Download 1.1.1 - LPS Business DEPT

3.4.3 The International Economy
The European Union (EU)
What countries have most recently joined he EU?
What do you think has been the impact of this EU enlargement?
Who may join next?
AQA ECON4: T HE NATIONAL
AND INTERNATIONAL ECONOMY
T HE E UROPEAN U NION (EU)
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You should have an elementary understanding of the institutional
structure of the EU, notably the role of the European Commission and
the European Central Bank
Note: a detailed knowledge of these institutions is not expected
You should be able to discuss the main features of customs unions and
understand the significance of the EU as a customs union. The EU as a
customs union should be considered in relation to the Single European
Market (SEM)
You should have an appreciation of the potential impact on the UK
economy of EU enlargement
You should be able to evaluate Economic and Monetary Union (EMU)
and the single European currency in the context of the debate over UK
membership
T HE I NSTITUTIONAL S TRUCTURE OF THE
E UROPEAN U NION (EU)
The EU was originally formed in 1958, with 6 original
member states; Belgium, Netherlands, Luxembourg,
France, Germany and Italy
 The UK joined in 1973, and there are currently 28
member states
 The EU has a wide range of social and economic
objectives, which include:
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Creation of an internal market where competition is free and
undistorted
Sustainable development, based on balanced economic
growth and price stability, a highly competitive social market
economy, aiming at full employment and social progress, and
a high level of protection and improvement of the quality of
the environment
The promotion of scientific and technological advance
The combating of social exclusion and discrimination
The promotion of economic, social and territorial cohesion,
and solidarity among Member States
EU I NSTITUTIONS
In order to achieve these objectives the EU has established a number of
institutions to influence and set policy.
NB: You only
require an
elementary
understanding of
these institutions.
European
Commission
European Central
Bank
Council of Ministers
European
Parliament
This represents the
whole of the EU and
is responsible for
the implementation
of EU laws and
policies.
The central bank for
the 18 countries
that have the Euro
as their currency.
They have aims to
maintain price
stability, implement
monetary policy,
control the money
supply, oversee the
banking system and
support the
economic aims of
each member state.
The Council of
Ministers is
comprised of
ministers
representing each
member state and is
the EU’s main
decision making and
legislative body.
This is the only
directly elected part
of the EU. It is
designed to debate,
amend, propose or
reject new EU laws.
However, this is a
process of codecision with the
Council of Ministers,
who ultimately ratify
any changes to EU
law.
C USTOMS U NIONS
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The EU is not a free trade area as such, but a customs union
A free trade area is a group of countries that have removed
most or all tariffs and/or quotas
A customs union will involve internal free trade amongst
member states, but also includes a common external tariff
Each member of the customs union cannot pursue their own
international trade policy, instead trade negotiations are
conducted on behalf of all member states
The EU is the biggest customs union in the world with a 15.5%
share of world trade
It is important to differentiate a customs union from the Single
European Market (SEM), which in addition to having no
internal trade barriers and a common external tariff, also
involves the free movement of goods, services, capital and
labour which promotes deeper economic integration and
market liberalisation
T HE S INGLE E UROPEAN M ARKET
The Single market has 28 member states and is a major world trading power. As an economic force,
it is larger than the USA, but being a member brings various issues for the UK.
Advantages
Disadvantages
Trade creation
Trade is encouraged within member states because
there are no barriers, so additional trade is created
within the block.
Trade diversion
The existence of the common external tariff, diverts
trade away from the EU. Goods within the SEM may be
more expensive, and this could damage consumer
welfare.
Competition
Stronger competitive forces within the SEM can drive
productive and dynamic efficiency, which will benefit
consumers.
Monopolies
In some markets e.g. gas and electricity, there has been
significant merger activity and the creation of large
monopolies seeking to exploit the available economies
of scale.
Access to markets
The SEM creates a market of 28 countries and a
population of over 500m, offering significant scope for
firms to expand.
Unemployment
In some countries, workers may lose their jobs as
production is transferred to member states with lower
labour costs.
Freedom of movement
There is the right to live and work anywhere within the
SEM without restriction which boosts labour mobility.
Cost
Membership of the SEM costs the UK around £15bn per
year.
EU E NLARGEMENT
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Since its inception in 1958, the EU has grown from 6 to 28 member
states, with Croatia the most recent country to join in 2013
At the current time there are a further 5 candidate countries for EU
membership; Iceland, Macedonia, Montenegro, Serbia and Turkey
Potential positive implications of enlargement include:
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In 2013 the EU
restarted talks with
Turkey after 3 years.
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EU enlargement has increased the potential for economies of scale and
free trade across a larger geographical area and population
For consumers, the increased competition may drive down production
costs leading to lower prices and increased choice and quality
For firms, they will be able to take advantage of the relative low wages of
new accession countries
However, there are some potential negatives to EU enlargement,
which include:
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Can the UK cope with the influx of migrant workers from new accession
countries?
New countries may require additional support from the EU, which may be
partly funded by stronger nations
EU enlargement may increase bureaucratic costs for all existing members
E CONOMIC
AND
M ONETARY U NION (EMU)
Economic and Monetary Union is a an extension of the EU
as a Customs Union and Single European Market
 The aim is to expand integration to include common
monetary and fiscal policies
 EMU comprises three core elements
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In essence, each member will adopt a single currency and
operate with one interest rate, set by the ECB
 The Euro was introduced on 1st January 1999, and now
includes 18 countries with Latvia the most recent country
to join the Euro in 2014
 The Euro is used by over 330m people across Europe, and
is now the second most traded currency in the world
behind the US dollar
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Latvia becomes
18th state to join
the eurozone.
To what extent do
you think
membership will
bring stability?
A single currency (the euro)
An independent central bank (the ECB)
The Stability and Growth Pact
A DVANTAGES
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For euro member countries trading with others in the euro area,
currency transaction costs are zero, which lowers business costs
Competition
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However, The
Telegraph reports
“The euro has failed
to boost trade
between the
countries that
adopted it”.
Consumers and firms do not have to factor exchange rates into price
comparisons
Transaction costs
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For euro states, it is no longer a requirement to exchange currencies
when trading, which means exchange rate risk is significantly reduced,
which encourage trade between member states
Price transparency
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E URO
Trade creation
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OF THE
The additional trade creation also encourages greater competition
within euro member states, which can help reduce prices and
promote efficiency
Certainty
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Overall, a single currency gives greater certainty for consumers and
firms, as it significantly reduces volatility in large areas of the SEM
D ISADVANTAGES
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Countries who wish to join the eurozone must achieve certain
economic criteria, so that economies are ‘converged’ to some degree.
This may be achievable in the short term, but may hide underlying
structural issues in an economy which may add costs in future years
Fiscal policy constraints
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The ECB sets one interest rate for all 18 countries in the eurozone,
which may or may not be appropriate to them. Economic challenges
will remain for each member state, but a common monetary policy is
unlikely to be suitable for all countries in all situations
Convergence issues
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Trade can be diverted away from countries that do not have the euro
due to existence of exchange rate risks
Loss of control of monetary policy
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E URO
Trade diversion
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OF THE
The Stability and Growth Pact requires that governments strictly
control their budget deficits. By implication, this creates limitations
for a member state when attempting to meet each countries own
economic objectives
Asymmetric shocks
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A single policy by the ECB might affect member states in different
ways as some countries will be more sensitive to policy changes than
others
T HE UK
AND THE
E URO (1)
As far as the UK is concerned, there are a number of arguments for and
against joining the euro.
Arguments in favour
Arguments against
Lower transaction costs
Loss of independence of monetary
policy
Certainty around exchange rate
fluctuations
Impact on the housing market. The UK
has a high proportion of home owners
who are sensitive to interest rate
movements
The UK will be able to exert greater
influence over economic policy within
Europe
No room to devalue currency to correct
a BoP deficit
Price transparency
Conversion costs
More inward investment from
eurozone countries
Loss of control over fiscal policy
T HE UK
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E URO (2)
In 1997, Gordon Brown, the then Chancellor of the Exchequer,
put in place 5 economic tests that the UK must pass if it were to
join the euro
The tests concerned:
1.
2.
3.
4.
5.
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AND THE
Convergence
Flexibility
Investment
UK financial services industry
UK employment
In recent times, the UK has shown little appetite to join the
euro
George Osborne was recently quoted as saying it was essential
to "protect the collective interests of non-eurozone member
states”, although membership of the euro has recently become
tied up in a debate as to whether the UK should stay in the EU
The lack of appetite to join the euro has been exacerbated by a
number of difficulties in eurozone countries with Portugal,
Ireland, Greece and Spain all requiring significant bailouts from
other member states to maintain the euro as leading world
currency
D EBATE
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Motion: “this house believes that the UK should,
at no cost, join the eurozone”
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Split the class into 2 (or 4) teams
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Decide which team will argue for the motion and
which one against
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Each team should carry out additional research
and prepare their case
Host your debate, why not invite year 12
economists to take part?