European Union

Key Terms
Euro: The currency adopted by the members of the Economic and Monetary union (EMU)

European Monetary Union: A group of countries that have adopted the Euro and have their monetary policy controlled by the European Central Bank
Theory

What is the European Union?


At its simplest the European Union is a club of neighbouring countries who have decided that their future well being will be enhanced if they act collectively.


History


  • The E.U has grown from its original 6 members in 1952 to 28 in 2014

  • The most recent member is Croatia who joined on 1st July 2013


    • Levels of intergration in the E.U.


    Level 1) Free trade (European Economic Area)

    Level 2) Customs union

    Level 3) Single market

    Level 4) Monetary Union

    Level 5) Economic union (Monetary & Fiscal)


    Features of a Single Market

    1) Free trade of goods and service

    2) Common technical, safety and health standards

    3) Liberation of financial markets to encourage better flow of investment

    4) Working to remove barriers to furter economic integration

    5) Common policy on government procurement (any member government is obliged to consider submission of bids for government contracts from any member country)
    Advantages of E.U Membership
    1) Huge potential market

    Being a part of the EU28 gives access for U.K firms to 500 million potential consumers. Firms will also be forced to increase efficiency and productivity in response to greater competitive environment. Consumers will therefore benefit from lower prices and better quality products.

    However if European firms have comparative advantage they will be able to produce at a lower cost. This could compete whole industries out of existence, causing structural unemployment.


    2) Investment / Economic Growth

    U.K membership of the E.U has increased investment from other E.U countries. The U.K attracts more investment then any other E.U member country country. Investment is a source of both short-term and long-term growth for the U.K.

    The E.U also supports entrepreneurs of member countries

    Entrepreneurship 2020 Action Plan is based on three pillars:

  • Entrepreneurial education and training
  • Create an E.U. wide entrepreneurial environment
  • Develop role models and reachout programs


    • However economists who strongly support endogenous growth theory may argue the importance of EU investment to economic growth.

    Endogenous growth theory holds that economic growth is primarily the result of improvement in the domestic economy e.g. higher rates of innovation rather than external forces.


    3) Free movement of Labour

    The E.U. provides the ability for citizens of member countries to work anywhere within the European union. Although a citizen is working elsewhere in the world, this does not necessarily mean a leakage from the circular flow since money may be returned home.

    However most recently free movement of labour has undermined the position of UK workers, especially low- skilled, male, full-time workers. This puts strains on local public services and infrastructure, leading to a budget deficit.

    Immigrants from the 10 countries which joined the EU in 2004 contributed more to the UK than they took out in benefits, according University College London's Centre for Research and Analysis of Migration. They added £4.96bn more in taxes in the years to 2011 than they took out in public services.

    Labour migration from poorer parts of the E.U. could also put downward pressure on wages. Lower wages could contribute to lower inflationary pressure.
    Disadvantages of E.U Membership
    1) Inefficiency / Trade Diversion

    The approach of the E.U is highly interventionist, generating numerous regulations which undermine efficiency e.g the external tariff. Being part of the E.U. means countries outside of the union fall under the external tariff.

    This may result in a steady weakening, perhaps ultimate loss of U.K economic trade links with the rest of the world. As a result the benefits of international trade and comparative advantage are lost.


    2) Cost of Interdepedence

    As member of the E.U. trade with each other and invest in each others economy they will become increasingly dependant on one another. If one country suffer it is likely the whole E.U will suffer.


    3) Loss of Fiscal Policy Effectiveness

    The Stability & Growth Pact limits the annual size of budget deficits to 3%. The budget position is an instrument of fiscal policy to manage the macro-economy, by limiting budget deficits the effectiveness of fiscal policy is reduced.


    4) Monetary Contributions

    In the book 'The Great European Rip-Off' the authors estimate that the total cost to Britain of the EU to be £118 billion a year. There is a strong argument to suggest that this money could be used far more efficiently by the U.K government.
    Evaluation

    Some commentators would argue that we need to consider the welfare of other state and the benefits that can be brought to them rather than considering our own costs and benefits of membership:

  • Political – support for democracy, human rights

  • Economic - increased trade = better living standards


    • The U.K could negotiate a status similar to Switzerland. Switzerland is not a member state of the European Union; instead it conducts its relations with the EU on the basis of bilateral sector agreements and remains one of the E.U’s major trading partners.

    If the U.K. removed itself from the E.U it is unlikely that it would be allowed to ‘cherry-pick’ the benefits.

    The E.U. also stands to lose if the U.K. leaves as it imports more from the E.U. than it exports. The U.K. is also an important political and economic member whose absence would substantially lesson the prestige and influence of the E.U.









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