European Economy PDF

EUROPEAN ECONOMY BLOCK 1: A REVIEW OF EUROPEAN HISTORY INSTITUTION AND DECISION MAKING PROCESS LECTURE 1: A REVIEW OF EU HISTORY, INSTITUTION AND DECISION-MAKING PROCESSES A review of EU history Early Post War Period, 1945-50: A climate for radical change and the prime question Europe has experien...

EUROPEAN ECONOMY BLOCK 1: A REVIEW OF EUROPEAN HISTORY INSTITUTION AND DECISION MAKING PROCESS LECTURE 1: A REVIEW OF EU HISTORY, INSTITUTION AND DECISION-MAKING PROCESSES A review of EU history Early Post War Period, 1945-50: A climate for radical change and the prime question Europe has experienced horrifying wars and was in ruins after WWII → Millions of people died, enormous damage to infrastructure and economic capacity Prime concern: ‘How can Europe avoid another war?’ What caused the war? Three schools of thought, implying three different solutions blame Germany → ‘Neuter’ Germany to avoid any future aggression; blame capitalism → adopt communism; blame nationalism → pursue European integration. → European integration ultimately prevailed, but this was far from clear in the late 1940s. Early Post War Period, 1945-50: The beginning of the cold war Wartime alliance among the US, UK and USSR rapidly unravelled. Communism spread in Eastern Europe 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 suggests a Marshall plan for economic recovery. The Federal Republic of Germany and the German Democratic Republic were established in 1949. 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, basically to the UK, France and West Germany. The Organisation for European Economic Cooperation (OEEC) administered this aid and prompted trade liberalisation: 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, i.e. by removing quotas on intra OEEC trade and establishing the European Payments Union. Make Europe not war: ECSC, EEC and EFTA, 1951-60 The German Question: The formation of West Germany was hoped to help with an economic recovery of post-war Europe, but needed to embed Germany in a European supranational structure. European Coal and Steel Community (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). Failed attempts to create the European Defence Community (EDC) and the European Political Community (EPC). European Economic Community (EEC, 1957): riding on the success of the ECSC, the ‘Six’ committed to form a customs union, promising free labour mobility, capital market integration, free trade in services, and a range of common policies. EEC meant discrimination against non-EEC Europeans, including OEEC members like Britain. European Free Trade Association (EFTA, 1960): tariff reduction without harmonising external tariffs – a free trade area (FTA) as opposed to EEC, a customs union (CU) Two non-overlapping circles by the late 1960s (above). The Federalism vs intergovernmentalism scheme EEC vs. EFTA - two concepts about the depth of European integration Intergovernmentalism: nations retain all sovereignty, (economic) cooperation only when necessary and agreed upon OEEC and EFTA, but also the Council of Europe (1949) and the Court of Human Rights (1950), unrelated to the European Union Federalism: embed nations in a supranational structure (EEC, EDC, EPC), embodied with some of the powers that had traditionally been exercised exclusively by nations European integration gains economic motivations New view: (trade) liberalisation is pro-growth , pro-industrialization Confirmed by spectacular growth in manufacturing, exports and incomes, beginning in the 1950s Evolution to two concentric circles Falling trade barriers 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. 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 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. Delayed trade integration, accelerated monetary integration: the 1970s Euro-pessimism: the 1970s Political shocks: ○ ‘Luxembourg Compromise’ + enlargement = decision-making jam; ○ 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); The three stage plan proposed gradual, institutional reform leading to the irrevocable fixing of exchange rates and the adoption of a single currency within a decade, but it did not recommend the establishment of a central bank. ○ 1973 and 1979 oil price shocks with stagflation; ○ New trade frictions: ‘technical barriers to trade’ However, also some bright spots: ○ democracy in Spain, Portugal and Greece lead to their accession; ○ EMS set up in 1978 works well. Special role for the Bundesbank.  ○ Budget Treaties (1970 and 1975) and direct election of EU Parliament (1979) Deeper circles and the domino effect: the Single Market Programme The Single European Market (SMP) was a powerful boost to European economic integration: Jacques Delors launched completion of the internal market; The Single European Act (SEA, 1987) aimed to create ‘an area without internal frontiers in which the free movement of goods, persons, services, and capital is ensured’ (i.e., the four freedoms already promised by the Treaty of Rome); It also implemented important institutional changes: EEC was renamed the European Community (EC) and European Union (EU) after monetary union was agreed upon in the 1990s Majority voting instead on unanimity on issues related to the Single European Market; → This change in voting procedures unleashed a massive wave of TBT liberalisation and gave a big boost to further trade integration; Basic elements of the Single Market Programme (SMP): 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 (which ultimately led to the euro); ○ liberalisation of cross-border market-entry policies, including mutual recognition of approval by national regulatory agencies. Dominos again: the EEA and the fourth enlargement ‘Investment diversion’ effect (on top of ‘trade diversion’ effect already by customs union). Non-EU governments under pressure to react. The fourth enlargement (1995) adds Austria, Finland, Sweden, and leads to the EC15. Norway, Iceland and Liechtenstein: European Economic Area (EEA, 1989). Accept single market regulations in return for market access, retain sovereignty over non-Single Market issues (“Norway Option“). Swiss solution: complicated set of bilateral, EEA-like treaties with the EU. Reuniting East and West Europe Communism’s creeping failure and spectacular collapse. Division of Europe was cemented by the Berlin Wall (1961). By the 1980s, the West's economic system provided a far better way of life and living standards diverged. Up to 1980s, Soviets thwarted reform efforts but inadequacy of Soviet system forced changes in USSR, i.e. pro-market reforms (perestroika) and openness (glasnost). Pro-democracy forces in the central and eastern European countries (CEECs) had been repeatedly put down by military force hereto but found little resistance from Moscow in the late 1980s: June 1989: Polish labour movement ‘Solidarity’ forced free parliamentary elections and communists lost. Moscow accepted the new Polish government. Moscow’s hands-off approach to the Polish election triggered a chain of events: Hungary opened its border with Austria and many East Germans moved to West Germany via Hungary and Austria; mass protests in East Germany; Berlin Wall falls 9th November 1989; end of 1989: democracy in Poland, Hungary, Czechoslovakia; end of 1990: German reunification.  End of 1990: independence of Estonia, Latvia, and Lithuania. End of 1991, the USSR itself broke up. Former Soviet Republics became independent nations or merged with Russia. The Cold War ended without a shot and with it, the military division of Europe ends. First steps: the Europe Agreements CEEC announced that their goal was to join the EU At first, no promise of eventual membership was made. but ‘Europe Agreements’ were introduced: free trade agreements with promises of deeper integration and some aid. In 1993, the EU sets the Copenhagen criteria for accession of CEECs: ○ political stability of institutions that guarantee democracy, the rule of law, human rights, and respect for and protection of minorities; ○ a functioning market economy capable of dealing with the competitive pressure and market forces within the Union; ○ acceptance of the Community ‘acquis’ (EU law in its entirety) and the ability to take on the obligations of membership. Copenhagen summit (2002): CEEC nations plus Cyprus and Malta join in 2004 (5th enlargement). Preparing the EU for eastern enlargement Envisaged enlargement required the EU to reform its institutions (designed for six members initially). New CEEC-members: Poorer, more agrarian, small populations per member state but in total 300 million more people. The process was politically painful for the existing EU members since almost every change helped some EU15 nations but hurt others. Basic dilemma: while there was a shared understanding of the institutional challenges, there was little agreement on the solutions. Four attempts at reform over a 16-year period: Amsterdam Treaty, 1997; Nice treaty, 2000; (rejected) Constitutional Treaty, 2004; Lisbon Treaty, 2007. Monetary Union German unification and renewed push for integration Political consensus: accompany German unification with increased European integration. Delors proposes the 2nd radical increase in European economic integration: monetary union. Maastricht Treaty (‘Treaty on European Union’) signed 1992: monetary union by 1999, a single currency to put into circulation by 2002. Further elements: EU citizenship; strengthened EU cooperation in non-economic areas (justice, defence etc.); strengthened the power of the European Parliament; introduced the ‘Social Chapter’. Monetary Union From ratification difficulties to the introduction of the euro Ratification difficulties: Britain opted out of common currency; Danish voters rejected the Treaty and reversed their choice only once Denmark opted out of common currency. Maastricht convergence criteria as entry conditions to enter the monetary union. ○ 4 January 1999: freezing of the exchange rates of 11 countries ○ Establishment of the European System of Central Banks (ESCB) and the European Central Bank (ECB). ○ January 2002: euro banknotes and coins Global and Eurozone crises and institutional responses European economic integration during the 1990s and much of the 2000s: Great moderation: growth, low and stable inflation. 15 September 2008 Lehman Brothers, a major US bank, became insolvent, and the US authorities decided to not bail it out. Reconsideration of risk associated with lending to weaker nations in financial markets: interest rates started to diverge between nations like Greece and Germany. Eurozone Crisis unfolds: Irish bail out of the Anglo Irish Bank in January 2009, announcement of higher than thought government debt in Greece in October 2009. Financial markets: fears about nations' solvency and the survival of the eurozone. Several emergency loans and rescue packages by other EU nations and the International Monetary Fund (IMF) to stabilise Greece, Ireland, Portugal and Spain; followed by a massive institutional reform. Euroscepticism 2.0 Rise of populists’ anti-EU positions, push for more national sovereignty (more intergovernmentalism) from Marie Le Pen (France), Matteo Salvini (Italy), Geert Wilders (Netherlands) and others. Eurosceptic vote shares in national and EU elections, 1992 to 2020: On the other hand: High and rising positive image of the EU by a majority of EU citizens Probable explanations: Economically harsh conditions? Migration shock? Brexit 23 June 2016: Should the United Kingdom remain a member of the European Union, or leave the European Union? Remain: 48% Leave: 52% Lack of a plan: how to leave the EU and about the future relationship between an independent UK and the EU and the Single Market. The long, difficult and messy Brexit negotiations → article 50 of TFEU Brexit began in 2015 by a political gamble by PM David Cameron, who won the general election but failed to win the promised Brexit-referendum. Key problem in Brexit negotiations: Avoiding a hard border between Northern Ireland and the Republic of Ireland, that is a member state of the EU and part of the Single Market. After many failed attempts to find a solution, a general election in 2019 and after Boris Johnson became Prime Minister, extended deadlines - the UK left the Single Market and EU Customs Union in January 2021. COVID19 pandemic & European Green Deal The COVID19 pandemic cost (and continues to cost) many lives and affected the health of many. The impact on economies worldwide was also enormous. The measures taken to contain the pandemic, which consisted in the beginning mainly of restricting physical contact, led to a recession and a resurgence of national unilateralism (not only) in Europe. But co-operation within the EU also played an important role, e.g. in vaccine procurement or through a recovery fund "NextGenerationEU" , which for the first time is funded by borrowing by the EU itself. European Green Deal: Spending plan 2021-2027 shifts EU priorities toward climate change issues. Carbon neutrality by 2050 as a legally binding obligation, goal of 55 percent lower emissions in 2030. The war in Ukraine The Russian invasion of Ukraine is a major challenge for the UK As in the past, the EU has had to improvise: there is no European defence structure → how to support the military effort of Ukraine? The unanimity rule in foreign affairs decisions has made things difficult (Hungary). Huge package of economic sanctions on Russia The gas problem (note that Russian gas is not included in the package of sanctions LECTURE 2: TREATIES AND INSTITUTIONS Treaty of rome The Treaty of Rome was a far-reaching document: it laid out virtually every aspect of the economic integration implemented up to the 1992 Maastricht Treaty. Radical Thinking: Economic integration as the way to a politically unified Europa, an “Ever Closer Union” The Treaty of Rome was re-labelled as the “Treaty on the Functioning of the European Union (TFEU)” by the 2009 Lisbon Treaty. The Treaty’s intention was to create a unified economic area = an area where firms and consumers located anywhere in the area would have equal opportunities to sell or buy goods throughout the area, and where owners of labour and capital would be free to employ their resources in any economic activity anywhere in the area. Key element: 4 freedoms - free movement in goods, service, workers and capital Free trade in goods: eliminate tariffs, quotas, and all other trade barriers (!) Common trade policy with the rest of the world: Customs Union and Common commercial policy to avoid trade deflection (‘tariff cheating’). Ensuring undistorted competition (to avoid ‘deals’ that offset trade barrier removal): ○ state aids (subsidies) are mostly prohibited; ○ anti-competitive behaviour regulated by Commission; ○ approximation of laws (EU-jargon for harmonisation of standards and regulations) – really started with the Single European Act 1986; ○ taxes (weak restrictions but no explicit harmonisation). Unrestricted trade in services: principle of freedom of movement of services, but implementation has been and still is hard. free movement of workers (Lisbon Treaty: of people); free movement of capital in principle = “Rights of Establishment” and no restrictions on financial capital flows. Very little capital market liberalisation until the 1980s. Exchange rate and macroeconomic coordination. Common policy in agriculture The Treaty of Rome was silent with respect to some important policy areas: Social and Tax policies. Social policy (wage policies, working hours, social benefits, …): harmonisation is very difficult politically: like social policies, tax policy directly touches the lives of most citizens, and it is the outcome of a national political compromise. Thus, EU leaders have always found it difficult to harmonise taxes. Eu architecture: TEU and TFEU The organisational structure of the EU has undergone many changes, but is now pretty simple: Most economic-related policies and some of the judicial and police related policies are under the ‘supranational pillar’ (individual member states might be outvoted and must still implement the policy). Policies related to foreign and security policy are under an ‘intergovernmental pillar’ where each member must agree to a specific proposal if the EU is to take action. Supranationality arises in the EU in three ways: The commission proposes new laws that are then voted on by member states (in the Council of Ministers) and the European Parliament. If passed, they are binding for all member states. The commission has direct executive authority in a limited number of areas (i.e. competition) Rulings by the European Court of Justice can alter laws, rules and practices in member states (in some areas) The EU as of the 2020s is based on two treaties (both updated and renamed versions of earlier treaties): Treaty on the Functioning of the EU (TFEU). Started life in 1958 as the Treaty of Rome, updated by the 1993 Maastricht Treaty and the Lisbon Treaty. Treaty on the European Union (TEU). Started life as the 1993 Maastricht Treaty. The Lisbon Treaty changed its content Eu legal System A unified economic area requires a legal system. Disputes over interpretation and conflicts among various laws are inevitable. By the standards of every other international organisation in the world, the European legal system is extremely supranational, mainly because of the EU’s Court of Justice right to rule on matters concerning the interpretation of EU law. ‘Deep supranationality’ does not apply to all areas, but the default is that applies to all areas except those that are explicitly excluded. The discussion about legal supremacy (also called legal primacy, or legal precedence) was a critical issue in the arguments made by pro-Brexit politicians in London, is a key part of why Switzerland has stayed out of the EU, and more recently it has hit the headlines when Poland’s constitutional court explicitly challenged the principle in October 2021. Since the EU lacks a constitution, the EU’s legal system is created via case law, based on rulings by the Court of Justice. Three principles of EU’s legal system: 1) ‘direct effect’ of EU law, 2) ‘Primacy of EU law’, and 3) ‘autonomy’ from national legal systems. The Big 5 There are many EU institutions, but the core ones are the ‘Big-5’. They have changed by each new treaty. Using the current names as defined in the Lisbon Treaty, these are: European Council (heads of state and governments); Council of the European Union (member nations’ ministers), [still often called by its old name, the Council of Ministers]; European Commission (appointed eurocrats); European Parliament (directly elected); EU Court (appointed judges) The European Council The European Council is the highest political-level body in the EU: it provides political guidance at the highest level (i.e., it initiates the most important EU initiatives and policies). All EU major strategic choices are made by the European Council. It usually takes decisions by consensus, so its decisions have the implicit backing of every EU national leader. One peculiarity of the EU is that the most powerful body by far – the European Council – has no formal role in EU law-making. It consists of the leaders of each Member State, the President of the European Council and the President of the European Commission. To facilitate cooperation with other EU bodies, the President of the European Commission, and the High Representative of the Union for Foreign Affairs and Security Policy attend the meetings but do not vote. The Lisbon Treaty created the ‘President of the European Council’ who chairs the European Council for two and a half years and is selected by qualified-majority voting in the European Council. The council of the European Union The Council of the EU is the EU’s main decision-making body. It was called the Council of Ministers for most of the EU’s history and today is often just called ‘the Council’. Almost every piece of legislation is subject to its approval. It consists of one representative from each EU member authorised to commit its government to Council decisions, so Council members are the government ministers responsible for the relevant area. It uses different names according to the issue discussed: e.g., EcoFin for financial and budget issues, the Agriculture Council for CAP issues, General Affairs Council for foreign policy issues. The Council is where the Member States’ governments assert their influence directly. The Council is responsible for certain supranational areas; it has the following powers: to pass European laws (jointly with the European Parliament); to coordinate the general economic policies of the Member States in the context of the Economic and Monetary Union (EMU); to pass final judgement on international agreements between the EU and other countries or international organisations (a power it shares with the European Parliament); to approve the EU’s budget (jointly with the European Parliament). In addition to these tasks linked to economic integration, the Council takes the decisions related to Common Foreign and Security Policies The Council has two main decision-making rules: unanimity: for most important issues (e.g., Treaty changes, accession of new members and setting the multi-year budget plan); ‘qualified majority voting’ (QMV): for most issues (about 80% of all Council decisions). The High Representative of the Union for Foreign Affairs and Security Policy is a new post created by the Lisbon Treaty. Previously, leadership and representation of EU policy on Common Foreign and Security Policy were divided between the Council of Ministers and the European Commission. Lisbon merged the two positions so that the new High Representative attended both Council and Commission meetings. The Lisbon Treaty also created the European External Action Service to assist the High Representative. This is a new organisation; its roles and form are still evolving. Its most obvious manifestation is the EU Delegations (something like an embassy) in about 150 non-EU nations. The European Commission The European Commission is the executive branch of the EU. It enforces the Treaties and is driving forward European integration: it proposes legislation to the Council and Parliament; it administers and implements EU policies; It provides surveillance and enforcement of EU law in coordination with the EU Court. It represents the EU at some international negotiations (e.g., WTO). However, the Commission’s negotiating stances at such meetings are closely monitored by EU members. The Commission is made up of one Commissioner from each EU member (including the President and two Vice-Presidents). Commissioners are appointed all together and serve for five years. Commissioners are not supposed to act as national representatives. The Commission is the executive in all of the EU’s endeavours, but its power is most obvious in competition policy. One of the key responsibilities of the Commission is to manage the EU budget, subject to supervision by the EU Court of Auditors. The Commission decides, in principle, on the basis of a simple majority: almost all of its decisions are on the basis of consensus. The reason for consensus is that the Commission usually has to get its actions approved by the Council and the Parliament: a decision that does not attract the support of a substantial majority of the Commissioners will almost surely fail in the Council and/or Parliament. However, it is ultimately answerable to the European Parliament since the Parliament can dismiss the Commission. The Commission as a whole, employs about 32,000 people (which is less than the administration of major cities like Vienna). The European Parliament The European Parliament has two main tasks: sharing legislative powers with the Council of Ministers and the Commission; overseeing EU institutions, especially the Commission. The Lisbon Treaty boosted the power of the European Parliament substantially, making it equal to the Council on most types of EU legislation (i.e., noteworthy are the Parliament’s new powers over the budget). Organisation: 720 members (MEPs) directly elected (last election: 6-9 June 2024); number per nation varies with population but is less than proportional; MEPs physically sit left-to-right, not along national lines, organised in groups. Centre-left + Centre-right around 2/3 of all seats. Location(s): It is located in Strasbourg (owing to France’s insistence); Parliament’s secretariat is in Luxembourg; It also has offices in Brussels (this is where the various Parliamentary committees meet). Court of Justice of the European Union EU laws and decisions are open to interpretation that may lead to disputes that cannot be settled by negotiation. The role of the Court of Justice (often known by its pre-Lisbon Treaty name, the European Court of Justice, or the ‘EU Court’) is to settle these disputes (between member states, between the EU and member states, between EU institutions, and between individuals and the EU). Judges are appointed by common accord of the Member States’ governments. Organisation: located in Luxembourg; one judge from each member appointed for six years; also, eight ‘advocates-general’ to help judges; Court reaches its decisions by majority voting. The Court of First Instance was set up in the 1980s to help with growing workload. Legislative procedure and Ordinary legislative procedure. The European Commission has a near-monopoly on initiating the EU law-making process: right of initiative allows the Commission a good deal of power over which new legislation gets considered. Once developed, the Commission’s proposal is sent to the Council for approval. Most EU legislations also require the European Parliament’s approval (exact procedure depends upon the issue). Procedures: ‘ordinary legislative procedure’: main one (but complex) and gives the Parliament and the Council equal power in terms of approval/rejection and amendment; ‘consultation procedure’: only Parliament gives opinion; ‘consent procedure’: Council adopts legislation (proposed by the Commission) after  obtaining the consent (without amendments) of Parliament. LECTURE 3: DECISION MAKING OF THE EU Two main questions: 1. Who should be in charge of what? That is, which decisions should be taken at the EU level and which should be taken at the national or subnational levels? Debates about subsidiarity and the appropriate division of powers has been a constant issue since the late 1940s. Brexit, as it was essentially about ‘taking back control’ is a recent example In principle, this problem also exists within nations. 2. Is the EU-level decision-making procedure efficient and legitimate? TASK ALLOCATION EU practice and principles Task allocation = ‘competences’ in EU jargon exclusive competences’: EU decides alone; ‘shared competences’: responsibility shared between the EU and Member States; two types: ○ members cannot pass legislation in areas where the EU already has; ○ existence of EU legislation does not hinder members’ rights to make policy in the same area; ‘supporting, coordinating or complementary competence’: EU can pass laws that support action by members; ‘national competences’: national or subnational governments alone decide. subsidiarity and proportionality The default option is that competences remain with the members. The ‘burden of proof’ lies on the instigators of EU legislation: they must make the case that there is a real need for common rules and common action. The allocation of tasks is guided by two principles:  Subsidiarity: keep decisions as close to the citizens as possible without jeopardizing win–win cooperation at the EU level (i.e., EU action is required only if it is more effective than action at national, regional, or local level). Proportionality: when EU action is necessary, the EU should undertake only the minimum necessary actions. Flexibility clause: there are situations when a new challenge – one not foreseen in the Treaties – arises that requires action at the EU level (e.g., vaccines in Covid-19). The theory of fiscal federalism Optimal allocation of tasks depends on 5 trade-offs: 1. diversity and local informational advantages: if people have different preferences, centralised decisions create inefficiencies; A centrally chosen policy will typically be a compromise and therefore not the right policy for everybody. Local governments might find it easier to acquire all necessary information. One-size-fits-all policies tend to be inefficient since they become too much for some and too little for others. Central government could set different local policies, but the local government is likely to have an information advantage. → ex: Decentralised decision at country level vs. regional decision 2. scale economies: cost savings from centralization; Per-person cost of a service might fall as more people use the service. Producing public goods at a higher scale reduced average cost. This leads to centralization: transport; medical services; etc. This depends on the fixed costs that do not depend on the quantity produced (rent). Marginal costs are horizontal, Fixed, whatever is the quantity. Improvement in the marginal cost that sometimes presents parallel movements. Monopsony → is the monopoly from the demand side, with a lot of bargaining power. 3. Spillovers: negative and positive externalities of local decisions argue for centralization (or, at least, cooperation); Spillover is an economic side-effect, known in economics jargon as an ‘externality’. Positive spillovers: a slightly higher level of a particular policy or public service in one region benefits citizens in other regions. Negative spillovers: when one region’s policy has a negative effect on other regions. The existence of significant spillovers suggests that decisions made locally may be suboptimal for the nation (or EU) as a whole. The pure existence of spillovers, however, does not force centralization: may take account of the spillovers via cooperation among lower-level governments; big differences in preferences. 4. Democracy as a control mechanism that favours decentralisation; If policy is in the hands of local officials and these are elected, then citizens’ votes have more precise control over what politicians do. This logic is important: it underpins the basic presumption that decisions should be made at the lowest practical level of government (i.e., as close to the voters as possible).  5. jurisdictional competition: ‘exit’ option is a way to influence governments. The fact that people can move (e.g., between regions) forces decision makers to pay closer attention to the wishes of the people. This favours decentralisation because if all decisions are centralised, voters will not have the ‘exit’ option. Economic view of decision-making: QMV The EU has several different decision-making procedures. But about 80% of EU legislation is passed under the ‘ordinary legislative procedure’: the Council adopts legislation by a ‘qualified majority voting’ (QMV). The QMV rules governing Council voting were set out in the Lisbon Treaty. They are based on the notion of a ‘double majority’: that is, to pass, a proposal must (1) pass a threshold in terms of the number of nations voting ‘yes’, and (2) have the population share of the yes voters. The result is a double majority in the sense that a sufficiently large share of EU nations, who represent a sufficiently large share of EU citizens, must approve. The number-of-members threshold is 55 per cent (>=15 states); the share-of-population threshold is 65 per cent. The European Parliament, by contrast, adopts laws by a simple majority: the usual 50 per cent majority threshold with one vote per member of Parliament. voting weights Member‘s voting weight under the double majority QMV system: Passage probability in a simple example (3 Countries) → Passage probability = number of possible winning coalitions number of possible coalitions. LECTURE 4: THE MFF AND THE EU BUDGET The MFF The EU has a long-term budget (for 7 years) called Multiannual Financial Framework (MFF) (formerly "financial perspective"). Currently in force 2021-2027. It is a mechanism to ensure that EU spending is both predictable and subject to strict budgetary discipline. It defines the maximum amounts ("ceilings") available for each major area of expenditure ("heading") of the EU budget (annual). Within this framework, the European Parliament and the Council have to negotiate each year the budget for the following year. In reality, the annual budget adopted is always below the overall ceiling of the MFF. The 2021-2027 MFF, made up of €1.211 trillion in current prices (€1.074 trillion in 2018 prices), After the covid19 crisis, it has been combined with the temporary recovery instrument, NextGenerationEU, of €806.9 billion (€750 billion in 2018 prices). The annual budget The EU budget is about 145 billion. It represents about 1% of EU27 GDP. It is much smaller than many Public budgets in MS. Expenditure is on 4 things: Agriculture (about 32%). Cohesion (about 30%) All else (internal and external policies) (about 31%) Administration (about 7%) The NextGeneration EU: It is a €806.9 billion temporary recovery instrument at current prices. The money from NextGenerationEU is invested across several programmes, and distributed to EU countries and beneficiaries through grants (€407.5 billion) and loans (€385.8 billion), at current prices. The majority of funds from NextGenerationEU (€723.8 billion in current prices) are spent through the Recovery and Resilience Facility (RRF) programme. The RRF consists of large-scale financial support to public investments and areas such as green and digital projects. It finances reforms and investments in Member States from the start of the pandemic in February 2020 until 31 December 2026. It has a close link with the European Semester. The grant component of the RRF was divided among EU countries according to several allocation criteria. These include Gross Domestic Product (GDP) per capita, unemployment levels, population and the impact of the coronavirus crisis. In order to receive support from the RRF, EU countries submitted Recovery and Resilience Plans to the Commission, where they explained how they will spend the money. The Commission assesses these plans and the European Council approves them. Money is disbursed upon the achievement of milestones and targets Member States have themselves committed to. Funding The NextGeneration To raise the necessary funds for NextGenerationEU, the Commission borrows on the capital markets on behalf of the EU, for up to around €800 billion in current prices. The timing, volume and maturity of the bonds issued will depend on the needs of the EU and its Member States. The funds raised will be repaid from future EU budgets or by the Member states concerned, by 2058 at the latest. The loans will be repaid by the borrowing Member States. The grants will be repaid by the EU budget. The MMF+ NextGeneration: More than 50% of the total amount of the next long-term budget and NextGenerationEU will support the modernisation of the European Union through : 30% of the EU budget will be spent to fight climate change. The package also pays specific attention to biodiversity protection and gender-related issues 20% of NextGenerationEU will be invested in the digital transformation For the first time, new and reinforced priorities have the highest share within the long-term budget, 31.9%. Funding of EU Budget The EU's budget must be balanced every year (by law). Sources of funding: three main types: Tariff revenues (custom duties), ‘VAT resource’ (Like a 1% value added tax (reality is complex)) GNI based (fourth “own resource”) → The biggest source transfer paid by MS based on their GNI The new resources for the EU budget To help repay the borrowing, new resources will be introduced to complement Member States' contributions to the EU budget. These would better align the sources of revenue to the EU budget with the EU priorities and objectives. The first new resource, as of 1 January 2021, is a new contribution based on non-recycled plastic packaging waste. In December 2021, the Commission proposed new sources of revenue for the EU budget and is working towards their swift introduction: -A percentage of revenues from the Emissions Trading System (ETS) -Revenues from the new Carbon Border Adjustment Mechanism (CBAM) National contributions % of GNI per member is approximately 1%, regardless of per-capita income →EU contributions are not ‘progressive’ → Though “absolute” contributions are very heterogeneous (due to differences in economic size) →The net contribution of the poorest members are positive and they are negative for the rich EU members BLOCK 2: ECONOMIC ANALYSIS OF THE MARKET INTEGRATION LECTURE 1: ECONOMIC ANALYSIS OF MARKET INTEGRATION: TRADE Concept of economic integration: removal of any kind of restriction to the free mobility of goods, services and production factors (capital and labour) between two or more countries Economic integration usually involves “discrimination”. For instance: By 1968, EU members charged zero tariffs on all imports from each, while imposing significant tariffs on imports from the USA, Canada and Japan Discriminatory effects also played a central role in the political economy of European integration (remember the “domino” effects we studied in Lecture 1) → preferential trade agreement: North Africa Countries and EU, monolateral asymmetric approach between countries. Usually one powerful union/country having preferential trade with a smaller less powerful one → you do not necessarily have to go step by step. Only example of the step by step is the EU → agreements are regional trade agreements (general term) except the preferential because is not mutual and bilateral CU/FTA: Removal of trade barriers among their members CU: Adoption of a common external tariff (CET) on trade with nonmembers. A combination of trade liberalisation between member states with restricted trade with the outside world Regional Trade Agreements (RTAs) include CU and FTA (but not Preferential Trade Agreements because they are unilateral) promote trade and investment between members, but have different impact on partner states and third countries (trade-creation and trade-diversion effects) ALL of them are notified to WTO The Multilateral approach → GATT (WTO) apply the principles of:  Trade without discrimination (FTAs and CUs violate this principle) Most Favoured Nation (MFN): the most favourable treatment granted to a product imported from any country should be given (immediately and unconditionally) to a product (a “like product”) from any Member of the WTO GATT rounds have substantially reduced trade protection based on tariffs. The Regional approach (Regional Trade Agreements, RTAs) → RTAs are reciprocal trade agreements between two or more partners (not specifically in the same region) RTAs include: FTA (Free Trade Agreement), CU (Customs Unions), Common markets It is a threat to multilateralism (Bhagwati, 2008), as RTAs involve an exception to the MFN clause GATT tolerates RTAs (art. 24) under certain conditions: Elimination of tariffs on “substantially all the trade” among members Intra-bloc tariffs must go to zero within a reasonable period In case of CU, the common external tariff must not on average be higher than the external tariff of the CU members were before. Since 1991, drastic increase in RTAs across the world Initially, members were geographically close to each other (e.g. EU, NAFTA, ECOWAS, ASEAN…) Nowadays, countries or regional blocs have signed or negotiated RTAs with diverse and geographically distant partners (e.g., Trans-Pacific Partnership, TTP, and Transatlantic Trade and Investment Partnership, TTIP) → more protectionism since the covid, ex: foreign direct investment limited as protectionist policy → for Eu when we talk about External trade, is external of the Eu and not among member states.  → Share in world trade in goods and services % of global trade, excluding intra-EU trade → market share as cake theory. → EU trade balance by partner country EUR billion (only goods) What is the best approach? Are Customs Unions always a step towards the advantages of free international trade? What does The Theory of Customs Union say? The main critic of preferential integration is that regional trading blocs (i.e, RTAs) limit global trade liberalisation due to high external trade barriers (discrimination). Objectives of economic integration: It is important to understand all the objectives that the participants of RTAs seek: economic, political, nationalistic, defence… Among other objectives, we will not focus on: Preserve peace and security (e.g. ECSC , 1951) Enough power to determine the terms of trade (international prices) ( e.g. OPEC) Bargaining power in the international political and economic forums (e.g. MERCOSUR) Insurance against future event such as trade war, possible discriminating trade liberalisation (Greece, Spain and Portugal joined EC to become part of a political system of liberal democracy) Short run effects of economic integration Trade effects of CU Trade creation. high-cost home production is replaced by imports from a lower-cost trade partner (prompted by the elimination of trade barriers) Trade diversion. imports from more efficient third countries (non-member of CU/FTA) are replaced by imports from a less efficient trade partner (due to the discriminatory suppression of trade barriers –member countries do not face trade barriers, but non-member do so). 2. Essential microeconomic tools Welfare analysis: consumer surplus Since the demand curve is 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*.