1. The European Economy 2013
Some Facts and Issues

2. Many Europes

3. Stages of Integration The Free Trade Area The Customs Union
no tariff barriers
The Customs Union
FTA + Common External Tariff
The Common or Single Market
CU + Factor Mobility - Non-tariff barriers
Economic and Monetary Union
EU + monetary integration
Economic Union
EMU + harmonisation of economic policies
Total Integration
EMU + harmonisation + fiscal and social integration (implies political union?)

4. The core theory Preferential liberalisation affects Effects
The volume of trade,
Prices of traded goods
Welfare (and its distribution between producers and consumers)
Effects
Trade increases
Goods become cheaper
All countries in the zone benefit
But is there trade diversion from third countries?
Free trade not enough to secure potential benefits?
Should it go beyond trade in goods?

5. The problem of competitiveness
EU large trading area, but fragmented markets mean:
higher costs through less scale economies
more scope for restrictive practices within states
lack of price convergence between states
opportunities for collusion
Removal of barriers may lead to:
further scope for collusion
emergence of larger monopolists
Evidence that EU lagging behind US and Japan in productivity, export growth and penetration of third markets and increased import penetration into EU

6. Non-tariff barriers
Restrictions may be institutionalised and not just product of competitive structure
Governments lobbied by firms to protect interests against partner competition
Non-tariff barriers typically raise costs and have ‘tariff equivalent’ effect – i.e. undermine potential benefits of PTA
Key decisions:
Dassonville (1974): defines NTBs as “equivalent effects” – presumes against restrictions except where derogation
Cassis de Dijon (1979): requires “mutual recognition” – any good legally available in any one member state can be legally sold in any other except where overriding public interest

7. The Single Market Programme
Push for completion of Single Market:
White Paper (Cockfield) 1985
Led to Single European Act, 1987
1992 Programme
Established principle of ‘four freedoms’
Goods
Persons
Capital
Services
But do ‘freedoms’ imply interference?
And do they require one further step – a single currency?

8. EU External Trade Intensity
Source: Eurostat Yearbook 2011

9. Shares in world trade
Exports
Imports
Source: Eurostat Yearbook 2011

10. Pattern of EU External Trade - Goods
Exports
Imports
Source: Eurostat Yearbook 2011

11. Internal and External Trade Patterns
Source: Eurostat Yearbook 2011

12. Why monetary integration?
Completing the Single Market
Currencies as non-tariff barriers
Transaction costs of exchange
Cost of hedging future currency expectations
Lack of transparency in prices
The Single Financial Market
Increased efficiency from a single financial sector
Common banking rules
Common interest rates to avoid market distortions
Effective macro-stabilisation policy – the one size fits all problem
No exchange rate adjustment
No setting of independent interest rate

13. The EU Practice The Maastricht Treaty convergence criteria:
the achievement of price stability – a low rate of inflation close to the best performing states (defined as being within 1½ per cent of the average of the three lowest);
sustainability of the government financial position – the government should not run a financial deficit greater than 3 per cent of GDP, and gross general government debt should be less than 60 per cent of GDP;
exchange rate stability – apparent by the observance of the normal fluctuation margins provided by the Exchange Rate Mechanism, for at least two years; and
durability of convergence – convergence of long-term interest rates (defined as being within 2 per cent of the average long-term interest rate of the three lowest inflation states).
Note how these ‘monetary’ criteria differ from the ‘real’ criteria of OCA theory

14. Fiscal implications
In Eurozone fiscal policy left to national governments
But governments can ‘cheat’ on fiscal responsibilities – get round tight monetary policy by looser fiscal policy
Hence need for a mechanism to control cheating – Stability and Growth Pact to reinforce Maastricht fiscal criteria
SGP has Excessive Deficit Procedure to ‘fine’ miscreants
But can EDP work effectively if:
Slow to initiate
Big countries can subvert it
Fines make the position of weaker economies even worse
Need for better early warning system – the ‘Cologne process’ – implies willingness to share budgetary plans

15. The deficit bias problem
Monetary and fiscal policy must be consistent
Should criteria be relaxed?
balance over cycle?
political and credibility implications
Fiscal indiscipline concerns financial markets:
raises borrowing costs
markets can distinguish between countries (credit ratings affect risk premia)
More serious is the risk of default in one member country:
capital outflows and a weak Euro
pressure on other governments to help out
pressure on the ECB to help out
The ‘no-bailout’ clause
was it ever credible?

16. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

17. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

18. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

19. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

20. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

21. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

22. Quarterly change in GDP (%)
Source: Eurostat

23. Quarterly change in GDP in 2012 (%)
Source: Eurostat

24. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

25. Source: Eurostat News Release 82/2013 April 2013

26. Source: Eurostat News Release 82/2013 April 2013

27. Source: Eurostat News Release 82/2013 April 2013

28. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

29. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

31. Source: European Economic Forecast, Spring 2013, European Economy 2/2013

36. Source: European Commission COM (2013) 350 Final

37. A banking union Single supervisory mechanism (SSM)
Direct bank recapitalisation through European Stability Mechanism (ESM)
Breaks link between banking problems and sovereign debt
Single resolution mechanism
Limit cost of bank failures to taxpayers
Swift action to resolve banking failures
Consistency in regulatory practices
Deposit guarantee mechanism
Harmonise deposit guarantees to give consumer confidence
Financial Transactions Tax
Issues for Eurozone economies
Which banks are covered – assets >€30billion (or >20% national GDP) – excludes small local banks
But need for close cooperation between SSM and national regulators of smaller banks
Issues for non-Eurozone EU economies
Non-exclusion - critical for UK
Inconsistencies in regulatory practice

38. Source: European Council, Towards a Genuine Economic and Monetary Union, December

39. Conclusions
Has the EU finally resolved the problems arising from the financial crisis?
Has this been an economic problem, a policy problem or a (lack of) solidarity problem
If so who was to blame?
Has the cure been worse than the disease? And for whom?
Is there a better alternative?
Does this mean the end of an integrating Europe and the beginning of an officially recognised multi-speed Europe of a closely integrated EMU core with a set of loose trading arrangements surrounding it?
Where does the UK sit in this changing architecture?
What about Europe in the world?