EUROPEAN UNION

MEANING
A treaty-based organization that was set up to manage economic and political
cooperation among 15 European member countries. The European Union
began in the 1950s with six countries: Belgium, France, Germany, Italy,
Luxembourg, and the Netherlands. Their theory was that by creating
communities that shared sovereignty in matters of coal and steel production,
trade, and nuclear energy, another war in Europe would be unthinkable.
Since then, common EU policies have evolved in a number of other sectors.
The members of the EU are Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal,
Spain, Sweden, and the United Kingdom. During 2003, ten new countries
were undergoing the process of becoming a member of the EU. Those
countries are the Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania,
Malta, Poland, Slovakia, and Slovenia.
The European Council makes the decisions to define and implement common
foreign and security policy and coordinates the activities of member states,
including police and judicial cooperation in criminal matters. The council is
made up of the heads of the member-country governments and meets at
least twice a year. The president of the council organizes meetings and works
out compromises to resolve difficulties. The presidency rotates every six
months.
INTRODUCTION

Background to the EU
1957 Treaty Of Rome established the EEC between 6 original members
1960 EFTA between UK, Aus, Den, Nor, Port, Swis and Swe
1973 UK, Ireland and Denmark join EC
1999 Creating of Euro single currency.

Community Institutions
1.

European Commission, this is the civil service of the EU

2.

Council of Ministers from different countries make decisions on policy

3.

European Council. Meets twice a year to make decisions which fundamentally alter
EU policy

4.

European Parliament directly elected body of 626 members

5.

The Court OF Justice. Is based in Luxembourg

Single European Act 1986

This was an attempt to relaunch the EU by attempting to create a Single Market.
It was necessary to drop unanimous decision making with an increase in Qualified
Majority Voting.
The SEA also committed the EU Economic and Monetary Union (EMU)

Treaty of Maastricht 1992

1.

Economic, social and Political extensions to the EU

2.

Common foreign and security policy

3.

Intergovernmental cooperation on justice and home affairs

Economic Integration

Preference Areas. The Lome conference of 1975 gave preferential treatment to

certain developing countries

Customs Union. This is s free trade area with a common external tariff

Single Market. European Union

This occurs when the member countries act as a single economic area with the free
movement of labour and capital
This involves:
1.

No Tariffs on trade between member states

2.

Elimination of border controls

3.

Free movement of People

4.

Mutual recognition of qualifications

5.

Harmonization of taxes and other industrial and economic laws

Monetary Union is a single market plus

1.

A common currency

2.

N0 internal exchange Rates

3.

Common monetary policy

Obstacles To Completing the Single Market in the

EU
1.

Customs Formalities

2.

Different Tax Rates, especially on Alcohol and tobacco

3.

State Subsidies to domestic industries, or tax breaks to encourage inward

investment. This creates unfair competition within the EU

4.

Different regulations added to the cost of business

5.

Different currencies (until the Euro was launched)

6.

Until 1994 there were restrictions on the movement of capital, but these controls have
been abolished and gradual liberalization has been made on other aspects of financial
services.

Benefits of A Single Market

Trade Creation. Exploitation of comparative adv allows lower prices and costs.
Leading to higher output and more employment

Reduction in the direct costs of barriers

Economies of scale from specialization

Greater competition

Costs of a Single Market

Structural Change due to increased specialization

Adverse Regional multiplier effects. The creation of a single market tends to attract
capital and jobs away from the periphery areas to the centre.

Development of Monopoly/ Oligopoly power

Trade Diversion. If external barriers remain high countries could lose out

EU Competition Policy
The EU competition has the power to examine mergers to see whether they are in
the public interest. They are not always opposed to mergers because they can have
benefits such as
1.

Economies of scale

2.

Greater international competition.

However the abuse of market power can cause problems such as higher prices,
unfair competition.
A merger could be referred to the commission if
1.

New Firm has greater than 3.6 billion

2.

Less than 2/3 of the new firm comes from one member state (therefore there is still a
role for national commissions)

Other unfair business practices include

1. Price fixing and market sharing Cartels. In 1994 the major steel manufacturers
were fines 7% of their turnover for fixing prices

Social Aspects of the Single Market

The Social Charter
This aimed to give greater protection to workers in the EU it included the following:

Free movement of labour

Min wages

Max working week

Right to paid holidays

Freedom to join in trades union

Vocational training for all EU citizens

Equal treatment between men and women

Protection for elderly and disabled

Health and Safety at work

The creation of Eur ES, this is a European information network for job vacancies

Criticisms of the EU

Agricultural subsidies inefficient

Bureaucracy

Lack of democracy

Euro has led to widespread unemployment across Europe

EXPANSION OF EU

The European Union (EU) was created by six founding states in 1958 (following the
earlier establishment by the same six states of the European Coal and Steel
Community in 1952) and has grown to 27 member states. There have been five
enlargements, with the largest occurring on May 1, 2004, when 10 states joined, and
the most recent on January 1, 2007, when Bulgaria and Romania joined.
Currently, accession negotiations are underway with several states. The process of
enlargement is sometimes referred to as European integration. However, this term is
also used to refer to the intensification of cooperation between EU member states as
national governments allow for the gradual centralising of power within European
institutions.
In order to join the European Union, a state needs to fulfill the economic and political
conditions generally known as the Copenhagen criteria (after the Copenhagen

summit in June 1993). That basically requires a secular, democratic government, rule
of law and corresponding freedoms and institutions. According to the EU Treaty,
each current member state and also the European Parliament have to agree to any
enlargement.
The present EU Treaty the Treaty of Nice does not provide for the voting
arrangements to be adopted for more than the present 27 members. Although the
proposed European Constitution did provide such a mechanism, the ratification of
this Treaty is currently on hold. New arrangements would therefore be needed to be
agreed prior to any expansion.
HISTORY OF EUROPEAN UNION
The European union (EU) was created by the Maastricht Treaty on November 1st 1993. It is
a political and economic union between European countries which makes its own policies
concerning the members economies, societies, laws and to some extent security. To some,
the EU is an overblown bureaucracy which drains money and compromises the power of
sovereign states. For others, the EU is the best way to meet challenges smaller nations
might struggle with such as economic growth or negotiations with larger nations and
worth surrendering some sovereignty to achieve.

Origins of the EU
The European Union was not created in one go by the Maastricht Treaty, but was the result
of gradual integration since 1945, an evolution when one level of union has been seen to
work, giving confidence and impetus for a next level.
In this way the EU can be said to have been formed by the demands of its member nations.

The end of the Second World War left Europe divided between the communist,
Soviet dominated, eastern bloc, and the largely democratic western nations. There
were fears over what direction a rebuilt Germany would take, and in the west
thoughts of a federal European union re-emerged, hoping to bind Germany into panEuropean democratic institutions to the extent that it, and any other allied European
nation, both wouldnt be able to start a new war, and would resist the expansion of
the communist east.

The First Union: the ECSC

Europes post war nations werent just after peace, they were also after solutions to
economic problems, such as raw materials being in one country and the industry to process

into another. War had left Europe exhausted, with industry greatly damaged and their
defences possibly unable to stop Russia. In order to solve this six neighbouring countries
agreed in The Treaty of Paris to form an area of free trade for several key resources
including coal, steel and iron ore, chosen for their key role in industry and the military. This
body was called the European Coal and Steel Community and involved Germany, Belgium,
France, Holland, Italy and Luxembourg. It began on 23 July 1952 and ended on 23 July
2002, replaced by further unions.

France had suggested the ECSC to control Germany and to rebuild industry; Germany
wanted to become an equal player in Europe again and rebuild its reputation, as did Italy; the
Benelux nations hoped for growth and didnt want to be left behind. France, afraid Britain
would try and quash the plan, didnt include them in initial discussions, and Britain stayed
out, wary of giving up any power and content with the economic potential offered by the
Commonwealth.
Also created, in order to manage the ECSC, were a group of supranational (a level of
governance above the nation state) bodies: a Council of Ministers, a Common Assembly, a
High Authority and a Court of Justice, all to legislate, develop ideas and resolve disputes. It
was from these key bodies that the later EU would emerge, a process which some of the
ECSCs creators had envisaged, as they explicitly stated the creation of a federal Europe as
their long term goal.

The European Economic Community

A false step was taken in the mid 1950s when a proposed European Defence
Community among the ESSCs six states was drawn up: it called for a joint army
to be controlled by a new supranational Defence Minister. The initiative had to be
rejected after FrancesNational Assembly voted it down.

However, the success of the ECSC led to the member nations signing two new treaties in
1957, both called the treaty of Rome. This created two new bodies: the European Atomic
Energy Community (Euratom) which was to pool knowledge of atomic energy, and the
European Economic Community. This EEC created a common market among the member
nations, with no tariffs or impediments to the flow of labour and goods. It aimed to continue
economic growth and avoid the protectionist policies of pre-war Europe. By 1970 trade
within the common market had increased fivefold. There was also the Common Agricultural
Policy (CAP) to boost members farming and an end to monopolies. The CAP, which wasnt
based on a common market, but on government subsidies to support local farmers, has
become one of most controversial EU policies.
Like the ECSC, the EEC created several supranational bodies: a Council of Ministers to make
decisions, a Common Assembly (called the European Parliament from 1962) to give advice, a
court which could overrule member states and a commission to put the policy into affect. The
1965 Brussels Treaty merged the commissions of the EEC, ECSC and Euratom to create a
joint and permanent civil service.

Development
In the late 1960s a power struggle established the need for unanimous
agreements on key decisions, effectively giving member states a veto. It has
been argued that this slowed union by two decades. Over the 70s and 80s the
membership of the EEC expanded, allowing Denmark, Ireland and the UK in
1973, Greece in 1981 and Portugal and Spain in 1986. Britain had changed its
mind after seeing its economic growth lag behind the EEC, and after America
indicated it would support Britain as a rival voice in the EEC to France and
Germany. However, Britains first two applications were vetoed by France. Ireland
and Denmark, heavily dependent upon the UK economy, followed it in to keep
pace and attempt to develop themselves away from Britain. Norway applied at
the same time, but withdrew after a referendum said no. Meanwhile member
states began to see European integration as a way to balance the influence of
both Russia and now America.

The development of the union was slowed in the 70s, frustrating federalists who
sometimes refer to it as a dark age in development. Attempts to create an Economic
and Monetary Union were drawn up, but derailed by the declining international
economy. However, impetus had returned by the 80s, partly as the result of fears that
Reagans US was both moving away from Europe, and preventing EEC members
from forming links with Communist countries in an attempt to slowly bring them back
into the democratic fold.
The remit of the EEC thus developed, and foreign policy became an area for
consultation and group action. Other funds and bodies were created including the
European Monetary System in 1979 and methods of giving grants to underdeveloped
areas. In 1987 the Single European Act (SEA) evolved the EECs role a step further.
Now European Parliament members were given the ability to vote on legislation and
issues, with the number of votes dependant on each members population.
Bottlenecks in the common market were also targeted.

The Maastricht Treaty and the European Union

On February 7th 1992 European integration moved a step further when the Treaty on
European Union, (better known as the Maastricht Treaty) was signed. This came into force
on 1 November 1993 and changed the EEC into the newly named European Union. The
change was to broaden the work of the supranational bodies, based around three pillars:
the European Communities, giving more power to the European parliament; a common
security/foreign policy; involvement in the domestic affairs of member nations on justice and
home affairs.
In practice, and to pass the mandatory unanimous vote, these were all compromises away
from the unified ideal. The EU also set out guidelines for the creation of a single currency,

although when this was introduced in 1999 three nations opted out and one failed to meet
the required targets.

Currency and economic reform were now being driven largely by the fact that the US
and Japanese economies were growing faster than Europes, especially after
expanding quickly into the new developments in electronics.
There were objections from poorer member nations, who wanted more money from the
union, and from larger nations, who wanted to pay less; a compromise was eventually
reached. One planned side effect of the closer economic union and the creation of a single
market was the greater co-operation in social policy which would have to occur as a result.
The Maastricht Treaty also formalised the concept of EU citizenship, allowing any individual
from an EU nation to run for office in their government, which was also changed to promote
decision making. Perhaps most controversially, the EUs entrance into domestic and legal
matters which produced the Human Rights Act and over-rode many member states local
laws produced rules relating to free movement within the EUs borders, leading to paranoia
about mass migrations from poorer EU nations to richer ones. More areas of members
government were affected than ever before, and the bureaucracy expanded. Although the
Maastricht Treaty came into effect, it faced heavy opposition, and was only narrowly passed
in France and forced a vote in the UK.

Further Enlargements
In 1995 Sweden, Austria and Finland joined, while in 1999 the Treaty of
Amsterdam came into effect, bringing employment, working and living conditions
and other social and legal issues into the EU remit. However, by then Europe was
facing great changes caused by the collapse of the Soviet dominated east and
the emergence of economically weakened, but newly democratic, eastern
nations. The 2001 Treaty of Nice tried to prepare for this, and a number of states
entered into special agreements where they initially joined parts of the EU
system, such as the free trade zones. There were discussions over streamlining
voting and modifying the CAP, especially as Eastern Europe had a much higher
percentage of the population involved in agriculture than the west, but in the end
financial worries prevented change,

While there was opposition, ten nations joined in 2004 (Cyprus, Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia) and two in 2007 (Bulgaria
and Romania). By this time there had been agreements to apply majority voting to more
issues, but national vetoes remained on tax, security and other issues. Worries over
international crime where criminals had formed effective cross border organisations were
now acting as an impetus.

The Lisbon Treaty

The EUs level of integration is already unmatched in the modern world, but
there are people who want to move it closer still (and many people who dont).
The Convention on the Future of Europe was created in 2002 to create an EU

constitution, and the draft, signed in 2004, aimed to install a permanent EU

president, a Foreign Minister and a Charter of Rights. It would have also allowed
the EU to make many more decisions instead of the heads of the individual
nation states. It was rejected in 2005, when France and the Netherlands failed to
ratify it (and before other EU members got the chance to vote).

An amended work, the Lisbon Treaty, still aimed to install an EU president and Foreign
Minister, as well as expand the EUs legal powers, but only through developing the existing
bodies. This was signed in 2007 but was initially rejected, this time by voters in Ireland.
However, in 2009 Irish voters passed the treaty, many concerned of the economic effects of
saying no. By the winter 2009 all 27 EU states had ratified the process, and it took effect.
Herman Van Rompuy, at that time Belgium Prime Minister, became the first President of the
European Council, and Britains Baroness Ashton High Representative for Foreign Affairs.
There remained many political opposition parties and politicians in the ruling parties
which opposed the treaty, and the EU remains a divisive issue in the politics of all member
nations.
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COMMON AGRICULTURAL POLICY

1:1 Why Governments have often intervened in Agricultural Markets in the EU
1:2 Extract B mentions 4 objectives of CAP as mentioned in the treaty of Rome.
These include
i) ensure a fair living standard for farmers
ii) Stabilise markets
iii) Assure availability of supplies (and reduce dependence on imports)
iv) Ensure reasonable prices for consumers
1:3 The farming sector has often experienced lower incomes, causing relative
poverty within national economies. One reason for this is that foodstuffs have a low
income elasticity of demand. Therefore farmers do not benefit from rising incomes,
as people do not buy more food

1:3 Farmers incomes can easily fluctuate due to variations in supply conditions.
Demand for food is inelastic therefore an increase in supply can lead to a fall in
revenues
1:4 Farming is more susceptible to problems caused by factors such as disease and
bad weather. Disease such as BSE can wipe out a farmers income therefore
requiring intervention (extract C)
1:5 Agricultural goods are essential goods for every one therefore govts often
intervene to prevent shortages or prices rising too high.

2:0 What CAP intended to achieve

2:1 The main aim of CAP was to give farmers a target price for foodstuffs. This would
enable them to gain a certain level of income from products which often had low
prices.
2:2 Extract A explains how the CAP operated. To maintain these target prices it was
necessary to do two things:
i) EU was to buy the surplus of food at the target price
ii) A variable import tariff was imposed on cheap imports to make imports as
expensive as the target price
2:3 The diagram illustrates how the CAP worked in practice
2:4 At the target price the Supply was much greater than demand therefore there
was a surplus of Q2 Q1 this is the amount that the EU had to buy. This is what led
to the creation of stocks of food such as butter mountains.
2:5 The target prices actually encouraged farmers to supply more through intensive
farming methods. Therefore the amount of surplus often increased in different years.

3:0 Costs of CAP

3:1 Higher Prices encouraged extra supply, this resulted in a surplus of food. The EU
had to buy this surplus. This is very inefficient and expensive. In 2000 CAP
expenditure cost 36 billion Euros. In addition with the expansion of the EU it is likely
to increase the cost to the EU budget

 However the cost of CAP has reduced as a % of the EU budget from 66% to about
46% now (Extract D)
3:1 To increase incomes of farmers consumers have had to pay higher prices. This is
allocatively inefficient and also it increases inequality because low income groups
pay a higher % of their income on food
3:2 CAP has caused economic difficulties for farmers in other countries
Firstly the excess supplies were dumped onto world markets. This caused prices to
fall and lower revenues. Secondly the EU bought less imports because of the
variable import levys Therefore demand fell from D1 to D2.
* The combined effect was to reduce farmers welfare in both the US and the
developing world.
3:4 Because of this the CAP has been a major stumbling block to trade at the WTO.
The US has retaliated against EU exports in response to the high degree of
protection given to agriculture.
* However the EU is not the only place where large subsidies to farming occur.
Extract D states that countries such as Japan and Korea have a high amount of
subsidies given to farmers measured by Producer Subsidy Equivalents. PSE
3:5 CAP has harmed the environment as Extract B says. CAP has encouraged
farmers to increase output with the use of artificial fertilizers and pesticides causing
problems for the environment.
3:6 CAP has arguably not helped overcome poverty is some rural communities
because subsidies have been directed to output rather than need. Extract D states
that the fund primarily goes to large farmers and landowners. They have received
more than they need but small farmers are still struggling e.g. hill farmers with a low
number of sheep.

4:0 Benefits of CAP

4:1 CAP has achieved some of its original objectives such as securing food supplies
and stabilising markets.

However this could easily have been done with much less cost and distortion of the
market.
4:2 Extract C states how Agenda 2000 has helped introduce reforms to CAP to
improve its operation. Now funds can be given to land devoted to nature
conservancy, encourage organic farming and the establishment of young farmers.
Therefore CAP is now beginning to direct funds in a more beneficial way.
* However these reforms arguably do not go far enough and there is still a lot of
economic distortion within CAP which leads to the disadvantages mentioned in
section 3:0

5:0 How CAP should be reformed

5:1 It would be very beneficial to abolish all target prices for all products. This would
have several benefits
i) It would lower prices for consumers
ii) It would help trade negotiations because EU would no longer have to impose
variable import levy and therefore farmers in other countries would be better off
iii) It would eliminates all food surpluses
iv) It would be less costly for the EU as they would not have to buy the food.
v) It would reduce over supply and therefore discourage intensive farming and
therefore improve the environment
5:2 The main disadvantage to this is that farmers would have a fall in income.
However this can be overcome by more direct aid payments. In addition these can be
more targeted to farmers who really need them rather than paying landlords who are
already well off. A ceiling could be imposed on payment to farmers.
5:3 One reason for subsidising farmers mentioned in section 1 is that farming can
have positive externalities therefore it makes sense for subsidies to be directed to
these positive externalities . Therefore there could be an extension to aid for
environmentally friendly measures such as organic farming.
5:4 A major advantage of these proposed reforms is that it should enable a reduction
in the cost of CAP to the EU. Some farming pressure groups may be unhappy but

there can be a clear gain to the EU because the money saved can be spent on more
worthwhile projects such as subsidising depressed areas both rural and urban.
5:% CAP is still 44% of the EU budget therefore this is a potentially very significant
policy for the EU. It is especially important given the expansion of the EU into the
east.
BENEFITS OF EU MEMBERSHIP
The Euro is the single European countries adopted by 18 /28 EU countries. (though
not the UK). It is the second largest reserve currency in the world, after the US
Dollar. Euro notes and coins came into circulation on January 1st 2002. It was hoped
that the Euro would confer many benefits on member countries.
1. Transaction costs
With a single currency, there will be no longer a cost involved in changing currencies;
this will benefit tourists and firms who trade within the Euro area. It has been
estimated that this benefit will be equal to 1% of GDP so will be quite significant. (this
is sometimes known as frictional costs) Some studies have suggested that the Euro
has led to a 6% increase in tourism, (though many other factors may be at work.)
2. Price transparency
With a common currency it will be easier to compare prices in different European
countries because they would all be in Euros. This enables firms to source cheaper
raw material and consumers to buy cheaper goods For example, arguably new car
prices are higher in the UK than elsewhere, a single currency could help reduce
these price differentials or make it easier for UK consumers to buy from the
Eurozone. Within the Eurozone, there has been a degree of convergence in car
prices since the Euro was introduced.
3. Eliminating exchange rate uncertainty.
Volatile swings in the exchange rate can destroy the profitability of exports (e.g. a
rapid appreciation). This exchange rate uncertainty undermines business confidence
in investing. Therefore with a single currency business confidence should improve
leading to greater trade and economic growth.
4. Improvement in inflation performance

The ECB which sets interest rates for the whole Eurozone area will be committed to
keeping inflation low; countries with traditionally high inflation should benefit from this
greater inflationary discipline. EU inflation has been low.

However this point is debatable as countries outside the Euro have

maintained low inflation, and arguably the ECB have concentrated too much on low
inflation to the detriment of growth and unemployment.
5. Low interest rates
It was hoped membership of the Euro would help reduce bond yields as there was
greater security belonging to a stronger currency. Initially this occurred with bond
yields in Greece, Spain and Ireland converging on German bond yields.

But the credit crisis of 2008-12, saw Euro bond yield rise to record levels,
suggesting that the Euro could be very destabilising for interest rates. (EU bond
yields)
6. Inward investment
Inward investment may increase from outside the EU as firms take advantage of
lower transaction costs within the EU area. Some firms have said they prefer to
invest within the Eurozone area.
7. Benefits to the financial sector. The introduction of the Euro appears to have
reduced the cost of trading in bonds, equity, and banking assets within the eurozone.
DISADVANTAGES OF EU MEMBERSHIP
Disadvantages of EU Membership to UK include:

1.

Cost. The costs of EU membership to the UK is 15bn gross (0.06% of GDP)

or 6.883 billion net. See UK government spending. (UKIP claim that the cost of
EU membership in total amounts to 83bn gross if you include all possible costs,
such as an estimated 48bn of regulation costs or 1,380 per head [1]

2.

Inefficient policies. A large percentage of EU spending goes on the

Common Agricultural Policy. For many years this distorted agricultural markets by
placing minimum prices on food. This lead to higher prices for consumers and
encouraging over-supply. Reforms to CAP have reduced, but not eliminated this
wastage.

3.

Problems of the Euro. Membership of the EU doesnt necessarily mean

membership of the Euro. But, the EU has placed great emphasis on the Single
Currency. However, it has proved to have many problems and contributed to low
rates of economic growth and high unemployment across the EU. See: Problems of
Euro

4.

Pressure towards austerity. Since 2008, many southern European countries

have faced pressure from the EU to pursue austerity spending cuts to meet budget
deficit targets, but in the middle of a recession these austerity measures have
contributed to prolonged economic stagnation.

5.

Net Migration. Free Movement of Labour has caused problems of

overcrowding in UK cities. The UKs population is set to rise to 70 million over next
decade, partly due to immigration. This has pushed up house prices and led to
congestion on roads. The concern is that the UK is powerless to prevent large scale
immigration because EU rules allow free movement of labour. See: Impact of
immigration on UK economy

6.

More bureaucracy less democracy. It is argued that the EU has created

extra layers of bureaucracy whilst taking away decision making process further from
local communities. For example, the British Chambers of Commerce has estimated
that the annual cost to the UK of EU regulation is 7.4bn. The introduction of
Qualified majority voting (QMV) mean that on many decisions votes can be taken
against the public interest of a particular country.

Evaluation of these problems

The cost of the EU is a relatively small percentage of overall UK government

spending.

The UK does receive a rebate from the EU ( 3.8 billion a year) because it
gets a relatively small amount from CAP though there is pressure to reduce this
rebate from other EU members. The UK has also received regional funds over the
years.

The CAP and other policies are being reformed. If the UK stays in the EU it
can help to promote policies which work in the long-term interest of the UK.

An estimated 3.5 million jobs are linked to membership of the EU.

Some EU bureaucracy has been very beneficial, e.g. forcing mobile phone
networks to limit charging when using mobiles abroad.

Issues like farming and fishing and the environment are global issues which
need to be tackled within a European framework, it is insufficient to have just a
national policy on fishing and the environment.

The EU Health Insurance Card enables EU citizens to receive emergency

healthcare on the same terms as the citizens of the EU country they are visiting
(often free). (Euro-movement)

By staying out the Euro, the UK has retained independence over monetary
policy, fiscal policy and the exchange rate. The UK doesnt have the same pressure
to pursue austerity as countries in the Eurozone have. This shows that the UK can
combine membership of the Euro with flexibility over economic policy.

Migration works both ways. Many British people have emigrated to take
advantage of opportunities elsewhere in Europe. An estimated 748,010 Britons live
or work in the European Union (link). However, net migration has been running at
around 200,000 a year.

The free movement of labour enables a more flexible labour market, with
immigrants able to fill gaps in the UK labour market, such as nursing and plumbing.
Also the additional labour increases UK productive capacity and helps increase real
GDP. (see impact of rising population)

BENEFITS OF EU MEMBERSHIP FOR EASTERN EUROPEAN COUNTRIES

1. Political Stability and greater integration amongst European states
2. Increased Trade.
This will lead to advantages such as lower prices for consumers and more exports
for industries with a comparative advantage.
3. Increased competition
4. Increased Inward Investment.
This will be because of greater stability in the economy, lower trade costs and greater
harmonization. The benefits of this include a positive regional multiplier and greater
technical assistance
5. Social Policys and subsidies. New countries will benefit from Regional, Social
and CAP.
6. These gains may be increased by the multiplier effect
7. The extent of the gains may depend upon the existing infrastructure of the
economy. For example if transport links are inefficient and under developed then the
gains from trade will be lower. The infrastructure of the economy will also affect the
success of attracting inward investment
8. The large disparities between the East and West may require subsidies to even
out the imbalance, this would make integration more successful
9. Recent economic developments have been encouraging, with many economies
growing at a fast rate in the East, but with low rates of inflation
10. Some progress toward greater harmonization has been made, Tariffs on
manufacturers have been cut. However because of CAP there are still high tariffs on
imports from eastern europe
PROBLEMS OF EURO

Problems with the Euro

The Euro is a bold experiment to create the largest currency area in the World. However, the current
Euro crisis have revealed deep flaws in the structure of the single currency
The Euro involves:
1.

A single currency within the Eurozone area.

2.

A common monetary policy. Interest Rates are set by the ECB for the whole Eurozone area.

3.
Growth and Stability Pact. In theory there are limits on government borrowing, national debt
and fiscal policy. However, in practice member countries have often violated the strict limits on
government borrowing.

Problems of the Euro

Interest rates not suitable for whole Eurozone. A common monetary policy involves a
common interest rate for the whole eurozone area. However, the interest rate set by the ECB may be
inappropriate for regions which are growing much faster or much slower than the Eurozone average.
For example, in 2011, the ECB increased interest rates because of fears of inflation in Germany.
However, in 2011, southern Eurozone members were heading for recession due to austerity
packages. The higher interest rates set by the ECB were unsuitable for countries such as Portugal,
Greece and Italy.

The Euro is not an optimal currency area. If a state in the US, such as New York ,was in
recession, workers in New York could move to New England and get a job. However, in the Eurozone
this is much more difficult; it involves moving country and possibly learning a new language. There are
more barriers to the movement of labour and capital within a diverse region like Europe. Therefore, an
unemployed Greek can't easily relocate to Germany. see: Two Speed Europe

Limits Fiscal Policy. With a common monetary policy it is important to have similar levels of
national debt, otherwise countries may struggle to attract enough buyers of national debt. This is a
growing problem for many Mediterranean countries like Italy, Greece and Spain who have large
national debts and rising bond yields.

Lack of Incentives. It is argued that being a member of the Euro protects a country from a
currency crisis. Therefore, there is less incentive for countries to implement structural reform and
fiscal responsibility. For example, in good years Greece was able to benefit from very low bond yields
on its debt because people felt Greek debt would be secured by rest of Europe. But, this wasn't the
case, and Greece were lulled into a fall sense of security.

No scope for Devaluation. Since the start of the Euro, several countries have experienced
rising labour costs. This has made their exports uncompetitive. Usually, their currency would devalue
to restore competitiveness. However, in the Euro, you can't devalue and you are stuck with
uncompetitive exports. This has led to record current account deficits, a fall in exports and low growth.
This has particularly been a problem for countries like Portugal, Italy and Greece.

This shows the effects of Eurozone members becoming uncompetitive. Very high current account
deficits.

No Lender of Last Resort. The ECB is unwilling to buy government bonds if there is a
temporary liquidity shortage. This makes markets more nervous about holding debt from eurozone
economies and precipitates fiscal crisis. See: Problems of Italy - why Italian bonds increased despite
having a much lower budget deficit than UK.

Italy bond yields rose despite a primary budget surplus

Deflationary Bias I would argue there is a deflationary bias in the Eurozone which increases
the risk of recession and higher unemployment

Eurozone members have seen a rise in unemployment

Divergence in bank rates. In theory, the Eurzone creates a common interest rate. However,
in the credit crisis of 2010-13, we see rising bank rates for peripheral Eurozone countries, like Italy
and Spain. Small and medium sized firms faced higher borrowing costs than in 2005, even though the
ECB cut the main base rate. This suggests that the ECB was unable to loosen monetary policy when
needed. See more on credit policy
Experience of EU Fiscal Crisis
The great recession of 2008-11 showed the vulnerability of Euro member countries to a common
monetary policy. Because they can't devalue and also ask the Central Bank to buy government
securities they are at much greater risk of a liquidity crisis.
Because of fears over liquidity crisis, bond yields rose from Ireland, Spain, Portugal and Greece. As a
result these eurozone countries were forced into pursuing spending cuts, and accepting higher
interest rates. But, this led to a vicious cycle of lower growth and lower tax revenues.

Problems for UK Economy

UK economy has additional problems which make joining the Euro a bad idea.

Housing market. Many in the UK have a mortgage which is a big % of their disposable
income. This is related to the high cost of buying houses in the UK.

Variable Mortgages In the UK more homeowners have variable mortgages. These two factors
means UK consumers are very sensitive to changes in the base rate. If the ECB kept interest rates
higher than the UK needed it would create serious problems in the UK. Arguably to join the UK would
need to reform its housing market and reliance on variable mortgages.

TRANSITION TO A MARKET ECONOMY

Basic Requirements
1.

Macro Economic stability

2.

Deregulation of Prices

3.

Liberalization of Trade

4.

Privatisation of state owned assets

5.

Establishment of market supporting institutions such as property laws

6.

Social Security e.g. unemployment benefits

7.

External Assistance

Macro Econ Stabilization

When prices were deregulated, rampant inflation was often a problem. However the
problem with reducing inflation is that it can exacerbate the problem of falling Real
GDP.
Falling Real GDP poses meant problems for governments there will be extra
pressure put on the governments budget, there will be less taxes collected but
increased need for spending

Liberalization of Trade
This is important for exploiting comparative advantage however in the short term the
developing economies may struggle to compete.

Privatisation
Many state owned industries were very inefficient, with poor quality goods,
overstaffing, and lack of incentives etc IN the Short term privatisation caused many
problems such as
1.

an increase in unemployment and a negative multiplier effect

2.

Many industries were so bad no body wanted to buy them

3.

Working practices were not relevant to the free market

4.

5.

Problem of corruption. Many state managers converted assets into their

private property
There was also a need to privatise the elaborate state admin system

External Assistance
As a % of GDP East Germany got the most and it was the most successful. Russia
got the least and struggled the most
Problems Faced by Russia and other countries making the change
1.

GDP fell by 50% between 1989 and 1998

However GDP was previously overstated

2.

3.

Collapse of the value of the rouble led to a fall in confidence and deterred
foreign investment
Crime and Corruption increased

If Planning was so bad why did things get worse?

1.

Statistics misleading

2.

Austere macro economic policies needed to prevent hyper inflation in wake of

price liberalization

3.

Failure of corporate control. Workers and managers not used to incentives of

free market

4.

Lack of Entrepreneurs

5.

Lack of Trade with Russia

6.

Inefficient nature of the economy

7.

Poor infrastructure

8.

Corruption meant many taxes not collected

Benefits of European Union

The European Union is a political and economic union of 28 countries. Originally formed in 1958 by
six countries (then the EEC), the EU has expanded in terms of size and integration. The aim of the EU
is to promote European harmony through creating a single market, enabling the free movement of
goods, services and people.
Some of the benefits of the European Union include:
Broad political and legal benefits
1.
European harmony - European Union countries are no longer at loggerheads like they were in
the past. With the exception of civil war in Yugoslavia (which wasn't in the EU at the time), Europe has
managed to heal the divisions which were so painfully exposed in the two World Wars in the Twentieth
Century. The EU was awarded the Nobel Peace Prize in 2012 for helping to promote peace and
international co-operation. Many Eastern European countries are keen to join the EU because they
feel it will help promote economic and political stability.
2.
Legal and human rights. The EU has a strong commitment to human rights, preventing
discrimination and the due process of law. This makes the EU attractive to countries, such as the
Ukraine who wish to share in similar legal and human rights.
3.
Prospect of membership has helped modernise countries, such as Turkey. The Copenhagen
Criteria for EU membership enshrine commitment to human rights, rule of law and market economy.
The prospect of gaining membership of the EU, encourage countries to implement human rights
legislation.
Economic benefits
1.
EU is one of strongest economic areas in the world. With 500 million people, it has 7.3% of
the world's population, but accounts for 23% of nominal global GDP.
2.
Free trade and removal of non-tariff barriers have helped reduce costs and prices for
consumers. Increased trade to the EU creates jobs and higher income. Over 52% of UK exports are
to the EU. Trade within the EU has increased 30% since 1992.
3.
According to one study - over ten years (1993-2003), the Single Market has boosted the EUs
GDP by 877 billion [588 billion]. This represents 5,700 [3,819] of extra income per household.
4.
A paper, Campos, Coricelli, and Moretti (2014) used the synthetic counterfactuals method
(SCM) pioneered by Abadie and Gardeazabal (2003). The red dotted line shows estimated GDP if the
country had not been a member of the EU. This shows that even more prosperous EU countries, such
as the UK have benefited from higher GDP as a result of being in the EU.

5.
Removal of customs barriers mean 60 million customs clearance documents per year no
longer need to be completed, cutting bureaucracy and reducing costs and delivery times
6.
Countries in the EU, are amongst the highest positions in the Human Development
Index(HDI)
7.
Poorer counties, such as Ireland, Portugal and Spain have made significant degrees of
economic development since they joined the European Union. A report suggests that over the period
of the 1980s and 2004 enlargement, there are substantial positive pay-offs of EU membership, with a
gain in per capita GDP of approximately 12% for poorer countries. (Vox - how poorer countries benefit
from EU)
8.
Social cohesion fund. This has invested in poorer areas of the EU to help reduce regional
disparities. For example, Ireland benefited from the EU social cohesion fund (over 6 billion of
investment in education and infrastructure spending)
9.
EU structural funds to help Eastern European economies develop will benefit the UK in the
long term because as they become more affluent, they will be able to buy more UK exports.
10.
The European Union has attracted greater inward investment from outside the EU. Inward
investment grew from 23 billion [15.4 billion] in 1992 to 159 billion [ 106.5 billion] in 2005. The
UK is the 5th largest source of inward investment in the world, and being a member of the single
market is an important factor in encouraging Japanese firms.
he European Social Fund (ESF)
Labour and free movement of people
1.
Free movement of labour and capital have helped create a more flexible economy. For
example, UK and Ireland have benefited from the immigration of Eastern European workers to fill
labour market shortages in certain areas, such as plumbing, nursing and cleaning.
2.
Far from 'taking jobs', migration has helped increase productive capacity and makes a net
contribution to tax revenues. (see impact of net migration)
3.
Free movement of labour also enables British people to live and work in Europe. Roughly 1.6
million British citizens live in the EU outside the UK (UNCTAD World Investment Report 2010)
4.
EU has enabled people to travel freely across national boundaries making trade and tourism
easier and cheaper. According to the European Commission, more than 15 million EU citizens have
moved to other EU countries to work or to enjoy their retirement.

5.
1.5 million young people have completed part of their studies in another member state with
the help of the Erasmus programme. The possibility to study abroad is considered positive by 84% of
EU citizens. (benefits of EU)
6.
Easier to use qualifications in different member countries. This makes it easier to work abroad
without having to retrain in different national qualifications.
7.
Mutual recognition of safety standards and rules have helped reduce costs for firms. This has
encouraged the development of small and medium business who rely on low cost of exports.
8.
Social charter enshrines protection for workers such as maximum working week, right to
collective bargaining and fair pay for employment.
9.
European Arrest Warrant (EAW) scheme has made it easier to track criminals across the
European continent.
Environmental benefits of the EU
The EU have raised the quality of sea water and beeches, by implementing regulations on
water standards 'Bathing Water Directive'. 92% of tourist locations now meet minimum water quality
standards. (Clean water at Europa.eu)

Tackling global warming. In 2006, the (EU) committed to reducing its global warming
emissions by at least 20 percent of 1990 levels by 2020. The EU has also committed to spending
$375 billion a year to cut greenhouse gas emissions by at least 80 percent by 2050 compared to 1990
levels. (global warming pdf)

Tackling acid rain. Environmental treaties which have sought to deal with European wide
environmental problems such as acid rain. The EU has set strict restrictions on emissions of
pollutants, such as sulphur, and other causes of acid rain. (BBC Link)
Consumer benefits of the EU
EU competition policy has harmonised regulation of monopoly and cartel power within
Europe. The EU competition policy seeks to avoid abuses of cartels / monopoly / dominant market
power and protect the interest of consumer. There has been successful deregulation of airlines,
electricity and gas markets.

The EU has reduced the price of making mobile phone calls abroad. In 2007 EU legislation
set maximum charges for making and receiving calls. The EU also agreed with 14 mobile phone
manufacturers to create standard design for chargers from 2011 in order to make life easier for
consumers and reduce wastage. In 2014, it is has voted to scrap roaming charges which will
drastically reduce the cost of using a mobile phone abroad. (BBC link)

Consumers are free to shop in any EU countries without paying any tariffs or excise duties
when they return home.

SOLUTIONS FOR EU CRISIS

It is a difficult question to answer. The dynamics of the single currency mean that
many of the conventional solutions to economic problems cannot be used. The
difficult task is to reduce levels of government borrowing whilst also managing to
target economic recovery and lower unemployment.

Problems Facing EU
If you looked at an economy such as Ireland, Greece Portugal, or Spain. They face
these problems

High unemployment

Stagnant economic growth, and chance of prolonged recession.

Very large current account deficit due to loss of competitiveness.

High government borrowing. Higher interest rates on government bonds

because of fears over default.
The obvious solution is to devalue the currency. This helps to regain
competitiveness, reduce the budget deficit, reduce unemployment and help the
economy recover. Economic recovery is an essential ingredient in reducing the
budget deficit. Yet, devaluation is not an option. Countries could leave the Euro, but
this would be very damaging and lead to capital flight (see: leaving the Euro). It is
not like devaluing in a fixed exchange rate (ERM)
Therefore, countries like Ireland, Greece and Portugal are currently facing internal
devaluation. They are trying to restore competitiveness by reducing wages, costs and
inflation. But, this deflationary process (spending cuts, higher taxes) is causing lower
growth and higher unemployment.

Solutions to EU Crisis
Problem of Government Debt.
1.

Debt Consolidation. Greece is bankrupt. They will need a partial debt default.
The EU shouldnt try to prop up Greece when there is no chance of repayment. They
should allow Greece to default, then they should concentrate on strengthening
position of countries like Italy which should be able to repay debt, but may face
liquidity constraints (temporary shortage of money due to market fears)

2.

Growth. the EU and ECB have to see the importance of economic growth. At
the moment, the only policy recommendations seem to be spending cuts and
austerity, but this is pushing countries into a negative spiral of lower growth, higher
unemployment and lower tax revenues.

3.

ECB should pursue monetary easing. Target a higher inflation rate, pursue
quantitative easing. Give peripheral countries some monetary stimulus in face of all
the deflationary pressures they face. The ECB have the wrong attitude to inflation.
(pursing wrong objective) e.g. faced with prospect of double dip recession, they
increased interest rates because inflation was temporarily above target.

4.

Supply side policies to improve competitiveness and efficiency. Important for

economies like Portugal and Greece

Economic Problems of European Union

Since 2007, the EU has experienced a deteriorating economic situation. This has been most
concerning for southern members of the Eurozone, such as Greece, Italy, Portugal and Spain.
Economists fear that with the current EU economic problems, we could see a lost decade of high
unemployment, low economic growth and deteriorating social conditions.
Main Problems Facing European Union

1.
Unemployment. Unemployment in the EU has reached a critical point. In Spain,
unemployment has increased to over 25%, and youth unemployment rates have reached 50%. The
recent rise in EU unemployment is primarily due to the prolonged recession. Long term structural
unemployment is also a problem.
2.
Prolonged Fall in GDP

After the deepest recession since the 1930s, Europe has still not been able to recover.
Weighed down by austerity measures and a weak global economy, the EU economy has
fallen back into recession. The concern is that structural problems and the current monetary
and fiscal policies will create several years of below trend economic growth. (Evaluation of EU
Policies for economic growth)
3.
Competitiveness Problem. The Euro has caused a divergence in competitiveness.
Countries who face higher labour costs cannot regain competitiveness in the usual way through
depreciation. Prices become uncompetitive, leading to lower domestic demand, and high current
account deficits. Since 2011, current account deficits have fallen in countries like Ireland and Spain,
but it has been at the high cost of reducing domestic demand and rising unemployment. Countries are
seeking to regain competitiveness through internal devaluation (lower demand, pushing down prices)
But, this is much more damaging to the economy than the traditional approach of depreciating
exchange rates. more on EU competitiveness.
4.
The ECB is too concerned with low inflation The ECB has been accused of giving too
much priority to the goal of low inflation. It is argued they have sought to maintain low inflation at the
expense of lower growth. The ECB have rigidly stuck to an inflation target of 2%, despite the rise in
unemployment and poor performance of nominal GDP.

5.
Bond Yields. Membership of the Euro, has created a tendency for bond yields to rise much
more quickly. After concerns were expressed over Greece, market fears soon spread to other
Eurozone countries, like Ireland, Spain and Portugal. This increased borrowing costs and also put
countries under pressure to pursue austerity measures to reduce budget deficits. However, these
austerity measures have been implemented when the economy is already weak, causing a big
negative multiplier effect and causing the economic downturn. Countries with their own currency and
ability to print money have been able to maintain low bond yields, which reduces borrowing costs and
gives them more time to reduce budget deficits. See more at Euro Debt crisis - Note - although bond
yields fell in last half of 2012, they are still higher than they should be, and there is concern without
strict austerity, the ECB may be unable to prevent rising bond yields in the future.
6.
Stability and Growth Pact. This is a constraint on expansionary fiscal policy because in
theory it limits governments borrowing to 3% of GDP. In a recession a European government is
unable to use monetary policy (ECB set rates for whole Euro zone) but also they are unable to reflate
the economy through higher spending and borrowing.
7.
Inflexible Labour Markets. This is frequently held up as a constraint on economic growth
and a cause of structural unemployment. In particular rigidities in the labour market discourage
investment from abroad. For example in France there are laws which makes it difficult to fire workers
once they are hired. This discourages firms from expanding and investing. Both the IMF and OECD
have argued that further labour market liberalisation is needed to regain competitiveness. Even many
of the European leaders acknowledge it is a necessity. However such reforms often face stiff
opposition from powerful interest groups who wish to protect the interests of their members. Thus
reform has proved very difficult and exceedingly slow. As Luxembourgs Mr Juncker once said.
We all know what to do, we just dont know how to get re-elected after weve done it.
8.
Demographic Changes. Countries like Germany and Italy have a declining birth rate. This
means that the population structure is becoming weighted towards those who are over 50. The
traditional population pyramid is being inverted. The increased demands placed on benefits and
decline in tax revenue is a serious burden for government spending. It is reflected in burgeoning
public debt. As of 2006 Italys public debt stood at 105%. German and France just below 70% of GDP.
Such high levels of debt are argued to cause crowding out of private sector spending. Unfortunately
this problem is likely to be exacerbated as the 1960s baby boomers retire. Again there is much
opposition to the reform of generous state pensions.