European Politics Notes PDF

**[European Politics notes]** **Lecture 1 : Democracy, Technocracy & Populism in Europe** **Democracy definition:** - Minimalist: presence of free and fair elections & electoral turnover (Schumpeter) - Maximalist: stresses participation, broad inclusion in politial processes, guarant...

**[European Politics notes]** **Lecture 1 : Democracy, Technocracy & Populism in Europe** **Democracy definition:** - Minimalist: presence of free and fair elections & electoral turnover (Schumpeter) - Maximalist: stresses participation, broad inclusion in politial processes, guarantees of basic rights and rule of law (Dahl) **Technocracy:** - Approach to organize political power based on expertise by highlighting the prominence of expertise and science in the identification and implementation of objective solutions to societal problems (caramani, Majone) **Populism:** - Thin-centered ideology based on notion that society consists of 2 homogenous and antagonistic groups: the people versus the elite - Is inherently anti-establishment as it views the elite as corrupt - Argues that politics should be an expression of general will of the people (Mudde) **Maximalist definition of Democracy (Dahl)** Two dimensions: - Contestation captures the extent to which citizens are free to organize themselves into competing blocs in order to press for the policies and outcomes they desire - Inclusion has to do with who gets to participate **Representative Democracy** - Representation \> relationship through which an individual or a group stands for a larger body - Citizens \> representation is the activity of miking citizens's voices present - Political partis \> the representation organize itself in political parties **Responsible party gov model** - Description \> gov bodies should correspond to the demographic and socioeconomic composition of ociety that it represents - Symbols \> through symbols, the units of society is represented \> construction of myths through various narratives \> should help legitimize political order - Interests \> competitive elections and government overturn allow for the expression of interests and preferences **Two models** - [Trustee] - Person that acts on behalf of others using her better knowledge, expertise and educ - Follow their own understand of the best action to purusue - (Burke) - [Delegate] - Person who is chosen to act on behalf of someone else on the basis of clear guidance and instruction - Follow the expressed preferences of their constituents - Madison **Populist and technocratic critique** - **Populist** - Politicians out of touch - Unable to deal with complexity \> allowing too much technocratic and supranational actors in - Mediatization - **Technocratic** - Less responsible to citizens by acting based on popularity instead of responsibility - Unable to deal with complexity : too little room for expertise - Mediatization: focus on short term results and proposal that be easily sold to the media market place - **Shared** - Critique of political parties, political class is out of touch - Critique of governance - Critique of focus on popularity **Role of the Eu** - Democratic norms a key accession criteria - Copenhagen criteria for democracy **[Lecture 2: Theories for studying politics in Europe]** **Models in political science** - Median voter - Delegation - Principles and agents - Multi-dimensional politics **Key models in political science** - [Spatial models] - How can we understand political preferences and outcomes spatially - How citizens' preferences feed into the representative democratic process - Median voter theorem \> for a unidimensional spatial model the ideal point of the median voter will win against any alternative in a pairwise majority rule contest **Judging Political outcomes** - There usually already is a status quo, a current policy (in some cases even absence of any policy) against which all proposed options are compared - So, which criteria to use to judge outcomes against status quo? 1. [Congruence] - A policy outcome mirrors the policy preferences of voters - Analysis is static: comparing the position of a policy and the position of the median voter on the same dimension 2. [Responsiveness] - A political system responds to changes in the policy preferences of voters - Analysis is dynamic \> comparing changes in the position of the median voter to changes in policy. - [Delegation model] - What are the advantages and disadvantage of delegating political power - Principal and agent relationships (principles hold decisions making power (such as voters) but have delegated tasks and authority to agents - Most decisions taken by representative through delegation \> necessary because modern societies deal with a wide range of issues \> decisions about solving these problems re governed by institutions **Complexity resulting from multidimensionality** - Political decision-making occurs on multiple dimensions - Decisions are often taken on issues that comprise more than one policy dimension - Decisions in a multi-dimensional space are often analysed using indifference curves - Intersection of the indifference curves is the winset of the status quo (policy alternatives that can beat the status quo) **Model vs reality** [Why the median voter theorem might not hold in Europe ?] - It assumes that politicians care only about winning but not about their policy. - It assumes that voters care primarily about policy - It assumes hat the electoral rule favour majority in terms of 50% but some systems are more proportional and may allow smaller parties to do well [Critique of democratic politics in the EU] - Increase in executive power and a decrease in national parliamentary control - EP is too week as a legislature, EU's executive is not elected by the EP - There are no European elections (elections are never about Europe) - EU integration poduces policy drift from voters' ideal policy **Is there a democratic deficit in the Eu?** - [Majone : No] - Eu is a regulatory state, so democratic institutions are not needed - Policy outcomes should be Pareto efficient - Politicization would result in redistributive rather than pareto efficient outcomes and would undermine legitimacy of the EU - - [Moavcsik: No] - National gov ensure democratic legitimacy in the EU - EP has become more powerful - EU is more transparent than domestic political systems - [Hix/Follesdal (and others) : yes] - Electoral contestation is needed at the Eu level - Not possible to distinguish entirely between regulatory and redistributive policies - Competitive elections are crucial to make policies and elected officials responsive to the preferences of citizens **Lecture 3 : Multilevel politics and theories of EU integration** History of European integration A black text on a white background Description automatically generated **Origins of European integration** 1. [Role of ideas] a. Idea of Europe b. Influence of the federalist movement i. Second world war called for a federalist solution to undermine nation state ii. Churchill "United States of Europe" iii. Jean Monnet, Robert Schuman and Walter Hallstein 2. [External factors] c. The threat of communism iv. Yalta agreement in 1945 \> division of Europe into spheres of influence v. Onset of the coldwar d. US influence vi. Trumain doctrine of containment vii. Marshall aid in 1947 viii. Nato in 1949 3. [Domestic interests] e. The German question/security issues ix. European integration would fix Germany safely in western Europe x. Avoid future conflict between European states f. Economic interdependence xi. Increased global trade, internationalization of prod and econ interdependence xii. Need for post war reconstruction **The EU's foundational myths (De Vries)** - [The EU as a peace project in which nation states learned from the atrocities of the WWII and bound themselves in peaceful cooperation] - In reality : European power kept fighting colonial wars after, it was not nation-states that kicked off the process of European integration but fading empires (Snyder, 2019) - [Notion that the EU is forged in crisis and that crisis lead to more integration] - How did the process of EU integration qualitatively change as a result of crisis? Example of Merkel giving very little concessions - [The sense that deeper economic interdependence fosters political change in the Eu's internal and external relationships] - Monnet's method: political integration under the disguise of econ integration - Makes EU vulnerable \> relying on outputs as a source of legitimacy might jeopardize public support for EU in the long term - It never solved the Eu's crucial dilemma (Majonne, 2005) \> are EU policies here to solve specific problems are they are here to serve integration's objectives. - [Idea that law can replace power politics in the EU] - Competences of the Eu are not simply regulatory, they are deeply political \> creates winners and losers - It therefore relies on loser's consent, which can only be obtained through a process of democratic political contestation **Why integration? Grand theories** - **Neofunctionalism** (Enst Haas)\> integration will spread from one sector to the other and the creation of supranational institutions will further advance integration - Functional spillover: spread of integration, from one sector to another - Political spillover: elites shifting expectations and loyalties to the Eu level - Cultivated spillover: Eu institutions cultivating spillover and further integration - **Intergovernmentalism:** states remain the chief arbiters of integration and the interests of national executives circumscribe the authority of supranational orga - [Realist intergovernmentalism] - Emphasise the link between international cooperation and underlying national security interests - Preferences and bargaining power are determined by the geopolitical positions of member states - [Liberal intergovernmentalism] - Acknowledges the importance of domestic politics - Explains integration as a function of growing economic interdependence **Solution to these issues : Multilevel governance** - Dispersion of authority across different territorial levels  - **Integration as a solution to prisoners' dilemma** - Through increasing close interactions helped by trust developed through institutions, regions can dev a more prosperous and peaceful relationship **Subnational politics** [Decentralization] - Some geopolitical division by which the country is divided into geographically mutually exclusive divisions (and some degree to which actual power lies with the subnational units) [federalism] - 2 levels of government rule the same land and people - Each level has at least one policy area in which it is autonomous - There is some constitutional guarantee of autonomy - Can be - De Jure \> federal structure of a country as constitutionally recognized (UK and Spain not federal countries in that case) - De facto federalism \> also referred to as decentralization. Refers to the degree to which actual power lies with the sub-national units. A map of europe with red and orange colors Description automatically generated **Two types of federalism** - Coming together \> previously independent individual units pool sovereignty to benefit from economic and security cooperation (Switzerland, Eu) - Holding together \> a unitary country chooses to decentralize to ameliorate tensons between ethnic or linguistic groups (Belgium)  A table with text and images Description automatically generated with medium confidence **Lecture 4: ideology and voting in Europe** **Ideology:** stable and consistent set of ideas about the world that provides a guideline for political action \# from preferences that refer to specific policies or actors **3 classic ideologies** - [Liberalism]: stresses rights and freedom; stems from the opposition to feudal and absolutist rule in Europe - [Conservatism]: rejects radical social change that tries to unseat existing power - [Socialism]: concerned about the distribution of wealth  **2^nd^ ideological dimension** \> related to [cultural issues] (attitudes towards religion; tradition, sexuality, immigration...) Emergence of this is connected to **post-materialist values** A graph of the eu member Description automatically generated with medium confidence - Citizens in southern Europe and parts of Eastern Europe want integration to move faster - In northern Europe, fewer citizens want fast integration - Level of populism vary between European countries, it correlates with experience of corruption, poor governance, and poor econ governances **Group attachments** - [Cleavage theory]: cleavage are rooted in historical events such as national revolutions, religious conflicts... - [Michigan model]: voter's psychological attachment to a party is formed during childhood socialization - [Running tally model of partisanship]: voters continually assess how they perceive parties - Volatility has been increasing since the early 2000s across Europe  A white text on a white background Description automatically generated **Who votes?** - People who voted in previous elections are more likely to vote in subsequent elections - Older voters \> younger - More income and more educ \> more likely to vote **Explaining vote choice** How do people cast a ballot for a particular candidate or party? - [Party identification model] - Voter's psychological attachment to a party - [Sociological model] - Cleavages rooted in historical developement - [Rational-choice model] - Retrospective voting: voters use evaluations of past performance to vote for or against incumbent - Prospective voting: they base their vote on expectations about future **European versus national parliamentary elections** [Elections to the EP are often regarded as second-order national elections:] - Considered less important - Turnout is lower - Voters often use them to voice their discontent with national politics - Eurosceptic voters are more likely to defect from the party they support in national elections - Defections are more likely when the campaign has been explicitly Eurosceptic  **Lecture 5: Political parties & the median in Europe** J**ohn Zaller's RAS model (Receive, Accept and Sample) based on 4 axioms** - [Reception axiom:] greater level of cognitive engagement with an issue makes person more likely to be exposed to and comprehend political messages concerning that issues - [Resistance axiom]: people tend to resist arguments that are inconsistent with their political predispositions - [Accessibility axiom]: the more recently as consideration has been called to mind or thought about, the less it takes to retrieve that consideration from memory and bring them to the top of the head for use - [Response axiom]: individuals answer survey questions by averaging across considerations that are immediately salient or accessible to them [Malleability of public opinion] \> public opinion does not develop in a vacuum, especially not public opinion towards political matters **Cueing** - Relates to political messages that aim to move people to a side - Political cue: a message that people, voters and elites may use to gather info about politics and take a position, they can be bottom up and top down **Political party cues (origins of political parties cleavages)** - [Centre-periphery cleavage]: regionalist parties fight against centralization of power - [Church state cleavage]: Christian democratic parties succeed with policies rooted in religious beliefs - [Urban-rural cleavage] \> agrarian parties represent the interest of rural areas - [Class cleavage] - [Agenda-setting]: the medias' ability to influence the importance placed on certain topics or policy issues in public debate - [Priming:] media influencing how the public evaluates different policy proposals or candidates - [Framing:] how the media affects the way people think about politic by providing diff ways to think about a policy issues **Biases in information processing** - Refers to the systematic errors in understanding facts of failing to update in light of new information - Selective exposure: the tendency of individuals to filter and favour information that reinforces their pre-existing views while avoiding contradictory information - Is it demand driven or supply driven \> the biases in the media? \> social media led to much more biases on how info got shared, negative info was shared way more than positive info.  - [Misinformation] \> false but not intended to cause harm - [Disinformation] \> false info that is deliberately created or disseminated with the express purpose to cause harm **Three mental processes** - [Drawing social inferences] \> people fill in information when parts are missing based on stored memory - [Strong drive to belief and attitude consistency] - [Tendency to become overconfident in one's belief]  **Lecture 6: policy outcomes in Europe** **Veto players: political actors who can veto policy change\ **A table with blue and white text Description automatically generated **Congruent:** it means that the two chambers or houses of the legislative body are essentially equivalent in their powers, functions, and roles **Enforcement through strong parliamentary institutions** - Strong parliamentary institutions allows coalitions to enforce compromise - Parliamentary policing - Strong parliaments defined by larger number of committees, correspondence between committee jurisdiction, rewrite authority, amendment authority, binding plenary debate, right to compel witnesses, limits on gov to curtail debate and legislative with urgency procedure  **Policy authority in multilevel Europe** Eu must exercise the principles of proportionality and subsidiarity - [Proportionality:] content and cope of action by Eu institutions should go no futher than what is necessary to achieve the objectives as laid down within the treaties - [Subsidiary:] Eu institutions only take actions action when Eu-level action would be more effective than actions at a lower level **Three types of policy competences** - [Exclusive competence] (trade policy) - [Shared competence] (immigration or environment) - [Supporting competence] (health policy) A diagram of a business Description automatically generated with medium confidence **Immigration policy** - Eu institutions determine conditions for entry into and legal residence in a member state for 3^rd^ country national - Countries can determine volumes of admission for people coming from 3^rd^ countries to seek work - Eu instit are required to prevent and reduce irregular immigration - Provide incentives and support for national measures to integrate refugees and asylum seekers **Health policy** - Largely a policy area reserved for the national level with little European role/ exception covid 19 vaccines - But Eu secures citizen's rights to cross border healthcare through European health insurance - Eu plays a supporting and coordinating role, vaccines. **Lecture 7: Europe's globalization trilemma** **Consequences of globalization** - The rise of global finance - Rise of north south trade **"Embedded liberalism" policies under fire** - International competition and technological changes force developed economies to move to diversified modes of production - Wage solidarity institutions - Unemployment and wage inequality - Capital mobility have reduced the discretion of government to use monetary policy **The political limits of globalization** - Global finance has made some policy instruments useless - Monetary politics have become increasingly contested - Dani's Rodrik's globalization paradox  **European trends** - Polarized intergovernmentalism and coational instability - Ideological polarization, rise of extremism, party fragmentation, high cabinet turnover - Hollowing out of democratic institutions: populism and technocracy (Monti, Papademos) - Regional secessionist tendencies (Scotland, Catalonia) **Input and output legitimacy** - Ideological space of electoral competition is increasingly truncated by the application of external policy constraints (eg: through fiscal coordination mechanisms) - Austerity and secular stagnation are sapping the foundations of the European welfare state - Economic interdependence (capital markets, labor flows, asymmetric shocks) and political integration (EMU, Schengen) have catalyzed a decline in the E(M)U's input and output legitimacy A diagram of a pyramid with Great Pyramid of Giza in the background Description automatically generated  **Political polarization in multi-party PR systems** - Unlike majoritarian 2 party systems, polarization in PR systems may be the result of ideological divergence and or party fragmentation - Traditional left and right extremes have joined up in their anti-globalization rhetoric against moderate pro-European parties [The nature of external policy constraints] - External policy constraints may stem from - Formal or informal intergovernmental commitments - The hard process of compliance, transposition and implementation - Conditionality agreements with the EU or the IMF and finally - The soft imperatives of globalization - [Tightness of these constraints may vary with respect to] - Country size - Political influence - Econ environment **Supranational integration and party-system polarization** - Relationship between supranational integration and polarization is non monotonic as a result of party-level trade-off between office motives and communications and reputational costs in the face of external policy - The weaker the party system, the lower the reputational costs of flip flopping and the more likely it is for ever closer integration to lead to more divergence and polarization **Summary of findings** - Binding policy constraints and rapid integration initially speed up ideological convergence across the spectrum, but extreme constraints and policy targeting may backfire in terms of extreme polarization - We find a negative and significant effects on aggregate levels of polarization during the early stages of the European project but this convergence process is reversed during the later stages pf EU integration **Normative implications** There is strong evidence of a **"second order**" **democratic deficit** ie the reversal of the Eu's role as a guarantor democratic consolidation in the European periphery to that of an instigator of heightened volatility and democratic erosion in the European periphery to that of an instigator of heightened volatility and democratic erosion. **Conclusion and projections** The political arena is becoming increasingly disembedded from the economic sphere The Eu in a state of flux, with forces of hyper-globalization and political integration battling against those of nationalism, populism and democratic sovereignty The EU is becoming a clear illustration of Rodrik's globalization trilemma **Lecture 8: the variable geometry of European integration** **Variable geometry** The "variable (political) geometry" of international unions can be characterized by 3 political dimensions Breadth (size)\* width (scope)\*depth (decision-making rules) The concept of legalization in IR (Abott et al, 2000) - Obligation: expressly nonlegal norm binding rule - Precision: vague principle precise, higly elaborated rules - Delegation: diplomacy international organisations/dispute settlement bodies/courts **The economic costs and benefits of integration** Economic benefits of policy integration are characterizd by: - Citizens's preference intensity for public good provision - Cross-country spillovers - Cross-policy spillovers (complementarities) **The economic costs of policy integration** - Proportional to the level of public good provision - Proportional to the size of the political jurisdiction and exhibit - Economies of scale - Economies of scope **Equilibrium unions** - **Exogenous enlargement**: how will the shape and form of an existing union be perturbed when the set of eligible countries within a certain region expands for domestic or systemic reasons? - **Unanimous regionalism**: a new stable coalition structure with a different international union may only arise subject to the approval of existing union members. Hence the existing equilibrium union at time t will condition the future path of integration - **The static trade**-ff between union size and scope is reversed in a dynamic setting **Flexible integration** - Possibility of non-overlapping policy-specific subunions - In a flexible integration stable coalition structure "enhanced cooperation (subunions) agreements will tend to emerge in policy areas with low fixed costs and low degrees of complementarities with common base policy areas **A system of differentiated integration** - Displays variance across policy areas and across space while maintaining an institutional core (ie: a single organizational and member state core and a territorial extension that varies by function) - They are characterized by variance in levels of vertical integration or centralization ad variance in horizontal integration or territorial extension by policy areas - **Internal differentiation**: if at least one member state does not participate in integration (Economic and Monetary Union) and by external differentiation if at least one non-member state participates (internal market) **Interdependence and politization** - Supranationalists: European integration produces endogenous interdependence (spillovers) - Intergovernmentalists \> gov engage in multilateral co-operation to obtain econ and security benefits that they could not achieve with unilateral policy options. If there are negative externalities entailed in policies conducted by other states, domestic actors incite them to provide policy harmonization or integration - Politicization: increase in polarization of opinions, interests or values and the extent to which they are publicly advanced towards the process of policy formulation A white and black text on a white background Description automatically generated  A map of different countries/regions Description automatically generated **The dynamics of European integration** - Cooperation started in areas of low politics on the basis of a permissive consensus with strong regulatory basis - The existence of multiple equilibria gave way to path dependency - Exogenous enlargement catalyzed the deepening process but also generated disagreements over the future shape of the union - From the 90s onwards, the Eu started to transition from the uniform community method to the de facto and de jure differentiation **Lecture 9: Eu and EMU conditionality** Types of contracts - Legal vs economic contracts - \- legal contracts are externally enforced by a 3^rd^ party arbiter or enforcement mechanism (such as a court) - Economic contracts are internally self-enforced by contracting parties assuming that it is in their on interest to uphold the terms of the contract  **Political principal-agent models** - Domestic inter-institutional relations (bureaucracy-executive, legislature-committees) political systems as chains of principal-agent relationships - Asymmetric info over the types of the contracting parties (abilities and preferences) **International institutions** - International cooperation in an anarchic environment - International regimes and institutions are self-enforcing contracts mitigating the transaction costs of cooperation and bargaining - Formal vs informal institutions **Principal agent models of the UE** - Delegation to Eu institutions and bureaucratization **Conditionality in international politics** - Conditionality as a set of conditions attached to the granting of benefits (loans, aid...) \> an extrinsic incentive scheme - Contractual obligations may be: - Political (democratization criteria) - Broad macroeconomic targets **Conditionality programs as contracts** - Commitment device for the transfer of benefits to the target country - Contractual tasks \> domestic fiscal consolidation, market liberalization... - Asymmetric contracts \> because of macro imbalances on the part of the target country **Eu accession conditionality** - How does union membership conditionality affect long-term reform sustainability and post accession compliance? - Promise of accession and threat of expulsion as extrinsic (coming or operating from outside) incentive schemes for fiscal adjustment and structural reforms (Grexit and other austerity packages) - Accession conditionality, eastern enlargement of the EU and differential rates of compliance A close-up of a document Description automatically generated Backward-bending \> se donner du mal pour, se mettre en quatre pour Crowd out \> evincer **Accession conditionality as an endogenous contract** - Signaling game between an informed supranational authority (EU commission) and the national government of an aspiring candidate members - Country reforms as changes in the overall level of liberalization over time - Eu conditionality as an (in)complete contract of accession subject to the full implementation of the acquis - Discriminatory membership implies different distributive post-accession transfers offered by the principal to the agent - Conditional accession contracts signal informational content to the agent with respect to the intrinsic long-term benefits of liberalization and rules adoption, hence, its intrisic will for reform **Acquis def:**  the collection of common rights and obligations that constitute the body of EU law, and is incorporated into the legal systems of EU Member States. The EU *acquis* evolves continuously over time and includes: - the content, principles and political objectives of the EU Treaties; - any legislation adopted to apply those treaties and the case-law developed by the Court of Justice of the European Union; - declarations and resolutions that are adopted by the EU; - measures in the fields of common foreign and security policy and justice and home affairs; - international agreements that the EU concludes, and agreements concluded among the Member States themselves with regard to the EU's activities. **Accession conditionality with fully observable reforms** - principal assumed to be fully aware of the agent's true intrinsic motivation but uncertain about their self-perception over the desirability of reforms - a country gains candidate-member status once it accepts the conditional membership contract, and then decides to join the union subject to the fulfillment of the accession criteria - no moral hazard in the form of an implementation drift  **Intrinsic and extrinsic incentives for reform** - net budgetary transfers of membership as positive short-term reinforcers of reforms - higher transfers are essentially bad news about a country's ability to compete in an integrated market - higher extrinsic rewards crowd out intrinsic incentives (political will) for reform in the long run - early liberalizers are ex ante more likely to engage in the necessary reforms to achieve union membership **EMU as an incomplete contract** - poor coordination and imperfect observability of fiscal behavior - EMU transaction costs arising from the difficulty of anticipating all possible eventualities, cost of agreeing and deciding, imprecision in describing all possible states of the world and the cost of enforcement among sovereign nation states - Lack of 3^rd^ party arbitration - Possibility of ex post (after the fact) bargaining and opportunism distorting ex ante convergence incentives **The Maastricht treaty as a contract device** - Sought to organize the difficult transition to EMU - EMU as a compromise between France and Germany - Pooling (mise en commun) of monetary sovereignty and cheap credibility in exchange for the acceptance of German monetary standards - Economist (low-credibility agents) vs monetarist (high-credibility principals) approach to monetary integration **The Maastrich convergence criteria** - Entry to EMU mandatory for all Eu countries (except for UK and Danish opt-outs) subject to fulfillment of Maastrich criteria - Maastricht criteria as a highly imperfect substitute for a fully state-contingent and enforceable ideal contract **Moral hazard in EMU accession contracts** - discrepancy between policy transposition and implementation - Agents can take hidden actions retracting observable reforms - Accession remains contingent on observable level of liberalization - Limits to the permissible size of implementation discretion, monitoring and contract renegotiability - High-powered \> Maastrich treaty, memoranda of understanding, automaticity of sanctions - Low-powered\> stability and growth pact, fiscal compact \> incentives schemes - Promise of accession and threat of expulsion as extrinsic motivation schemes for fiscal adjustment and structural reform - Role of market expectations in fostering good convergence equilibrium A screenshot of a document Description automatically generated **Lecture 10: European fiscal and monetary integration** **The monetary disorder of the 1970s** - Fixed but adjustable exchange rates became increasingly unsustainable in the face of international financial integration - Gov had to choose between: - Exchange rate flexibility, to allow for monetary policy to operate when necessary: USA, Japan, less susceptible to currency volatility - Fixed exchange rate to avoid currency fluctuations: EMS in the 80s and 90s; EMU (1999-) - Gradual shift from exchange rate stability (adjustment through internal prices \> interest rates, wages) to inflation targeting (adjustment through external prices, ie floating exchange rates)  **The unholy trinity (above) states that it is impossible to have all three of the following economic objectives at the same time:** - Exchange rate stability - Monetary autonomy - Capital mobility **The facts of monetary unification in Europe** - Collapse of the Bretton Woods system led to increasing demands for monetary unification in Europe - EMS (European Monetary System) \> all currencies pegged to the Deutsche Mark. - After German reunification, monetary policy in Germany tightened up - Currency crises in 1993: Italy and Britain leave the system, countries realign and he system becomes more flexible - Adoption of fixed ER's precedes the common currency - In 1999; the euro becomes the national currency of 10 member states **Theoretical approaches to European monetary unification** - Economic integration, synchronicity of business cycles and Eu fiscal redistribution generate demand for EMU - Low credibility countries are willing to tie their own hands - Franco-German negotiations and grand bargaining **Optimum Currency Area** - Benefits of sharing the same currency - Trade integration - Size of the economy - Dealing with asymmetric shocks - Business cycles in sync - Diversified economy - Usefulness of monetary policy in the event of an symmetric shock - Labor market flexibility - Fiscal redistribution with monetary union **The borrowing monetary credibility argument** - Politicized monetary policy has undesirable economic outcomes (higher inflation, no gain in growth) - Removing monetary policy from politically motivated decision-makers might be good - Fixed ER implies that monetary autonomy is lost - When problems of monetary credibility are serious (high inflation), adopting a fixed ER regime may be an attractive wat to control monetary policy **Demand for monetary unification** - When fixed ER were prone to overvaluation, stronger preferences for floating regimes - When fixed ER were not prone to overvaluation, stronger preferences for fixed regimes **EMU as an incomplete contract** - Moral hazard in the form of creative accounting and fiscal gimmickry - Imperfect observability of fiscal behaviour - EMU transaction costs (difficult to anticipate eventualities...) - Lack of binding 3^rd^ party arbitration **Misdiagnosis of the crisis** - European political leaders overlooked the economic implications of a monetary union, driven by political motives - Sovereign debt crisis \> wake-up call - Political leaders misdiagnosed the crisis as stemming from gv profligacy, ignoring the role of unsustainable private debt accumulation - Austerity measures exacerbated econ depressions A graph of different colored lines Description automatically generated **Fragility of the Eurozone** - Lacked mechanisms for addressing liquidity crisis - Asymmetric econ trends \> divergent competitiveness and fiscal challenges - Absence of a lender of last resort and central bank support **Policy responses** - ECB's failure to provide systematic liquidity support in gov bond markets worsened the crisis - Imposition of collective action clauses on gov bonds increased market fragility - Moralizing approaches, punitive austerity, political misperceptions....  **Interstate conflict in crisis resolution** - [Debtors vs creditor countries] - [Compromises in debt crises] - Threat of credit blockage vs default - Lack of meaningful debt relief in Eurozone - [Additional weapons] - Threats of expulsion - Panic on bond markets affecting all states - [Unusual responses] - Austerity over substantial reform - Limited and delayed debt restructuring - [Unequal burden on debtor countries] **Conflicts about Eurozone reform** - [Internal vs external adjustment] - [Challenges in implementing fiscal coordination] - Centering efforts on monetary policy - Establishment of the ESM (European Stability mechanism) - Temporary and permanent funds - Troika's role in approving ESM funds - [Continued disagreements ] - [Conflicts over financing proposals] - [Need for deeper political integration] A table of information with text Description automatically generated with medium confidence **Crisis politics in creditor states** - [Distributive questions in creditor states] - Absorption of crisis costs by financial institutions - Transfer of costs onto taxpayers - [Preference for financing over adjustment] - [German dominance in crisis narrative ] - Framing crisis as southern overspending - Limited discussion on redistributive nature **Lecture 11: The Eu's external economic relations** - 1950s: European Economic communities - 1980s European community deepening: Canada-US FTA, NAFTA, FTAA - 1990s: bilateral PTAs, North-South, intercontinental New regionalism \> Preferential trade agreements (PTAs) and regional trade agreements (RTAs), more than trade (investment, dispute settlement)... Typology of PTAs and RTAs - [Degree of econ integration] - Preferential trade agreement - Free trade area - Customs union - Common market - Economic and monetary union - Total econ integration  **Custom unions theory** Trade creation (TC) vs Trade Diversion (TD) Trade creation: when the formation of a free trade area leads to an increase in trade between member countries Trade diversion: when the formation of a free trade area or a custom unions leads to a shift in trade patterns away from more efficient producers outside the group towards less efficient producers within the group. - TC occurs when the formation of PTA leads to the replacement of high cost domestic production by low cost imports from other members - TD occurs when the formation of PTA leads to the replacement of low-cost imports from non-members by higher cost imports from members - TD tends to be lower when prior tariffs are lower and transportation costs with the rest of the world (ROW) are higher - TC tends to be the norm in PTAs whereas TD is the exception - When present, TD magnitude is relatively small **Comparative advantage analysis:** - Countries with extreme CA lose out from an FTA with a country with intermediate CA compared to ROW due to TD effects - North-north agreements \> income convergence - South south \> income divergence - North-South \> preferable for developing countries **Additional dynamic effects:** - Firm-level economies of scale - Eliminating domestic market power - FDI capital inflows - Terms-of-trade-effects **Eu trade policy: history and institutional framework** The Eu's common commercial policy, established in 1968 alongside the common external tariff. The EC is responsible for negotiating trade agreements subject to oversight of the council while the EP ensures democratic input and scrutinity Formation of the Common commercial policy was a pivotal step in the progression from the EEC to the modern EU. **Eu trade policy: objectives and accountability mechanisms** Objectives of the common commercial policy extend beyond economic integration to include promoting global trade liberalization and protecting the interests of EU citizens Article 207 of the treaty on the functioning of the EU (TFEU) outlines the scope and principles of the policy, covering areas such as tariffs agreements, intellectual property and measures against dumping and subsidies Accountability mechanism \> approval from the council and the EP to ensure transparency **The Brussel effect (Bradford)** The Brussel effect \> the process of unilateral regulatory globalization as a result of the UE's de facto externalizing its laws outside its borders through market mechanisms, whereby regulated entities (corporations) end up complying with Eu laws even outside of EU jurisdictions **Necessary and sufficient conditions for the Brussel effect:** - Larger market - Regulatory capacity - Strict rules - Inelastic targets (consumer as opposed to capital markets) - Non-divisible standards: legal, technical an economic non divisibility **Example of the Brussel effects** - Anti-trust - Chemicals - Airplane emissions - Data protection - Exploitation of natural resources - Consumer electronics **Contemporary challenges to Eu trade policy (Dur et al)** - Increasing backlash against Eu trade policy amid the dynamics of globalization - Emergence of GVCs and rise of anti-globalization sentiments challenge the conventional Eu trade policy **Trade policy and GVCs** **Main hypothesis** - Eu trade policy will become more free-trade oriented due to the increasing integration of European firms into GVCs - Emphasis on NTIs (non-trade interests) in trade agreements will decrease as GVC integration strengthen - Eu's bargain power in trade negotiations will decrease with greater import dependence **Trade policy and the globalization backlash** Main hypothesis - Eu TP (Trade policy) + more protectionist - Eu will prioritize NTIs in trade agreements \> bc of unfair competition - Public scrutiny of trade agreements will enhance the EU's bargaining power A white paper with black text Description automatically generated **Industrial policy** IP \> interventionist measures typical of mixed-economy countries. Can include protectionist practices. Infrastructures play a crucial role in enabling economic growth Ex: subsidizing export industries and ISI, focus on supporting linkages between firms and investing in upstream technologies **History of the Eu's industrial policy** - Post WWII: nation states playing an active role in economic governance. - Shift in the 1980s: globalization and deepening European regulatory frameworks challenged the capacity of nation-states to govern the economy through activist econ governance - Some scholars argue that pro-competition regulatory governance in Europe replaced industrial policies - Other that there are new modes to intervene "market shaping interventions". **Main function of Eu industrial policy (Di Carlo and Schimitz)** - Targeted resourcing: providing fundings to actors with projects likely to achieve technological innovation - Brokering: connecting scientist and investors to stimulate innov - Facilitation: smoothening market operations - Protection: shielding domestic market actors from foreign competition through regulatory barriers  **The rise of Eu industrial policy** - Shit from horizontal measures to interventionist strategies in the 2010s - Leadership: France initiated a push for interventionism and rallied support from member states - German's pivot \> shifted its stance - Franco-German consensus \> France and Germany aligned - Commission's role\> expanded in targeted funding, innovation networks, facilitating policy....