The Economics of the European Integration

The Economics of the European Integration: 

The Economics of the European Integration PD Dr. André Schmidt University of Goettingen

The Economics of the European Integration: 

The Economics of the European Integration Structure: Introduction: History and Institutions of the European Union The Microeconomics behind the European Integration Fields of EU-Policies

1 Introduction: History and Institutions: 

1 Introduction: History and Institutions 1.1 The Different Stages in the Process of the European Integration Early post-war period Market Integration Institutional Integration 1.2 EU Organizational Structure The three Pillars of the EU The Institutions of the European Union Principles of Decision Making

References: 

References Baldwin, R., and Ch. Wyplosz (2006), The Economics of European Integration, 2. ed., London. Molle, W. (2006), The Economics of European Integration: Theory, Practice, Policy, 5. ed., Aldershot. Swann, D. (1995), Economics of the Common Market: Integration in the European Union. 8. ed., London.

1.1.1 Early post war period: 

1.1.1 Early post war period

The European Coal and Steel Community: 

The European Coal and Steel Community Article 4: The following are recognised as incompatible with the common market for coal and steel and shall accordingly be abolished and prohibited witin the Community, as provided in this Treaty: import and export duties, or charges having equivalent effect, and quantitative restrictions on the movement of products; measures practices which discriminate between producers, between purchasers or between consumers, especially in prices and delivery terms of transport or transport rates and conditions, and measures or practices which interfere with the purchaser´s free choice of supplier subsidies or aids granted by States, or special charges imposed by States, in any form whatever restrictive practices which tend towards the sharing or exploiting of markets.

1.1.2 Market Integration:The Treaty of Rome: 

1.1.2 Market Integration: The Treaty of Rome The Treaty establishing the EEC affirmed in its preamble that signatory states were „determined to lay foundations of an ever closer union among the peoples of Europe”.

The Signatory States: 

The Signatory States

Core Elements of the Treaty of Rome: 

Core Elements of the Treaty of Rome Customs Union Common Market Common Agricultural Policy Prohibition of Monopolies, State Aids and Subsidies

The Common Agricultural Policy of Rome: 

The Common Agricultural Policy of Rome Free market of agricultural products inside the EEC Protectionist policies: sufficient revenues to European Farmers avoiding competition from third countries guaranteeing sufficient agriculture prices

Euro-pessimism, 1966-1986: 

Euro-pessimism, 1966-1986 Political shocks Empty Chair Policy and the ‘Luxembourg Compromise’ Failure of Monetary Integration Failure of Deeper Trade Integration Growing cost of Common Agricultural Policy creates frictions over budget Phase of Euro-Scleroses !

The „empty chair policy“ of France: 

The „empty chair policy“ of France In 1966 France opposed a range of Comiision proposals, which included measures for financing the CAP France stopped attending the main Community meetings and threatened to withdraw from the EEC In exchange the Council of Ministers overturned the Treaty of Rom´s majority voting provisions whenever a Member State annouced that if felt that „very important interest“ were a stake.

The new Forces: The Single Market Program and the Single European Act : 

The new Forces: The Single Market Program and the Single European Act Delors launches completion of the internal market with Single European Act create "an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured". Important institutional changes, especially move to majority voting on Single Market issues

Single Market Programme, EC92: 

Single Market Programme, EC92 Basic elements Goods Trade Liberalisation Streamlining or elimination of border formalities, Harmonisation of VAT rates within wide bands Liberalisation of government procurement Harmonisation and mutual recognition of technical standards in production, packaging and marketing Factor Trade Liberalisation Removal of all capital controls (!!!), and deeper capital market integration Liberalisation of cross-border market-entry policies

The European Union 1992: 

The European Union 1992 1958 1973 1980 1981

1.1.3. Institutional IntegrationThe Treaty of Maastricht 1992: 

1.1.3. Institutional Integration The Treaty of Maastricht 1992 monetary union by 1999, single currency by 2002, creation of the EU citizenship, Locked in the free movement of capital, strengthened EU cooperation in economic areas (macroeconomic policies, fiscal policies, research and technological policy, industrial policy) strengthened EU cooperation in non-economic areas (security and defence policy, law enforcement, criminal justice, asylum and immigration policy) enshrined the principle of subsidiarity to control the transfer of the responsibilities from Member States to EU introduces a social chapter which expanded the EU social policy

The European Union 1994: 

The European Union 1994 1994

The Treaty of Amsterdam 1997: 

The Treaty of Amsterdam 1997 Failed to reform main institutions Tidied up of the Maastricht Treaty More social policy, Parliament powers modestly boosted, Employment Policy flexible integration, ‘closer cooperation introduced Amsterdam leftovers voting rules in the Council of Ministers, number of Commissioners, Extension of issue covered by majority voting

The Treaty of Nice 2000: 

The Treaty of Nice 2000 Reforms of main institutions agreed, but poorly done Council voting rules highly complex and reduce EU’s ability to act with more members No important extension of majority voting Make shift solution for Commissioners No reform of decision making in ECB Generally viewed as a failure Main changes re-visited in draft Constitutional Treaty, 2003 ?????

European Union 2004: 

European Union 2004 Cyprus Malta

1.2.1 EU Organizational Structure: 

1.2.1 EU Organizational Structure The EU’s 3-Pillar Structure What is the difference between the European Community and the European Union? 3 Pillar Structure 1st: Economics 2nd: Security & Foreign 3rd: Justice EC law only applies to 1st pillar. EU is ‘roof’ over the three pillars

1.2.2 The Institutions of the European Union: 

1.2.2 The Institutions of the European Union There are dozens of EU institutions but only 5 are really important European Council Council of Ministers Commission Parliament EU Court Others matter in specific areas or at particular moments

European Council (I): 

European Council (I) consists of the leader (prime minister or president) of each EU member plus the President of the European Commission. by far the most influential institution its members are the leaders of their respective nations. provides broad guidelines for EU policy thrashes out compromises on sensitive issues, e.g. reforms of the major EU policies, the EU’s multiyear budget plan, Treaty changes, final terms of enlargements, etc.

European Council (II): 

European Council (II) meets at least twice a year (June and December) meets more frequently when the EU faces major political problems. highest profile meetings at the end of each six-month term of the EU Presidency. These meetings are important political and media events determine all of the EU’s major moves. most important decisions of each Presidency are contained in a document, known as the “Conclusions of the Presidency”, or just the “Conclusions”

European Council (III): 

European Council (III) Strangely, European Council has no formal role in EU law-making Its political decisions must be translated into action via Treaty changes or secondary legislation. Confusingly, the European Council and the Council of the EU are often both called the Council The 2003 draft Constitution proposes to make the European Council a form part of the EU institutional structure

Council of Ministers (I): 

Council of Ministers (I) Usually called by old name Council of Ministers formal name is now “Council of the EU” Consists representatives at ministerial level from each Member State, empowered to commit his/her Government Typically minister for relevant area e.g, Finance ministers on budget issues, Confusingly, Council uses different names according to the issue discussed. Famous ones include EcoFin (for financial and budget issues), the Agriculture Council (for CAP issues), General Affairs Council (foreign policy issues).

Council of Ministers (II): 

Council of Ministers (II) Is EU’s main decision-making body Almost every EU legislation must be approved by it main task to adopt new EU laws, e.g. measures necessary to implement the Treaties also measures concerning the EU budget and international agreements involving the EU. is also supposed to coordinate the general economic policies of the Member States in the context of the Economic and Monetary Union (EMU) e.g. famous 3% deficit rule

Council of Ministers (III): 

Council of Ministers (III) Council also decides on: 2nd and 3rd pillar issue, i.e. Common Foreign and Security Policies (2nd), police and judicial cooperation in criminal matters (3rd). two main decision-making rules. On the most important issues, unanimity e.g. Treaty changes, enlargement, multi-year budget plan, Council decisions are by. On most issues (about 80% of all Council decisions), majority voting qualified majority voting (QMV).

European Commission (I): 

European Commission (I) European Commission is at the heart of the EU’s institutional structure driving force behind deeper and wider European integration. Has three main roles: propose legislation to the Council and Parliament, to administer and implement EU policies to provide surveillance and enforcement of EU law “guardian of the Treaties” ALSO, represents EU at some international negotiations

European Commission (II): 

European Commission (II) Before the 2004 enlargement: one Commissioner from each member extra Commissioner from the big-5 (Germany, UK, France, Italy and Spain in the EU15). This includes the President (Romano Prodi up to 2005), two Vice-Presidents and 17 other Commissioners. Under Nice Treaty each member in EU25 has one Commissioner draft Constitution, only 15 Commissioners rotating evenly among all members Would have non-voting Commissioners from other nations

European Commission (III): 

European Commission (III) Commissioners are chosen by their own national governments subject to political agreement by other members. Commission, the Commission President individually, approved by Parliament. Commissioners are not national representatives. should not accept or seek instruction from their country. appointed together, serve for five years current Commission’s term ends in Jan 2005. Each Commissioner in charge of a specific area of EU policy Directorate-Generals or DGs

European Commission (IV): 

European Commission (IV) Executive powers Commission executive in all of the EU’s endeavours, power most obvious in competition policy and trade policy Manage the EU budget, subject to EU Court of Auditors. Decision making Decides on basis of a simple majority, if vote taken almost all decisions on consensus basis

European Parliament (I): 

European Parliament (I) two main tasks: oversees EU institutions, especially Commission; it shares legislative powers, including budgetary power, with the Council and the Commission; Organisation Up till the 2004 enlargement, 626 members (MEPs) After 732. Directly elected in special elections organized by member nation. number per nation varies with population but rises less than proportionally.

European Parliament (II): 

European Parliament (II) MEPs supposed represent local constituencies, but generally organised along classic European political lines, not national lines as in Council. Centre left and centre right two main party groupings Together about 2/3rds of seats MEPs seat, physical, left-to-right Location Parliament is in Strasbourg, in Luxembourg, and in Brussels Nationalistic struggles to keep an EU institution local resulted in this.

European Parliament (III): 

European Parliament (III) Democratic control Parliament and Council are the primary democratic controls over the EU’s activities. MEPs directly elected so in principle a way for Europeans to have a voices In practice, however, European Parliamentary elections dominated by standard left-versus-right, and purely local issues rather than by EU issues. The 2003 draft Constitutional Treaty proposes few changes for the Parliament does expand its power, giving it equal standing with the Council on almost legislation.

European Court of Justice (I): 

European Court of Justice (I) EU laws and decisions open to interpretation that lead to disputes that cannot be settled by negotiation. Court settle these disputes, especially disputes between Member States, between the EU and Member States, between EU institutions, and between individuals and the EU. EU Court’s supranational power highly unusual in international organisations. As a result of this power, the Court has had a major impact on European integration. As mentioned above, a 1964 judgment established

European Court of Justice (II): 

European Court of Justice (II) Influence Court has had a major impact on European integration via case-law Organisation located in Luxembourg one judge from each member appointed by common for six years also eight “advocates-general” to help judges The Court reaches its decisions by majority voting. Court of First Instance set up 1980s to help with ever growing workload.

1.2.3. Principles of Decision Making: 

1.2.3. Principles of Decision Making Key question: “Which level of government is responsible for each task?” Setting foreign policy Speed limits Trade policy, Competition Policy etc Typical levels: local regional national EU Task allocation = ‘competencies’ in EU jargon

The Principle of Subsidiarity (I): 

The Principle of Subsidiarity (I) Before looking at the theory, what is the practice in EU? Task allocation in EU guided by subsidiarity principle (Maastricht Treaty) Decisions should be made as close to the people as possible, EU should not take action unless doing so is more effective than action taken at national, regional or local level.

The Principle of Subsidiarity (II): 

The Principle of Subsidiarity (II) 3 Pillar structure delimits range of: Community competencies (tasks allocated to EU) Shared competencies (areas were task are split between EU and member states) National competencies 1st pillar is EU competency 2nd and 3rd are generally national competencies details complex, but basically members pursue cooperation but do not transfer sovereignty to EU

The Principle of Subsidiarity (III): 

The Principle of Subsidiarity (III) „Under the principle of subsidiarity, in areas which do not fall within its exclusive competences, the Union shall act only if and insofar as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either of central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level.”

The Principle of Subsidiarity and Fiscal Federalism: 

The Principle of Subsidiarity and Fiscal Federalism There is no clear answer from theory ! Diversity and local informational advantages Diversity of preference and local conditions argues for setting policy at low level (i.e. close to people) Scale economies Tends to favour centralisation and one-size-fits-all to lower costs Spillovers Negative and positive spillovers argue for centralisation Local governments tend to underappreciated the impact (positive or negative) on other jurisdictions. (Passing Parade parable) Democracy as a control mechanism Favours decentralisation so voters have finer choices Jurisdictional competition Favours decentralisation to allow voters a choice

The Principle of Subsidiarity and Fiscal Federalism (II): 

The Principle of Subsidiarity and Fiscal Federalism (II) One-size-fits-all policies tend to be inefficient since too much for some and too little for others central government could set different local policies but Local Government likely to have an information advantage

The Principle of Subsidiarity and Fiscal Federalism (III): 

The Principle of Subsidiarity and Fiscal Federalism (III) By producing public good at higher scale, or applying to more people may lower average cost This ends to favour centralisation Hard to think of examples of this in the EU

The Principle of Subsidiarity and Fiscal Federalism (IV): 

The Principle of Subsidiarity and Fiscal Federalism (IV) Example of a positive spillovers If decentralised, each region chooses level of public good that is too low e.g. Qd2 for region 2 Two-region gain from centralisation is area A Similar conclusion if negative spillovers Q too high with decentralised

Jurisdictional Competition: 

Jurisdictional Competition Voters influence the sort of government they live under via: ‘voice’ Voting, lobbying, etc. ‘exit’. Change jurisdictions (e.g. move between cities). While exit is not a option for most voters at the national level, it usually is at the sub-national level. since people can move, politicians must pay closer attention to the wishes of the people. With centralised policy making, this pressure evaporates.

2. The Microeconomics behind the European Integration: 

2. The Microeconomics behind the European Integration Structure: 2.1 Introductory remarks Supply and demand in a open economy Economic effects of protectionism 2.2 Economic effects of regional integration 1. Welfare effects of a customs union 2. Market size and scale effects 3. Growth effects and factor market integration

Microeconomic Tools – Demand Curve: 

Microeconomic Tools – Demand Curve Demand curve shows how much consumers would buy of a particular good at any particular price. Market demand is aggregated over all consumers’ demand curves Horizontal sum

Supply Curve: 

Supply Curve Supply curve shows how much firms would offer to the market at a given price Based on optimisation: Would selling one more unit at price increase profit? Market supply is aggregated over all firms Horizontal sum

Welfare Analysis: Consumer Surplus (I): 

Welfare Analysis: Consumer Surplus (I) Since demand curve based on marginal utility, it can be used to show how consumers’ well-being (welfare) is affected by changes in the price. Gap between marginal utility of a unit and price paid shows ‘surplus’ from being able to buy c* at p*

Welfare Analysis: Consumer Surplus (II): 

Welfare Analysis: Consumer Surplus (II) If the price falls: Consumers obviously better off Consumer surplus change quantifies this intuition consumer surplus rise, 2 parts: Pay less for units consumed at old price; measure of this = area A = Price drop times old consumption Gain surplus on the new units consumed (those from c* to c’) measure of this = area B = sum of all new gaps between marginal utility and price

Welfare Analysis: Producer Surplus (I): 

Welfare Analysis: Producer Surplus (I) Since supply curve based on marginal cost, it can be used to show how producers’ well-being (welfare) is affected by changes in the price. Gap between marginal cost of a unit and price received shows ‘surplus’ from being able to sell q* at p*

Welfare Analysis: Producer Surplus (II): 

Welfare Analysis: Producer Surplus (II) If the price rises: producers obviously better off Producer surplus change quantifies this intuition producer surplus rise, 2 parts: Get more for units sold at old price; measure of this = area A = Price rise times old production Gain surplus on the new units sold (those from q* to q’) measure of this = area B = sum of all new gaps between marginal cost and price

Supply and Demand in a open Economy (I): 

Supply and Demand in a open Economy (I) Start with Import Demand Curve This tells us how much a nation would import for any given domestic price Presumes imports and domestic production are perfect substitutes Imports equal gap between domestic consumption and domestic production

Import Demand Curve: 

Import Demand Curve

Import Supply Curve: 

Import Supply Curve

Welfare Effects of Imports: 

Welfare Effects of Imports

Welfare Effects of Exports: 

Welfare Effects of Exports

Summarizing Illustration of Supply and Demand in an open Economy: 

Summarizing Illustration of Supply and Demand in an open Economy MD-MS diagram can be usefully teamed with open economy supply and demand diagram Permits tracking domestic & international consequences of a trade policy change

Economic Effects of Protectionism: 

Economic Effects of Protectionism