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EC1503 Macroeconomics I: Introduction to International Economics European Integration: Economics in


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Title: EC1503 Macroeconomics I: Introduction to International Economics European Integration: Economics in

EC1503 Macroeconomics I Introduction to
International EconomicsEuropean Integration
Economics in Action?
  • Ken Thomson
  • Emeritus Professor of Agricultural Economics
  • 4pm, Tuesday 8 May 2007

Post-War Europe
  • Hunger starvation 1945, cold (1947)
  • US Marshall Aid to Britain, Germany, France,
    Italy, etc.
  • The Cold War (Berlin blockade 1948-49, Korea War
    1951, Cuba Crisis 1962)
  • The United Nations and its family IMF, World
    Bank, GATT (now WTO) FAO (Boyd Orr), WHO, UNHCR,
  • Colonies move to independence

Political Steps in Europe - I
  • 1951 (the Schumann Plan) the European Coal
    Steel Community (France and Germany, plus Italy,
    Belgium, Netherlands, Luxembourg)
  • 1957 (Treaty of Rome) the European Economic
    Community (EEC) of the Six UK stays out
  • 1963 and 1967 UK applications to join the EEC
  • 1973 UK, Eire, Denmark (but not Norway)
  • 1980 1986 Greece Spain and Portugal

Political Steps in Europe - II
  • 1990 Germany re-unification
  • 1995 Sweden, Finland, Austria (the EU-15)
  • 2005 Eastward Enlargement Estonia, Lithuania,
    Latvia, Poland, Czech R., Slovakia, Hungary,
    Slovenia, Malta, Cyprus (the EU-10)
  • 2007 Romania, Bulgaria (the EU-12)
  • 20?? Croatia, Macedonia (Candidate Countries)
  • 20?? other Western Balkans (Serbia, Albania,
  • 20?? Turkey (also a CC), Ukraine, Belarus

(No Transcript)
Political Steps in Europe - III
  • Special aid and trade policies for ex-colonies in
    Africa, Caribbean, Pacific (but not N. Africa,
    India, Pakistan)
  • A Neighbourhood Policy for countries in the
    West Balkans, North Africa, East Mediterranean
    and the ex-Soviet Union
  • The EU and other organisations, e.g. the UN
    family, NATO, OSCE, Kyoto, etc.

The Economics of Integration
  • The gains from trade arising from
    specialisation (Adam Smith and Ricardo
    comparative advantage) in a Single Market
  • Economies of scale of production in a larger
    market (e.g. for aircraft, banking, ..)
  • A more efficient economy if internal trade
    barriers are reduced, e.g. common standards
  • More negotiating (market) power, e.g. vs. the USA
    or China, in the WTO, etc.

Two-Country Autarchy (No Trade)

Two-Country Free Trade

The Effects of Two-Country Trade
  • Higher-priced (high-cost) country becomes an
    importer lower trading prices benefit consumers
    (users), but hurt producers
  • Lower-priced (low-cost) country becomes an
    exporter higher trading prices hurt consumers
    (users), but benefit producers
  • but comparative statics diagram shows
  • net social gains in economic welfare

The Welfare Effects of Two-Country Trade
Other Effects of International Trade
  • Greater variety for consumers
  • More competition for producers dynamic effects?
  • More specialisation ( less self-sufficiency)
  • More (or less?) risk
  • More scope for govt. intervention (trade policy)
  • Links to non-trade issues environment, labour,
    politics (e.g. war), etc.

Stages of Economic Integration
  • Autarchy no (or very little) foreign trade
  • Protection tariffs and non-tariff barriers to
    trade (import quotas, regulations, etc.) e.g.
    to raise tax revenue, stabilise industries (most
    developing countries)
  • Free (or Preferential) Trade Area remove (or
    lower) tariffs etc. between countries in trading
    bloc (empires)
  • Customs Union a common external tariff against
    third countries (EEC)
  • Common (or Single) Market freedom of movement of
    goods, services and factors, i.e. labour, capital
    (the EU) and common policies (e.g. the CAP)
  • Monetary Union the same currency (Eurozone 13)
  • Complete economic integration (the UK - ?!)

The effects of a Customs Union
  • Static
  • Trade creation removal of trade barriers allows
    low-cost producers to supply high-demand
  • Trade diversion imports shift from lower-cost
    supplier outside the CU to higher-cost supplier
    inside the CU net gain/loss?
  • Dynamic
  • Economies of scale, better terms of trade,
    increased competition, faster technology
  • Some countries (or regions) may become depressed
    takeovers may lead to monopolies

The Common Agricultural Policy (CAP) of the EU
  • The only mandatory (compulsory) EEC/EU policy
    (Treaty of Rome, 1957) the old CAP (1960s to
    1990s) involved
  • common guaranteed market prices for wheat, milk,
    beef, etc.
  • common external tariff (vs. imports from US etc.)
  • intervention buying of surpluses into public
    stocks, and export subsidies
  • structural expenditure on land improvement,
    farm amalgamations, modernisation, etc.

Results of the old CAP
  • Steadily rising production (mostly yields)
  • Consumer taxation (esp. of poor)
  • Steady loss of small family farms farming
    incomes more or less steady
  • Greatly rising budget spending (over 50 of total
    EEC budget) to handle surpluses
  • Increased price of land
  • Some specialisation (where allowed)

Ideas for CAP Reform
  • Subsidise resources (land, labour, cows) to move
    out of agriculture? almost impossible (except
  • Reduce guaranteed prices? - very difficult
    (farming lobby)
  • Tax farmers to reduce budget cost? - ditto!
  • Impose production quotas? tobacco and sugar
    (1960s-),cotton (1981-),milk (1984-)

Real CAP Reform
  • Lower guarantee prices but compensate farmer
    incomes via direct (not market) payments
  • MacSharry 1992 part-move (for GATT/WTO Uruguay
    Round) agri-environmental payments
  • Agenda 2000 further decoupling of payments
    from levels of production
  • Currently most CAP subsidies decoupled in
    single farm payments (av. 10K/farmer)
  • Budget cost still high about 30 billion/year

Other EU Policies
  • Competition Policy
  • Regional Policy
  • Social Policy education, training, youth
  • Research European networks, projects
  • Environment water, GHGs, waste, nature reserves,
  • Consumer Safety, e.g. food, chemicals
  • Overseas Development

e.g. EU Competition Policy
  • For a more efficient internal economy, and to
    compete with USA, China, etc.
  • Anti-trust (anti-monopoly)
  • Mergers
  • Cartels, e.g. price-fixing
  • Monitoring and control of state aids
  • International, e.g. multinationals
  • Regulation (e.g. labelling)

e.g. Regional Policy
  • Greater cohesion between countries and regions
  • is a strategic EU goal
  • European Regional Development Fund
  • Aid for infrastructure roads, rail, ferries,
    water, sewerage, etc.
  • Urban, rural, cross-border etc. schemes

European Economic Integration a Good Idea?
  • Yes
  • Consumers gain from free internal trade
  • Economies of scale, in EU and globally
  • Higher standards for environment, safety, etc.
  • No
  • Uneven distribution of economic gains
  • Loss of national flexibility (sovereignty)
  • Loss of local variety, e.g. foods, shops, etc.
  • ???
  • A powerful, capitalist, world bloc
  • A political home, e.g. for Central/Eastern