Saturday, September 1, 2012

International Economics

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International Economics

Enlargement and Deepening of EU

The original six members established the European Community in 157 West Germany, France, Italy, Netherlands, Belgium and Luxemburg. The main reason behind this unification was a specific response to a series of problems, which confronted a group of countries in Western Europe in the immediate aftermaths of 145. Unification offered Western Europe a means of strengthening itself against both super powers united states and USSR. Stanley (p.0) argued that “the main motivation for European Community integration…is the argument of scale, or put more bluntly, the attraction of sizeism” In 145 it was easy to relate size with success, Europe’s political failure could be attributed to smallness, which military victory against Germany could be accredited to the sheer size of the new super powers. “Economic studies of the advantages of scale, were simply taken as proven” Stanley (page ). From this we can understand that the development of the European Union is seen mainly in terms of enlarging and deepening, as we have seen the development in the last 45 years of the EU from six countries to fifteen, and from a Common Market Zone to a single market zone.

Enlargement is the process by which countries join the European Union. Article 4 of the Maastricht treaty specifies, “Any European State… may apply to become a member of the Union…” Timothy (p.148) Table .1 in Appendix A will show you the different stages of the enlargement process from application to accession.

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On balance, enlargement should be economically beneficial for the Union because “…it is likely to lead to better performances (economies of scale, higher growth and investment, more technological innovation, stronger global corporate players)” Avery & Cameron, 1, (p.141) not only that but the addition of more than 100 million people, in rapidly growing economies, will boost economic growth and create jobs in both old and new member states. “…Increased size of the internal market combined with the relatively higher growth of the CEECs (productivity gains over the medium term in the applicant countries will be higher than in the EC-15…)” (p.141) The extension of zone of peace, stability and prosperity in Europe will enhance the security of all its peoples and this is supposed to attract large volumes of portfolio investment. In the process of enlargement of the Union both group of countries joining, and the EU-15 are going to be faced with trade creation from a cheaper source and trade diversion from a cost producer. “the applicant countries trade mostly with existing members…” (p.14) so from this we can understand that the enlarged Europe is going to gain more through trade creation than loose by facing trade diversion. Andurton in 15, suggested that “existing countries are afraid that their markets will be swamped by cheap imports from these countries…specially the agriculture and textile markets, where the EU has traditionally imposed high tariff barriers to protect domestic economies”. It is not only the cheap imports they should be afraid of it is also the influx of cheap labour from CEECs which can create a disequilibria in the labour market. Another dynamic economic gain arises from enlarged Europe is increased competition between firms. An enlarged Europe will eliminate restrictions on trade between EU-15 and the new member countries. Domestic industries will therefore face greater competition than before from firms in other member countries. Competition is believed to encourage innovation, reduce costs of production and reduce prices. Anderton contradicts this point by saying “…competition is reduced in the long run. Competition will derive the least efficient firms out of business…over time, the oligopolistic nature of competition will be recreated” (p.561) Movement of labour and capital can also pose problems. According to Anderton “there is a fear that capital would move to newly joined cheap labour countries whilst workers would move in large numbers from these countries to existing member countries, attracted by much higher wages” After looking at several sources on advantages and disadvantages of enlargement, the threats to existing members are mirror images of the opportunities to applicant countries. Even Breuss (000) said in his report “the enlargement debate in the EU and in the Central and Eastern European countries centres on different priorities, the earlier the better…in the east, while the west takes cautious attitude towards enlargement”. Some economists like Avery and Cameron argue the point that “The Economic gain to be reaped from enlargement will depend primarily on the conditions in which the Single Market is enlarged”. According to Breuss time is an important factor in the process of enlargement, and his main argument is all in all earlier enlargement will bring the poor CEECs more rapidly to EU standards. Enlargement will involve an increase in EU budget expenditures and in receipts. It is too early to assess the overall impact on the EU budget. The greatest impact of enlargement is likely to occur in the common agricultural policy and in the structural funds, the two largest components of EU spending. But most economists like Henig (17) and Avery and Cameron (1) contradict this point by saying most of the structural fund is going to be raised by redistributing the current structural fund which is been given to Greece, Spain, Portugal and Ireland. Breuss (000) believes in the notion that “Integrating rich with poor is never an easy business”, so if the EU 15 wants a to become an EU 7 it has to withstand the consequences, and he believes that “deepening is one of the tools to have a successful enlargement”.

Deepening is the integration of the EU both in economic and political terms.The main aspects of deepening fall under six targets first one is Economic and Monetary Union (EMU), secondly The Common Agricultural Policy (CAP), thirdly Sectoral and Regional Adjustment, forthly Development of Freedom of Movement (Goods, Capital, Services, Labour), fifthly Competition Policy, and finally Tax Harmonisation.

The deepening framework consist of a single market and a single currency thoughtout all “euroland”.The common foreign and security policy (CFSP) that covers all matters relating to the security (internal security, immigration and asylum) of the Union, should aim on framing a common defence policy, an objective that the Treaty of Amsterdam defines clearly.

Enlargement is a priority and is indeed the current vision of the Union, clearly stated in the political Agenda 000. By increasing the number of the members of the EU

Major political benefits to the Union and to peace and security are expected. In the economic field too, although problems related to adjustment strains from the developing integration process, especially since acceding countries are at a lower level of economic development, have to be addressed. The objective must be to ensure that the full potential of enlargement is developed to strengthen the European model, i.e. “a Europe built on a set of values shared by all its societies and combining the characteristics of democracy with those of an open economy underpinned by market forces, internal solidarity and cohesion.”

It is quite obvious that enlargement and deepening although interdependent come at odds with each other. Common currency in so many different countries with different growth rates and developments could cause chaos. Even using fiscal policies wont be the remedy as inevitably Europe is going to be separated into “weak” member states absorbing all aids (in term of grants and credits) and powerful ones. BSE (mad cows disease) was an indication of the need of the EU to prioritise to matters like agriculture and trade freedom, as they could cause great damage..

Enlargement and Deppening are two different stategies that are based on the same factors but focus on different aspects. I believe that both are needed in order to make “euroland” an equal competitor land, it is asserted companies across Europe must be able to compete on equal basis; “for example germany imposes heavy obligations on employers on matters like health and safty while the spanish are less stringent” The Economist ed. Volume 57 number 800, this puts the German companies at disadvantsge. The playing field is not level, so enlargeing EU with its current situation might increase the imbalaced competition level. So to truly create a single market that works “harmonisation of economic policy” should be the first priority. The EU could become really massive and even reach 6 member states that would result to % increase in the current population and 4% increase in land occupied but if it not really united, there is no point. There is another contrasting debate by Avery & Cameron that “enlargment processes could actually speed up the process of integeration, or deepening” they drew this conclusion by looking at previouse enlargments which were followed by deepening of the community.

There is no one answer on which should take place first enlargement or deepening, because widening makes deepening more difficult; deepening in turn makes widening more difficult, since it makes the criteria for entry into the Union more demanding. Even if it can be shown that successive enlargement have on the whole quickened the pace of integration, but now the union is faced with enlargement on unpredicted scale. Sloman (000) said, “It is extremely difficult to assess this arguments. Also, many of the advantages and disadvantages are very long term, and depend on future attitudes institutions, policies and world events, which again can’t be predicted”


Economic and monetary union is the latest stage in the evolution of European integration; it is indeed the latest manifestation of deepening. It involves the replacement of local currencies in individual Member States with a single currency the euro. Basically from the first of January 1 the first 1 countries (see appendix B for list of countries) to join European Monetary Union (EMU) will have their local currency exchange rates fixed at set rates to euro. In order to achieve the transition that took place in January 1st 00, the economies of member states will be required to converge, financial prudence will be enforced, government debt reduced and low inflation maintained, Bainbridge argued that EMU is “…the boldest economic experiment of all times…”

The European single currency operates in a slightly different form than the European Currency Unit, the ECU, was introduced alongside the European Monetary System (EMS) to provide a weighted average of the EMS currencies. What made the ECU different than the euro is that ECU was not hard currency with coins or bank notes, and although one ECU will equal one euro, the ECU is the average of all EMS currencies, on the other hand euro is the average of the 1 countries that joined the EMU. After 1 January 00, if you are trading with an EMU member country you will be obliged to use the euro.

Prior 1 ERM the exchange rate mechanism was created to set bands for EMS. It only allowed currencies of member states to fluctuate with in certain bands. From January 1 it was replaced by EMU, which introduced fixed exchange rates for the 11-member states- so currencies will no longer fluctuate within set bands. As well as the single currency 1 is the year when the European Central Bank was created, the ECB is responsible for setting interest rates across the 1 countries which are in the EMU, their responsibility includes the right to authorize issues of bank notes and Member States can only issue euro coins with approval of ECB. “…the transfer of monetary power to ECB has raised issues of sovereignty” this is an understandable phenomena which is inevitable, according to Bainbridge “without EMU the Union’s economic future would have been dominated by its privileged access to central and eastern Europe.” What Bainbridge is saying is EMU is seen as the means of containing German economic hegemony in the longer term.

The single currency is said to provide the citizens of its members with many practical advantages, according to the European Commission it is believed to bring a more efficient single market, once the single currency is in place. For the single market to wok smoothly, exchange-rate adjustments must not be allowed to disrupt trade or investment through their unpredictable impacts on profitability. Even a slight adjustment of the exchange rate will affect the relative wealth of citizens and purchasing power of consumers. So now as the single currency is in place, there will be no more disruption caused by exchange rates. Not only that but for the first time it will permit a genuine comparison of the prices of goods and services across frontiers. This will benefit both consumers and businesses, it will increase competition and boost trade at the same time. This point about increased trade could be contradicted; it is true indeed the single currency will be very transparent on price differences

According to Chesworth and Pine-Coffin (18) “the single currency will promote investment and employment” this suggestion is drawn from the fact that the European Central Bank is going to have a close watch on inflation rates and interest rates, everything being equal this will create an environment where businesses and individuals are more likely to invest and save for the future.

Another obvious positive impact of the single currency is the elimination of transaction costs; this is the costs of foreign-exchange transactions or the cost of exchange-rate cover. According to euro website on European Monetary Union “…transaction costs are far from negligible they are estimated to be 0. to 0.4% of the Unions gross domestic product.” This elimination of exchange-rate cost is not only believed to lower cost for member countries, but also increase trade according to Anderton’s (15) expectations of the single currency.

The European Union is the world’s leading trading power. Now there is high expectation on the euro to become one of the main exchange and reserve currencies, like the dollar and the yen. It is expected that Europeans will be able to pay for their imports, and invoice their exports from third countries in euros. According to the European Commission “EU equipped with an internationally recognized currency, Europe will be better able, together with its US and Japanese parties, to strive for greater stability in the international monetary system.” The main question now lies in whether or not the EU is an optimal single currency area or not?

There is lots of scepticism on the benefits of the single currency, as Griffith and Wall (001) said, “the advantages of adopting the euro seem encouraging, but the advantages do not come without costs”. A single currency means irrevocably fixed exchange rate according to the European Commission. Some argue the point that exchange rate instruments cannot be used to deal with difficulties with in the EMU countries as the interest rate is in complete hands of ECB. Some economists like Anderton feel the trade and cost advantage of the single currency have been grossly over-estimated, they believe it is not much to be gained. Loss of sovereignty is also a political issue, which can’t be ignored; Anderton (15) argues the point “…independent central bank is undemocratic.” This argument has been supported by many other economies like Fishers “ Governments must be able to control the actions of the central banks because governments have been democratically elected by the people, whereas an independent bank will be controlled by a non-elected body.” This is loss of sovereignty, a transfer of power from London to Brussels, this could point could actually be contradicted again it doesn’t really matter if interest rates are set in UK by Bank Of England or by European Central Bank it doesn’t make a difference for the general public.

What we could actually support is the motion that if Britain joins the euro it will face loss of independent monetary policy. This basically mean countries with in the monetary union accept the monetary policy implemented by the ECB. However, this one size fit all monetary policy might implemented by the ECB might not suit all countries equally. Griffith and Wall support this point by giving an example “let us assume there is a recession in one country but not in the other. If that country is outside the euro (e.g. UK) the countries central bank could reduce interest rates and stimulate economic activity. However the ECB is unlikely to respond in this way if the recession is only country specific because this will raise inflation throughout the union.” The ECB will only alter its interest rates when target inflation rate with in the euro zone rises above %. This is one of the arguments why UK doesn’t join the single currency but sometimes it is difficult to understand why exactly, it is understandable that the UK wants to control its own interest rate but according to Griffith and Wall UK is one of the countries which change in interest rate will take up to three years before full impact in the economy is noticed. That is not the only reason why UK should not join the single currency, UK’s Business cycle is not entirely convergent with business cycle in Europe (see appendix C) So joining the euro area and accepting a Europe wide monetary policy might well impose heavy economic costs on the UK.

There is an interesting economic ideology, which is mentioned in Begg (001) it is an optimal currency area defined as “a group of countries better off with a common Currency than keeping separate national currencies”. Is the euro zone an optimal currency zone? Professor Robert Mundell has identified three attributes that might make countries suitable for an optimal currency area first one is countries that trade a lot with each other which is true for most EU countries, secondly the more similar the economic and industrial structure of partners the more likely it is they face common shocks, which can be dealt by a common monetary union, thirdly the more flexible the labour market with in the currency area, the more easily any necessary changes in competitiveness. Conversely, Begg suggested that “countries gain the most by keeping their monetary sovereignty when they are not that integrated” so it is best for UK to stay out of the euro, but is it really even thou Britain has control over interest rates can’t it really afford to increase interest rates any more as the sterling is already sky high.

Appendix A EU Membership-From Application to Accession

Table 1.1

1. A European country submits an application for membership to the council of the European Union.

. The Council asks the Commission to deliver and Opinion on the application.

. The Commission delivers its opinion on the application to the council.

4. The Council decides (unanimously) to open negotiations for accession.

5. Negotiations are opened between the member States on the one hand, and each applicant individually on the other hand.

6. The Commission proposes, and The Council adopts (unanimously), positions to be taken by the union vis-à-vis the applicants in accession negotiation.

7. Agreement reached between Union and applicant on a Draft Treaty of Accession.

8. Accession Treaty submitted to the Council and the European Parliament.

. The Commission delivers another Opinion, on the Accession Treaty.

10. European Parliament delivers its assent to the Accession Treaty (by absolute majority).

11. The Council approves the Accession Treaty (unanimously).

1. Member States and applicants formally sign the Accession Treaty.

1. Member States and applicants ratify the Accession Treaty.

14. After ratification, the Treaty comes into effect on the day of accession the applicants become Member States.

Appendix B

Twelve euro zone countries, source

Members of the European Union in the euro













Appendix C

Source Griffiths andWall (001)


Bainbridge T. (000) “The Penguin Company TP European Union”, nd Edition, Penguin Books

Henig S. (17), “The Uniting of EURPE”, ROUTLEDGE

Avery G. and Cameron F. (1), “The Enlargement of the European Union”, Sheffield Academic Press

Anderton A. (15), “Economics”, nd Edition, Causeway Press Limited

Begg D. (000), “Economics”, 6th Edition, McGraw-Hill

Chesworth N. and Pinne-Coffin (18), “The EMU Fact Book”,

Kogan Page Limited

Griffiths A. and Wall s. (001), “Applied Economics”, th Edition, Printice Hall

Sloman J. (000), “Economics”, 4th Edition, Printice Hall

Enlargement and the Finality of European Integration

Basic Arguments of Enlargement

European Monetary Union

The Single European Currency

Where the EURO is used

Breuss F ed; (Jul 000), “The role of time in EU enlargement”, Euromoney,

The Economist ed. (000), “Single Market In Question”, volume 57, Number 800

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