same tarif for exportng to all the
countries in the customs union, in the FTA these tarifs are diferent.
3. Common market: creatng a level playing feld for companies in these markets.
4. Economic union: not only creatng a level playing feld, but also creatng a singular economic
policy: harmonizing taxes and economic policies. This is because these policies can act as
trade barriers. Creatng one economic policy gives less trade barriers.
5. Monetary union: Final step of economic integraton: harmonizing monetary policies, a single
currency, interest rate etc.
European Union and economic integration.
- EU went straight away to a customs union (did not start as a FTA)
- Not yet a common market, but it’s getng there, almost a level playing feld.
- There is no economic union: taxes are guarded by the states.
- aonetary Union: 18 members share a common currency since 1999.
- Economic union? The EU is trying to be a monetary union without being an economic union.
In theory this is not possible, these are not the stages. The EU is doing it in a diferent way,
diferent steps. We might go frst to a monetary union and then go to an economic union.
The founding fathers of the EU wanted an politcal and economic union, not possible in the
1950’s so they went for the economic integraton.
Further with the history of economic integraton:
Treaty of Rome (1957): The Britsh didn’t join this, they were happy with the OECD and didn’t want
this supranatonal. 6 countries joined.
- European Economic Community (EEC): established by the treaty of Rome
- Four freedoms:
1. Free fow of goods
2. Free fow of services
e. Free fow of people
4. Free fow of capital: direct investment: buying companies fow around the world, but
also a free fow of fnancial capital: bonds of companies around the world.
- Supranatonal: this supersedes natonal authority. They made decisions overruling natonal
decisions, like the external tarif.
- Subsidiarity principle: organize things on the lowest possible level, so they wanted to do
things on a natonal level if this was better.
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Focus in the frst two decades is on:
Free foo of goods:
Eliminatng non-tarif barriers, important cases:
- Van Gend and Loos (1963): The Dutch introduced a new trade barrier without cooperaton of
the EU.
Ruling: since you are working towards a customs union you cannot introduce new
rules in your custom system as country. The Netherlands had to stop this new rule.
Important rule: No new import dutes allowed (direct efect): European treates have
a direct efect on the natonal legal systems, since the countries gave away a part of
their sovereignty.
- Dassonville (1974): import of Whiskey by Belgium out of France. The Belgium required a
whiskey certfcate from the French exporters.
Ruling: indirect import requirements, equivalent efect: a non-trade barrier can have
an equivalent efect as a trade barrier, these are also not allowed. The requiring of
the Belgium of a Whiskey certfcate has the equivalent efect as a trade barrier.
- Cassis de Dijon (1979): The French only recognized Cassis de Dijon when it had a certain
percentage of alcohol, this meant a similar German drink could not be sold as Cassis de Dijon.
Product standards, mutual recognition: you cannot impose trade barriers by product
requirements. If one country acknowledges something as a product all countries
should do this the Germans and French in this case should have the same
defniton of Cassis de Dijon. Giving this a diferent defniton is a product
requirement that is the same as imposing a trade barrier.
What is Chocolate, what is a sausage, these defnitons should be the same,
important step in European integraton.
Importance: this case is the beginning of actvity for creatng a level playing feld for
European countries.
- Positive integration: creatng of a customs Union took from 1958 (creatng of the EU)-1969:
Destroying trade barriers and creatng a general external tarif was difcult because
diferences between European countries, that’s why this took tme, untl 1969.
Afer that came more positve integraton: creatng of a common market, like the product
standards in Cassis de Dijon important for creatng a level playing feld.
Single European Act (1987): the four freedoms where emphasized again, afer a difcult period in
the 1970’s:
Free foo of goods:
- Eliminatng border formalites: these are trade barriers
- Harmonizaton of VAT (BTW): Value added tax. If you charge the VAT at the point of origin
the French producer pays the tax and not the Dutch consumer, countries were charging this
VAT at a diferent moments this creates unfair competton, because these producers
have higher costs because of the VAT.
Harmonizaton of when charging the VAT was important for creatng a level playing feld.
- Freeing state purchases: governments and public organs have a lot of purchases from fellow
companies. This creates compettve advantage, this was unfair competton. This was
changed.
- Harmonizaton and mutual recognitons of technical standards a.o.
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Free foo of capital:
- Eliminaton capital restrictons: capital was not allowed to fow freely in the European
countries, there were a lot of restrictons. By eliminatng this, it helped the free fow of
capital.
- Free establishment and acknowledgement of natonal authority (home principle)
Treaty of European Union Maastricht (1992):
- First steps towards monetary union, without economic union!!
- Three pillar structure
- The road to a single currency was established, we are going to create a monetary union. One
of the consequences of the free fow of capital: come to this later.
Treat of Lisbon 2009:
- Consttuton of the European Union (2005)
- Lisbon 2009
- Cleaning up the treates and agreements: there were too many treates, so this was 1 treaty
which cleaned up. Eliminate all the ambiguites that were there because of the many treates.
Enlargements: change in the agenda and character of the EU as a result of the enlargement by
adding countries, consequences:
- First there were 6 members.
- 197e: UK, IRL and DK
2nd attempt for the UK, UK preferred not to join in 1957: it did not want the
supranatonal.
But it wanted to join: UK found out it made a mistake from an economic point of
view. EU countries were trading more with each other instead of the UK lost trade
and income. Secondly, the rate of growth in the EU was larger than in the UK. So
integraton contributed to a higher income.
Problems UK joining:
Problem idea UK: UK widening not deepening (OECD vs EU discussion): UK didn’t
want deep integraton, they wanted to widen not deepening the Union.
Problem fnancing, UK budget contributon: the main fnancing was of direct
contributons at this tme. aain contributon was for agriculture, almost 80% of all
expenditures were agricultural expenditures.
UK with small agriculture: they had to contribute a lot, but they would not get a lot
of benefts because of small agriculture.
- New budget rules: the way the EU was fnanced changed, not only direct contributons, but
also:
Own resources tarif revenue: in 1969 customs union was created, there was one
external tarif. Tarif revenues were paid to the European budget as of 1974, straight
to the wallet of the EU. (this source is now becoming lower and lower, since there
are less and less tarifs).
VAT share (1%): all countries had to give 1% of there VAT into the European budget.
This was not enough so the rest with direct contributons.
The enlargement of the Union lead to a change of fnancing of the EU.
- 1981: GR, 1986: SP, PT
Poor countries: difcult to integrate them in the EU economic policies.
Support democracy: they came out of dictator, so this integraton was also a politcal
argument to support democracy.
Diferent type of agriculture: EU was supportng dairy, wheat farms northern
countries. These countries had other types of agriculture, and they would not be
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,© Olaf Tijhuis
supported by the EU.
Because of this problem the next thing was created:
Regional policy: weaker economic areas can get fnanced from the European budget
and strengthening their economic structure. This can be fnanced from the regional
policy. This became a large policy. Diferent type of policy as a result of enlargement.
Agricultural policy was stll huge but the regional policy was growing.
- 1995: AU, FN, SW: this was smooth, became members without problems.
- 2004-2007: Central and East European Countes, 8 countries:
Political support democracy. Came from communist dictatorships.
Transiton from planned to market economies. These were completely diferent
economies, Portugal and Spain were market economies when entering, but problem
with this enlargement was that they were planned markets. These countries needed
a system change:
Accession criteria to get the system change for these countries:
Acquis communauitaire: adopt all the rules of the economic law of the EU.
aarket economy able to compete with companies in the EU before entering.
There were programs for helping this, to become more compettve.
Democracy
Enlargement creates challenges to the ruling of the EU, and also the preferences of the EU:
Decision making: from homogeneity to diversity:
With the enlargement there became a lot more preferences, diferent countries with diferent
backgrounds and which wanted diferent things. Diversity has increased a lot, also difcult for ruling
EU, this brings us:
Diversity and the allocation of pooer:
When do you bring decision making to Brussels?
- Spillovers, external efects (economic theory): if these are there you need to bring it to a
higher level. Efects what you do efects other countries, like polluton. If this is the case this
is an argument to bring the authority to a higher level. You can then discuss if this needs to
be supranatonal or governmental.
- Economies of scale (efciencies): if you can achieve economies of scale as an enlargement of
the economic area which businesses can operate businesses can serve a lot more
consumers and produce more which becomes cheaper. You can reach more consumers, so
you scale up your producton which makes it cheaper. Also, argument for bringing the
authority to a higher level.
These are arguments for enlargement.
But, with the enlargement you bring in diversity, diferent type of preferences. How do you bring this
to one go?
Diversity: arguments not for a higher level
- Preferences: preferences can be an argument not to bring authority to a higher level. There
needs to be a common destnaton.
- Solidarity: there needs to be willingness of countries. For example, to help adn pay the
poorer countries within the EU. The solidarity needs to be there for authority on a higher
level.
Democratic control: more than we discuss in this course.
- Fiscal federalism: where do you decide. understanding which functons and instruments are
best centralized and which are best placed in the sphere of decentralized levels of government
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- Subsidiarity: decision making or policy making on the lowest possible level, where it is the
most efcient.
Economic perspective for fscal federalism, ohere do you decide:
Optimum supply and oelfare:
Example, area 1: there is a quantty bus service, price/costs. We assume the marginal costs are
constant, each ride costs the same amount. Grey triangle: consumersurplus. Demand curve is the
willingness to pay. There is an equilibrium.
Too countries: optimum?
Example area 2: also, an area 2 with a preference for bus services, but with diferent preferences for
bus services. The demand for area 2 shows that these people prefer the bus service to a higher
extent than area 1 higher demand for every price than in area 1.
Does it make sense to join these services with diferent preferences, is the queston.
Join the demands average demand gives an equilibrium for the area’s taken together. In area 1
the provision of the service is higher, see the most lef dotted line. In area 2 the provision of the
service declines.
Welfare terms, consumer and producersurplus: two triangles will be the loss of welfare:
- Area 1: higher quantty at the same price higher provision than they are willing to pay, so
the lef triangle is the extra costs of this that they lose.
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