Chapter 8 Student F11-1

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Regional Economic Integration

Regional economic integration (REI) refers to

preferential trading arrangements in which

member countries agree to coordinate their

trade, fiscal, and/or monetary policies.

Agreements seek to eliminate tariff and non-

tariff barriers to the flow of goods, services,

and/or factors of production between

member nations.



Reasons for REI

Economic Benefits

± Increases world production

± Stimulates economic growth

± Provides greater gains than the WTO

Political Benefits

± Provides incentives for political cooperation

± Enhances economic clout



Levels of Economic Integration

Free Trade Area

Customs Union

Common Market

Economic Union

Political Union



Remove Internal

Barriers

Common External

Barriers

Free Movement

of Factors

Common Economic

Policy

Political

Integration

Free Trade

Area

Customs

Union

Common

Market

Economic

Union

Political

Union

Levels of Economic Integration



Remove Internal

Barriers

Common External

Barriers

Free Movement

of Factors

Common Economic

Policy

Political

Integration

Free Trade

Area

Customs

Union

Common

Market

Economic

Union

Political

Union

Free Trade Area



Remove Internal

Barriers

Common External

Barriers

Free Movement

of Factors

Common Economic

Policy

Political

Integration

Free Trade

Area

Customs

Union

Common

Market

Economic

Union

Political

Union

Customs Union



Remove Internal

Barriers

Common External

Barriers

Free Movement

of Factors

Common Economic

Policy

Political

Integration

Free Trade

Area

Customs

Union

Common

Market

Economic

Union

Political

Union

Common Market



Remove Internal

Barriers

Common External

Barriers

Free Movement

of Factors

Common Economic

Policy

Political

Integration

Free Trade

Area

Customs

Union

Common

Market

Economic

Union

Political

Union

Economic Union



Remove Internal

Barriers

Common External

Barriers

Free Movement

of Factors

Common Economic

Policy

Political

Integration

Free Trade

Area

Customs

Union

Common

Market

Economic

Union

Political

Union

Political Union



Forms of Economic Integration



REI and the WTO

GATTs Article 24 allows regional trade

arrangements if:

± an agreement impacts substantially allsectors of trade among the members

± and non-members are not exposed to more

restrictive trade than before theagreement.



Afta Doha. (2008, September 6). The Economist , 388(8596).



Gordon, B. K. (2008, September 5). Bilateral trade-off.Wall Street Journal Asi a

, p. 11.



REI: Friend or Foe?

Successful negotiations for regional trade

agreements appear to be coming easier than

progress with the Doha Round.

The participating nations in a regional trade

agreement are more likely to be able to reach

agreements that remove at least some

barriers to trade.



REI: Friend or Foe?

Regional trading blocs are increasing in

importance and may pit one bloc against

another.

Regional trade agreements may be diverting

more trade than they are creating.

The comprehensive trade packages discussedunder the WTO would more efficiently use the

worlds resources.



The European Union (EU)

The EU is composed of 27 member countries

and has approximately 500 million

inhabitants.

The EUs member states combined represent

the worlds largest economy by GDP, the

seventh largest territory by area and the third

largest by population.

The EU has 23 official languages and an

operating budget of 141 billion.



Evolution of the EU

Year Countries1957 Belgium, France, Germany, Italy, Luxembourg

and the Netherlands

1973 Denmark, Ireland and the United Kingdom

1981 Greece

1986 Portugal and Spain

1995 Austria, Finland and Sweden

2004 Malta, Cyprus, Estonia, Latvia, Lithuania, Poland,Czech Republic, Slovakia, Slovenia and Hungary

2007 Bulgaria and Romania



Expansion of the EU

Turkey, Croatia and the Republic of Macedonia

are Candidate Countries set to join once

conditions are met.

Iceland applied to join the EU in July 2009.



Political Structure of the EU

European Commission

Council of the European Union

European Parliament

Court of Justice



European Commission

The Commission represents the interests of

the EU as a whole and is the executive arm of

the EU.



Structure of the Commission

Commissioners are nominated by their

national governments to serve five-year

renewable terms and must be approved bythe Parliament.

There is one Commissioner per member

state and each Commissioner has a specificpolicy area of focus.



Responsibilities of the Commission

Proposes legislation to Parliament and the

Council.

Manages and implements the EU budget.

Represents the EU in external trade and the

World Trade Organization.

Monitors compliance with EU laws by

member nations.



Commission and Competition Policy

The Commission controls market power by

regulating anti-competitive practices and

abuse of dominant market positions. The Commission has aggressively gone after

companies such as Microsoft and Intel.

Some contend the Commissions penalties aretoo large since the Commission acts the

prosecutor, judge, and jury.



Council of the European Union

The Council represents the individual member

nations and is the main decision-making body

of the EU.



Structure of the Council

Consists of ministers from the national

governments who serve at the pleasure of their

home governments.

There is one representative per member state

at a Council meeting, but minister attendance is

determined by the topic to be discussed.

There are nine configurations of the Council,

including councils for Economic and Financial

Affairs, Agriculture, and Education.



Responsibilities of the Council

The Council shares with Parliament theresponsibility for passing EU legislation and forapproving the EU budget.

Coordinates the broad economic and socialpolicies of the member nations.

Signs international agreements between the

EU and other countries or internationalorganizations which have been negotiated bythe Commission.



European Parliament

The Parliament represents the EUs citizens

and is the directly-elected legislative arm of

the EU.



Structure of the Parliament

Members are elected every five years by

the people of the member nations.

The number of seats per nation is based onpopulation.



Responsibilities of the Parliament

Parliament, in consultation with the Council,

passes laws presented by the Commission.

Parliament approves the Commissioners andhas the power to dismiss the Commission.

Parliament and Council share joint authority for

approving the EUs budget.



Court of Justice

The Court of Justice is the judicial arm of

the EU and it is the final arbiter in disputes

about EU

law.



Court of Justice

The Court ensures EU law is interpreted and

applied in the same way in all EU countries.

The Court has one judge from each membercountry, who serve renewable terms of six

years.

The Court of First Instance addresses casesrelated to competition law.



The Euro Zone

A subset of 17 nations of the EU use the

euro as a common currency.

± Estonia began using the euro on January 1,2011.

± Most of the newest EU members currently

do not yet use the euro.

±United Kingdom, Denmark, and Sweden are

notable exceptions to the use of the euro.



EU countries using the euro: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece,

Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

EU

countries not using the euro: Bulgaria, the Czech Republic, Denmark, Hungary,L

atvia,L

ithuania,Poland, Romania, Sweden and the United Kingdom.



Benefits of the Euro

Lowers foreign exchange costs.

Facilitates price comparisons.

Fosters efficiency and cost reductions.

Creates a pan-European capital market.

Increases the range of investment optionsfor individuals and institutions.



Concerns with the Euro

The European Central Bank (ECB) controls

monetary policy for the euro zone.

The EU is not an optimal currency area.

The EU needs a stronger, centralized

political structure.



The Euro Zone

The member countries share a currency and a

central bank that sets interest rates, but each

country determines its own fiscal policy. Each country is supposed to limit its budget

deficit to no more than 3% of the nations

gross domestic product (GDP) and its debt to

60% of GDP.



The Euro in Crisis

In the fall of 2009, the European Commissionissued warnings to nine countries for excessivebudget deficits.

Greece was ordered to cut spending and raisetaxes immediately.

One of the main criticisms of the common

currency is that the EU lacks sufficient powerto keep individual countries from spending toomuch.



EU Budget Deficits

Cohen, A. (2009, November 12). EU offers reprieve on deficits, but gives ultimatum to Greece. Wall Street Journal , p.

A18.

For WSJ.com subscribers:

http://online.wsj.com/article/SB10001424052748703876404575199520197362174.html#project%3DEURODEF0422

%26articleTabs%3Dinteractive



Forelle, C., & Cohen, A. (2009, October 8). Latvias woes highlight Europe's fragility. Wall Street Journal , p. A9.

EU Budget Deficits



The Euro in Crisis: Greece

Greece has repeatedly violated EU budget

policies, and its budget deficit for 2009 was 13%

of its gross domestic product. Concerns about high debt levels and the risk of

default increased Greeces cost of borrowing.

Many feared that the economic woes of Greecewould infect markets in the relatively healthy

economies of the euro zone.



Greece Debt Rates

Mollenkamp, C., Bryan-Low, C., & Zuckerman, G. (2010, April 8). Investors playing defense heighten Greek debt

woes.Wall Street Journal

, p. A1.



Lauricella. T. (2010, July 1). Euro trips as zone faces identity crisis.

Wall Street Journal , p. C7.



Euro-Zone Contagion

Neither the ECB nor national central banks can

bail out countries but individual governments

can provide loans.

The EU needed to walk a fine line between

avoiding financial contagion and letting

chronic overspenders escape without

consequences. Providing aid was a particularly contentious

issue in Germany.



Euro Zone Rescue Plans

EU Emergency Fund

± 60 billion from the EU budget

Bond Purchasing Plan of the ECB

Special-Purpose Vehicle

± 440 billion raised in the capital markets with

guarantees by member nations

For more information see: Forelle, C. (2010, June 8). Euro zone finalizes terms of rescue package. Wall Street Journal ,

p. A14. For WSJ.com subscribers: http://online.wsj.com/video/am-report-europe-sets-955b-rescue/E6A49369-A63F-40AB-8214-8FD7269C2421.html



Forelle, C. (2010, June 8). Euro zone finalizes terms of rescue package. Wall Street Journal , p. A14.

For WSJ.com subscribers:

http://online.wsj.com/video/am-report-europe-sets-955b-rescue/E6A49369-A63F-40AB-8214-

8FD7269C2421.html



The Euro-Zone Crisis Spreads

Ireland applied for an IMF and EU bailout

worth 67.5 billion in November 2010.

Portugal applied for a $114 billion bailout in

April 2011.

By May 2011, it was clear that Greeces initial

bailout package needed to be revised but

clear divides emerged within the EU on howto address the situation.



A Second Bailout for Greece

On July 21, 2011 euro-zone leaders

provisionally agreed to a new $157 billion

bailout for Greece.

The EU would no longer work to prevent a

selective default by Greece.

The EU committed to provide credit

enhancements to the ECB for it to continue

to accept Greek debt.



Proposed Changes to the Rescue Fund

Could lend directly to countries even before

they lost access to private funding.

Could buy euro-zone bonds on secondarymarkets.

Lowered the interest-rates on bailout loans

and extended their maturities.



The ECB Bond-Buying Program

Blackstone, B. (2011, September 10). Banker's exit rattles markets. Wall Street Journal , pp. A1, A6.



Rift over Collateral

Robinson, F. & Walker, M. (2011, August 20). New rift over terms threatens Greece aid. Wall Street Journal , p. A8.



The Future of the Euro Zone

The EU continues to struggle with how it can

prevent another crisis.

The crisis still threatens Italy, Spain andBelgium.

The currency contender countries may be

more cautious about their plans to adopt the

euro.



Fairclough, G., & Rousek, L. (2010, July 9). Czechs wary of joining troubled euro. Wall Street Journal , p. A11.

Pl t thi fi i h t td t d i E t i j i d th J 1 2011

Chapter 8 Student F11-1

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