Economics Pt 2

Final Season Lock In Trim

What is the main idea of EU trade policy?

EU trade policy is the common external trade policy of the Union. It exists because a customs union needs one common policy toward non members.

Why is the EU such a major trading power?

The EU is one of the world’s biggest trading powers because a huge share of trade happens inside the Union and the EU also trades heavily with the rest of the world.

Who are the EU’s main trading partners?

The EU trades mostly with itself. Asia is the next key partner, followed by North America.

What is the Common External Tariff?

It is the common tariff the EU applies to imports from non member countries. It is a basic feature of a customs union.

Why did the Lisbon Treaty matter for trade policy?

It expanded EU trade policy beyond tariffs to include services, foreign direct investment, and intellectual property rights.

What are the three traditional objectives of EU trade policy?

The EU traditionally pursued reciprocal tariff cuts with other European countries, reciprocal tariff cuts with non European countries, and unilateral tariff preferences for developing countries.

How has EU trade strategy changed in recent years?

It moved toward deeper free trade agreements. These now cover investment, public procurement, competition, intellectual property, and regulation, not only tariffs.

What is dumping?

Means selling abroad at an unfairly low price compared with the normal price or cost based benchmark. The EU can respond with anti dumping measures.

What is an anti subsidy measure?

It is a trade defense measure against imports supported by foreign government subsidies. Its purpose is to restore fair competition.

What is one key Brexit trade fact from the slides?

The slides stress that the EU is much more important to UK trade than the UK is to overall EU trade.

Why did European leaders support integration from an industrial point of view?

They feared fragmentation would keep European firms inefficient, prices high, and quality poor. Integration was seen as a way to raise efficiency and competitiveness.

What is the pro competitive effect of integration?

Raises competition, squeezes profit margins, and pushes inefficient firms out. This leads to lower prices and more efficient production.

What is industrial restructuring in this context?

It is the process where weaker firms exit, merge, or get bought out, while surviving firms become larger and more efficient.

What happened to markups in Europe after deeper integration?

Markups fell after deeper integration. This showed that firms faced stronger competitive pressure.

What does the BE curve show in the BE COMP framework?

It shows the combinations of firms and markup where firms break even. Higher markups support more firms.

What does the COMP curve show?

It shows the relation between the number of firms and the markup charged under imperfect competition. More competition tends to lower markup.

What happens in the short run after trade integration in the BE COMP model?

Competition rises quickly and markup falls first. The number of firms does not adjust immediately.

What happens in the long run after trade integration in the BE COMP model?

Some firms exit, the surviving firms get larger, average cost falls, and profitability is restored. Consumers gain from lower prices and higher quantities.

What welfare effect does the BE COMP framework predict?

It predicts a long run welfare gain because consumers benefit from lower prices and more output.

What important cost does the BE COMP framework leave out?

It leaves out medium term adjustment costs such as unemployment, bankruptcies, and restructuring pain.

Why are labor markets in the EU less integrated than goods markets?

Migration is limited and labor laws, welfare systems, and labor market practices differ a lot across member states

How does trade integration affect labor demand?

Exporting sectors tend to expand, so labor demand shifts right there. Import competing sectors tend to shrink, so labor demand shifts left there.

What happens in a flexible labor market after trade integration?

Wages rise in expanding sectors, fall in shrinking sectors, and workers move across sectors. In the simple model, there is no involuntary unemployment.

What happens in a rigid labor market after trade integration?

Wages are sticky, workers are specialized, and movement across sectors is harder. This can raise unemployment and inequality in shrinking sectors.

What are medium term adjustment costs?

They are the costs of shifting from a protected setting to a more open one. They include structural unemployment, firm restructuring, and bankruptcies.

What policies help reduce adjustment costs?

Active labor market policies, reskilling, upskilling, and social safety nets help workers adjust. Temporary state aid is also discussed, though it is controversial.

How is migration expected to affect labor markets in theory?

If migrants complement native workers, total employment rises and the overall economy becomes more efficient. Wage effects tend to be small and uneven across sectors.

What do empirical findings in the slides say about migration?

The evidence does not support large negative effects on output, wages, or unemployment overall. The impact is small, mixed across sectors, and depends on complementarity.

What barriers still limit labor mobility inside the EU?

Language barriers, housing costs, health systems, pension portability problems, benefit rules, and difficulty recognizing qualifications all reduce mobility.

What is the main goal of the CAP?

The Common Agricultural Policy aims to protect and raise farmers’ incomes in the EU.

When did the CAP begin?

It started in 1962, when Europe was still a net food importer and agriculture mattered much more for jobs and GDP.

What were the two classic CAP instruments?

Price support and direct payments to farmers.

How does a CAP price floor work in a net importer case?

It works like tariff protection. Imports fall, producers gain, consumers lose, and deadweight loss appears.

Why did the Green Revolution create a CAP problem?

Productivity and output rose much faster than consumption. The EU became a net exporter, so tariffs alone could no longer maintain the price floor.

What happened once the EU became a net exporter under the CAP?

The EU had to purchase surplus food and then resell it abroad at lower world prices. This made the policy costly and inefficient.

Why did CAP reform become necessary?

The old CAP created surpluses, high budget costs, environmental concerns, and unequal benefits. It also caused trade tensions.

What is the modern CAP logic?

It lowers support prices toward world prices, compensates farmers with decoupled direct payments, and links payments to environmental and rural development goals.

What are the two pillars of the CAP today?

Pillar One covers direct payments and market measures. Pillar Two covers rural development.

What is a major criticism of the CAP today?

A large share of support does not end up with farmers themselves. Some of it goes to landowners, and inequality in support remains a problem.

What is the goal of EU regional policy?

It aims to support job creation and sustainable growth while reducing regional income disparities.

Why did EU regional policy start?

Large regional inequalities are both a social problem and a political problem. They threaten cohesion between core and periphery.

What happened to regional inequality with integration?

Income gaps across member states narrowed, but inequality across regions within member states often increased.

What are agglomeration forces?

They are forces that pull economic activity into core areas. The two main channels are demand linkages

What are dispersion forces?

They are forces pushing activity away from crowded areas, such as high rents, congestion, land costs, and tough competition.

What are the broad Europe 2020 regional policy priorities?

Smart growth, sustainable growth, and inclusive growth. In practice this includes innovation, digitalization, SME support, low carbon transition, and social inclusion.

What is EU competition policy?

It is a set of rules that protects fair competition and a level playing field in the internal market. Its goal is to support consumer welfare and stop distortions.

Which institution enforces EU competition policy?

The European Commission has the main power to enforce it. The EU Court can overturn Commission decisions.

What kinds of actions does EU competition policy cover?

It covers collusion and cartels, abuse of dominant position, mergers, and state aid.

What powers does the Commission have in competition policy?

It can do inspections, impose fines, investigate firms, and order firms to repay illegal subsidies.

What are the two main objectives of a central bank?

Control inflation and stabilize the economy.

What is counter cyclical monetary policy?

It means raising interest rates when the economy overheats and lowering them when the economy slows down.

What is the balance of payments?

It is the record of all transactions between a country and the rest of the world.

What are the three parts of the balance of payments?

The current account, the financial account, and reserve transactions by the central bank.

What is the Impossible Trinity?

A country cannot have all three at the same time: fixed exchange rates, free capital mobility, and independent monetary policy. It must give up one.

How does the Euro Area respect the Impossible Trinity?

It keeps free capital mobility and a fixed internal exchange rate through one common currency. National governments give up independent monetary policy to the ECB.

How did Bretton Woods work?

Gold was the ultimate anchor, but the dollar was the practical anchor. Other currencies were pegged to the dollar and the IMF supervised the system.

Why did Bretton Woods collapse?

Capital controls weakened, the dollar became overvalued, the US suspended gold convertibility in 1971, and the fixed but adjustable system ended in 1973.

What did the Maastricht Treaty do for monetary union?

It formally created the path to monetary union, set entry conditions, and specified the ECB centered system.

When were euro exchange rates irrevocably fixed?

They were fixed in January 1999 for the initial member countries.

When were euro notes and coins introduced?

They were introduced in January 2002.

What is the basic OCA question?

It asks whether a group of economies is suitable for sharing one currency. The answer depends on balancing benefits and costs.

What are the main benefits of a monetary union?

Lower transaction costs, greater price transparency, less exchange rate uncertainty, more trade, and stronger policy credibility.

What is the main cost of a monetary union?

The loss of national exchange rate adjustment when member states face different shocks.

What is an asymmetric shock?

It is a shock that affects one member state or region differently from others. This makes one common monetary policy harder to fit all members.

Why are asymmetric shocks a problem inside a currency union?

Countries can no longer devalue their own currency to restore competitiveness. Adjustment must come through prices, wages, labor movement, or fiscal support.

What are the main OCA criteria?

Labor mobility, openness, diversification, fiscal transfers, homogeneous preferences, and solidarity.

What is the Mundell labor mobility criterion?

A currency area works better when workers can move easily from depressed regions to booming ones. This helps absorb asymmetric shocks.

What is the McKinnon openness criterion?

Highly open economies that trade a lot with each other are better candidates for one currency because exchange rate changes matter less.

What is the Kenen diversification criterion?

Countries with broad and diversified production structures are less exposed to severe sector specific shocks, so they fit monetary union more easily.

What are the three main Maastricht principles?

Price stability, central bank independence, and fiscal discipline.

What are the five Maastricht convergence criteria?

Inflation, long term interest rates, ERM participation, budget deficit, and public debt.

What is the Maastricht inflation criterion?

Inflation must not exceed by more than 1.5 percentage points the average of the three lowest inflation countries.

What is the long term interest rate criterion?

The long term nominal interest rate must not exceed the average of the three lowest inflation countries by more than 2 percentage points.

What is the ERM participation criterion?

A country must stay in the exchange rate mechanism for at least two years without forced devaluation.

What are the two fiscal Maastricht criteria?

The budget deficit must be below 3 percent of GDP and public debt below 60 percent of GDP.

What is the ECB’s primary objective?

Its primary objective is price stability.

How does the ECB define price stability now?

It uses a symmetric 2 percent inflation target over the medium term.

What are the two pillars of ECB analysis?

Economic analysis and monetary analysis.

Why is fiscal policy so important inside a monetary union?

It is the only main macroeconomic instrument left at the national level after monetary policy is centralized.

What are automatic stabilizers?

They are built in fiscal responses. Tax revenues fall and welfare spending rises in downturns without a new policy decision.

What is the main argument for fiscal coordination in the Euro Area?

Member states create spillovers, and irresponsible fiscal policy can trigger debt problems and contagion. Coordination reduces these risks.

What is the main argument against too much fiscal centralization?

Member states differ in preferences and information. A one size fits all fiscal approach may not match national conditions well.

What is the Stability and Growth Pact?

It is the EU fiscal framework designed to prevent excessive deficits and support discipline. It has preventive and corrective parts.

What is the preventive arm of the SGP?

It tries to stop excessive deficits before they happen.

What is the corrective arm of the SGP?

It lays out the response once deficit rules are broken.

What is the European Semester?

It is the annual cycle for coordinating economic and fiscal policies across the EU.

What are the three main functions of financial markets?

They transform maturity, perform intermediation, and manage risk.

What is the basic risk return trade off?

Higher returns require taking more risk, so investors demand a risk premium.

Why does diversification matter?

Combining assets with different risk patterns reduces overall risk.

What two big crises are emphasized in the slides?

The Global Financial Crisis from 2008 and the Sovereign Debt Crisis from 2010.

What happened to Eurozone bond markets during the crisis?

Government bond rates diverged sharply because markets feared default risk and redenomination risk.

What is redenomination risk?

It is the fear that a country might leave the euro and repay debt in a new, weaker national currency.

What is the Banking Union?

It is the post crisis EU framework to centralize key parts of banking supervision and resolution, especially in the Eurozone.

What are the three building blocks of the Banking Union?

The Single Rule Book, the Single Resolution Mechanism, and the Single Supervisory Mechanism.

What is the Capital Markets Union?

It is the EU effort to deepen capital markets so Europe depends less on banks and has broader financing options.

What was Draghi’s key crisis message in 2012?

The ECB would do whatever it takes to preserve the euro.

What was OMT?

It was the ECB backstop program announced in 2012. It helped calm markets and lower spreads.

What equation gives the efficient level of a public policy or public good in these exercises?

Set marginal value equal to marginal cost, or MV = MC.

What formula do you use for the number of possible coalitions?

Use 2 to the power of n, where n is the number of countries.

What is passage probability?

It is the number of winning coalitions divided by the total number of coalitions.