Economic Integration – Part 1

How rich is the EU compared to the rest of the world?

EU China Japan Russia United States EU China Japan Russia United States

10 793

1 326

3676

468

10 035

24 700

6 400

27 800

10 000

37 300

Size of economy: Gross Domestic Product inbillion of euros, 2006

Wealth per person: Gross Domestic Productper person in Purchasing Power Standard, 2007

The EU – a major trading power

Share of world trade in goods (2006)

Share of world trade in services (2005)

Others50.5%

EU17.1%

United States16%

Japan6.6%

China9.6%

Others44.9%

EU26%

United States18.4%

Japan6.9%

China3.8%

Growth in Comparative Perspective

Common Market: Examples – Aerospace (Negative)

• Deregulation and competition– 1978 – Airline ticket: London-Madrid MORE EXPENSIVE THAN London-NYC-Madrid– State-owned, national airlines – “national champions”– Monopolies (Air France, Alitalia, Lufthansa)

• Arianespace– 10 Countries involved, 1/3 stake held by EADS– >50% all commercial satellite launches

• EADS – European Aeronautic, Defence, and Space– 2000 merger of Aerospatiale (Fr.); Daimeler(Chrysler) Aerospace (Germ.); CASA (Esp.); BAE (UK)– Airbus is a subsidiary, itself a consortium of European companies and governments

Common Market: Examples – TENs (Positive)

• Trans-European Networks– Infrastructure projects required for market’s efficient functioning– Transportation, Energy, Telecommunications

• Based in the Commission (Euro-bureaucracy)– Operate in any and all member states

• http://ec.europa.eu/avservices/video/video_prod_en.cfm?type=detail&prodid=681&src=1

• http://www.youtube.com/watch?v=XGPO-YmSbfs

Euro-zone membership status

• ERM II States– Denmark, Estonia, Latvia, Lithuania, (Sweden)

• Expected to Join ERM– Poland, Hungary, Czech Republic, Bulgaria– Romania in 2010-2012

• Britain is fully out

European Central Bank and EMU

• INDEPENDENT ORGANIZATION tasked with PRICE STABILITY– Inflation near, but not to exceed, 2% per annum (aside: do we know about interest rates?)

• Modeled on the Bundesbank– Executive Board (8 members, unanimous agreement among Council– Board of Governors (Head of each euro-zone central bank)– Located in Germany, Dutchman (Wim Duisenberg) 1st president of the Exec Board

• Exclusive Powers:– Set euro-zone interest rates– Authorize printing of euro notes and *coins*– Maintain national foreign reserves

• Eurosystem– Network of central banks of ALL member states (even Britain)– Carry out printing of money, application of ECB policy in the member states– ECB funding is FROM the Eurosystem’s banks, not from the EU budget

Convergence Criteria and SGP

• Convergence Criteria for euro membership– Budget deficit <= 3% GDP– National Debt <= 60% GDP– Inflation <= 1.5% of 3 best performers– Currency stability, +/-2.5% limit on ERM fluctuations– Interest rates not less than 2% lower than highest-rate state

• Stability and Growth Pact– Enforces convergence criteria among euro-zone members– Max 3% GDP deficits– Max 60% GDP debt– Amended in 2005 to allow “temporary” violations (loosely defined)

• http://www.nrc.nl/international/article2160480.ece • http://en.wikipedia.org/wiki/

Stability_and_growth_pact#Member_states_by_SGP_criteria

Economic Integration – Part 2

Beating inflation

European Economic and Monetary Union: stable prices

Average annual inflation in the 15 EU-countries that used the euro in 2008 

GDP per inhabitant: the spread of wealth

GDP per inhabitants in Purchasing Power Standards, 2007

Index where the average of the 27 EU-countries is 100

280

144131 129 127 123 121 118 117 113 113

104 102 10094 89 87

79 77 7567 66 63 58 56 53

38 37

Lu

xe

mb

ou

rg

Irel

an

d

Net

he

rla

nd

s

Au

str

ia

Den

ma

rk

Bel

giu

m

Sw

ed

en

Un

ite

d K

ing

do

m

Fin

lan

d

Ger

ma

ny

Fra

nc

e

Ita

ly

Sp

ain

EU

-27

Cyp

rus

Gre

ec

e

Slo

ve

nia

Cze

ch

Re

pu

bli

c

Ma

lta

Po

rtu

ga

l

Est

on

ia

Hu

ng

ary

Slo

va

kia

Lit

hu

an

ia

La

tvia

Po

lan

d

Ro

ma

nia

Bu

lga

ria

Solidarity in practice: the EU cohesion policy

2007-2013: 347 billion euro invested for infrastructure, business, environment and training of workers for less well-off regions or citizens

Regional fund

Social fund

Cohesion fund

Convergence objective: regions with GDP per capita under 75% of the EU average. 81.5% of the funds are spent on this objective.

Regional competitiveness and employment objective.

How is the EU’s money spent?

Total EU budget 2008: 129.1 billion euro

= 1.03% of Gross National Income(ELMO – Alternative Breakdown)

Citizens, freedom,security and justice

1%

Other, administration6%

Sustainable growth:new jobs, cohesion,

research45%

The EU as a global player:including development aid

6%

Natural resources:agriculture,

environment43%

Three pillars

The European Union

The Treaties

European Community

domain (most of common policies)

Common foreign and

security policy

Police and judicial

cooperation in criminal

matters

Common Agricultural Policy

• 5% of the European Population, <3% GDP is agriculture (EU-15)• 1950s, the Six – 20% population, 12% GDP• Currently, 19% population in Poland; 22% in Romania

• 2007 about 40% EU Budget

• Contrary to the free market – protectionist– “The most idiotic system of economic mismanagement” ever devised (The Economist)

• Why?– France demanded as key concession from Germany under Treaty of Rome– Price stability (Agri prices fluctuate more than industrial goods)– Push for European agricultural self-sufficiency– EU has 4x more agri exports than the US, largest in the world– Farmers vote (more than the rest of us)

Common Agricultural Policy

• Common Agricultural “Price-support” program– Target prices – what farmers should get– Threshold prices – price of imported goods (to protect local agriculture)– Guaranteed prices – what the Commission will pay to take goods off the market

• EU obliged to buy surpluses – warehoused or given away as aid

• Problems:– Too much production – technological advances– Problems with “dumping” surpluses– Inequality – 70% of CAP funds 20% of farms, usually the biggest and wealthiest– Inefficiency – prices artificially high (and costs to produce getting lower constantly)– Consolidation – fewer little farms, more conglomerates– EU payments to not grow (a boon to the golf course industry)

• Reforms– Separate payments from production, now a set amount per farm(er) (Decoupling)– Subsidies dropped for the biggest farms

• What about the East? – Lump sums and a phase-in to CAP (10 years)

Structural and Cohesion Funds

• Economic development aid when GEP/capita <75% EU average

• Regional competitiveness aid when >75% average EU GPD/capita

• Territorial cooperation – transnational development and common problems

• 7 Structural Funds– European Regional Development Fund (aid to poor areas)– European Social Fund (employment and worker mobility aid)– “Guidance Section” incorporated in CAP (agricultural diversification)– Cohesion fund (aid to poor states to reform environmental standards and transport)– Fisheries Guidance (upgrade fleets, aid to ports, aqua-culture)– Solidarity fund (aid to respond to natural disasters)– Globalization adjustment fund (aid to sectors hurt by globalization and safety regulations)

Structural and Cohesion Funds

• Major foci: Development (of course) and tackling unemployment

• Job creation, worker training, educational programs, mobility

– Problems:– No standard education– 27 States, 23 Languages

• Lifelong Learning Program– Preschool – vocational training

Europe of Regions: NUTS

• NUTS – Nomenclature of Territorial Units for Statistics

• Here: NUTS-2

• http://www.youtube.com/watch?v=uoU-Qz9T86o&feature=related

Economic Integration – Odds and Ends

CAP: Beneficiaries

• Recall that CAP subsidies only apply to the EU-15, thus excluding the 12 new members

CAP: A possible future

• Assuming all current reforms are finished, and no new policy changes are made

EU Budget

• http://news.bbc.co.uk/2/hi/europe/8036097.stm

• This is far better than anything I can offer you, bar me ripping off the BBC and re-packaging this as my own

Ireland: Celtic Tiger

• WideAngle Documentary -- http://www.pbs.org/wnet/wideangle/episodes/mixed-blessings/video-full-episode/1119/

– Includes discussion of all your favorite topics – including history, the common market, globalization, immigration, property bubbles, the marginalization of religion at the hands of big business, Poland, and much, much more!

• Newshour report on the Ireland more recently (also Poland) – – http://vvi.onstreammedia.com/cgi-bin/visearch?user=pbs-

newshour&template=template.html&squery=%2BVideoAsset:pbsnh020409

• OR I can talk about it (as I intended to do yesterday), and then you can have group time.

• EITHER WAY I need 5-10 minutes with each group/country, so “group time” would not mean “hooray, let’s leave early”

Ireland

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