Booklet on the EU for ECON4

1. Examination Questions on the EU
1. France and Germany would like the EU to have ‘the power to impose an EU-wide fiscal policy on all
member states and not just the eurozone’. Assess the possible economic consequences for the UK
economy of an EU-wide fiscal policy requiring all member states to balance their budgets (25 Marks)
2. The impact of the increased government borrowing arising from budget deficits across the EU is of concern The European Union and Eurozone
amongst some economists’. Assess the impact on the UK economy of increased government borrowing by
EU governments (25 Marks)
Key Concepts :
3. ‘A more ambitious set of common macroeconomic policies would help speed recovery in the EU’. Assess
European Union: Economic and Political Union between 27 countries of Europe known as Member States. It is
the impact on the UK economy of a recovery in the EU as a whole. (25 Marks)
known for its single market across all members.
4. UK adoption of the euro at such an economically unstable time remains highly unlikely, whatever the
Eurozone: The economic and monetary union of 17 member states of the European Union established in 1999.
potential benefits’. To what extent do you agree with the view that the UK economy would benefit if the
They hold the Euro as the currency of all areas.
euro were to be adopted by the UK at some point in the future? (25 Marks)
European Central Bank: This is the Central Bank for the Eurozone and is centred in Frankfurt. It is responsible
5. The EU, including the UK, may need to rely on an external economic stimulus to improve macroeconomic
for Monetary Policy within the Eurozone
performance’. Assess the possible effects on UK macroeconomic performance of an external economic
stimulus, whether arising from other EU members or from other parts of the world. (25 Marks)
6. Discuss the view that the UK cannot adopt the single currency until the economy converges with other
Eurozone members (25 Marks)
The European Union
The European Union was established as the European Coal and Steel Community in 1951 before becoming the
European Economic Community (EEC) in 1958. What started out as 6 nations has grown into an international
economic and political union between 27 member states across Europe. It’s monetary arm is the Eurozone which
comprises of 17 member states . The Treaty of Rome established the EEC and the Treaty of Maastricht
established the EU as it is today.
The EU has established a single market across all the member states territory and has negotiated several Free
Trade Agreements with other countries such as Switzerland and Norway.
Economy of the European Union
This includes all countries within the Eurozone and all member states. The economy of the EU generated €12.629
trillion in 2011 which made it the largest economy in the world.
Key Statistics for the Economy:
World GDP Ranking 1st Current Account €-26.983 billion
Nominal GDP €12.629 trillion Public Debt €10,421.9 billion
GDP Growth 1.5% (2011) Population 501 million
Inflation 3.1% (2011) % of Population in Poverty 17%
Labour Force 239.3 million Biggest Employment Sector Services with 69.5%
Unemployment 10.6% (Sept 12)

2. Member States of the European Union
Economic Data from the Eurozone
Flag Country Population (millions) GDP (€millions) Currency Gini
GDP €9.4 trillion
Austria 8.4 300,712 Euro 29.1
Interest Rate 0.75%
Belgium 10.8 369,836 Euro 33.0
Inflation 1.6%
Bulgaria 7.6 38,483 Lev 29.2
Unemployment 11.7%
Cyprus 0.8 17,979 Euro 31.2
Trade Balance €81.8 billion surplus
Denmark 5.5 240,453 Krone 24.7
Estonia 1.3 15,951 Euro 36.0
Finland 5.3 189,368 Euro 26.9
Key Terms on the EU
France 63.3 1,996,583 Euro 32.7
Germany Euro 28.3 Term Definition
81.4 2,592,600
Convergence Criteria Macro economic conditions which must be met before
Greece 11.3 208,532 Euro 34.3
a country is allowed to join an Economic and Monetary
Hungary 10.0 99,819 Forint 30.0 Union
Ireland 4.4 156,438 Euro 34.3 Stability and Growth Pact Limit placed on government budget deficit for countries
belonging to the European Single Currency.
Italy 61.5 1,579,659 Euro 36.0
Social Chapter Section of the Maastricht Treaty which commits EU
Latvia 2.2 20,211 Lats 65.7 countries to guarantee certain legal rights of workers in
Lithuania 3.2 30,807 Litas 35.8 the Labour Market
Working Time Directive Regulation setting a maximum number of hours per
Luxembourg 0.5 42,625 Euro 30.8
Malta 0.4 6,544 Euro 25.8 European Union Institution of European member states which aims to
Poland 38.2 369,666 Zloty 34.9
European Commission Main executive branch of the European Union which
Portugal 10.6 171,040 Euro 38.5 initiates policy and proposes EU legislation in its areas
of competence
Romania 21.5 131,327 Leu 31.5
European Central Bank (ECB) The independent central bank responsible for monetary
Slovakia 5.4 69,108 Euro 25.8
EU Enlargement Process whereby the established members of the
Slovenia 2.0 36,172 Euro 31.2
European Union are widening its membership to new
Spain 46.0 1,063,355 Euro 32.0 European Countries
Sweden 9.3 387,596 Krona 25.0
The Czech Republic 10.5 156,217 Koruna 25.8
The Netherlands 16.6 601,973 Euro 30.9
United Kingdom 62.6 1,750,396 Pound Sterling 36.0

3. ECB Interest Rate
Countries in the EU
EURO to US DOLLAR Exchange Rate
Eurozone Current Account Balance (Millions of Euros)
EU Future Members
Currently Croatia is becoming part of the EU
Iceland, Macedonia, Montenegro, Serbia and Turkey are all candidates, as are Bosnia and Herzegovina and
Kosovo, although these two have yet to apply for EU Membership. Albania has submitted an application and is
waiting to be given candidate status.
Question: Using economic arguments, evaluate the view that EU expansion will be
good for the economies of the EU Member States

4. The Single Market Key Information on the ECB
Eurozone GDP Growth Rate
A single market is designed to promote economic competitiveness between nations. The Treaty of Rome (1957)
set out its goals that would make Europe more economically competitive.
1. Free movement of capital
2. Free movement of people
3. Free movement of goods
4. Free movement to provide services
The European Commission since the creation of the European Monetary Union has sought to liberalise the
European Market, to help further these aims set out in the Treaty of Rome. The Eurozone and single currency has
arguably made this far easier.
In an exam you will be asked questions on the EU, and you should be able to argue the benefits and the
drawbacks of the Single Market
Eurozone Inflation Rate
Benefits Drawbacks
Economies of Scale - Larger Consumer base, but also a Some firms may not be able to compete with the
larger pool of labour talents which firms can use to expansion of the market, so may close
achieve economies of scale
Increased dynamic efficiency - larger competitive Single Market doesn’t cover all areas such as transport,
environment will mean an end to monopoly power energy, IP rights for example.
Increased liberalisation - lead to the creation of budget EU Services sector has opened up, but not to the scale
airlines such as RyanAir or Jet2. This would not have which was originally envisaged, monopolies have
been possible without a single market which reduced simply spread across the countries
overall costs to firms
Creation of a Larger Domestic Market—the removal of The disparities between nations fiscal policy means the
trade barrier has effectively led to the European market still has large differences
Market becoming one which is a domestic market.
Eurozone Unemployment Rate

5. The European Central Bank The European Commission
This is the main executive of the EU and represents the interests of the EU as a
whole. It’s main responsibilities is for ensuring that the laws and policies are
carried out correctly. The Commission has a cabinet government and the 27
members all sent commissioners to the Commission, but they represent areas not
the home state.
The Commission was established in 1958 and is currently chaired by it’s
President, José Manuel Barroso. The UK’s commissioner Catherine Ashton
currently holds the Vice Presidency of the Commission.
The Commission itself implements the policies agreed by the Council of Ministers
and the European Parliament. It often decides on what policies will be put before
the Council of Ministers and Parliament.
José Manuel Barroso
President of the Commission
The Eurozone
The Eurozone is the term for the countries which have adopted the Euro as their
national currency. The Eurozone is controlled by a strict convergence criteria Eurozone Members
and all members of the EU are obliged to join the Eurozone, except if they have Austria Greece
opt outs such as the UK. Once member states have complied with the conver-
gence criteria they should join the Euro Currency. In an exam you may get asked Belgium Ireland
to evaluate whether or not the UK will join the Euro. You should know the ad- Bulgaria Italy
vantages and the disadvantages
Cyprus Luxembourg
Advantages Disadvantages
The European Central Bank is the Central Bank for all the Eurozone
Demark Malta
Countries, those which have accepted the Euro as a Currency. It was Eliminates currency conversion costs Transition costs (changing ATMs etc)
established by the Treaty of Amsterdam in 1998 and is headquartered in Estonia Netherlands
Eliminates exchange rate volatility Sterling may swing more against the
Frankfurt. It has main objective is to maintain the purchasing power of the
between UK and Eurozone Dollar Finland Portugal
Euro currency. It is run by a President which is currently Mario Draghi. The
Price transparency will reduce prices Shocks may destabilise the economy e.g.
President is the chair of a board of governors which is comprised of the France Slovakia
loss of national control may cause
Governors of the Former Central Banks, which the ECB replaced.
problems (one size doesn’t fit all) Germany Slovenia
Main Functions of the ECB:
FDI inflows are encouraged Lack of convergence in housing market
Spain
 Main price stability—target inflation level is 2% at which it wants to keep inflation close to (UK more sensitive)
 Create and carry out Monetary Policy for the Eurozone Increased trade as a result of the above ECB has lower inflation targets which
 Support Economic Policies of the Eurozone Members may cause UK deflation
 Foreign Exchange operations with regards to Euros
No devaluation option which increased Political Union moves closer
 Issue Bank notes
long run competiveness
 Ensure smooth operation of the banking system across the Eurozone
Political union moves closer

6. Euro Convergence Criteria Countries in the Eurozone
Convergence criteria (valid for February 2013)
Budget Deficit to Long Term Interest
Country Inflation Rate Debt to GDP ERM II Membership
GDP Rates
Reference values max. 2.7% max. 3.0% max. 60%, or min. 2 years max. 5.74%
declining
EU members outside of the Eurozone
Bulgaria 2.4% 1.0% 18.9% No 4.33%
Czech Re- 3.4% 5.2% 45.5% No 2.68%
public
2.2% 4.0% 45.6% 1 January 1999 1.39%
Denmark
Hungary 5.4% 2.4% 78.6% (decreasing) No 7.62%
Latvia 2.0% 1.5% 41.9% 2 May 2005 4.35%
Lithuania 3.1% 3.2% 41.1% 28 June 2004 4.72%
Poland 3.5% 3.5% 55.8% No 4.85%
3.6% 2.9% 38.0% No 6.59%
Romania
Sweden 0.9% 0.2% 37.7% No 1.60%
UK 2.8% 6.3% 89.8% (increasing) No 1.73%
Candidates for EU membership
Croatia 3.6% 4.6% 53.6% No 6.10%
6.0% 1.7% 96.2% (decreasing) No 6.81%
Iceland
Macedonia 3.4% 3.8% 31.0% No No data
Montenegro 4.1% 4.0% 52.0% No No data
7.3% 6.4% 59.2% No No data
Serbia
8.7% 1.9% 36.3% No 8.35%
Turkey
Potential candidates for EU membership Eurozone Future Members
Albania
2.0% (2012) 3.5% 63.8% (increasing) No No data All members for the EU except for Denmark, Sweden and the UK are obliged to join the Euro when they meet
the criteria outlined in the Stability and Growth Pact.
Bosnia and 2.2% (2012) 2.8% 43.7% No No data
Herzegovina Latvia plans to adopt the Euro in 2014 and Lithuania in 2015. The other states within the Union; Romania,
0.6% (2012) 2.8% 17.6% No No data Bulgaria, Poland, Czech Republic and Hungary are all expected to join the Euro in 2016-2020.
Kosovo
Questions:
Question: Using economic arguments, evaluate the view that Britain will one day
1) For each column identify which countries are able to join under that criteria
2) Are there any countries which could join now potentially? join the single European Currency