European Economic Integration - PowerPoint PPT Presentation

Loading...

PPT – European Economic Integration PowerPoint presentation | free to download - id: 6ff613-MDEwN



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

European Economic Integration

Description:

European Economic Integration ... – PowerPoint PPT presentation

Number of Views:127
Avg rating:3.0/5.0
Slides: 47
Provided by: FuquaS
Learn more at: http://www.fatih.edu.tr
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: European Economic Integration


1
European Economic Integration
2
The current state of European integration
  • Among 15 European countries there is
  • Free trade
  • Free mobility of labor
  • Free mobility of capital
  • Among 12 of the 15 European countries
  • Since July 2002, national currencies are
    completely replaced by the new European
    currency, the EURO.

3
Why should we be interested in the process of
economic and monetary integration in Europe?
  • Europe is economically important
  • The economic size of the European Union is
    similar to the economic size of the United
    States.
  • Possibility of imitation
  • Other areas in the world are undertaking similar
    steps to integrate national economies. Examples
    are
  • ASEAN for some East Asian countries.
  • MERCOSUR for some Latin American countries.
  • SAARC for some South Asian countries.

4
Why should firms be interested in the process of
economic and monetary integration in Europe?
  • EUROPEAN FIRMS
  • Opportunities - Larger market to target
  • In the immediate because formal trade barriers
    are eliminated.
  • In the long-run trade and business expansion will
    make the European market more homogeneous.
  • Challenges - Stronger competition
  • Local firms are facing the increasing competition
    of foreign firms. Foreign firms may be more
    competitive in technology, management and
    financially.

5
  • NON-EUROPEAN FIRMS
  • Opportunities
  • The European market is no longer a fragmented
    combination of local markets, but rather a large
    uniform market.
  • This will reduce the cost of market penetration.
  • Challenges
  • The within-union increase in competition will
    reinforce the competitiveness of European firms.
  • The increased efficiency and size of European
    firms imply that they will be more competitive
    also in non-European markets. This may be of
    concern also for firms that are not directly
    interested in the European market.

6
  • ALL FIRMS (EUROPEAN AND NON-EUROPEAN)
  • The investment and location strategies will be
    only driven by
  • Local regulations.
  • Availability of qualified labor.
  • Vicinity to the final market.
  • Exchange rates uncertainty will no longer play a
    role for intra-European investments.

7
  • ALL FIRMS (continue)
  • The faster way to take advantage of the new
    market opportunities and to face the competition
    is through
  • Cooperative agreements with other firms.
  • Mergers.
  • Acquisition of local firms.
  • These are the dominant strategies as they combine
    managerial and organizational experience of the
    foreign firm with the knowledge and market
    position of the local firm.

8
(No Transcript)
9
(No Transcript)
10
Main notions of economic integration
  • Free trade area
  • Eliminates tariffs within the area only. Each
    country retains its own policy towards
    non-members.
  • Custom union
  • Add a common external policy to the free trade
    area.
  • Common market
  • Factors of production can flow freely within a
    custom union.
  • Economic union
  • Common market with common determination of some
    structural and macroeconomic policies.

11
What is Monetary Union?
  • Weak version
  • Fixed bilateral exchange rates (rigidly or
    within a band)
  • Each member undertakes monetary policies to
    defend the rates
  • Strong version
  • Individual currencies are replaced by a single
    currency
  • Individual monetary authorities are replaced by a
    single authority

12
Finland
Sweden
Denmark
Ireland
England
Netherlands
Belgium
Germany
France
Austria
Portugal
Spain
Italy
Greece
13
Treaty of Rome (1957)
  • Establishes European Economic Community (EEC)
  • Belgium, France, Germany, Italy, Luxembourg,
    Netherlands.
  • The EEC was a Custom Union.
  • Elimination of internal tariffs.
  • Common external tariffs of 15 percent (members
    average).
  • Institutionalize the virtuous circle of
    export-led growth.
  • The elimination of tariffs would create trade
    (trade creation).
  • The imposition of external tariffs would reduce
    dependence from the United States, Soviet Union,
    etc. (trade diversion).

14
(No Transcript)
15
Non-tariff barriers
  • Government procurement
  • Government units purchase their supplies from
    domestic companies as much as possible.
  • Technical standards
  • Countries require different standards for the
    commercialization of some products. Also, some
    products do not work in other countries (e.g.
    Electrical plugs).

16
  • Local content and rules of origin
  • Local laws require foreign firms to buy fixed
    percentages of their production supplies from
    domestic firms.
  • Physical barriers
  • Internal customs stations slow down communication
    and impose bureaucratic burdens.
  • Fiscal frontiers
  • VAT, excise taxes, corporate taxes, are very
    different among countries.

17
Single European White Paper (1985) Single
European Act (1987)
  • The European White Paper was a proposal of
    legislation to eliminate the existing non-tariff
    barriers.
  • The Single European Act (SEA) formally approved
    most of the legislation proposed in the White
    Paper and other legislation promoting the
    liberalization of capital.

18
Single European Act (1987)
  • Government procurement
  • The SEA requires member governments to open up
    their purchases from firms of other member
    countries.
  • Technical standard
  • The SEA adopts the principle of Mutual
    Recognition if a product is legal in one
    country, it can access all other countries
    markets, given no security or safety problems.
  • Physical barriers
  • Simplification of export-import documentation and
    custom checkpoints procedures.
  • Fiscal barriers
  • Homogenization of VAT and corporate taxation.
    Countries could choose, for each product, to
    eliminate the VAT or impose a minimum VAT of 15
    percent.

19
Liberalization of factors of production
  • Labor mobility
  • Workers move from areas with low wages to areas
    of high wages.
  • The movement of workers to areas with high wages
    tends to reduce the wages of existing workers.
  • The redistribution effects motivates conservative
    resistance.
  • However, intrinsic labor immobility prevented
    this mechanism from working in the EU.

20
Equilibrium wages with and w/o labor mobility
Wages in Italy
Wages in Germany
LaborG,I
MPLG
MPLI
WG
WI
LI
LG
21
Equilibrium wages with and w/o labor mobility
Wages in Italy
Wages in Germany
LaborG,I
MPLG
MPLI
WG
WG
WI
WI
LI
LG
22
  • Capital mobility
  • Capital moves from areas where the return on
    capital (interest rate) is low to areas where the
    return is high.
  • The movement of capital to areas with high
    interest rate tends to reduce the interest rate
    in these areas and increases the interest rate in
    the areas with law rates.
  • As for labor there are significant redistribution
    effects that motivate conservative resistance.

23
  • Capital mobility (continue)
  • During 1980s there were extensive capital
    controls in the EU. Individuals and firms were
    not allow to open bank deposits in other EU
    countries.
  • In July 1990 these controls were eliminated and
    it was one of the causes of the 1992 collapse of
    EMS.
  • In 1993 there has been a major liberalization of
    the banking system
  • In anticipation of the SEA, there has been an
    increase in merger and acquisition activities. In
    particular in the service and banking sectors.

24
(No Transcript)
25
History of the European Monetary Integration
  • European Payment Union (1950-1958)
  • Facilitated multilateral clearing of payment
    imbalances. The Bank of International Settlements
    acted as a clearing house.
  • European Monetary Agreement (1958-1972)
  • Many European currencies became convertible. The
    Agreements facilitated central banks in making
    settlements in gold and dollars.

26
  • Bretton Woods Agreement (1959-1971)
  • Currencies were allowed to fluctuate by ?1 with
    respect to the dollar.
  • European currencies could fluctuate as much as 4
    with each other.
  • With the Smithsonian Agreement on December 1971,
    the band was enlarged to ?2.25

27
  • Basle Agreement (Snake in the Tunnel ) (1972)
  • EC currencies jointly moving within a dollar
    tunnel.
  • Bilateral exchange rates with respect the dollar
    ?2.25.
  • Bilateral exchange rates among European
    currencies ?1.
  • Intervention mechanism and monetary support for
    member countries.

28
Snake in the Tunnel
Bilateral band among European currencies ?1
Fluctuation band against the dollar ?2.25
29
(No Transcript)
30
(No Transcript)
31
  • European Monetary System (1979)
  • Currencies were allowed to fluctuate by ?2.25
    with each other (Italy and UK ?6).
  • Possibility of realignments allowed within the
    EMS.
  • Financing facilities were provided.
  • Creation of the European Currency Unit (ECU)

32
(No Transcript)
33
(No Transcript)
34
Delors Report (1989) Plan for the realization of
EMU
  • Stage 1 (July 1990)
  • Free movement of capital. Member states undertake
    programs that make possible fixed exchange rates.
  • Stage 2 (January 1994)
  • Creation of the European Monetary Institute (EMI)
    to
  • Coordinate monetary policies and ensure price
    stability.
  • Prepare the establishment of the European System
    of Central Banks (ESCB) overseen by the European
    Central Bank (ECB).
  • Prepare the introduction of a single currency in
    stage 3.
  • Examine the achievement of economic convergence
    among EU states as established by the Maastricht
    Treaty (1992).

35
  • Stage 3 (January 1999)
  • Introduction of the single currency EURO.
  • Establishment of the European Central Bank in
    charge of the European monetary policy.

36
Maastricht Treaty (1992)
  • Price stability
  • For the preceding year the average inflation rate
    must not exceed that of the best three states by
    more than 1.5.
  • Interest rate convergence
  • For the preceding year the average long-term
    interest rate must not exceed that of the best
    three states (in term of inflation) by more than
    2.
  • Budget discipline
  • Government budget deficit must be less than 3 of
    GDP.
  • Government debt cannot exceed 60 of GDP.
  • Exchange rate stability
  • For the preceding two years no exchange rate
    realignments.

37
(No Transcript)
38
(No Transcript)
39
The EURO area
40
Costs and benefits of the Euro
  • Benefits
  • Reduction in transaction costs.
  • Elimination of the exchange rate risk.
  • Greater competition leading to greater
    efficiency.
  • Greater integration among the European financial
    markets and greater investment efficiency.
  • Inflation discipline guaranteed by the
    independence of the European Central Bank.
  • Fiscal discipline as a requirement to enter and
    stay in the system.
  • Increase the urgency of structural reforms in
    Europe.

41
  • Costs
  • The system of fixed exchange rates eliminate the
    possibility of using exchange rate adjustments as
    a policy tool in the presence of asymmetric
    shocks.
  • Individual countries cannot use monetary policy
    to face country-specific shocks.
  • Europe may not be an optimal currency area due
    to
  • Likelihood of asymmetric or country-specific
    shocks.
  • Limited labor mobility.
  • Structural labor market rigidities.
  • Limited ability to use fiscal policy as a
    stabilization tool in absence of monetary
    independence.
  • Absence of a system of fiscal redistribution to
    insure against regional/national shocks.

42
European Institutions
Legislative Institutions - European
parliament - Council of Ministers Executive
Institutions - European Commission -
European Council Jurisdictional Institutions
- European Court of Justice - Court of First
Instance Economic Institutions - European
System of Central Banks
43
Legislative Institutions
  • European Parliament
  • Functionalist version of the legislative branch.
  • Composed of 626 members.
  • Elected every five years.
  • Council of the European Union or Council of
    Ministers
  • Important legislative organism.
  • Formed by the 15 ministers responsible for the
    matter being decided.
  • Votes are distributed taking into account the
    size of the country members.
  • Deliberations are directives that are applied by
    each individual country.

44
Executive Institutions
  • European Commission
  • Functionalist version of the executive branch.
  • Composed of 20 members (one official from each
    country).
  • Initiate legislation for the Council of Ministers
    (and the Parliament). Identifies European
    problems and studies possible solutions.
  • Once the legislation is passed, it oversees its
    implementation by monitoring individual
    governments in passing the necessary national
    legislation.
  • European Council
  • Realistic version of the executive branch.
  • Formed by the heads of the government of each
    country plus the president of the European
    Commission.
  • Proposes initiatives to the Commission.

45
Justice Institutions
  • European Court of Justice
  • Composed of 16 judges.
  • Each member is elected for 6 years by a member
    state. The sixteenth member is the Chief Justice
    and it is elected by the other members.
  • Suits may be brought by member states,
    corporations, or individuals on issues related to
    the interpretation of Community law.
  • Court of First Instance
  • Similar composition of the Court of Justice.
  • Deals with most of the actions undertaken by
    individuals and companies.
  • Appeal can be made with the Court of Justice.

46
Economic Institutions
  • European System of Central Banks
  • It is composed of the European Central Bank and
    the central banks of the member states.
  • Similar to the Federal Reserve System in the
    United States.
  • The executive body is the ESCB Board appointed by
    the European Council.
  • The ESCB Board and the Governors of the
    countries central banks form the Council of the
    ESCB.
About PowerShow.com