Economics of European Integration Course 2022-23 PDF

Economics of European Integration Course 2022-23 PROF. JUAN IGNACIO DÍAZ BIDART Baobab is the web of 2 Jean Monnet Chair  Were are allocated the course resources?:  https://baobab.uc3m.es/monet/monnet/spip.php? rubrique24  Course sl...

Economics of European Integration Course 2022-23 PROF. JUAN IGNACIO DÍAZ BIDART Baobab is the web of 2 Jean Monnet Chair  Were are allocated the course resources?:  https://baobab.uc3m.es/monet/monnet/spip.php? rubrique24  Course slides are downloable at  https://baobab.uc3m.es/monet/monnet/spip.php? rubrique25  Compulsory reading is downloadable in this link from the slides of each lesson.  Compulsory reading hard copy is available “clave 2” for the course 2020-21 from “reprgrafía” ground floor building 9. Complementary readings 3  readings to help writing the course essay are also downloadable from thous link:  Monetary and fiscal policy in the European Union readings: https://baobab.uc3m.es/monet/monnet/spip.php?rubrique108  Brexit or BINO (Brexit In Name Only)?: https://baobab.uc3m.es/monet/monnet/spip.php?rubrique116  CAP reform and the multiannual financial framework 2014-20 and 2020-26: https://baobab.uc3m.es/monet/monnet/spip.php?rubrique91  Deepening the European Monetary Union. Banking Union: https://baobab.uc3m.es/monet/monnet/spip.php?rubrique121  Environmental policy in the EU / Política Ambiental Europea: https://baobab.uc3m.es/monet/monnet/spip.php?rubrique74  Euro-Area Debt Crisis: Debate readings: https://baobab.uc3m.es/monet/monnet/spip.php?rubrique55  Food price stability and food security: https://baobab.uc3m.es/monet/monnet/spip.php?rubrique99  Lisbon Strategy and the infrastructures and R & D + i policy: https://baobab.uc3m.es/monet/monnet/spip.php?rubrique94  More verbal information during the reduce classes will insist on this information Grading 4  Grading rules are at  https://baobab.uc3m.es/monet/monnet/spip.php? rubrique41  Please before start writing your papers read the instructions carefully for written homework and research paper at  https://baobab.uc3m.es/monet/monnet/spip.php? article144 Grading 5  GRADING  Continuous evaluation 60% and final exam 40%. Grades of the continuous evaluation will be posted in Aula Global before the final exam, from 0 to 65. Remember that the continuous evaluation is comprised of 40 points from the midterm exam + 20  points from the essay (and a bonus of up to 5 extra points for submission of assignments and participation in class). The final exam will add up to a maximum of the remaining 40 points GRADING 6  ESSAY (20% OF THE FINAL GRADE) Extension. Maximum 10 pages for the body of the essay (unless you have been allowed to follow the 80-20 system, in which case the body's essay shall be 20 pages). Submission of the topic chosen for the essay and the team members.  By 29 September 2024, students should submit through an Assignment in Aula Global two things: the names and surnames of the members of the team (up to 3) and the topic chosen for the essay. It cannot be changed afterwards. In case the team is made up of 2 or 3 members, only one of them should submit the names and the topic. You can discuss the topic with the Lecturer and/or the Teacher Assistant before the submitting date. Once submitted, the Teacher Grading 7  MIDTERM EXAM (40% OF THE FINAL GRADE)  PROBLEM SETS (+5% EXTRA FOR THE FINAL GRADE)  Submissions of Problem Sets, together with active participation in both theoretical and practical classes, can add an extra 5% to the final grade. Please note that the real value of theoretical and practical classes resides in the preparation of both midterm and final exams, which together represent 80% of the final grade. Course program 8  1 Introduction: The process of European integration. From 6 to 27, from the Treaty of Rome to the Treaty of Lisbon: A brief history of the EU EU Institutions. The Council of the EU and the European Council The European Commission. The Parliament, The Court of Justice and Other European Institutions The EU budget Basic statistics of the European Union: Income, population and territory.  2 The economic crisis in Spain and the EU. Origins of the mortgage and financial crisis. Effects of the crisis in Spain and the EU. European initiatives to overcome the crisis.  3 Economic Theory of Integration. Forms of regional economic integration. Bilateral agreements and preferential agreements. Free trade areas and Customs Unions. Economic Unions and Monetary Unions. Free trade versus protection. The principle of community preference, the TEC and export refunds. Effects of protection on consumers and producers. Tariffs, fees and subsidies. Free Trade Area: Creation and diversion of trade. Customs Union: Pro-competitive effects, Economies of scale. Common Market: Mobility of factors. Economic and Monetary Union. Economic Integration and Growth: Cost Benefit Analysis . Course program 9  4 European monetary integration. The Optimal Monetary Zones model: Asymmetric shocks. The Delors report (1989): From the EMS to the Euro.. Exchange rates and the single European currency.. The ESCB and the European Central Bank.. The Maastrich criteria, the EMS-II and the Stability and Growth Pact  5 Common Policies I: The Common Agricultural Policy (CAP). Stabilization and Maintenance of income. Redistributive effects: The new and the old CAP. The reforms of the CAP (from CAP92 to CAP2021-27). Expost evaluation of the CAP.  6 Common Policies II: Regional Policy. The real convergence: Competition and regional policy. Structure policy: ERDF and EAGGF. Structure and regional policies. The EIB and the Growth Initiative.  7 Common Policies III: Environmental Policy. The VI Environmental Action Program. Economic instruments for environmental control: Emission Permits and Pigouvian Taxes. The European Emissions Trading Scheme  8 Common Policies IV: Electricity policy. -Commercial policy (with third countries). Negotiations in the WTO (World Trade Organization). Trade disputes  10. European Integration Dynamic Bibliography 10   Theo Hitiris. European Union Economics. 5th edition. Prentice-Hall. 2003   Ali El-Agraa. The European Union: Economics and Policies. Prentice-Hall; 7 edition. 2004   Paul De Grauwe. Economics of Monetary Union. Oxford University Press. 2007.  What is Economics of 11 Integration?  Countries -> regional economic association.  Meaning trade liberalization for member countries  Market integration -> and enhanced competition by trade liberalization  Market integration drives to  scale economies  The origin of the EU were to reach bigger markets for the European companies allowing to compete with the US companies Forms of economic 12 integration: 1) Free Trade Area (FTA) -Free trade between the members 2) Custom Union (CU) -FTA + common external tariffs (CET) on trade with non-members 3) Common Market (CM) - CU + free mobility of factors of production 4) Economic Union (EU) - CM + common economic policy SCHEME Free Common Free Common One intra- comer- factor 13 monetary govern scheme cial policy mobility and fiscal ment trade policy Free trade area Yes No No No No Yes Yes No No No Customs union Common market Yes Yes Yes No No Economic union Yes Yes Yes Yes No Complete Yes Yes Yes Yes Yes economic & political integration  Objectives of the 14 economic integration  External economies (maximize the gains)  External diseconomies (minimize the losses) The members adopt either cooperative policies (internalize the externalities- advance economic integration) or non-cooperative policies (looser form of integration- FTA) The process of economic 15 integration Integration increases  the interdependence between the members increases  the need for cooperation is intensified.  During the economic integration the member states voluntarily choose to restrict/ replace their national objectives and policies and undertake it in a common level of union. Integration is a process during which the sovereign power of the member states is progressively diminished. The objectives of economic 16 integration  Association between states aim at the realization of a benefit  All economic associations always have positive and negative economic implications trade liberalization and enhanced competition in an enlarged market.  The objectives of the union can be reached efficiently only with the sacrifice of national sovereignty in order to achieve a collective goal. Economic integration 17 between developed countries 1. The essential requirements for an increasing economic integration are:  Comparable levels of economic development;  Similar but potentially complementary structures in production and demand; There are static effects (immediate general benefits) and dynamic effects (accelerate development and raise welfare). The economic integration will stimulate research and development, inducing innovation and technical change faster economic growth. Integration among 18 developing countries  The economic integration is not based on static benefits, it aims at the potential dynamic effects and the expectation that closer cooperation will foster regional markets.  The objective of their integration is the acceleration of their development by:  enlarging the market  pooling resources essential for economic growth  Avoiding unnecessary and uneconomic duplication in capital investment  Integration between developing countries contains also elements of self-destruction, for that reason the economic association rarely survive for a long time.  Example: East Africa Common Market (EACM), Central American Common Market (CACM). Economic disintegration 19 Back to protectionism?  Grexit -> A number of economist defended the option of exit the UE to solve the debt crisis of Greece.  Finally Greece government opted to remain  The conservative prime minister approve a referendum to end with cyclical claims of the conservatives Eurosceptics  The Brexit option won, for a narrow margin and the UK sent out the EU in 2020  A number of issues remains. Trade creation 20 Definition of trade Effects of trade creation creation  Trade creation refers to  This switch to lower cost the increase in producers will lead to an economic welfare from increase in consumer joining a free trade area, surplus and economic such as a customs union. welfare.  Trade creation will occur  But in our next graph we when there is a refers to the case in reduction in tariff which a country joint a barriers, leading to lower Customs Unions with a prices. lower tariff than before integration.  TRADE CREATION after integration in a free trade area 21 Px Welfare Gain Welfare gain through Sx from Production increased consumption 3 E PSp J H S1+T = P2 2 G Producer income lost C S1 = P1 GJAC 1 A M N B Dx W X 10 20 Consumer 50 70 Profit / Loss of Tariff Income Trade diversion 22 Example: Spain joint the EU Trade diversion  Suppose that the international Price of Lamb is S1 = Pw  Trade diversion occurs when  But with the Spanish tarif tariff agreements cause consumers pay Pw + TSp imports to shift from low-cost countries to higher-cost  Suppose Australia export countries. lamb at the international Price PW  Trade diversion is considered undesirable because it  Suppose the UE place a tariff concentrates production in TEU on the import of lamb to countries with a higher all countries equally. opportunity cost and lower comparative  There is an equal tariff to advantage. European countries and so an equal tariff for imports from  Trade diversion may occur Australian. when a country joins a free trade area with a common  Member States do not pay external tariff (or Common tariff in the internal market, so Market). imports art duty free. Trade diversion 23 Joining the customs Welfare effects union  After the integration of Spain in the EU consumers will pay a price PU = PW + TEU  Spanish producers sell less they only sell 15, as we now  Now Spanish consumers may import lamb from France duty free diverting import more 60 – 15. trade from Australia to France  Producers lose GG’JJ’  France or other ME of the EU Consumers gain an increase in  The government loses tariff  consumer surplus of areas Transfer from area: Tariff transfer from the producers to consumers plus the government to consumers Welfare gain triangles plus the Tariff transfer from the government to  Other taxes may increase consumers to compensate the losses  Consumers will pay a price of P1, Pw + TEU and total quantity of lamb will be of income from tariff Q4  The net gain is Trade  Consumers gain area between 1 and 1.5 = GG’HB’ creation – Trade diversion  TRADE DIVERTION 24 Px Country Sx welfare gain (Trade creation) Transfer from producers to Tariff transfer from the consumers E government to consumers 3 GJG’C’ JHJ’H’ J H G S + TSp 2 G` C` B` S3 Pw + TEU 1.5 J` H’ S1 = Pw S1 1 S1 = Pw M N Trade divertion Dx (tariff loss not accounted for) 10 15 20 50 60 70 X Trade divertion 25 Joining custom unions from a position of free trade Overall welfare  The above analysis suggests the UK effects had equal tariffs to all countries, such as Australia. However, before joining  Australian farmers lose out. the EU, the UK had free trade Exports fall. agreements with countries in the  EU farmers gain Commonwealth, such as New Zealand and Australia.  The global economy loses out because we have shifted  When the UK joined the EU, it had to from low-cost producers – implement an EU wide common Australia – to relatively high- external tariff of imports from outside cost producers the EU. the EU.  By joining the EU, the UK  The effect was to make Australian gained from new free trade and NZ agriculture more expensive agreements within Europe. The big losers were New than previously. Therefore we Zealand and Australia who switched imports from New Zealand lost trade to the UK. to European countries. Prices rose for consumers for items like butter.  Brexit may not change the situation if the UK remains in  Consumers in UK tend to lose out the EU Internal Market. because they pay higher prices from the less efficient producer.